I call the meeting to order.
I invite the witnesses to come forward.
Pursuant to Standing Order 108(2), this is the briefing on automated teller machine fees and electronic payments.
I welcome our witnesses. I thank you for being here.
We will allocate five minutes, as you have already been informed, for each presentation. To the witnesses, I will give you an indication when you have one minute remaining. I will then have to cut you off after your five minutes has elapsed, and we will leave time for questions for committee members. Thank you again for taking the time to be with us today; it's much appreciated.
We have a bit of housekeeping before we commence. Following the presentation we have one hour for the ATM presentations and one hour for the electronic payments. I will carry on to allow an hour for each panel, so we will go a little long. Next week we will move to deal with estimates. Following the break week we will continue our discussion on the topics we're dealing with today.
First of all, from the Canadian Bankers Association, we have Mr. Raymond Protti, president and chief executive officer. I understand he is not long for his position, but welcome here today, Mr. Protti.
Five minutes is yours, sir.
Thank you very much, Mr. Chairman.
I have with me Karen Michell, who is the vice-president of banking operations and who knows and understands the ABM system well.
You're quite correct, Mr. Chairman. After 39 plus years, this will be my final appearance in front of the finance committee. I must say that I've always been received with extreme courtesy by the members of the committee in all the appearances I've had. I want to thank all of you for that courtesy, and the former members who used to serve on this committee as well. I wish you nothing but the best in your deliberations on this and the many other issues you have in front of you.
I will respect the five minutes.
You have received a package from us that's being distributed by the clerk. It contains a submission of 38 pages, which describes many of the features of the ABM system.
I'm going to turn your attention, please, to a slide deck that's in there, because I'd like to walk you through that slide deck. I apologize in advance. It will be quick, but I want to demonstrate some of the features of the system that we currently have in place.
Perhaps you can turn to slide 2, which reads “Competition, choice access and convenience”.
I remember intently the days when I started here as an economist with the Bank of Canada, when I had one choice to get cash. That was to go up Sparks Street to my bank and be there between ten o'clock and three, Monday to Friday, and that was it.
Today we have a branch network of 6,000. We have almost 16,000 bank-owned ABMs, and now of course, a big feature of the system, 35,000 non-bank ABMs, and 571,000--a truly explosive growth--in direct payment, point-of-service facilities. Even in that, of course, I'm not mentioning telephone banking and Internet banking. So there has been an explosion in the last 40 years in terms of what's available.
If you turn to slide 3, I want to point out that Canadian consumers have the highest ABM access in the world. The slide speaks for itself. The U.S. ranks third, and the U.K., against which we're frequently compared, ranks 22 in terms of ABM access in the world.
On slide 4, I want to emphasize this quickly, because there are different types of ABM systems available. Each of the major banks in Canada runs its own proprietary network, which is available as a delivery system for their own clients. Banks invest in these networks, and when bank clients use their own bank's ABM systems, they are doing so in a closed system and they don't pay fees for using their bank's own machines.
If we go to slide 5, this is a complicated slide. I won't spend time on it, but Ms. Michell and I would be pleased to come back to it if you'd like. It describes the process that's used when the non-client chooses to access funds from another bank's ABMs. It's a complicated system, but it works, and it's called shared cash dispensing. I won't spend any more time on it, but I would be delighted to come back to it if you'd like to have a more detailed description.
If you turn to slide 6, I want to have a quick word about the fact that our system is a low-cost, pay-for-use system, which we feel is very transparent and fair for consumers because the price they pay for their retail banking services, including ABM access, is low compared to other countries. We've done a quick comparison here, which highlights some of the issues we need to think about when we look at ABM transactions. For some countries, like the U.K., they will have no convenience fee charged for the use of bank-owned ABMs, but as you see on the chart, you will pay substantially more for some basic banking services. So it's difficult to compare one system to another, but you have to bear in mind that the pricing of a lot of products and services can and will differ substantially across countries.
On slide 7, these are very expensive systems to run. Three out of four Canadians have told us they're delighted with the technology that's available. We spent $33 billion amongst the six largest banks in the last decade. We spend about $4.5 billion to $5 billion a year now to keep the system running.
Slide 8 is a critical slide. Canadian consumers are making a lot of choices from a whole array of options available to them. Very importantly, over 75% of bank ABM cash withdrawals are clients using their own bank's ABMs. No convenience fee applies. What you will also notice on that chart is how the number of shared ABMs is increasing, but, very importantly, the number of withdrawals from ABMs not owned by a consumer's own bank is decreasing.
Why is that? If you turn to slide 9, you'll see that one of the reasons is the very explosive growth in the consumer use of point-of-sale and cash-back services that are available in grocery stores, pharmacies, drug stores, and liquor stores. There is an absolutely explosive growth in the use of Interact direct payment terminals, with a growth from 253,000 to 570,000. Ms. Michell and I are prepared to talk in more detail about the extensive use of this system.
To use up my last 30 seconds, the bottom line is that we feel there has been a development that leads to tremendous choice and competition in the banking system and with the credit union system. We feel the system is low-cost. It's a pay-for-use system that is transparent and fair for consumers, and we're making extensive investments to improve that system continuously.
Thank you, Mr. Chairman.
I've been asked to appear before the committee to give my views on ATM fees. I have not formally studied the issue, but I have read much of the literature and am aware of the issues involved. I have co-authored three books and numerous articles and book chapters on the Canadian financial industry, so I'm certainly aware of the issues and can speak to the question as an informed, dispassionate consumer.
ATM fees are contentious. In fact, one might say they're thorny. Given the views of my co-panellists, I might describe myself as a rose between two thorns.
I will argue that not all ATM fees are bad, but not all ATM fees are justified. To address this, I think it's useful to sort ATM fees into three categories. One is own-bank fees, the second is interbank fees, and the third is white label machine fees.
When most people speak of ATM or ABM fees and the controversy about them, most people are referring to the interbank fees, which I think are the ones with the highest profile. Nonetheless, the other fees exist in the system and should be addressed.
On the own-bank fees, most of us don't even realize we pay them, because they're covered by most bank plans. At my bank, I downloaded from the Internet a little thing at the bottom, and that's the per transaction cost if you don't have a plan. Most people have a plan so they don't pay it. Nonetheless, at my bank, it's 60¢ per transaction for an own-bank withdrawal. It's important to put that into perspective. It's a dollar if I go to a bank and see a teller to withdraw my money.
The issue isn't paying to withdraw your money. That's an embedded principle, or at least an embedded practice. The issue is relative pricing. The key is, what is relative pricing? My bank charges 60¢. Evidence from the U.S. is that the cost of a transaction, including amortization, salaries, and technology costs, is about 27¢. If we assume the U.S. experience is transferrable and we allow for exchange rates, then the banks get about a 100% surcharge on their basic cost. I would argue that this surcharge is probably reasonable.
The banks would argue that it's reasonable because of convenience. Well, the new system is not necessarily convenient. By commodifying the banking system, what they have done is actually restrict consumer choice. I haven't moved in 25 years, but I'm on my fourth bank branch. My account is in its fourth branch. The two closest to me have closed, and it's now extremely inconvenient for me to find money. That's not because I've changed banks, but because of the rationalization and reallocation of resources. The banks have in fact restricted choice for many people. I would argue that this is particularly a problem for students, seniors, and people living in rural areas.
That's for own-bank fees. Interbank fees are over $1.50. I would argue that these fees are probably too high and that a reasonable charge for an interbank fee is the same as an own-bank fee. I understand that there are switch costs involved through Interac and that there are interbank charges involved. These are small, and I think they can be accepted by the banks as a cost of doing business.
I recognize that this would introduce a moral hazard problem, where the banks would have little incentive to install and maintain machinery and the systems. However, as the physicists say, that's an engineering problem. I think it's readily resolvable by such things as shared revenue mechanisms or common platforms.
Turning briefly to the white label machine fees, these are pure convenience and outside the banking system. They are there for consumer choice, usually at awkward times and awkward hours. If consumers choose to use those machines, then they should bear the cost of using those machines. It is not the case for interbank ATMs, because even rational consumers, at normal business hours and in normal locations, often find that their access is restricted.
Mr. Chairman, members of the committee, thank you for inviting Option consommateurs and giving us an opportunity to express our views about automated teller machine fees.
For those of you who are not familiar with our group, Option consommateurs was established in 1983. We are a cooperative involved in defending and promoting consumer rights mainly in Quebec, but we are interested in many Canada-wide issues as well. For a number of years now, Option consommateurs has been actively involved in the area of financial services. One of the things we did was take part in the discussions that led to changes to the federal Bank Act.
Generally, when greater competition is allowed, we expect a drop in prices and an increase in the quality of service. In the case of ATMs, exactly the opposite occurred. Since the Competition Tribunal opened up the market in 1996 and allowed companies that are not financial institutions to establish and run ATMs, the fees involved have increased steadily. Since January 2002, convenience fees have also been charged to non-clients at most financial institutions' ATMs. At the time, we asked financial institutions why they had started charging these fees. Their answer was that if the others were doing it, why not them as well?
Since 2000, we have seen that the number of ATMs owned by financial institutions, as Professor Johnson was saying, has been decreasing, while the number of white label ATM has been increasing. Some business people have even removed the direct payment system and replaced with a white label ATM. We will see later in our presentation that it is cost-effective for business people to have a white label ATM on their premises.
At the same time, financial institutions have fewer and fewer ATMs in some neighbourhoods and in some rural areas. Have you ever tried to find a CIBC, TD or Scotia Bank ATM in east-end Montreal, an economically disadvantaged neighbourhood? Contrary to the claim made by some bankers, consumers cannot always walk to their institution's ATM to avoid the ever-increasing fees involved in a switch transaction.
According to figures from the Interac Association, 66% of consumers use the Interac network to make withdrawals from an ATM that does not belong to their own financial institution. This is what the association calls shared cash dispensing. The association also stated that in 2006 in Canada over 285 million shared withdrawals were made by consumers.
As Prof. Johnson said, there may be three types of fee involved in an ATM transaction: the lump sum amount paid to the financial institution, generally monthly; the Interac charges, which range from $1.50 to $2; and the convenience fee, which may vary from $1 to $3. The Interac fee and the convenience fee are charged when a consumer uses an ATM that does not belong to his or her financial institution.
We think that financial institutions are profiting unduly from this situation. By charging convenience fees, they require consumers to pay twice as much as previously for the same service and they are increasing their profits considerably, because, without knowing it, consumers are already giving a good percentage of the Interac fee to the financial institution or to the business that owns the ATM that they use. A few cents of the $1.50 charge for using the Interac network actually go to the Interac Association. The rest is more profit for the financial institutions or the private businesses.
Let us look at how the Interac fees are broken down—for example the $1.50 fee. A few cents of each transaction go to the Interac Association. The association gets 1¢ per message. Generally, there are two messages involved in a transaction, the request and the reply. The association thus makes 2¢. Seventy-five cents go to the financial institution or the business that owns the ATM where the transaction takes place, either a white label ATM or an ATM owned by a financial institution. The remainder, 73¢, when the fee is $1.50 and 48¢ when the fee is $1.25, goes to the financial institution that issued the debit card.
Since I have very little time left, I will move immediately to our recommendations. You will be getting a copy of my presentation and you will be able to refer to it.
Option consommateurs recommends that Parliament hold a public inquiry into all the factors involved in bank service fees, particularly with respect to payment services, and determine the profitability of the operations associated with these fees for deposit-banking institutions and, in light of the findings of the inquiry, decide whether it should introduce legislation concerning these fees, whether or not they are charged by federally-regulated deposit-banking financial institutions.
Option consommateurs also recommends that legislation be introduced to eliminate the convenience fees for all ATM operators. We must also ensure that these fees are not simply passed on to consumers by increasing the cost of other basic services.
Finally, Option consommateurs recommends framework legislation to regulate all the different types of electronic payments. Otherwise, rules and limitations on bank fees should be included in the Bank Act.
Thank you very much for the question.
I will give a reasonably brief answer. But Professor Johnson has raised quite a few points that I will want to reply to the committee in detail on in writing, because I simply won't have time today to refute the positions he has taken on a number of things.
I do want to speak first to his point about access. It is incorrect to say that access is in any way restricted. If you can turn to the full submission in your packages, I want to point you to a chart on page 14, which is a dramatic illustration of the contrary view on the issue of access.
I recall when my only choice, starting as an economist at the Bank of Canada in 1968, was my branch on Sparks Street. I had to be there between ten and three o'clock, Monday to Friday. That was the only time when I could access cash and the only way in which I could access cash.
If you look at the access chart on page 14 of the submission, you will see an absolutely explosive growth in what we call “access points” for Canadians in the ways in which they can get cash out of their own institutions, whether it's a bank or a credit union. What this access chart reflects is that there were two to four access points essentially for 10,000 people, 20, 25 years ago. By the year 2000, because of the explosive growth in the ABM system, and then the explosive growth in the non-bank ABM system, and then the explosive growth in point-of-sale facilities, you went to about 185 access points per 10,000.
Thank you, Mr. Chairman.
Mr. Arnold spoke briefly about the famous white label ATMs, that is those that are not owned by a bank. As a consumer, I find these machine particularly offensive, particularly when I am in a business and the business person refuses to take my credit card and directs me to one of these ATMs.
Personally, I boycott these people. I refuse to deal with people who make me pay so that I pay them, so that I can pay whatever they are selling. On the other hand, I understand that in some rural areas or in some other locations it may be impossible to do that, and that there really is no choice.
Can you tell us how extensive this problem is? For example, what sort of agreements are there between the businesses that have these white label ATMs and the companies that offer this service?
They're considering it on a continuous basis. I don't think there's a product or a service that's offered by the individual banks that's not under constant and continuous review as to whether the quality can be improved, whether or not it can be at a better price, and in particular whether or not you can steal some customers away from the other banks. There's a continuous review.
There's a point that I understand was made by the CEOs when they met with the Minister of Finance. My understanding is that they said thank you very much, we have these products and services under constant review, and this is a useful input that was made to the process.
I want to come back to access, though. It is not recognized what a fundamental change the point of sale and debit terminals have meant to seniors, students, Canadians of all sorts and stripes. This use of the cash-back services has been explosive, and they are available in convenience stores, in grocery stores, in drug stores, in liquor stores, where Canadians live and work and do their shopping—
I don't mean to cut you off, but five minutes is five minutes. In this world you know how short that can be.
I can appreciate that. What it comes down to from my perspective is in the document you presented. Usually when you get a document or read a book, the thesis is somewhere in the middle or toward the end of the document. Here you have it right at the end. It is: “Regulation is simply no substitute for competition.” You are here, conveniently enough, on behalf of all the banks, versus their being here individually, so it does say that on the one hand it's competition, while on the other hand you do represent them as an organization.
I wonder, when you speak about competition, what happens and what the next steps are going to be. Right now, who in fact is the most competitive of the top five banks when it comes to my going to the bank? If I'm going to make a withdrawal out of an ATM machine, if it isn't my bank, who right now is the most competitive?
Thank you, Mr. Chairperson.
I'm certainly happy we're having this preliminary hearing on the issue of electronic transactions, ATM fees, and the general area of electronic payments as well. You will know that from today we will look for more information in terms of how we pursue this in the future.
I want to start with Mr. Protti. I know he cannot be responsible for every bank and he doesn't speak for the detail of the major banks, but since he is the one who, when the NDP raised the question about fees being charged to access your own money, accused the NDP of bank bashing and of political rhetoric without a full understanding of the facts, I figure I can be pretty hard on Mr. Protti with my questions, and pretty pointed.
The first has to do with choice.
Mr. Protti, you suggested that long gone are the days when banks gave personalized service, that back 30 years ago you could only access banking between the hours of ten o'clock and three o'clock. I want you to know, Mr. Protti, that some people in this country would give anything just to have that much service, just to be able to access a bank with real people between the hours of ten o'clock and three o'clock, because, you see, what all the members of your association have done is selectively closed bank branches and hit communities without choice, without options.
You take away the bank branches, you leave a bank ATM, and then, before you know it, you sell that to a white label. What does someone in my constituency do, someone who hasn't the wherewithal to travel downtown or to the outer edges of the city, but go either to a payday lender or to a white label ATM because the banks under your association abandoned communities?
This is exactly what Option consommateurs is saying. There is no choice in many areas, so that argument has to be put aside.
Now let's get to competition. You talk about competition. Let me ask you this. Your report regarding ABMs for October 31, 2005, says the report excludes transactions made at private label ABMs owned by banks. I want you, Mr. Protti, to tell us today how many ATMs or ABMs are owned by banks. If you can't give us all the information today, how fast can you provide us with that information?
: Merci, monsieur le président
, and thank you all for appearing.
I live in rural Canada. I have a lot of choice. I can go to a white label and pay a fee, I can burn $10 worth of gas and get to my own bank and get money from a machine at any hour without a fee, or I can go to that branch when it's open and get it from a teller. I like the choice.
As far as the debit machines and all those are concerned, I haven't seen those stores yet in my area where I couldn't use a credit card or a debit card. The only place I've seen that, actually, is at the cafeteria on the fifth floor of the Centre Block of Parliament Hill. It may be happening; I'm not aware of it. I haven't seen that move. I have seen an increase in choice.
What I am concerned about, and I think it's the fundamental question here, is whether we should be regulating or not. Should we have legislation or should we not? It comes down to a question of pricing, and that comes out to a question, basically, of whether there is collusion in the market. Is there true competition in the market? If not, then there's an argument to be made that perhaps Parliament should look at this, that there should be some regulation.
So I will ask the question first to Mr. Protti. I don't think we'll have time for answers from the others, but I would appreciate it if you would reply in writing to the chair so that we can get it. If there is no collusion, if there is true competition in the market, why are the prices similar?
Yes, you do. The lowest-cost providers in terms of accessing your non-bank ABMs are in fact the banks at $1.50.
The Mouvement Desjardins has just increased its rate by thirty-three and a third per cent to $2, and the argument that the Mouvement Desjardins made in doing that was that they have the most extensive network of ABMs in the province of Quebec. They have 2,800. They are the single biggest financial institution. They're saying why should they subsidize anybody else using their ABM system, so they increased their rate from $1.50 to $2.
Then, of course, with white label providers, you can have fees that range up to $3, $4, and I'm told--I have none of this on personal experience--that in gentlemen's clubs, stripper organizations, bars, the fee may be outrageously high. But I assure you I don't have data based on personal knowledge. So there's a tremendous range out there if in fact a consumer is looking at a variety of choices.
If I can, I want to make one more basic point. For me, the issue is not 50¢, $1.50, $2, or $4. The issue for the consumer is that the fee can very easily be made to be zero, because there is an enormous amount of choice out there. So for me the relevant number is zero.
Thank you, Mr. Chairman.
If we acknowledge that the need for cash is a basic need in our society, like the need for water or food, why should we rely solely on market rules to establish the cost?
In general, market rules work very well for people with money. I don't have a lot but I do have some. Therefore I obviously do quite profitable business with the banks. If I only have $100 and I withdraw $20 every day or every three days, I will not be a profitable customer for the bank. The bank won't be interested in my kind of transaction and will therefore make me pay through the nose.
Since this is a basic need, it requires not necessarily regulations, but standards according to which if you have a small savings account, you will withdraw very little money. It should be more expensive if you withdraw more money. I'd like to hear your views on that.
If I may, there's been a lot of discussion about whether regulation or competition is the best. In Canada, we have the number one access to ABMs per capita in the world. I would suggest that what that has resulted from is the competition we have in the marketplace. We have banks, we have non-banks, and we have non-financial institutions all participating in this ABM network. That situation arose as a result, as Mr. Protti mentioned, of the Competition Tribunal announcing in 1996 that you would have the ability to surcharge so that there would be a business model that supported putting ABMs in lower traffic volume areas. And this competition of all sorts of different providers has led to, number one, the best system in terms of access per capita in the world in Canada.
In terms of whether the choice is driven by consumers or by banks, our polling tells us repeatedly that three-quarters of our customers are very pleased with the technology solutions we offer them. They find it makes their banking more convenient and it saves them time. In addition to that, we're finding now that about 85% of transactions are actually done electronically, whether over an ABM, online, or telephone banking, so it extends the banking experience to a 24/7 kind of experience. So I would suggest to you, as a result of that, that consumers are telling us, and the marketplace is telling us, that we've got a good--
There's always a concern, when we are dealing with issues of any kind here, about the law of unintended consequences. Now, you've said repeatedly that we have the greatest access to ATM services in Canada of any country, and I think that's great. I represent a rural area, in which, as Mr. Thibault alluded earlier, it would be most inconvenient and costly for a lot of my constituents if they couldn't access the services of these machines. Some of them can't now, in fact, without driving considerable distances, access these machines. I'm concerned about the unintended consequences of making it less attractive to banks to invest in the further expansion of the installation of these types of machines.
I fail to understand how reducing the profit that could potentially be derived from the installation of such machines would result in further services being available to Canadians who can't access banking services. I fail to understand the relationship between those two. So I guess I'm asking here, to what degree do you think a reduced profit might result in a reduction of the availability of machines, which would subsequently be replaced by the white label machines, which cost a heck of a lot more?
Probably the best sound bite of the morning, I would suggest, is Mr. Johnson's indicating that “regulation is required when forces of competition fail”.
Mr. Protti, you indicated that there is competition. At least certainly you feel that way. There are hundreds of different bank packages available that consumers can look at, that they can choose from, that have many cost-saving measures in them. Why aren't the banks doing more to talk to people about these options? Why aren't they doing more to educate people?
I think people understand that there are fees for convenience. We understand that if we go to a convenience store, we'll pay more for our groceries than if we go to a grocery store. We understand that there is a fee for convenience. But why aren't the banks doing more to educate people about how to avoid paying fees and how to save their money?
I know it's certainly very attractive in the media to talk about how we want to help people save money. Isn't this a great area where the banks could be talking to people?
Well, I think you have an excellent point, sir, with that comment.
Each of the banks has a strategy for educating their client bases. It can be face to face, through brochures, through their websites. Each of the banks has its own program, and I'm going to provide you with some information on each one of those.
In addition to that, at the industry level, I am particularly proud of one thing in the last 11 years, and that's a massive education campaign that we have undertaken on a variety of issues, including, in particular, the one you have just talked about. We have distributed over five million free booklets to Canadians on a variety of issues. The most important one is how to get value for your fees. There's a very simple calculator in there. You look at your customer profile and decide how you use the banking system, and it points you in the direction of the sort of package you should have.
In addition, perhaps the very best thing that's happened in the 11 years I've been there is a high school education seminar that we provide on personal financial management. How you can manage your money in the most efficient way is at the heart of that particular program.
I'm limited in time, but I would have liked to continue.
I'm a member of Parliament from east-end Montreal. If we talked only about branches that closed 10 years ago, I would say you are more or less right. However, in my riding, in the district of Saint-Léonard, there are four branches of the TD Bank that have opened and they are now 12 to 15 caisses populaires, I believe. Therefore there is competition, but as Mr. St-Cyr pointed out, we have a problem when we go into a business and are forced to use a no-name ATM.
I think that you are a protector of consumers. How we could avoid this? That's the problem. The problem is these no-name or white label ATMs. When I don't know any other place, I will be forced to use that kind of ATM the first time, but there won't be a second time. If there are no profits to be made with this, the others will not offer more options, but there is a way to strike a balance between these two aspects. We're looking for a solution and I don't think that you've proposed one here today.
Thank you, Mr. Chairman.
Before I begin, I'd like to thank you for having given us this opportunity to appear before the House of Commons Standing Committee on Finance in order to discuss the CPA and the process involved in bill paying.
I'd like to introduce my colleagues, they are Mr. Doug Kreviazuk, who is our Vice-President, Policy and Research, and Ms. Barbara Ciarniello, Associate Vice-President, delegate of the Credit Union Central of British Columbia.
In coming before you today, I know you have many questions about how bill payments operate in this country and specifically why the process is not instantaneous, particularly in light of all the automation we see today in the banking and payments arena.
The reality is that other than cash, there are no real payment options in the marketplace that are truly instantaneous. Although some provide the appearance of real-time payment and settlement, this appearance is generally in the eyes of the consumer and is not necessarily from the biller or merchant.
The short answer is this. Moving payments and the related billing information from a consumer to the biller requires a number of sequential steps, each of which relies on a separate system. Further, the delivery route and mode may vary considerably among billers and depends on a number of factors, such as how the consumer initiated the payment and the technical capabilities of the biller.
While the process of initiating a bill payment electronically is both quick and convenient for the consumer, there's a complex web of arrangements behind the scene to ultimately make it happen. The CPA plays an integral role in most instances, as it operates the national clearing and settlement system through which many of these payments will be exchanged among financial institutions. In essence, our role could be seen as the central link in a chain, with other links both before and after our links that are operated and managed by other parties.
First, I would like to walk you through the life cycle of a bill payment. Although alternative clearing arrangements exist outside the CPA for bill payments, my comments will focus solely on the case where the payment is processed via CPA systems and rules.
Indeed, today there is no online, real-time, end-to-end processing to support the payment of a bill. By end to end, I mean from the point that a consumer initiates the payment instruction to the time a biller updates the consumer's account to reflect the payment. In fact, most consumer bill payments or the information respecting the bill payment must go through four unrelated systems, as indicated in our submission.
First, let's say a consumer decides to pay a utility bill online. He or she logs on to the financial institution website, selects the bill to be paid, and initiates the transaction. To the consumer, this looks like it is seamless and fully integrated, but it is not.
You instruct your financial institution or FI to send the payment. This is the first system connecting you to your FI.
Then your FI takes the instruction, along with all the others for the day, and batches them in a particular electronic file format that is sent across the CPA clearing system to the FI for the utility company. This is the second system.
Each day there are specific cut-off times that FIs must adhere to when delivering this information. Once the utility company's FI has received the files, they aggregate the payments to the utility company received from all the other FIs on that particular day and credit the account of the utility company for the total amount received. This is the third system.
To complete the fourth step, the utility company will need the detailed data pertaining to each customer who has made a payment on that day so that the biller is able to assign the appropriate credits to the individual accounts.
Depending on the biller's technical capabilities, receiving the data from the various FIs may take several forms. While the most efficient system for delivering this information is electronic data interchange, EDI, many billers in Canada have not adopted this technology, in part due to cost and complexity.
Non-EDI billers receive the details of each payment in the format specifically requested by that biller, for example, by fax or e-mail. In most of these cases, the biller is not able to use an automated process to transfer the information into the accounts receivable system. Where a manual process is involved, this would likely extend the time required by the biller to update the individual customer account. There is a time-in-transit period that must be considered.
As part of our strategic planning for 2006, we'd already considered examining the provisions of the frameworks for bill payments.
When we met with you last time, we'd also indicated that we intended to begin a consultation. In order to support this commitment, we will soon be establishing a task force composed of representatives of member financial institutions and stakeholders who will analyze the current issues and recommend improvements. We will also prepare a public consultation document for you and later, we will hold a series of round table discussions including stakeholders as well as members of financial institutions.
Since some of the current challenges of the bill payment environment go beyond the scope of action of the CPA, the implementation of solutions will have to be done in cooperation and with commitment from various stakeholders within the industry. To succeed, the participation of bill payment service providers and billers will be essential. Your support for this initiative is therefore important and will enable us to put greater emphasis on this review.
I thank you for your time. We remain at your disposal to answer your questions.
And thank you for the presentation.
I think the problem of the clearance system is that you're being hoisted by your own petard. What you appear to have is an instant system when in fact you don't have an instant system. As you properly described, it goes from a bank account to a batching system to another batching system and to the creditor, and frequently it is a two- or three- or four-day process.
Your entire system is based upon the notion of cheque clearances and things of that nature, just as everybody did in the old days. What I see as the problem is that you, in some respects, have sold Canadians an illusion. I'm not criticizing you personally, but the financial system. You've sold Canadians an illusion, because when I am sitting at my computer paying my bills online, doing my own batching, if you will, I'm thinking that when I see the money removed from my account—and therefore inaccessible to me—I have somehow or another paid my VISA bill, when in fact I haven't paid my VISA bill. I'm not going to be able to pay my VISA bill for two days, or some such time.
What I see as the problem, Mr. Legault, is that this is simply a failure of coding, if you will. And here I use VISA as an example of a large creditor that receives money daily—in fact, hourly, or every minute—in saying that, really, the coding of my VISA card on my computer could be set up so that when the money came out of my bank, it really went instantaneously around, or through, the batching system. You could code this on my computer so that could happen.
Is that technologically possible, is my first question? And if it is technologically possible, is this simply a failure of will, if you will, or a lack of intention to put resources into a system that could make what appears to be instant in fact instant?
I'll start with the first question on the technical possibility.
First of all, you have to realize that the clearing and settlement portion basically takes a day. I could ask my colleagues for more details on this, but basically if you do it within the cut-off time, the next day the clearing and settlement will have occurred already. Now if you talk specifically of a credit card, that's one issue. If you talk of other billers, as you can imagine, there are also other systems that need to be put in place. When you talk about credit cards, again, we don't deal specifically with credit cards per se, because there are different ways that credit cards can be paid, but as I said, it could be done for the next day. We cannot talk on behalf of credit card companies, but our understanding is that most of them can in fact give you credit fairly quickly for the payment of your account.
Now is it a failure of will or not? It seems to me that it's not a question of failure of will, because I think it does occur within that period of time for most payments. And when you look at some of the credit cards, again, most of the transactions are done under one of our rules, which we referred to last time, whereby they give you credit for the date of the payment.
We don't either collect or monitor from a fraud perspective. That's the domain of the individual financial institution.
I should say, though, since we are sort of the managers of the national clearing and settlement system, that our public policy objectives are safety, soundness, and efficiency. Routinely, we review our rules to ensure that the transactions that flow through us and are going to be cleared and settled through us have proper risk management processes.
We require, for example, certain levels of authentication in the POS environment and the ATM environment. What we generally rely on is that when you as a consumer send funds from your institution, your institution institutes proper authentication technology, because they are essentially on the hook for those transactions.
Thank you, Mr. Chairperson.
Thank you very much for being here.
As you know, we had a considerable discussion on this whole area when dealing with , the changes to the Bank Act. We deferred to a later point recommendations from many groups on a complete overhaul and review of the area of electronic payments, because it is such a major issue for consumers.
I know the Canadian Payments Association is involved in terms of some guidelines and in trying to oversee this area. However, overall, it seems to me that this area is largely unregulated. As you said, it is based on voluntary support. You've talked just now about a code of ethics for electronic payments. It seems to me that we've gone way beyond that approach, and that we, as parliamentarians, need to be working on a legislative framework in this area.
I want to start by asking you about the recommendations that we've had from Option consommateurs, and also from CCI, the Canadian Consumer Initiative. Both of those organizations, and others as well, have documented serious problems with the electronic payments system. I'm going to refer to their study and information from back in the spring of 2006.
They commissioned a study that reported 900,000 pre-authorized debit problems in two years. They said it breaks down to about 1,000 mistakes each day. They identify the problems in terms of wrong amounts, wrong dates, or inadequate funds. I could go on and on, but I don't want to take up the time of the committee. I'm sure you know this study very well.
First of all, I'd like your comments on the study, on the problems at hand, and on whether or not you would support this committee going forward with a recommendation to the government that we work hard at developing a new legislative framework. Whether it's part of the Bank Act or separate makes no difference at this point. I think the question is how much we are going to start to come to grips with this ever-changing world.
Okay, I accept that. Well, I don't accept it all, but I understand what you're saying.
I think, then, part of the issue is getting information so we can even judge whether we accept what you're saying. You know, we can't even get immediately from banks the cost of electronic transmissions involving ATMs. Can you give us a breakdown of the cost, on average, for every one of these aspects of the whole electronic payments system, as is actually possible I think in Great Britain through their Office of Fair Trading, so at least consumers then know?
That's sometimes why you need regulations, because if you let it just be a self-regulating model, first, you're not always guaranteeing consumer protection, and second, there are a whole lot of costs that get passed on to consumers that may not be more than simple ways of increasing one's profit margins. Sure, the banks can say that all this new technology is just beyond their free will and it just happens. Or we can understand it in terms of something that's being pushed on consumers by financial institutions, because in fact it allows them--
I will come back a second time on what Mr. McKay said. I hope that will not happen too often.
I would like to say a few words about instantaneousness. I know that you cannot answer, but perhaps you can tell your banking institutions that since money seems to move instantaneously, this should be reflected in the banking payment system. I know that ING, of which I am a client, is fairly good in that area. When I make a payment which does not go through, the money goes to a buffer zone for pending transactions, and I can see that the money has not yet been deposited in the other account. I can see that the money has left my account and that it is there. But with other institutions I deal with, when I do a transaction, my money is in limbo for a certain amount of time, and I don't know where it is. I simply wanted to point that out. I hope you will pass on this message.
Further, I have a question regarding processing delays. It seems that there's no consistency in this area amongst banking institutions. I would like to have an explanation. Let me give you an example from my own experience. At the end of the year, when the time comes to contribute to my RSP, I decide to sell some shares. I receive a cheque for the sale of these shares which I deposit into my account. On the same day, I write a cheque for my broker so he can take the money and put it into my RRSP. But since the cheque I received from my stockbroker is held for a certain number of days, the money is not immediately available in my account. So the amount is taken from my line of credit and I have to pay interest.
If the same rule applied to the cheque I wrote, it could be said that the bank still has not deposited my money into my RRSP. So you end up in a situation where the bank still does not have the money and yet charges me interest. However, it still has not transferred the money to the other institution.
First, do you process transactions involving cheques?
Second, how do you explain the fact that when it is convenient for the bank, the money is not available, but when it is convenient for the consumer, the money must be debited immediately?
I'd like to start off with a point that Mr. McKay was making, I think, which is that people have a tendency to procrastinate. In fact, you could probably argue that one particular gender is predisposed towards procrastinating, which is the one that I belong to. My wife tells me I procrastinate fairly regularly. But people tend to think that when they go into their website and they authorize a payment on their credit card, that payment has been made and it has been made on time.
The problem with the way the system works right now is it's not clear that those payments are not being made instantaneously. That's the problem. What happens is if this payment is received two days late by VISA, using it as an example, they will register that as 30 days late. It goes on your credit as R2. If you have a number of R2s on your credit rating, it lowers your overall credit score. And even though as far as you're concerned you've always paid your credit as agreed, you've always maintained it, you've been a good credit customer, you may not qualify for prime lending fees because of this misunderstanding as to how electronic payments are carried forth.
I've dealt a lot with retail finance at one time and a lot of people come in and tell me that they've always paid their bills, they've always paid them on time. They don't understand why their credit score would not be perfect, and I think this is a reason why; they don't understand that authorizing a payment is not the same as having made the payment.
How can we assist people? How can we make it so that they understand the system better and can use it better to their benefit?
Okay. I appreciate that.
The other thing is that a small business, for example, may have very large cash transactions, particularly retail businesses where they're operating with large lines of credit. They're paying interest on one side and they're waiting for money to come in on the other side, and this cycle tends to go on and on.
At the end of the year.... Even though you get a fax that says the money has been sent or you get an e-mail saying that funds have been transferred, you may wait three or four days for those funds to arrive in your account, which means you've paid four days of excess interest on your account. It can be quite costly. In fact, it can be thousands and thousands of dollars at the end of the year.
How can we tighten this up? Is there an incentive for the banks to tighten this up, first of all? Secondly, if so, how do we do it?