Evidence of meeting #31 for Finance in the 40th Parliament, 2nd session. (The original version is on Parliament’s site, as are the minutes.) The winning word was merchants.
A recording is available from Parliament.
Bloc
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
Very well, thank you.
You seemed to warn us, Ms. Hughes, that you were not responsible for everything, that you did not have any control over the contracts between acquirers and merchants, or over the interchange fees, and so on.
In some ways, I think that you have put your finger on our great concern as committee members. I have learned this over the meetings we have held in recent weeks.
The fact is that there is little or no interaction between these players. There is some, if we consider the money transactions that go on between issuers and acquirers, between Visa and the merchants, and so on. However, there is no interaction or control of one party with respect to the other. On the one hand, there are the acquirers and the issuers; on the other, there are the merchants who supply goods to consumers who use their credit card.
There is no overall vision. There is one, but it is so complex that consumers really have trouble making heads or tails of the system. I am sure that many of them think they are dependent on the credit card system.
Let me give you an example. Anyone who wants to travel in Canada must use a credit card to make his or her reservations. There are some situations in which even cash seems to be less valued than a credit card. We are caught up in this system, whether we use it or not, and that causes a great deal of discontent. Committees have looked into these issues in an effort to get a better understanding of what is going on, and, at the very least, to shed some light on it.
Someone talked about competition and free markets. We understand that the objective of banks is to make money, and the same goes for the other stakeholders as well. However, once the Standing Committee on Industry, Science and Technology and the Standing Committee on Finance have completed their study, we may find that there are some injustices, either for consumers or merchants—because I do think there is some injustice, but in any case, I will not start by making that hypothesis. I would say that so far, it is hard to understand why merchants have to accept all credit cards and why the banks are offering people premium cards. Everyone seems to go along with the system, sometimes without really understanding why.
If the members of the committee realize that there is some injustice, do you not think that the government should regulate the system?
President and Chief Executive Officer, Canadian Bankers Association
Perhaps I could make a few comments.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
My question is to Ms. Hughes, but also to our other witnesses as well.
President and Chief Executive Officer, Canadian Bankers Association
I will make a few comments, and then I will turn the floor over to my colleagues.
For my part, I think that rather than regulating any industry, the best approach is always to allow for competition and free choice, and to promote a good understanding on the part of all participants of their advantages and their responsibilities.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
Can you tell us then why, when the Bank of Canada's key rate is now at 0.25%—it has been dropping steadily for a few years now—the rates charged by the banks for their credit cards has not dropped? The gap is growing between the Bank of Canada's prime rate and the rate charged by banks on credit cards.
President and Chief Executive Officer, Canadian Bankers Association
First, I will continue with my answer to your first question. Clearly, the system is very complex, but it is also clear that the objective of each party within it is to compete with the others. So I think there is a very good level of competition among the issuers of credit cards. On one hand, there are millions of credit cards available to consumers, and on the other, there is competition among the acquirers, for example.
I will just clarify it for the committee because this is a frequently asked question. On the Bank of Canada interest rate, it has a very, very small impact on the overall cost of funds of any bank. It is less than 1%. It is an overnight clearing rate for banks. On that point, there is sometimes a bit of a misconception about exactly what the Bank of Canada rate is.
As I mentioned, there is obviously a huge choice of credit cards in the marketplace, where you can get low interest rates, you can get rates tied to prime, etc. But the fact is a credit card is an unsecured card that has a lot of risk involved. Unfortunately, as we see in today's environment—and we've certainly seen that recently—the risks are rising, and therefore the issuers must respond to that risk for the benefit of being able to provide cards for the entirety of their customers.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
You said that the difference between the credit card rates was only about 1%.
President and Chief Executive Officer, Canadian Bankers Association
No, it is 1% of the cost of the funds. Banks have to seek out funds...
Bloc
President and Chief Executive Officer, Canadian Bankers Association
I apologize if I was not clear, Mr. Laforest.
I meant that it is 1% of the actual cost of funding for a bank. So they get 99% of their funding elsewhere and it costs much more than the Bank of Canada rate. That is my point.
Head, Cards and Payments Solutions, RBC Royal Bank
In fact, over the same period, our interbank lending rates have gone up, not down.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
I would like to ask another question. If necessary, you could always send us your answers in writing.
What type of investigation do you do before issuing a credit card? I would mention the example of students, who have no credit rating and who receive offers of credit cards with limits of $4,000 or $5,000. I find that rather extreme.
Bloc
Conservative
The Co-Chair Conservative James Rajotte
I'll subtract it from the Bloc's second round.
A very brief response—
President and Chief Executive Officer, Canadian Bankers Association
Perhaps others could answer on the student cards.
Mr. Kitchen, would you like to comment?
Mike Kitchen Senior Vice-President, Product Management, Personal and Commercial Banking Canada, BMO Financial Group
I would suggest it is certainly not within our policy that we would see students getting $4,000 and $5,000 credit limits. Usually it's a very small credit limit, typically $500, that type of thing, which is much more in the appropriate level. We don't typically grant $4,000 to $5,000.
Conservative
Conservative
Ted Menzies Conservative Macleod, AB
Thank you, Mr. Chair. Thank you, ladies and gentlemen, for appearing here today in this most interesting discussion.
I have a question to which I would like a comment or response from each organization.
I know, Ms. Hughes Anthony, you represent the Canadian Bankers Association, so I'm going to refer to a conversation that you and I had some time back, when I shared with you that we were hearing from a lot of concerned constituents, who are also your customers—or customers of the credit unions and banks, I should say. They were concerned about credit card fees, as well as issues with debit cards coming forward.
I'm quite sure you do your job well, and I'm quite sure you go back to your membership, so I had suggested it would certainly be helpful if all of the players in this, the issuers through to the banks—all of those involved in a credit card transaction—sat down and worked this out. I said that because our constituents were complaining to us, enough that we were going to have to do something about it. I suggested to you at the time that if we ended up having to regulate it, if all of the players in this business didn't get together and fix this problem, you'd probably not like the regulations we would have to put in place.
We're still trying to avoid that. We've put in what we think are some realistic regulations. The comments from Australia are that they're prepared to step back now from regulating direct interchange fees if the industry shows it can take steps to increase competition.
How was that message received when you shared it with your membership?
I would like a comment from everyone on this. Why can't we get this competition worked out, so it is fair to everybody: fair to the retailer, fair to the customer, and fair to the providers involved in the whole process?
President and Chief Executive Officer, Canadian Bankers Association
If I could respond first, Mr. Chair—and I hope Mr. McTeague is not leaving the room—I think it's a very logical and sound suggestion. There are legal impediments through the Competition Act—and I mention it because I know Mr. McTeague is an expert in the Competition Act—that prevent any industry, and certainly the banking industry would be one, or any other industry, from getting together and agreeing on pricing, and on any agreements concerning the quality or quantity of products and allocations of markets or customers.
Obviously, because all the member banks of the CBA take this extremely seriously, it is just not feasible for us to get around a table and say, “How do we fix this market?” We would obviously be challenged by the competition commissioner.
I suppose there may be ways for the government to call us together, Mr. Menzies, under the umbrella of a ministerial exemption under the Competition Act. That could be done. I think at the moment what we and you would find—and I'm sure this could potentially be frustrating for you around the table to hear, because you may hear from the banks and then from individuals—is that it is very difficult, and totally against the Competition Act, for all of us to get into a big room and cook this up.
If the committee does have suggestions about better, permissible ways to resolve some of these issues, I'm sure we would be very happy to hear those.
Conservative