Evidence of meeting #53 for Government Operations and Estimates in the 42nd Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was post.
A video is available from Parliament.
Conservative
The Chair Conservative Tom Lukiwski
To all of you, thank you once again. Your testimony has been very well received, very helpful to us. Some of our committee members may have additional questions they want to pose to you, and I hope you would invite them to do that directly. Conversely, if you have any additional information that you think would benefit us, please send it to our clerk.
We will suspend for a couple of minutes while we wait for our next witnesses to come to the table.
Conservative
The Chair Conservative Tom Lukiwski
Colleagues and witnesses, we'll commence once again.
Thank you to our witnesses for being here. Once again, I'll make an assumption that you understand the process. After your opening statements, we'll follow with questions from all of our committee members.
Mr. Irwin, I have you first up for your presentation. Is it a five-minute or a 10-minute opening statement?
President, Canadian Consumer Finance Association
Thank you, Mr. Chair and committee members.
My name is Tony Irwin, and I'm president of the Canadian Consumer Finance Association, formerly known as the Canadian Payday Loan Association. We appreciate the opportunity to speak to the House of Commons Standing Committee on Government Operations and Estimates regarding the discussion paper “Canada Post in the digital age”.
Our association represents financial service businesses that provide payday loans to Canadians, as well as a range of other financial products including installment loans, cheque cashing, wire transfer services, bill payment services, and currency exchange. The CCFA has 18 member companies that hold the lender licences for approximately 960 stores and online lending platforms. This represents 69% of the payday loan industry across Canada.
A payday loan is typically a loan in an amount of $400 to $500 that is repayable on the borrower's next payday. The legal definition of a payday loan is a loan not to exceed $1,500 for a term of not more than 62 days. In 2008, the federal government transferred jurisdiction to the provinces to regulate this product. The provinces of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, and Prince Edward Island have now licensed the product, and the Province of New Brunswick is currently finalizing its regulations.
To operate in these provinces, a payday lender must apply for and obtain a lending licence, which requires payday paying annual licensing fees, and often filing transaction data, or financial statements, on an annual basis. Each province sets maximum fees that can be charged for loans, and all aspects of the operation of the business are strictly regulated, including disclosure of information, standard contract terms, right to rescind by borrowers, limits on default fees, advertising, sale of ancillary products, and collection practices, among other things.
There are many misconceptions and much misinformation about the industry. Some opponents have labelled our industry as predatory, but the industry grew in response to consumer demand. Many Canadians have a need for a small loan for a short period that they can obtain quickly, and for those who do not have good credit or an established banking relationship, the need was not being served by banks or credit unions. A survey of payday loan borrowers that was just published by the Financial Consumer Agency of Canada on October 25, 2016, found that 45% of respondents typically used payday loans for unexpected necessary expenses, and 41% typically used payday loans for expected necessary expenses. Borrowers will tell you our members provide a needed and valuable service, and provincial governments understood this when they chose to regulate the industry in a manner that protects consumers but allows for a viable industry.
There is a perception that payday lending is a rapidly growing industry, and lenders are making excessive profits. This is not correct. At the time regulation came into effect in most provinces, in 2009, there were approximately 1,452 payday loan outlets across the country. Today, there are approximately 1,426 licensed online or store outlets. The return on investment of payday lenders is far lower than that of the banks. If the industry were highly profitable, the industry would have grown in the last five years, rather than contracted.
As the Canada Post discussion paper states, despite the high rates, the payday loan industry has low margins. The cost of credit is expensive because it's costly to provide. Costs are high not just because of higher default rates, as the consultation document notes, but also a high cost of operation. Unlike banks and credit unions, payday lenders do not hold deposits or offer large secured loans to help cover the cost of operations. In addition, our industry serves a large sector of borrowers with thin credit files, and lenders have to employ complex and expensive technology and systems to manage their product offerings, risk assessments, and regulatory compliance.
Many payday lenders offer the service of cheque cashing, which is referred to in the discussion paper. Cheque cashing is a competitive business, and a typical fee for cashing a cheque is 2.9% of the face amount, plus an item fee of $3 on average. On a $300 cheque, that would equate to $11.70. While the government indemnifies banks, credit unions, and trust companies for loss due to fraud resulting from cashing cheques up to $1,500, no such indemnity is provided to financial service businesses. They must bear the risk.
It is important to note that over the past decade, the use of cheques has dropped dramatically, and this trend is continuing as more and more businesses are making payments electronically. As a result, cheque cashing is becoming an ancillary and increasingly more marginal business.
The Canada Post discussion paper increasingly notes payday loan-type businesses are moving online. This is very true. Five years ago, getting an online loan was not common. Today there are any number of apps you can download on your phone to provide you with a loan. A survey of our members who are primarily bricks-and-mortar operators found that the amount lent by their online divisions from 2010 to 2014 increased over 520%.
In the past there was typically a delay of up to 24 hours between the time a customer applied online for a loan from the lender and the time funds were deposited into the borrower's bank account. With recent updates in technology, lenders can now deposit funds into a borrower's bank account instantly. Removal of this time delay will result in greater and more rapid growth of the online business in Canada.
A recent study commissioned by the Consumers Council of Canada noted that in the United Kingdom more than 80% of transactions are done online. In the U.S. and Australia online lending comprises one-third of all payday loan transactions. We expect this will be the Canadian experience as well. In the future as most customers are reached electronically, the need for physical premises to transact and advance a loan are less important.
Access to credit for all Canadians is important. The Canadian Consumer Finance Association believes that the more options consumers have to meet their credit needs, the better. However, anyone considering entering the marketplace should be aware that this is a highly regulated and competitive market. Margins are small and even at the maximum fees permitted in each province, only the most efficient operators will succeed.
Thank you.
Conservative
The Chair Conservative Tom Lukiwski
Thank you very much.
Mr. Hannah, do you have a five-minute or a 10-minute presentation? You have a five-minute one.
Thank you, sir. You're on.
Darren Hannah Vice-President, Finance, Risk and Prudential Policy, Canadian Bankers Association
Thank you for inviting me to be here with you this afternoon to contribute to your review of Canada Post.
My name is Darren Hannah, and I am the vice-president of finance, risk and prudential policy, at the Canadian Bankers Association.
The CBA represents 59 domestic banks, foreign bank subsidiaries, and foreign bank branches operating in Canada.
As the committee is likely aware, the CBA was an active participant in the first phase of the review process led by the Canada Post review task force. The banking industry's interest in the review is limited, and it relates specifically to the proposals that Canada Post engage in the business of banking across the country. Our concern is that such proposals are not guided by a clear public policy need. They overlook that Canada benefits from a highly competitive and accessible financial services sector, and that banking is one of the most heavily regulated and supervised sectors across the country.
Canada has a highly competitive financial services sector. There are currently 80 banks operating in Canada, with more than 40 offering financial products and services to Canadian consumers. Canada has more large banks actively competing against each other for customers than practically any country in Europe, including the U.K., which has almost double the population of Canada. There are also non-bank providers of financial services that actively compete with the banking industry, including over 1,000 credit unions and caisses populaires.
With so many financial service providers available to consumers, Canadians are actively taking advantage of the choices available and shopping around for the options that are best suited to their needs. Nearly 60% of Canadians have switched accounts to reduce their service fees, and 32% have switched banks entirely. Additionally, 65% of Canadians deal with more than one financial institution, and of those, 34% deal with three or more. With so many bank and non-bank providers of financial products and services actively competing across the country, consumers continue to be well served by Canada's competitive financial marketplace.
Some proponents of postal banking have asserted that banking services have become inaccessible in Canada. Contrary to these claims, banking is more accessible than ever. According to the World Bank, 99% of Canadian adults have an account with a financial institution, and Canadians can now bank virtually any time from anywhere using a number of different options that reflect the growing expectations of Canadians for greater ease and convenience when banking.
Online is emerging as the preferred means of banking for the majority of Canadians of all age groups. Banking has continually evolved, and customers value innovation and convenience as they access their banking outside of traditional business hours. Now 55% of Canadians use online as their preferred means of banking, which is up from only 8% in 2000. Additionally, 48% of Canadians use online as their primary method of bill payment. Furthermore, the number of transactions taking place online keeps growing, with nearly 615 million Internet banking transactions being completed in 2015.
With more and more Canadians carrying mobile devices, banks offer mobile banking services and apps that allow customers to carry out a variety of day-to-day transactions through their mobile devices. Over a few short years, the number of Canadians who use these applications has grown dramatically, with 31% of Canadians using mobile banking last year, which is up from 5% in 2010.
Branches remain an integral part of banking in Canada. While only 13% of Canadians visit branches for their daily banking, banks have maintained their extensive branch network for those clients who choose to access financial services and advice they need in person when making important life decisions like purchasing a home, making investments, or planning for retirement.
To argue that postal banking is needed so that Canadians can have access to banking services does not reflect the continuing innovations and growing convenience of banking across the country.
A healthy financial sector is a key component to a well-functioning economy. Canada's banking system is widely recognized as being one of the strongest and soundest in the world. This strength was clearly demonstrated through the global financial crisis, as the Canadian banking sector continued to perform and did not require government-funded bailouts, which stands in sharp contrast to the challenges faced in other countries. Canada's prudent banks, combined with effective regulation and supervision, form a model of stability in the global financial system.
Given the strength of Canada's financial system and its critical importance to the health and stability of the broader national economy, proposals for Canada Post to become involved in retail financial services should not be taken lightly. The cost of regulatory compliance is high, and it's critically important for all financial service providers to have appropriate expertise, processes, systems, and robust risk management practices in place to protect Canada's financial system. Canada Post is a crown corporation, and taxpayers ultimately bear the risk of its operations.
Canadians benefit from more choice, convenience, and access in banking services than ever before. Canadians are well served by Canada’s competitive, prudently regulated, and effectively managed banking system. We agree with the task force members, who concluded that Canada already benefits from a well-established market for financial services. We believe there is no public policy objective or existing gap in the marketplace that would necessitate the Government of Canada entering into the business of retail banking through Canada Post.
Thank you, again, for the opportunity to present our views. I look forward to your questions.
Conservative
The Chair Conservative Tom Lukiwski
Thank you, Mr. Hannah.
Mr. Martin, do you have a five-minute opening statement?
Robert Martin Senior Policy Advisor, Canadian Credit Union Association
It's probably closer to 10.
Senior Policy Advisor, Canadian Credit Union Association
Good afternoon. My name is Rob Martin, and I'm a senior policy adviser at the Canadian Credit Union Association. Looking around the table, I think that some of you know who we are.
The Canadian Credit Union Association is the national trade association for credit unions outside of Quebec. Desjardins is our co-operative partner, but it's mostly within Quebec. CCUA represents 293 credit unions including the first federal credit union, which is called the UNI Financial Cooperation, which came out of New Brunswick.
Credit unions are banking institutions owned by their members and their customers. This means we're 100% Canadian-owned competitors to the big banks. Currently 5.6 million Canadians trust the local credit union for their day-to-day banking needs. Collectively we employ more than 27,000 people and manage over $196 billion in assets. This makes us bigger collectively than National Bank.
In terms of market share, credit unions have about 6.3% of the assets held by deposit-taking institutions in Canada, but we have large market shares in two key segments, small business and agriculture, with 11.5% of the market and 10.4% of the market respectively. As co-operatives, credit unions are different. We are not motivated by profit maximization but rather focus on the benefit of our members and our community. This translates into our having preferential rates, providing patronage dividends for credit union members, and keeping branches and service outlets in underserved areas.
In fact, credit unions are the only banking service provider in 380 communities across Canada. In other instances we see credit unions like Vancity providing alternatives to payday loans, such as Vancity's fair and fast loan or First Calgary Financial's cash crunch loan, to help individuals get out of a payday loan debt. Servus Credit Union in northern Alberta is working on a similar offering as is the Ontario system.
While credit unions are users of the mail and parcel services offered by Canada Post, the reason we are presenting today is to address the debate concerning Canada Post's potential entry into the financial services industry. We know that CUPW is promoting the entry of Canada Post into banking as a means of increasing revenues, offsetting losses, and maintaining jobs. Other advocates emphasize delivering financial services to under-banked rural remote regions and indigenous communities. Of course, given our history and our orientation, concerns about the financially excluded have considerable resonance with credit unions, and we are always open to dialogue with the government on these issues. That being said, CCUA is not supportive of establishing a stand-alone postal bank in Canada. Our reasoning behind this position aligns well with the report of the task force for the Canada Post review.
Specifically we believe that the business case for such an enterprise is weak, and the entry of Canada Post into the banking field could result in negative unintended consequences in the market. Regarding our first point, given the rapidly evolving financial services sector, we are certain a postal bank would face a challenging time establishing itself in a crowded and well-served market. On the supply side, the market is served by nearly 80 chartered banks—ATB in Alberta, Desjardins, and 293 credit unions across Canada. These institutions offer remote cheque capture, eliminating the need to access an ATM or branch, and most allow customers or members to conduct all their transactions—everything from applying for a loan to transferring funds—from the convenience of their home. Not surprisingly then, credit unions are seeing a steady decline in traffic in their branches.
On top of this, Canadians also have offerings from the Business Development Bank of Canada, Farm Credit Canada, and Export Development Canada. On the demand side, as my colleague here mentioned, World Bank research suggests that unmet demand for financial services is limited. The World Bank research indicates that 99% of adult Canadians age 15 or over have some form of bank account. Other research from the Canadian Centre for Policy Alternatives indicates that only 3% of all Canadian adults have no bank account at all. Admittedly this number rises to 8% for low-income Canadians. This is a fact that merits attention from policy-makers. CCUA is open to a dialogue with government on how these issues might be addressed. We do not, however, believe that this situation justifies the establishment of a stand-alone postal bank in Canada.
Now to our second point. A concerted push to establish a postal bank in Canada could produce unintended consequences and crowding-out effects in the financial services market. Banks and credit unions could find themselves in competition with a postal bank that benefits from difficult-to-match state-granted privileges and advantages. One of these advantages would be a lower cost of funds. C.D. Howe Institute research has noted that crown financial institutions enjoy a comparatively low cost of capital because they can issue debt that is backed by the federal government and can borrow directly from the government itself at preferential rates.
The institute estimated that crown borrowing costs are 30 to 50 basis points lower than those available to private sector competitors like credit unions. This can rise to 300 basis points in times of stress. This funding advantage can tilt the playing field in favour of the crown by granting it pricing advantages. If a postal bank were to lean on these advantages, it might produce perverse outcomes with banks and credit unions possibly pulling back from markets where margins are thin.
Also, a postal bank would enjoy a pre-established outlet network. A postal bank could also enjoy an advantage over competitors as a result of its outlet network, which I think is approximately 6,400 locations across Canada. This outlet network was developed with Government of Canada investment over many decades in the service of its mail mandate. From the get-go, a postal bank would face fewer costs associated with establishing and administering a financial network as do other financial institutions.
The scope of that network will be difficult to match and could undermine the economic rationale for some bank and credit union branches in regions with a limited economic base or thin operating margins. I can elaborate on that further in questions.
My final point is there would be a lighter regulatory touch. If history is any guide, it's possible that a postal bank would face fewer regulatory pressures in comparison to those faced by banks and credit unions. For example, Farm Credit Canada, the BDC, and EDC are not answerable to a prudential regulator. Furthermore, they often face fewer statutory restrictions on their business powers and activities than crowns do. This is in contrast to credit unions and banks that face significant restrictions on their business practices and are therefore subject to ongoing prudential onsite guidance.
Before I conclude, I would like to flag the fact that at the moment, there are two concurrent federal ongoing efforts to research competition and financial inclusion in the Canadian banking sector. The first announced in the 2016 budget consists of the decision to push off the five-year 2017 financial services review by two years to 2019 and to provide $4.2 million in funding for that effort. It's to look at competition and service in the market. The second, as recently announced by the Competition Bureau, is looking at how technology-led innovation in the Canadian financial services sector is affecting the way consumers use financial services and products.
From a policy perspective, it would be ill advised for the Government of Canada to move toward establishing a postal bank in advance of these studies being completed and their recommendations known by the Canadian public.
To conclude, the Canadian Credit Union Association thanks the committee for this opportunity to contribute. While the CCUA is not supportive of the establishment of a postal bank in Canada, we appreciate the need to expand the availability of banking services in some targeted areas. CCUA is open to engaging with the government on how that might best be achieved through collaborative approaches involving both public and private sectors.
We'd be happy to respond to any questions you have.
Thank you.
Conservative
The Chair Conservative Tom Lukiwski
Thank you very much.
We'll go directly to questions. Mr. Whalen, you have seven minutes.
Liberal
Nick Whalen Liberal St. John's East, NL
Thank you all for coming. We've heard a lot of testimony across the country not just from CUPW members but also from other members of the community about the desire for postal banking services and the additional revenues that could be used to help fund the operations of Canada Post.
We've also heard some commentary that the banks and various lobbying groups are speaking out of both sides of their mouths and they say, first of all, that there's plenty of competition and then that they couldn't handle competition from Canada Post were it to enter the market.
With respect to online banking services, Mr. Hannah, as someone representing the banks, do you see that Canadian banks have the lion's share of online banking services in Canada or do foreign competitors like PayPal or other foreign offerers of these services hold the majority of the online transactional market in Canada?
Vice-President, Finance, Risk and Prudential Policy, Canadian Bankers Association
Let me separate online banking from payment services providers. Online banking is in effect a suite of products that provide you with online access to be able to conduct your financial affairs on your account. You can make a deposit through remote deposit capture; you can make a payment; you can make a bill payment; you can transfer funds; you can execute a remittance. Almost anything you can do in a branch you can do online. A service like PayPal does one thing and one thing only. It moves money from you to somebody else. So they are two more than slightly different things.
To your point, one thing we have been very strongly supportive of is providing a robust regulatory framework to capture all those financial services providers and payment services providers like PayPal to ensure that Canadians who use any product or service can do so with certainty that there's a robust regulatory framework that sets minimum standards for safety and security.
Liberal
Nick Whalen Liberal St. John's East, NL
From your experience, approximately how many different offerers or suppliers of the back-end IT infrastructure that is needed to start your own online bank or to service one of the Canadian online banks are there in the market? Is this something readily available for a large number of international suppliers, or is this something that every individual bank needs to create in-house?
Vice-President, Finance, Risk and Prudential Policy, Canadian Bankers Association
It is no small undertaking to build the technological capacity to operate a full-service bank in today's environment. To give you a sense of scale, last year alone, Canadian banks spent $10 billion on technology investments. It gives you a sense of what's involved in trying to build out the capacity that Canadians have demanded, in order to give them the service they want, to be competitive in this business.
Liberal
Nick Whalen Liberal St. John's East, NL
Well, I'm sure we could find some better things to do with $10 billion than to develop our own in-house bank.
In terms of leveraging the existing banking network, the task force and some of the external analysis that was done suggested that maybe something in the order of $10 million could be generated per year, if the big banks co-operated with Canada Post to provide some type of rural offering, but at a great cost.
From your perspective, do you think there would be an appetite among the competitors that are part of your organization to participate in such a nation-building exercise, to partner with Canada Post and reach out to rural Canada, to make sure they have the services they need to bank in the 21st century?
Vice-President, Finance, Risk and Prudential Policy, Canadian Bankers Association
I'll start by saying that partnerships are the sorts of things that would need to be evaluated on a case-by-case basis. The challenge in this particular question though is what partnership means in that context. Partnership can mean any number of things, with any number of degrees of complexity and interaction, so it's hard for me to generalize.
Liberal
Nick Whalen Liberal St. John's East, NL
Mr. Martin, it's over to you then. Would the credit unions be open to this? One assumption was that, even the minor or minimally profitable models that were explored by the task force would require some type of partnership with an existing financial institution. Would credit unions be open to partner with Canada Post to service communities where Canada Post has sufficient physical resources and there is sufficient population density, despite the fact that it's rural? Would you be open to it?
Senior Policy Advisor, Canadian Credit Union Association
The short answer is yes. We have heard from some of our credit unions already that there is some interest in partnering, though we have some concerns. Historically, many crowns seek out partners through a tender process and it often goes to the largest and highest bidder. That would be our concern, and if there's any process around moving to a partnership model, that it be open to smaller institutions to participate and it not be done on an exclusive basis with one institution or two.
Liberal
Nick Whalen Liberal St. John's East, NL
Mr. Martin, does your organization offer a full suite of online banking tools for customers of the various credit unions across the country?
Liberal
Nick Whalen Liberal St. John's East, NL
Are you spending tens of billions of dollars a year to develop that internally?
Senior Policy Advisor, Canadian Credit Union Association
We're spending a lot. I don't have an exact figure, but it's quite expensive. One issue we face is that our members want us to be available in branch; they want us to be available by telephone, by Internet, all kinds of different...and the number of channels requested seems to proliferate. We're trying to keep on top of that, though we are seeing some decline in branch activities.
We do spend a lot.
Liberal
Nick Whalen Liberal St. John's East, NL
Okay. That's fair enough.
Overall, would you consider that your market share for credit unions is growing or is it staying about the same?