Evidence of meeting #34 for Finance in the 40th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was cash.
A recording is available from Parliament.
Conservative
The Co-Chair Conservative Michael Chong
Thank you, Mr. Lee. Thank you, Mr. Mulcair. We can get a copy of that study from the clerk and provide it to members of the committee.
Mr. Carr.
Prof. Jack Carr
I have two points. One is that the interchange fee should not be related to costs. The second thing is economists do studies, empirical work, and we look to see what happens. We know we have a system. If your argument were correct and cash were cheaper and it was more expensive to use credit cards, we should find—because there's nothing stopping merchants—merchants saying, “You're coming with a credit card and it's costing me more; I'm going to give a discount for cash.” The fact that we don't see it is proof—it's not proof, but it goes towards validating the proposition that it must be more expensive. If it weren't more expensive, what you would do is simply give a discount.
Now, it's not true for all transactions. Different retailers may have different costs of cash and credit card, and some retailers may say, “We're not going to accept credit cards”, as Costco does. It has a very efficient model and it works. For other retailers, that doesn't work. So what you find is, let the system compete. If cash is dominant, it will; if credit cards are dominant, they will.
Conservative
The Co-Chair Conservative Michael Chong
Thank you, Mr. Carr. Thank you, Mr. Mulcair.
We're going to go to Mr. Van Kesteren now.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Thank you, Mr. Chair.
I'm going to be splitting my time with one of my colleagues. I'm going to fire off three things.
First, just a statement. I appreciate what you said about cash, Mr. Carr. I think you also need to include cheques, and I'm not trying to correct your presentation. I remember being in business and waiting until the end of the month and seeing if that cheque was going to bounce.
Second, I've asked for a study. I appreciate what you've just done for Mr. Mulcair. I wonder if there is a study, and I've asked a number of other witnesses to follow consumer spending with consumer card use. In other words, is there a study that proves or disproves that as credit card use increases the spending increases as well, so there's a net benefit for the merchant as well?
Third, and finally--you don't need to answer this right now--there's been some talk about the credit card and how it has led to increased usage and possibly some problems with increased usage. Is the role of government to interfere with consumer habits? Aside from possibly making it mandatory to send a pair of scissors with every credit card, is it the government's role to correct or guard against bad behaviour and credit card use? I'll just open that up.
Prof. Jack Carr
Let me take one part of your question. You asked is there a study that shows that credit card use has increased as consumption has increased. There is a study, and that study was quoted in the Visa presentation. It's the Global Insight and Visa Canada study—The Benefits of Electronic Payments in the Canadian Economy.
What that study shows, and it does a statistical analysis, is it looks at what's happened to the growth of credit cards and the growth in the economy. It's not an easy matter, but if the argument is correct that credit cards are more efficient—it takes less cost to make these transactions than other forms—it saves on resources. Before we had anything, we had barter, which was very efficient. People spent all their time in exchange and none of the time in production. If you can spend less time exchanging and buying goods, you have more productive time for producing. The argument is that since credit cards are more efficient in making exchange, they free up resources for production, and output is higher. That's what the Global Insight study shows.
From there, it's an easy step that with higher output, consumption is higher. The biggest factor affecting consumer spending is output and income in the economy. That's where the link is, and that's the study you have to go to.
Conservative
The Co-Chair Conservative Michael Chong
Thank you, Mr. Carr.
We're going to go to Mr. Lake. We have two minutes left.
Go ahead, Mr. Van Kesteren.
Conservative
Dave Van Kesteren Conservative Chatham-Kent—Essex, ON
Nobody has addressed yet if it's the role of government to interfere with consumer spending habits. Should there be regulations?
Prof. Barry Scholnick
I think there's some role for government in terms of financial education and financial literacy. I think we know that financial literacy among most average people is very low. People make poor decisions because they have a lack of education on financial issues. So there's a key role for government.
I think there's another role for government in terms of transparency. When you get your monthly statement, it should be clear. You should be told if you don't pay off your account or you pay your minimum balance, it will take so many months or years to eventually get out of debt. All these transparency issues are the role of government.
However, beyond that, I think it's very hard for government to tell people what to do with their own money and their own credit cards.
Conservative
The Co-Chair Conservative Michael Chong
Thank you, Mr. Scholnick.
We're going to go to Mr. Lake now. He has a few questions.
Conservative
Mike Lake Conservative Edmonton—Mill Woods—Beaumont, AB
I get a little bit concerned when I hear people asking for price regulation. Could you explain what would happen if we had a cap of a maximum interest rate on credit cards? What effect would that have on maybe cutting people off who might otherwise be able to get a credit card but couldn't? What other unforeseen consequences could there be to that kind of price regulation?
Conservative
Prof. Jack Carr
It's usury laws. A long, long time ago, I wrote a paper, which never got published, on usury regulation. There's a huge amount of government regulation on interest rates, and it goes back to the Bible prohibiting any interest rates; it's in Deuteronomy, if you want to know where the original quote comes from.
Prof. Jack Carr
But if you look at the history of this, banks never got involved very much in consumer lending. Consumers used to borrow from sales finance contracts at very, very high interest rates. Credit cards were a way, even though we think of them as high-cost--but you have to look at the risk, the size, and the costs--of providing a line of credit to consumers, and at a lower cost than any other method for these particular consumers.
If the government comes in and regulates the interest rate, we know what happens when they put a cap on it. The demand for the loans will go up and the supply of loans will go down, and banks will have to ration. There will be people who will be squeezed out, who won't be able to borrow at all, and that can't be helpful.
So you're not helping anybody to say, okay, you're not going to pay these high rates; it's these low rates, but guess what, a large number of you won't be able to get these low rates because financial institutions will not be adequately compensated for the risks they take at that low rate. You'll just be pushing them out of the credit market.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
I thank Professor Carr for that biblical reference. Possibly one of the recommendations of the committee should be that we have a year of Jubilee.
Liberal
John McKay Liberal Scarborough—Guildwood, ON
It's another interesting example of how to deal with debt.
The problem here is that this system has become incredibly Byzantine. It takes an incredible amount of time just to follow all of the transactions, etc. The issue is that at the tail end or the front end of the system there is a load of rewards points, bells, whistles, etc., which have effectively distorted the system.
Professor Lee rightly analyzed the Australian system. There, they tried to do something. When you only try to do one thing in isolation, naturally the credit card companies react and either load up fees or do something else. That's the lesson to be learned in Australia: either you do it all or you do nothing.
Professor Lee, you seem to be driving to a “do nothing” argument; other than, well, we need more education and we need to be more literate and all that sort of good stuff, it's really “don't do anything”. But don't we really want a credit card system that looks a little bit more like the interchange debit card system, which basically runs on a cost or a cost-plus system and doesn't have a whole whack of bells, whistles, rewards, incentives, etc.? Then you'll actually get the best of both worlds. I'd be interested in your comment on that.
