[Recorded by Electronic Apparatus]
Tuesday, February 11, 1997
.1530 
[English]
The Chairman: Welcome. Pursuant to Standing Order 108(2), the committee will resume its study of credit card interest rates.
Before calling upon the witnesses, we have two items of business. Firstly, the report of the Standing Committee on Industry regarding the science and technology review will be tabled in the House tomorrow, not today. We didn't get unanimous consent for doing it at the time we had available.
A voice: [Inaudible - Editor].
The Chairman: No, actually the Conservative Party finally had a voice. We'll take it away from them again.
Secondly, Mr. Lastewka will be chairing this committee from 5 o'clock to 5:30. I should remind all members there's a vote at 5:30, so we can stay until about 5:25 and then go for the vote.
On behalf of the committee I'd like to welcome representatives from the Canadian Bankers Association. I'll call upon its president and CEO, Mr. Raymond Protti, to do the introductions and to indicate to us how he's organized his time. We've told the witnesses before in this committee that we like to get on to questions as soon as possible.
Mr. Protti, this may not be your very first appearance in front of the House of Commons in your new capacity, but it's your first in front of us, I believe. So welcome, and I hope you're enjoying your new career. We look forward to hearing from you.
Mr. Raymond Protti (President and Chief Executive Officer, Canadian Bankers Association): Thank you very much, Mr. Chairman. Yes, indeed, I'm enjoying my new career.
I have with me today Mr. Mark Weseluck, who's the vice-president of banking operations at the CBA; Mr. Paul Vessey, who's executive vice-president of personal lending products at CIBC; Rob Pearce, who's senior vice-president of electronic banking services at the Bank of Montreal; Jane Fershko, who is the senior vice-president of card products, card services, and point of sale at the Royal Bank of Canada; and Mr. David Livingston, who is senior vice-president of card and direct services at the Toronto-Dominion Bank.
[Translation]
We are here today at the invitation of the committee to provide members with some general information about the credit card market in Canada, including that portion of the market comprised of bank-issued credit cards. In doing so, Mr. Weseluck has a short presentation that will cover the issues raised in the chairman's news release of January 22 - including a description of the credit card market, the information provided to consumers about credit card choices and the status of recommendations made as a result of past studies. We would then be pleased to answer questions that you may have. We have provided each of you with packages of material that will be referred to during the presentation.
[English]
I should point out before I turn this over to Mr. Weseluck that issues relating to pricing and product design are individual bank matters that the CBA is not in a position to address. For this purpose, the bank representatives are here to address any questions on these matters from the perspectives of their own separate institutions.
Mark.
Mr. Mark Weseluck (Vice-President, Banking Operations, Canadian Bankers Association): Thank you.
You have before you a couple pieces of information. I'll be referring to the presentation that was handed out to you today, and at the back are four diagrams, which I'll refer to throughout the presentation. Also, you will have received this folder of information, which I'll be referring to shortly.
We appreciate having the opportunity to meet with you today to discuss the competitive credit market in Canada. Credit cards are widely accepted by merchants and are extremely popular among Canadians. Approximately 80% of Canadians carry some form of credit.
Credit cards offer a wide range of services. They're a way of paying for goods and services, accessing credit, and also taking advantage of various enhancements. But credit cards are just one of the various forms of payment. There are cash and debit cards at one end, where you have immediate transfer of funds; there are cheques, where the withdrawal of funds depends on when the cheque is deposited; and then you have credit cards.
In the case of credit cards, holders can have up to 51 days before they make payment or incur interest. For almost 55% of cardholders in any given month, this represents a free form of access to credit.
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As well, there are charge cards, which are like credit cards; however, the balances have to be paid off by the end of the month.
Also, once electronic commerce becomes commonplace on the Internet, consumers will have further choices of how they may make payments.
Another factor that contributes to the competitiveness of the credit card market is the large number of issuers in Canada. There are at least 15 principal issuers of Visa and MasterCard in Canada, which include the banks, trust companies, various credit unions, caisses populaires, and other financial institutions. There are also numerous issuers of other types of credit cards, such as retailers, oil companies, and specific card-issuing companies such as American Express.
If you refer to diagram one, you'll see a pie that shows the percentage of cards in circulation that are attributed to banks as compared to the other FIs that issue Visa, MasterCard, and the other credit cards. Banks constitute 44% of that market, which is roughly a total of 59 million to 60 million cards in circulation.
As well, it's worth noting that there are no substantive barriers to entry. Any company that perceives an opportunity to generate a profitable return can start a credit card program.
It should be noted that credit cards are a mature product in the financial services marketplace. They are certainly very popular among Canadians and there's wide acceptance among merchants.
Given that the growth in the size of the market is relatively limited, issuers aggressively compete among each other for each other's consumers. This has resulted in a wide range of services being developed by the various issuers. A list of those would include standard cards, which typically do not have an annual fee; premium cards, which have a wide range of rewards; co-branded cards, which allow you to receive discounts and rewards with the bank's co-branding partner; affinity cards, which allow you to contribute a certain amount to a favourite charity or club; and low-rate cards, which have lower interest rates but also carry an annual fee.
This increased product differentiation has provided consumers with a greater selection from which to choose the credit card that best suits their needs. They can therefore look at the various attributes and pick the one that best suits their requirements.
Of particular note are low-rate cards. Of the many issuers of credit cards, banks have been the leaders in offering these cards. If you refer to diagram 2, you will see the banks' low-rate cards are roughly half the level of standard bank-rate cards, and when compared to some of the other issuers, such as retailers, they're roughly two-thirds the level. As of February 4, 1997, low-rate cards average 9.35%.
If you then refer to diagram three, you will note that at no time since we've been tracking monthly data, which is since 1980, has the rate available to consumers been lower. We've gone back to 1973 - we have partial yearly data - and it shows that even up until that point, this is probably the lowest rate that has been available since then.
We'd like to note that low-rate cards have been available from some banks for more than five years, since early 1992. Since their introduction they have been extensively promoted through a variety of means, which I will refer to in a minute. In terms of the take-up, they represent over 7% of the active cards issued by issuers with low-rate cards. If you look at the cards in 1996 that were new accounts, it represents roughly 15%. If you take into account that only about 45% of all cardholders pay interest in any given month, that's a substantial proportion.
I'd now like to refer to some of the material in the brochure, just as a reference to the type of material that has been used both to promote individual cards and also in the initiatives to educate consumers as to how they should use credit cards more wisely. I won't go into too much detail, but I'd just like to reference that so you're aware of what's in there.
At the back on the left side are a variety of card brochures and applications. If you scan through those, you'll see the banks offer the whole range of their cards and they delineate the various features attributed to those cards. In essence they're giving a menu to consumers so they can choose the ones that are best suited to their needs.
I've also included a statement stuffer in the Bank of Nova Scotia pamphlet to show that they have included, from time to time, tips as to how to minimize your interest calculations.
We've also included, as some of the promotional material from the banks and in terms of print ads, examples of where the banks have publicized in various papers advertisements to get the word out about their low-rate cards. This has happened over the last number of years - not just in the last little while, but pretty well since their introduction.
Also, quite a range of press statements are included as well as press clippings. The press clippings in particular are of note, because there was a price war over the last summer, where banks vied to have the lowest rate, and that was widely reported in the press throughout Canada.
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I'd like also to go through just some of the industry initiatives whereby the CBA, in conjunction with our members, worked to educate consumers about the use of credit and credit cards. I've included examples of some of our educational material. I'll just briefly touch on those.
Every six months we produce a short one-pager that we send out to about 2,000 different media outlets. In June 1996 we issued ``Using Credit Cards Wisely''. That was reported in roughly 17 newspapers and was picked up in other media outlets. It was in essence to help consumers better understand how they could use their credit cards more effectively.
We also produced a booklet called ``Credit Wise'', which covers all uses of credit, the types of credit available, and how it can be used more wisely.
We also produced a statement-stuffer that the banks have used in the past to demonstrate how to minimize your interest.
We also produced some material to educate students. Those are the newsletters in the back of the material. It's called ``Access''. We produce these every month and send them to roughly 40,000 teachers across Canada, which in essence is at least one copy for every school.
The ones that are particular to credit cards, which were produced in January 1993, January 1995 and April 1996, dealt specifically with credit and credit cards. Based on our surveys of the recipients of the newsletters, they've been found to be very helpful.
One other one we produced is called ``More Than Money'', which we sent to 4,000 schools. It was targeted at the high school level and it had a particular section that was called ``Credit''. Again, I've included a copy of that. I would also like to just make a bit of a plug for Street Cents, which is one of the programs of which we are the sponsors. A segment aired last Friday, February 7, on CBC on credit cards. That's a program targeted directly for the younger audience. It will be shown again on February 12, 15, and 16 on Newsworld.
I also want to mention that Visa Canada has produced a substantial binder that includes two CD-ROMs and 13 sections on managing money more effectively. That has been sent to 200 schools. We hope to have it in 89% of schools in four or five years.
I think that's credit. We've tried to cover the types of material that have been published for Canadians. I'd just like to now move on to some possible ideas we've suggested as to how the word might be put out further.
We have written to a number of the MPs to suggest that perhaps householder flyers or constituency offices might provide some of this material. It need not necessarily be a commercial for any particular product. It could be as we had with ``Using Credit Cards Wisely'', which was a useful tip for consumers. We're not advocating a particular type of product. We're saying that when you're looking for a product, here is the type of thing you should look for.
Just moving on to the issue of the business of credit cards, as I noted, there is a wide range of choices. As well, there are a variety of cost components that should be factored in when one considers the prices involved in these types of products.
Not only should the cost of funds be considered, but there is a variety of other factors as well, such as: the cost of funding the credit provided; the fact that there is also forgone income that could have been earned on that funding that was provided for the balances; the risk of extending credit that is unsecured, i.e., there is no collateral attached; the cost of administrating the card program to allow you both to use it around the clock in Canada and internationally; increasing levels of delinquencies and losses due to customer defaults, bankruptcies, and fraud; and the cost of providing the various benefits I mentioned earlier that is associated with various cards like premium cards, co-branding cards and some of the standard cards.
I think it's just worth mentioning that with the extension of other types of credit such as loans, the weight of each cost component will depend on how effectively the issuer manages his costs. All issuers face these costs; it's how effectively they manage them that's the issue.
One other factor is, in terms of spread issues, that the economic factors that have developed over the last number of years have to be considered. Inflation has been dropping, hence so has the bank rate. On the other end, there still remains a high level of unemployment, and consumer defaults are substantive. On the other side, there has still been a high level of losses incurred. Those have tended to be factors that have factored into the cost of funds and pricing.
In addition, market pressures have led to the elimination of annual fees on standard credit cards, while more holders of credit cards are paying off their balances in full. Even with all these factors exerting upward pressure on the cost of credit cards, strong competitive pressures have lead to decreases in credit card interest rates.
It's also worth noting that the proprietary market research conducted by the bank shows that interest rates are not necessarily a top priority for a lot of cardholders.
.1545
A quick comparison with other countries such as the U.S. and the U.K. shows that Canada's credit cards are competitive.
The Chairman: I just want to point out to the witness that if you're going to introduce a public opinion survey, either you introduce it or you don't. You don't introduce it and say it's proprietary.
Mr. Weseluck: Okay.
On the comparison among the U.S., the U.K. and Canada, it can be determined that the Canadian credit card market for Visa and MasterCard is extremely competitive. Not only are the interest rates and annual fees at or below the levels of other countries, but Canadian issuers typically do not levy the extra fees that are associated with many credit cards in the U.S., fees such as cash advance premiums, late payment fees, and over-limit fees.
One of the other issues this hearing is looking at is how the recommendations of other hearings were complied with. We have gone through those recommendations, and the banks have essentially met all of them.
I will conclude by saying that the CBA believes that the best way to assist consumers is to provide them with information and choice so that ultimately they can choose the best product for their services.
We'd also like you to know that the other payment mechanisms that are developing, such as debit cards, have proved to be very popular. Interac estimates that by the end of this year it could well exceed $1 billion in transactions. It will have taken only three years for debit card transactions to reach that limit, compared to thirty years for credit cards.
Mr. Protti: Thank you very much, Mr. Chairman. We would be pleased to do our best in answering any questions you and your colleagues might have for us.
The Chairman: Thank you very much, Mr. Protti, Mr. Weseluck.
Before I turn to the members, I think we can see that there's a large attendance today. There's already a list. We would appreciate it if everyone could adhere to our time limits so that everybody has a chance to ask a question and a chance to air their opinions.
[Translation]
Mr. de Savoye.
Mr. de Savoye (Portneuf): Gentlemen representing the banks, we have an interesting opportunity to discuss a subject that we're hearing more and more about in the news. It was drawn to the public's attention last November, when roughly 150 Mps asked you to bring credit card interest rates down to more acceptable levels, in view of how the Bank of Canada had adjusted its own rate.
Having said that, it is normal for banks to make a profit. It is even a good thing, because it allows them to pay taxes and contribute to the tax base.
The question that arises is this: where do your profits come from? What worries me is that while market forces should ensure that interest rates on credit cards, which are borrowing instruments, follow the downward trend of other instruments, your credit card rates seem to be set. It is as if there were no ceiling, but a floor.
Obviously, not everyone pays interest on their accounts. People who are in a position to pay their monthly balance within 21 days do not pay interest. But people who do not pay their balance in time do pay interest.
These interest payments represent a substantial part of your earnings. I appreciate your having given us a table with your costs. I assume that earnings are important for a bank. So where do they come from?
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For MasterCard and Visa, and I'm relying on the data provided last week by the Consumers Bureau, you have a retail volume of $68 billion. Of that amount, the retailer pays you a 2, 3 or 4% charge, which, considering that you advance funds for roughly 51 days on average, results in an annual rate of 14.3% if the retailer pays 2%, 21% if the retailer pays 3%, or 28% if the retailer pays 4%. Yes, you are there to make money, and collecting on transactions is an excellent way to do it.
However, at 2% on sales of $68 billion, your earnings are $1,360 million. Then there are the outstanding accounts. According to numbers from the Consumers Bureau, outstanding accounts represent $17 billion. Assuming that they are all at 17%, that represents $2,890 million in interest collected. And there are the loans, in the amount of $7.4 billion that, also at 17%, represent $1,260 million in interest. That is a total of five and a half billion dollars in earnings and I have perhaps missed some amounts. I did not include annual contributions in that calculation.
Now let's look at expenditures. There are frauds that, again according to the Consumers Bureau, are on the order of $83 million. Then of course there are your administrative fees, including the cost of benefits like insurance and the other gifts that you offer your clients and that, I repeat are not paid by those who pay their accounts on time, but those who do not have the means to pay it on time.
There are administrative fees. Let's estimate them at one dollar per transaction, which includes your amortization period. Correct me if my figures are wrong. So the cost is roughly 1 billion dollars for processing 900 million transactions.
As for credit, you will acknowledge that you extend it at 14, 21 or 28%. The cost of credit is the amount you pay to the person who lends you the money, i.e. the person who deposits money with you, and I'm not under the impression that you are paying me much these days. So I estimate your profits to be roughly 4 billion dollars out of 5 billion dollars in earnings, which means that in reality your net benefit is roughly 80%.
My figures are undoubtedly wrong, and I would like you to give me the right ones so we can see the real picture. If not, I'm going to believe that my perception is right.
[English]
The Chairman: Mr. Protti, please.
[Translation]
Mr. Protti: I would like to make two preliminary remarks on your comments, which touched on a number of points, and then I will ask my colleagues to comment on your numbers.
First of all, I would like to thank you for your comments on taxes, because you are right. This year, our industry will pay 6 billion dollars in taxes. We are subject to the highest tax rate in the private sector, and we are one of the sectors that pays the most taxes to the federal and provincial departments of finance.
I would also like to go back to the issue of bank profits, and the source of profits that you spoke about at some length. Bank profits for the year that just ended and for 1995 fall into three categories.
[English]
The first category, and the most important source of the profitability of the banks, is that we have become better lenders. The loan loss provisions that we've put in place for 1995-96 are very significantly improved over what we saw in the early part of this decade.
Secondly, we have been involving ourselves in what in the past have been non-traditional businesses, and in particular, the securities business. That has proved to be a very significant source of the profit strength of the industry in 1996.
Third, we have been very effectively repatriating earnings from abroad. We've become far more successful in generating earnings abroad.
Those three factors were the primary source of strength of bank profits in 1995 and 1996.
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[Translation]
Mr. de Savoye: Mr. Protti, you do not need to charge such high interest rates on credit cards, since the bulk of your earnings is on very solid foundations.
Mr. Weseluck, however, told us that outstanding balances were substantial. Just how substantial are they on credit cards?
Mr. Protti: I will ask my colleagues, including Mr. Weseluck, to explain the numbers we presented.
[English]
Mr. Weseluck: In terms of the amount of outstanding balances, we should note that part of that is included in the outstanding balances currently given in any given month. A certain percentage of that will not be revolving so it will not incur interest. So the balance that is seen as roughly $19 billion should not be factored in as fully generating interest income. I think that was a component of your revenue calculations.
A point was also made about annual benefits, the costs and who bears those costs. There are also annual fees paid by holders of those cards that reflect those added benefits and hence the cost in an attempt to try to cover that.
In terms of the merchant fees and some of these other issues, I would suggest that perhaps some of my colleagues could address those.
Mr. de Savoye: Prior to that, Mr. Weseluck,
[Translation]
I understand the principles that you were referring to, and I think that everyone here understands them well. Can you put a number value on the consequences? For example, in terms of outstanding balances, how much do you write off each year and how much do the benefits cost?
The Chairman: That was your last question.
Mr. de Savoye: Thank you.
[English]
The Chairman: I was going to ask you to be very pointed. I'm sorry, we will have to be very tight in our answers and questions, please.
Mr. Protti: Mr. Chairman, I believe both Ms Fershko and Mr. Vessey would like to comment on that question.
Ms Jane Fershko (Senior Vice-President, Card Products, Card Services and Point of Sale, Royal Bank of Canada): In terms of the $17 billion you quoted as the outstanding balance we might potentially earn interest on, as a rough order of magnitude, it could be reduced by one-third to one-half, because you have to assume that one-twelfth of all spending is on a given month. So that could reduce it by $6 to $7 billion. That's a significant reduction.
Also, just in generic terms, the administrative costs of people who maintain balances from month to month are higher because we have to send out statements. We also have to do more administrative and credit review on those people. So that type of portfolio, in general, is more costly.
Then there are a variety of other generic costs we could factor in that we talked about.
Mr. Paul Vessey (Executive Vice-President, Personal Lending Products, Canadian Imperial Bank of Commerce): I'd like to make a couple of points. I will answer your question on loss rates directly, but first, following the same train of thought, CIBC last year billed $17 billion and financed most of that without earning any interest at all. In fact our receivables, which we bill every month, were around $5 billion. Out of that $5 billion, figuratively, assuming 50% of people pay off their balances and 50% generate interest on them -
Mr. de Savoye: We don't have to assume. The consumers bureau gave us the right numbers, which I included in my preamble. We don't have to assume anything. We have the right numbers unless you contest the office of the consumer.
Mr. Vessey: I can only speak to the numbers I have from my financial institution. The point I was trying to make is that the interest you earn - and I think Jane was making the same point - draws no direct correlation to the amount of billed dollars.
What are our loss rates? At the Canadian Imperial Bank of Commerce, it was public information that our loss rate on our portfolio of $5 billion was slightly in excess of 3%.
If one wants to make the assumption on the $5 billion worth of receivables that 50% of those are current and paid off with no interest paid - in other words, there can be no losses attributable to the 50% that pay off their balances because they pay us off every month - then the loss rate associated to the interest payers is approximately 6% of the portfolio.
.1600
To sit down and say we have a 6% loss ratio, operating costs and so on.... In the cost structure of this business, to just look at billed business as $17 billion at the top and then calculate an effective interest rate isn't an effective way to do it. But 3% is our loss ratio.
The Chairman: Thank you.
I'll come back to you in a minute, Mr. Protti. I will now go on to Mr. Harper, please.
Mr. Harper (Simcoe Centre): We're here today representing the consumers, and I guess we're really representing 50% of them if 50% are able to take advantage of the cards. It's the other 50% that are trapped. I'd just like to set the scenario here that the consumers are facing and the situation they're looking at.
The first thing you read about is the profits the banks are making, and people look at their own personal situations with declining incomes and increasing debt loads. It's a well-known fact that the percentage of debt in the average Canadian family has almost doubled. When people go shopping, in many cases they're trapped because they must have cards. It's a necessity now - it isn't a choice any more. I don't think you can rent a car or go to a hotel without a credit card. The consumers are really being squeezed here. They have to have cards and they have to pay high interest rates. They see and hear daily that we're in a period of record low interest rates - the cost of money has never been lower - but it isn't reflected in what they're paying the banks on their credit cards.
I looked at your chart. It's a very nice chart that tracks what has happened since you introduced the low-rate card. I would have been very interested to see a tracking of what's been happening to the high-rate cards. I suspect, from my knowledge of the numbers, there hasn't been any real change in that area, vis-Ã -vis the drop in the basic rate. I think that question is bothering a lot of those people who are trapped in their use of credit cards.
I use that one because we are becoming a cashless society. People must have cards, so they're being controlled by businesses to some extent. They're being controlled by banks, and the banks enjoy a privileged position here in Canada, to some degree, by virtue of the government. So the consumer is really desperate, and feeling trapped. Who is speaking on behalf of the consumers here? How do you justify not reflecting that drop in rate to the high-card users when the rates come down?
Mr. Protti: Thank you very much for your question, Mr. Harper. You've raised quite a variety of very interesting points in what you've said. Let me address two or three, and then my colleagues may want to speak to some of them.
You spoke at some length about consumers and the sorts of situations they find themselves in when they want to purchase products. When consumers go out to purchase retail products they have five choices - cash, cheque, debit card.... I'll stop there. These numbers are rough, but I think the order of magnitude is about right. Those first three choices a consumer has represent about 70% of all retail sales purchases, so of course the interest rate issue does not arise there.
The fourth choice a consumer has is to use a credit card and pay off the balance at the end of the month. As you and your colleagues on the committee are aware, 55% of bank-issued credit cards are paid off. I can't speak for the other 45% of credit unions, caisses, oil companies and retailers because I just don't have any information on that.
That represents about 10% to 15% of retail sales. So in somewhere between 80% and 85% of retail sales, the interest issue doesn't come into play when you purchase a good or service. That leaves the 15%. You are quite right, we've raised the issue of the 15% of retail sales purchases where people are buying and carrying balances. That's why we put some emphasis in our presentation on diagram two in the package you had, where we demonstrate very graphically to consumers that they have a variety of choices when it comes to purchasing retail goods and services if they feel they won't be able to pay for them at the end of the month.
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Consumers are really facing quite a wide variety of choices in the market. You have some cards up at 28%, and you're quite right that those have been flat-lined for a very long period of time - I don't have the data as to how long, but some of my colleagues might. But you can also have a low-rate card that was introduced by banks in 1992, and which now averages 9.35% for the banks that issue them. That is a very significant difference, and there is clearly an interest on the part of informing consumers that those choices are available.
Mr. Robert W. Pearce (Senior Vice-President, Electronic Banking Services, Bank of Montreal): I'd like to address the issue of the people you've labelled as ``trapped''. In fact, it is the introduction of low-rate cards that has tried to allow those people to get out of the trap they're in.
In the credit card business you have effectively three groups of people. You have the people who pay off their balances every month and would never carry a balance from month to month - roughly a third of our portfolio. You have the other end, the people who use their credit cards as a borrowing mechanism - the people you would call trapped - who borrow from month to month, and carry balances from month to month. And then you sort of have a middle group in there. They are also about a third of the people, and they generally pay off their balances, but they occasionally do roll those balances from month to month.
It's for that one-third - those who use credit cards to borrow - that we introduced low-rate credit cards. At our bank, the Bank of Montreal, those people can get that card for 9.4%. We've sent millions of pieces of information to them through statements, through mail, through other things, to advise them of it. They can move from our standard-rate card, which happens to be at 18.4% today, to the 9.4% card simply by calling our call centre - and they do so every day. So it is in fact those people that you've labelled as trapped - I wouldn't call them that, but I'm addressing that group - to whom we've offered low-rate cards. That's been a huge change in this market over the last number of years.
The banks were last here five years ago to address the issue of credit cards. We were the only bank at that time that had a low-rate card. Now most of us here at this table do, and the industry is moving to that game specifically to address the trapped individuals that you rightfully are supporting here today.
Mr. Protti: I think Mr. Livingston would like to make a comment, Mr. Chairman.
Mr. David Livingston (Senior Vice-President, Card & Direct Services, Toronto-Dominion Bank): I think the issue of how the consumer benefits is very important to all of us. We feel we represent the consumer, as well. We have a very competitive market here, and we compete very aggressively for the business of the customer.
What we try to do is make sure the customers are getting value for what they have. The thing that hasn't come into the conversation so far is that a lot of fees have been given back to the consumer over the course of the last couple of years, and to an unprecedented degree. Where consumers were paying annual fees and other types of fees for a credit card many years ago, they are no longer having to pay those.
We've also added benefits to many of our cards so that consumers who choose to take advantage of the benefits also have them at their disposal. They represent real value, they represent real money, and they're also things that benefit all of the consumers who use the cards. If you waive a fee, everybody gets a benefit from the waiving of the fee. If you give points or you give other sorts of benefits, everybody gets the benefit of that.
So the way in which we compete is by trying to gauge what it is consumers are looking for, and by offering them options. The consumers who want those options we offer are the ones who are going to take them.
The Chairman: Okay, thank you.
Mr. Harper, you're near the end of your time. We'll come back to you, but did you want to make a comment here?
Mr. Harper: I'll just finish with a comment. If I understood the response of Mr. Pearce, all these credit card customers have to do to get the low rate is write to you. There are no qualifiers, there is no refusal. They just have to write to you, and they automatically get the lower rate. That's what I took from your response.
Mr. Pearce: And that's exactly what you should have taken from my response.
At Bank of Montreal, if they're existing cardholders who want to move to our 9.4%, low-rate credit card, which, just for clarity, comes with a $25 annual fee - there's a fee associated with the low rate, and it's not for everyone, but the position in the marketplace is - what we're telling our customers is that if they have a card with Bank of Montreal, they can move from the high-rate card to the low-rate card simply by calling our call centre. And because this is a very competitive business we're in, we're also trying to go to the Visa banks to get those people on their high-rate cards to come to Bank of Montreal to use our low-rate card. We want this segment, we want this business, and we're going after it.
The Chairman: Thank you, Mr. Pearce.
I'd now like to turn to Mr. Shepherd.
Mr. Shepherd (Durham): Mr. Pearce, I have a comment on that. If it's such a great idea, why wouldn't you just give it to everybody right away?
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Mr. Pearce: This is a clear point: not everybody wants a low-rate card.
Mr. Shepherd: They want a high-rate card?
Mr. Pearce: No, it's because they don't want to pay the $25 fee, and I think that's very important. There are many people who use the high-rate card for day-to-day transactions - in fact they spend a lot of money on their cards - and pay them off at the end of every month. As a consoumer at our institution, and every other institution, you can get that card for free. There's no annual fee, and you can get loyalty programs and a number of other things that go with it. So they have no interest in moving to a low-rate credit card.
Basically, there is not just one set of customers here. They're very different groups of customers with very different needs. As Mr. Livingston pointed out, what we've tried to do is present a choice to consumers so that they can pick the product that best serves their needs.
Mr. Shepherd: I'd like to focus on an age group. I have a study here, a survey that was done by Angus Reid just last month, in January. As a government, we're very interested in our young people, youth unemployment, etc. This is for the age group 18 to 34. This study showed that 58% of these people use a Visa card and some other retail card; 45% did not pay off their balances; 78% pay rates in excess of 16%. In addition to that, we asked them if they had a low-rate card, and 84% said they did not.
We go to our university campuses and we see these kinds of brochures - this isn't the brochure that's in your package, but there's a brochure that shows your bank in here - in what is called a ``campus kit''. To get a campus kit, as I understand it, the qualifying requirement is that students simply have to have an annual income of $1,200. You're talking about giving these people over $1,000 credit on an annual income of $1,200.
Here are some of the other comments in here: ``Initial credit limit may be increased on request''; ``Each card issuer will send you complete information on terms and conditions with your credit cards''. So it's only after you get the credit card that they're going to tell you how much you're going to pay for it.
The bottom line for why you want to do this when somebody doesn't have a regular income and is just starting out in university is this: ``It's best to have a credit card history in place before you need a loan.''
What you're basically promoting is the use of credit among an age group that doesn't have regular incomes. You're creating a lifestyle of indebtedness there. What's your responsibility for doing this?
The Chairman: With a question like this - and this is what normally happens when we have the CBA - I want you to be very careful when you choose the person who's going to respond so that we can go back to the questions without everybody kicking in, because members have lots of questions.
Are you going to respond to this question then?
Ms Fershko: Yes.
I'm speaking on behalf of the Royal Bank on our portfolio and approach to the student market. I know there are many misconceptions about the student market, i.e., that we lend frivolously to them and that they're bad credit risks. Recently we analysed our own student portfolio, and it turned out that the credit quality or the loan losses were actually less with our student population than they were with our cardholder portfolio in general. I can only speak for our approach, but I think the reason for this is that when we lend to students we start them at a maximum of $500 per year. After a year of good credit history, we will bump them up very little.
What we try to teach them is prudent credit management over a period of years so that they learn how to manage credit. Certainly to give a student $5,000 right off the bat would not be in their best interests, and it wouldn't be in our best interests. And I think other banks have also experienced that their student portfolios are actually turning out to be very strong, because we're teaching students how to manage credit.
Again, I can only speak for Royal Bank, but I think this is also reflective of the fact that we have a loan loss experience that's very low in general. Most of the Canadian banks have a loan loss experience that's three times less than what's seen in the U.S., and I think it's because we know our clients over periods of time, over generations. Seventy-one percent of our cardholders actually are our clients, and they're not just there because they want that particular credit card.
Mr. Shepherd: But I'm not tallking about your loan loss record. That's a success, that's what you're into doing - selling credit and making money on it. What I'm saying is that you're putting a hook in people from a very young age group, and they become subservient to or almost exist on the whole concept of credit.
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So as we study those people as they move through the economy, the bottom line is yes, you're absolutely right, you're doing a great job, because they're the 45% of the people who aren't paying these things off and are paying the high interest rate.
In other words, I don't care about your loan loss records, and you talk about giving that one kid $500. These other credit card companies also gave him $500, okay? I don't doubt that there are students in there who can manage their debts, but there are a hell of a lot who can't. You go to any credit counsellor in this town and they'll tell you that they see people coming in every day showing them $25,000 of credit-card debt that they can't service.
The question I have for the financial institution is where's the responsibility for that?
Ms Fershko: I think we do have a responsibility, and I think our record is actually very good.
I know, for instance, at the Royal Bank, if after a year a student wanted to increase his or her credit limit, we would do another credit check. If indeed we found out that in that period of time they had gotten credit cards with all the other financial institutions at the same time, it would show that they had probably reached their maximum in terms of being able to support that loan. It wouldn't do us or them any good if we got them in over their heads, so I think we're working in it together. We want to develop long-term relationships in Canada. As you know, there are just a few major banks, and we want to maintain these relationships and make them good over a lifetime, not just at one sale.
Mr. Shepherd: Do you make it part of your condition for obtaining credit to check with other financial institutions as to the total amount of credit that's been borrowed by the individual?
Ms Fershko: Yes, through a credit bureau.
Mr. Shepherd: There seems to be some concern that it doesn't happen in Canada.
Ms Fershko: Canada has a loan loss experience of a third of the U.S., so we're doing it better than almost any other country.
Mr. Shepherd: I'm not talking about the people who hit the wall. I understand that people hit the wall. But I'm talking about a whole other group of people who are never going to be financially or fiscally in a position to manage their resources because they started borrowing at a very early age and continued in that process.
Ms Fershko: I think you'll see that banks have changed their philosophies in terms of relationship banking, to be more one of financial advice as opposed to purely pushing products, because we do want this long-term relationship.
We know, for instance, when people are young they may be more in a borrowing mode. Then as they get older, they get more into - and we try to help them get more into - an investment mode so that when they retire they do have some substantial wherewithal.
Because we want them to be financially healthy, we've changed our approach, I think, over time. You'll see we're more into advice and relationship as opposed to simply selling product.
Mr. Shepherd: We have these other statistics that come from the Bank of Canada -
The Chairman: Mr. Shepherd, Mr. Pearce has been asking to get in. I'm going to go to Mr. Pearce. Would you then ask the final question, Mr. Shepherd, and we'll go back to Mr. Pearce?
Mr. Pearce: I generally agree with the points that Jane brought up.
Clearly for students, particularly for students in post-secondary schools, getting a credit card has a certain cachet to it, a certain rite of passage for them. It shows they're starting to come out on their own and gain a level of maturity. What we don't want to do is get them into financial trouble right off the bat. It's not in our interest, and it's not in their interest. So with ourselves, we put an $800 to $1,000 limit on a student card, and our performance is very similar to that of the Royal Bank on this. That portfolio has worked very well for us.
We're not telling them that they have to buy our card. What we're doing is offering it, and they want it. But what we're doing is making sure they don't get in over their heads, by putting very nominal - in today's world - limits on those cards. What they generally use them for is purchasing, buying goods and services, both on campus and off.
The Chairman: Mr. Shepherd, please make your final point.
Mr. Shepherd: The bottom line is that the Bank of Canada shows us that as a percentage of disposable income in this country, debt levels are rising. We're up to 92% of disposable income. Consumer bankruptcies are at an all-time high. I find it difficult that you're also telling me that this is all good for people, that we're teaching them how to use credit. The bottom line is that there's a lot of people out there who are having difficulty with this.
What I'm suggesting to you is that there should be some responsibility aspect of the access to capital here, that maybe some of these people in fact shouldn't be receiving credit at all, or if they are, that within the credit-granting industry we put specific limits on people, based on their income. To me, $1,200 of income to sustain a - she said it herself - $500 credit line...is that reasonable?
Mr. Pearce: I think the experience, both at the Bank of Montreal and, as Jane said, at the Royal Bank, is that it is reasonable. In fact students are performing very well, and they're not getting in financial trouble.
Mr. Shepherd: Your definition of financial trouble is bankruptcy.
Mr. Pearce: No, it's not bankruptcy -
Mr. Shepherd: Or default.
Mr. Pearce: - or delinquencies, or any of the ones you want to....
I would make two points.... Well, I'll pass on that.
The Chairman: Thank you very much for these questions. We're going to turn now to Mr. de Savoye.
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I would really hope that you would help me out here with your responses too. The only reason I'm doing this is that there's a long list here, and this is one of those topics that has a great deal of interest around the table, so I would really like every member to have a chance to at least ask a question.
[Translation]
Mr. de Savoye.
Mr. de Savoye: Ladies and gentlemen, I must say that earlier I was not satisfied with the numbers. So let's forget about the numbers and see if you are any better in terms of social conscience.
The Bank of Canada decreases its rate to give individuals and businesses more disposable income and to stimulate consumption. When you have high credit card rates, you are depriving people of a portion of their disposable income that they could use to increase consumption.
Consequently, do you not think that these high rates, these abnormally high rates, because they have in no way followed the trend, fly in the very face of economic recovery that is based among other things, might I remind you, on low wage earners who do not have the means to pay their bills at the end of the month when they receive them because they are two high due to the interest rate?
Mr. Protti: Mr. Chairman, I will start to answer the question. I refer you to diagram 3. You mentioned the high rates; that was your comment. As we have shown in diagram 3, credit card interest rates are the lowest they've been in almost 25 years in this country.
Mr. de Savoye: I would like to point out that the Consumers Bureau - and I imagine their numbers are accurate - told us that for the past three years, MasterCard and Visa rates have remained more or less the same, whereas the Bank of Canada rates have dropped considerably. In fact, the spread is larger; there is now more than a 13% spread between the rate you charge for ordinary cards and the Bank of Canada rate. What I'm saying is that you are financing your whole credit card system to a large extent on the backs of people who do not have the means to pay their accounts at the end of the month. The net result is that our social justice is completely backwards. People who have money don't pay and those who don't pay for the entire system. What do you have to say about that?
Mr. Protti: Mr. Chairman, I would like to make a comment and my colleagues will perhaps like to make some additional ones. I would point out that Industry Canada's analysis is based on banks' regular cards. As we indicated on diagram 2, we have low-rate cards at 9.35%.
Mr. de Savoye: I would like some clarification on what you just said, Mr. Protti. What percentage of the cards in circulation are low-rate cards?
[English]
The Chairman: Mr. Weseluck, or...?
Mr. Weseluck: Seven percent of active cards, those who offer these low-rate cards, are currently low-rate cards.
Mr. de Savoye: So 93% of your answer is gone. Thank you.
The Chairman: Mr. Bodnar, and then we'll go back to Mr. Harper, then back to a Liberal, then back to Mr. Solomon, who is going to be leaving.
Mr. Bodnar (Saskatoon - Dundurn): Thank you, Mr. Chair.
I've reviewed the applications the banks have left or we've obtained from the banks. I have those of the TD, Scotia Bank, CIBC and the Royal Bank. I noticed, especially since Mr. Livingston indicated that you do have concerns for consumers, that in none of these applications from any of the banks is there ever an indication of what your interest rate is, except when you have the low interest rate card of 9.9%, as for the TD Bank. There is never a reference as to what the TD Gold Elite card is, what the TD Gold Travel card is, what the TD Green Card is, or the GM card - never. If you're that concerned about consumers, why don't you disclose this?
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I raise this as well with the Royal Bank, because the reference on the application, in probably one of the nicest brochures I've ever seen, says, on the back, ``The fees: standard interest rate''. There is no disclosure of an interest rate when an application is being made.
The Chairman: Ms Fershko.
Ms Fershko: There is disclosure of interest rates. It's not on those brochures because they get dated and we want to have the flexibility to move rates with the market. In every single branch in Canada, you'll find interest rates posted very prominently in a number of places. We can't do it on the brochures because they date them and it would escalate costs.
Mr. Vessey: I would add too that for any direct mail or any current promotions that go out, I think all the members around here directly post the interest rate on the offers. This just follows along with what Jane is saying. We do have in-branch brochures with a shelf life that is much longer than that of interest rates, but those interest rates are predominantly posted in the branch.
Mr. Bodnar: But if that's the case, why would you post the low rate? For example, the Toronto Dominion Emerald Visa card, for which you have in brackets 9.9%.... And I realize they can become dated, but there is an explanation: that it's accurate as of a specific date. Why don't you give the rate for the other cards and, as well, put asterisks beside it and say it's as of a particular date? If you can do it for the low card, why can't you do it for the high card?
The Chairman: Mr. Livingston.
Mr. Livingston: That brochure was printed at the specific time we were launching that particular card. We presented the interest rate and, quite frankly, we probably should have put the other rates on it.
Mr. Bodnar: One of the biggest problems, even though interest rates have gone down in Canada significantly and it's easier to buy a home now because of lower rates, etc., is that the rates are staying high on credit cards and many consumers buy only on credit cards. If rates don't come down on credit cards, it's hard to stimulate an economy by getting interest rates down when the rates are staying up on the credit cards themselves.
Would you not agree that for the economy to be better stimulated by consumer spending it is essential that the banks participate by reducing the interest rates pretty well immediately?
The Chairman: Mr. Protti.
Mr. Protti: Thank you very much for that question, Mr. Bodnar.
As we tried to demonstrate earlier in our presentation, the answer to the question is of course that banks have indeed responded. If we can go back to diagram two and diagram three, we'll see the nature of that response.
You're quite right to point out the impact that interest rate levels do have on consumer purchasing power. As diagram two indicates, those consumers who want to purchase, carry a balance and pay interest charges on it have quite a staggering range of choices in front of them. For those who want to make sure that in their outstanding balances they minimize their interest carrying charges, Canada's chartered banks do offer the low rate alternative in the market.
The Chairman: You have a final question, Mr. Bodnar.
Mr. Bodnar: Mr. Protti, let's take Visa as an example. Let's pick on Visa today. What are comparable rates in the United States for comparable cards? What's their lowest-rate card? What's their highest-rate card?
Ms Fershko: In the United States, it's a little bit deceptive because they have a practice that's very common there. Probably at least half of the cards have this practice, which is called...if I want to be polite I'll call it an ``introductory special rate'', but it's really called a ``teaser rate''. It lasts for a very short period of time and can be set at anywhere from 6% to 9%. But within a six-month period - and in fact the time period is getting even shorter - they all switch you to ``prime plus'', which is usually the prime plus 10% or prime plus 11%, somewhere in that neighbourhood. Their numbers are very much affected by the fact that most of them suck you in with a teaser rate. Then people are stuck and the inertia factor takes effect.
But I'd like to point out again that choice is something we really do emphasize in the banks. You can use debit. You can use personal lines of credit. You can use credit cards.
I shouldn't mention this, but I happen to be a person who maintains a credit balance and has a high-rate card - even though I'm very well aware of the high rate - because I like the other features on it.
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We've had our low-rate card since November 1992. On our old classic brochure, which existed from 1993 to 1995, it said on the cover that a reduced-rate option was available. I could only find nine press releases - I'm sure there are more - in which we announced this. We were recently twice in national newspapers.
What we keep finding is that it's a niche product. People really are attracted to the other features. There's a J.D. Power study in the U.S. saying that the prime drivers of satisfaction are not interest rates but the choice of cards, rewards, travel, and everything else. Interest always comes in third or fourth on the list.
A Canadian study that was recently done in the last couple of months showed that, again, of the key drivers for satisfaction, of why I chose a card, or of why I switched a card, interest rates are never among the top two. An Angus Reid study found the same thing. It's just not something we can interest consumers on.
The Chairman: Thank you. You used two verbs interchangeably: ``sucked in'' and ``attracted''. I'll be interested in your further definition of those.
Mr. Harper.
Mr. Harper: Thank you, Mr. Chairman. Do I get one question or two?
The Chairman: Five minutes.
Mr. Harper: I hope that we can get two answers in. I'm going to ask two questions in the five minutes.
Here's the first question. There's this controversy in the media about how much profit is made from the cards. I think the Bank of Montreal was the one that said it showed $8 per card. The others - I'm not sure who the others are - were talking about $14 to $18 per card. That's a significant spread. Can you explain that spread to me?
Mr. Pearce: I'd be glad to. Here are a couple of points on profit disclosure. It was in front of this committee in 1992, if my memory serves me right, that Al McNally, who looked after the credit card business at the Bank of Montreal at that time, said that the overall credit card profit represented about 3% of the profit of the Bank of Montreal group of companies. This committee should know that this number in 1996 was 3.9%.
That worked out to about $8 a card. We have roughly five million cards in the marketplace in Canada. Our net profit was roughly $8 a card. That is on the record. It was picked up by the press. That is in fact true.
We in the bank are moving to a fuller disclosure of various lines of business. In fact, our chairman is on the record as saying in our annual report this year that we plan on showing the performance of up to 30 different lines of business in our bank. We'll show the profit and loss of 30 different lines of business, and credit cards will clearly be one of them.
This committee, the investment community, and our customers can look forward to a full disclosure by Bank of Montreal on line-of-business profits in the credit card business, among many other businesses that we have.
We're out in front on disclosure. We've been a gold medal award winner for the last two years with the Canadian Institute of Chartered Accountants and The Financial Post survey of disclosure. We're out in front.
Our profit in 1996 was $8 per credit card, and we have roughly five million of them.
Mr. Harper: Thank you. This is my last question. I have to come back to the comment that you made, Mr. Pearce, about the low-rate card not being for everybody. I can understand that it isn't for those people who pay off their balance, as they could care less what the interest rate is. They're able to take advantage of it.
But on the other side of the ledger, what is the average running balance? I think I read somewhere that the average balance on credit cards is around $1,500. Why in the world wouldn't they leap at the opportunity to have almost half the interest rate? I did hear about incentives, such as trips and travel, but I have a little difficulty with that really.
Mr. Pearce: I would suggest that they are leaping to low-rate credit cards in the segment that in fact carries balances from month to month.
Look at our portfolio right now. We launched low-rate credit cards in a large way in May 1996, which is roughly ten months ago. Right now, 9.6% of our credit card outstandings are on low-rate cards. We want more. If a consumer in this country can qualify for a credit card and wants to borrow for their needs, I want them to come to our 9.9% card at Bank of Montreal.
Excuse me, it's a 9.4% card at Bank of Montreal. We lowered the rate. It started at 10.9%, and it has worked down to 9.4%.
Mr. Livingston: Two quick responses. As Ms Fershko said earlier, customers are not all driven by the interest rate. That's because the value of the benefits they get are substantial.
Take something like car points on a card, which is true in the case of TD and CIBC. The customer earns 5% on what they spend, versus an interest rate savings only on what they borrow. What they use the card for in terms of spending is much larger than what they would have in the way of outstandings.
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So for many customers, it's a very simple economic equation: which one is going to get me more money? The benefits in many, many cases will bring more money than the saving on the interest.
The Chairman: Mr. Regan, please, followed by Mr. Solomon.
Mr. Regan (Halifax West): Thank you, Mr. Chairman.
We heard last week from the consumer affairs section of Industry Canada that for each 1% drop in credit card interest rates, $10 million is put into the economy. We used to have rates that were around prime plus 10%, whereas now they seem to be hovering at an average of about prime plus 12%, 13%, or 14%. It looks to me and to many consumers as if banks are taking $20 million, $30 million, or $40 million a month out of the Canadian economy at a time when we need to have a recovery and consumers out there being able to put those dollars into the economy to create jobs.
It's interesting to hear from you that in the U.S. the banks are tying their credit cards to a prime rate. They're setting their rates for credit cards at prime plus 8%, 10%, or whatever. Why can't we do that in Canada if they can do it in the U.S.?
I was interested to hear you talk about trying to teach people how to manage their credit. I'd be interested to know how many hours you spend with your average customer doing that, because I've never seen any example of that, aside from the experience you get from looking at your statement each month.
We received from you in this booklet today a number of brochures. I see that some of them refer to cards with low interest rates, while others don't. We have a piece of material here from the Royal Bank that's dated 1994 for some reason. Now that's kind of out of date, but you give us that.
I note also that the Royal Bank's brochure refers to four different credit cards, none of which is the card with the low interest rate. Why would you not display it? Am I mistaken? Is one of these the low-rate card?
Ms Fershko: The blue one has it as a feature. The blue one is the classic card. I'm sorry, it's the first one.
Mr. Regan: This one.
Ms Fershko: Yes. It's on there.
Mr. Regan: That's a feature of it?
Mr. Fershko: Yes. You can choose that or choose -
Mr. Regan: That's one of the options?
Ms Fershko: Right.
Mr. Regan: That's an additional feature of this card?
Ms Fershko: Right.
Mr. Regan: Thank you. Here's the other thing that strikes me. I noticed with TD that their low-rate card doesn't have the same benefit as in other cases in which you have an interest-free period of 21 days. In other words, with this low-rate card, your interest is charged from the moment you buy an item, unlike that of some of other lower-rate cards. It strikes me that you're getting the consumer either way. I don't see a big savings if you move to that system.
Mr. Livingston: But the fee is also lower.
Mr. Regan: The fee is also lower, you're saying. That's the annual fee?
Mr. Livingston: Yes.
Mr. Regan: So that's the difference?
Mr. Livingston: Sure. What we try to do is balance all these things out so that the benefit from having a card with a low interest rate from TD is that the fees can be zero if you use the card.
Mr. Regan: Let me ask you this.
The Chairman: You directed some questions earlier at Ms Fershko. Did you want any particular response or did you want to make another point first?
Mr. Regan: I guess the problem is that I have too many questions and not enough time. The nature of this process is that members of the government side can ask very few questions in relation to our colleagues. That's because the nature of the system, which rightly favours the opposition here, allows them to ask lots of questions, and that's a good thing.
So let me ask this as my main question. What are the total revenues from credit card operations broken down by total interest revenues and fee revenues from holders of credit cards? What is the total cost of those operations according to general accounting principles as broken down by general administration, operating costs, advertising, promotional costs, bad debts, fraud and the replacement of lost or stolen cards?
I realize it's a fairly detailed question. I can give you a copy of the question so you can answer it as best you can. Perhaps if you can't give us the answer in detail today, you can get it to us on all the questions you find listed here.
The Chairman: That will be filed by the committee.
Is there a brief response? I know he put a lot on the table. Is there an overview comment? Mr. Protti?
Mr. Protti: Maybe just a quick comment on the questions. Given the time limitations, Mr. Chairman, we'd be quite prepared to accept any questions in writing and get back in writing very quickly to each of the members on the issues they've raised.
The Chairman: The researcher keeps good track of these questions too. As for the things we feel are loose ends, we'll make sure that -
Mr. Regan: Let's look at the question of prime. Why couldn't you declare your rates as tied to prime as they do in the U.S.?
Ms Fershko: Prime is only half the way in which they make revenues in the U.S. They have much, much higher fees, and they actually - pardon the slang - ding people all the way along. There are charges for late payments. There are charges for cash advances. They have charges that greatly exceed what we do in Canada.
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Also, as I said, their interest rates are deceptive, because the interest rates you end up paying are generally higher than what you end up paying in Canada. If you track it over the long term, you'll see that in the U.S. they generally end up paying more, but don't realize they are. They also get a lot less.
For instance, I've had snowbirds write to us - in fact I see all the correspondence that comes in from our customers. Snowbirds will frequently write and say they were just down in the States and saw this Chase Manhattan gold card with a zero fee, and interest rate of such and such. What I write back is: Well, did you notice that after six months the rate goes up to such and such, which is generally higher than ours, and that that gold card doesn't have out-of-province medical, doesn't have trip cancellation, doesn't have collision damage, doesn't have a reward program, and on and on and on?
There's generally more value for less money in Canada if you weigh out the whole equation, and I'd be glad to do that.
The Chairman: Mr. Solomon.
Mr. Solomon (Regina - Lumsden): Thank you, Mr. Chair.
Canadians who have talked to me about the high interest rates that banks and others charge for credit cards are seeing the same economic indicators as we all are. I raise five today: inflation is at record lows; we have bankruptcies at record high levels; we have personal debt as a percentage of disposable income at record levels; we have interest rates at record lows since the 1940s or 50s; and we have banks that are receiving the largest profits in their history.
They see these economic indicators and they look at the tracking. We see that the prime rate and the credit card rates for MasterCard and Visa have been around 9% to 10% on the spread. As my colleague from Halifax West has indicated, this margin has been consistent pretty well throughout until the last half of the last year and the first quarter of this year, where the spread is not 9% or 10%, but between 13% and 14%.
We are wondering why there has been such a long lag in terms of dropping that margin. I'm very curious to know that.
Second, you indicate in your presentation that your rates are competitive to the U.S. and to Great Britain and other countries. The U.S. prime rate is 8.5%. The Canadian prime rate is 3.25% or 3.5%. Yet you say we're competitive. There are obviously five or five and a half points that are missing somewhere in this equation in terms of how our rates are competitive.
I'd like you to address those two issues if you could.
Mr. Protti: Mr. Chairman, this question of spreads is something we'd like very definitely to get back to you and the committee in writing on, because as you know, we have some concerns with respect to a comparison that's based on spreads.
Consumers do not pay a spread; they pay an interest rate. The analysis we have seen is predicated on the standard card rate, when in fact what consumers have in the marketplace is a choice for a credit card that's at 9.25%, out of a Canadian bank. This is obviously not true for the set of other issuers in the marketplace that have had substantially higher rates than that basic low-rate card.
The spread, we think, obviously is not what it is the consumer pays. They pay an interest rate, not a spread. There are a wide variety of other factors, as we tried to show on our diagram number four, which goes into credit card cost components, and the cost of funds is only one of the six basic elements that go in there.
I think, Mr. Chairman, that on this issue you deserve a written response from us, and you'll get one.
The Chairman: Mr. Solomon.
Mr. Solomon: I look forward to your written response, but I think you're ducking the question, primarily because when you look at the spreads.... For example, in 1991 the inflation rate was greater than it is now, the prime rate was triple what it is now, and bankruptcies were lower. Other economic indicators show that personal debt was lower as a percentage of total disposable income than it is now. Yet the margins, when you factor all this in, probably aren't 13% or 14% greater; they're probably in the 20% range.
My sense is that Canadians want to know a little bit more in detail.... I'm not talking about rewards and that sort of thing. We all understand that. That's a cost for doing business. And people will choose to take those credit cards as they see fit, according to their preference. But with respect to this margin or this spread, my sense is it's out of control.
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Prior to 1981, you recall, there was legislation on the books in Canada that provided for all financial institutions to charge no more than 12%. At that time interest rates skyrocketed, but the Liberal government repealed that bill. Now we're seeing rates not at 12% but at 18%, and in many cases retail is up to 28%, when the prime rate is 3.5%. It's no longer 18% and 19% or 17%, as it was in the early 1980s.
So there's something that's not right here. It's something that's not sitting right with Canadians who are paying these sorts of things, and I think you should respond to that generally - that situation.
The Chairman: Mr. Vessey, would you like to give a response?
Mr. Vessey: I would.
One of the problems we have here, Mr. Solomon, is that the proliferation of products that we put out.... There seems to be a common theme coming from the committee that we would like to roll everything we provide to cardholders into one package, and that will include a low rate. Mr. Shepherd asked why we didn't just drop the rates on all our cards.
Here is a calculation of our portfolio at CIBC, to give some facts and some numbers. When we dropped our classic card rates, that was the equivalent of 170 basis points on rate. That was $12 per card on every classic card that we had out there.
There are different prices for the benefits we talk about, whether they're cars, medical insurance, airline points, or whatever. But just as a ballpark figure for our discussion, because I don't think it's out there, they average around 100 basis points. Let's just use that. So now we have 270 basis points.
You made a reference, Mr. Solomon, to the fact that we have had increased bankruptcies in the last year. There's no doubt that loss rates in the last year or year and a half have increased, different ones have started at different points, and different portfolios perform differently. But roughly, to say around 100 basis points isn't out of the question, as to what those have gone up...and fraud rates, and I could go on.
The problem we face is if we have a co-branded card, to take an example, where a customer wants a zero fee, and if I charge that person a fee, he's going to run down to that Bank of Montreal card or whatever, because fee is the most important issue to that specific customer.
We have now differentiated the market in this country, and we can't go back. We've differentiated it into segments where we have people who are very interested in very expensive reward programs. They showed different behaviours on how many of them pay off and how many of them don't. We have different ones that want out-of-country medical insurance for when we had to because the insurance companies increased our rates. Your constituents complain to you and they complain to us because we had to withdraw it from those people who were in excess of 65 years of age. I've never had anything hit me on my desk as when we had to do that because of the huge cost.
We have people who want cars. And now we have a segment of the market that wants low interest. I'm surprised - I was waiting here and ducking - that CIBC doesn't have one. Well, we will have one, and we will have one because my dear friends around me have created a market.
I would like to make a point -
The Chairman: Mr. Vessey, I've just got to be -
Mr. Vessey: This will be my last point. That 7% of the Canadian credit card market, in the period of time these things have been out, is huge. There is a large rush to low-interest-rate cards, and there is a significant market that's been created. And even though CIBC is focused on co-branded cards, we are going to be out aggressively retaining our customers in the low-rate market as well.
The Chairman: Thanks, Mr. Vessey. Thank you, Mr. Solomon.
Mr. Lastewka.
Mr. Lastewka (St. Catharines): I have three questions, the first one being on the student kit for university. It was mentioned earlier that you keep it at a low amount and so forth. When you look at the kits, though, they're not your basic cards. We're not teaching our students off the bat that they could have basic cards. All the promotion, at least for the ones I have - the kits are the ones for air miles or a new home or whatever. That's one question - and I did notice that CIBC was on that.
My other question concerns information for consumers on the amount of interest paid. This question has come up once before. I thought that was going to be part of the scheme to inform consumers at least once a year of how much interest they've paid on their cards. They're told monthly how much they've made in purchases. I know you're going to come back to me with ``it's a computer item'', but I hope not.
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Why don't we inform our consumers so they are knowledgeable? As someone mentioned here earlier, to provide information and source for the consumers is, to me, an item that needs to be given. Those who have mortgages should receive statements once a year on how much they've paid on their mortgage and how much interest they've paid so they can better plan. I'd be very interested in that.
Last week we received information concerning the spread. I'm glad Mr. Protti said the interest rate is not determined by the spread.
I'll put that question aside, but I will leave this with you, Mr. Protti. If interest rates do rise four or five times, I would hope that wouldn't be the reason we change the low-interest card.
The Chairman: Mr. Protti or Mr. Pearce.
Mr. Pearce: I've already had a couple of comments on students, so I'll pick up your second point, which is on disclosing to customers the amount of interest they've paid.
We at the Bank of Montreal do it monthly on our statements. I have a copy here. There's a section at the bottom that tells the customer what interest rate they are being charged and the amount of interest we are requesting from them every month. So it's not that we don't do it once a year. In fact we do it every month.
Mr. Lastewka: Is that year-to-date?
Mr. Pearce: No, it is simply a monthly calculation, and if the customer wants a year-to-date total, most people keep their statements, and they can add it up. We do it on our monthly statements, and it's clearly right on the front page, not buried in mice-type on the back. Right on the front page it's disclosed what their rate is and the amount of interest they're being charged for the month.
I quite honestly don't know how much more clear our disclosure could be on interest rate. It's simple and it's on the front of the statement, exactly where the purchases are.
Mr. Lastewka: Do you show your purchases year-to-date or just for the month?
Mr. Pearce: Just for the month. Basically it's a monthly statement, but every month we tell the consumer exactly to the penny the amount of interest they're paying. If they want to add it up, that is their prerogative. We have very few if any calls to our call centre asking ``What's my annual interest cost?'' The people who need that keep their statements.
The Chairman: Mr. Lastewka, do you want to hear from one of the other witnesses? They wanted to jump in.
Mr. Lastewka: Yes, Ms Fershko.
Ms Fershko: The reason we don't have it is simply that we don't have any customers demanding it. I mentioned before that I actually do read the 300-odd consumer letters we get a year - that's about all we do get; we get more phone calls - and I have not yet seen one single request for an annual interest calculation, and I've been in cards for two years.
Having said that, it's not just a simple turn of the switch. Actually some fairly extensive systems changes would be required, and it would be costly. There really isn't any demand. If there were significant demand, as in most cases, we'd respond to what our customers were asking for.
Mr. Lastewka: Maybe what I'll do is just copy you my letters. If that's the way of getting things done with the banks, then we'll do that, but I don't think that's the proper way of doing it. If we want people to be conscious of interest they're paying, we should provide that to them. I don't belong to the Bank of Montreal, but I'm glad they do that on a monthly basis.
Ms Fershko: We all do.
Mr. Lastewka: Absolutely, and some do it with finer print than others.
Ms Fershko: [Inaudible - Editor].
Mr. Lastewka: Well....
Do we only respond to complaints, or do we respond because it's a good thing for them to know? You said information and consciousness; I want to take you at your word on that.
The Chairman: Mr. Vessey.
Mr. Vessey: Out of the eight million telephone calls we receive through our call centres at CIBC Visa, we track what those people are calling for, what they're asking for, and what their issues are. We have system requests lined up 100 deep on things our customers are asking for, and I have to agree with Jane; this particular issue doesn't even register on the radar screen.
I hear your point about doing it of our own initiative, but I have to agree with Rob's point. We have responded to a number of the requests that were made in previous committees. All the financial institutions represented here have really responded to making sure there isn't mice type on our statements. In fact, collectively our interest rates are clearly stated, the amount of interest is clearly stated, and so on, on all our monthly reports that are produced.
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We're lining up other things against our systems changes that customers are asking us for. We respond to those. We have to, to stay in this competitive market today.
The Chairman: Mr. Pearce, do you have a final comment on this?
Mr. Pearce: The committee should rest assured that if I thought I could attract Visa customers to come to Bank of Montreal and take our MasterCard by putting their annual interest cost on their statement, I'd do it.
Mr. Lastewka: I want to hear from Mr. Protti on my last question.
We talked last week about the differential between the Bank of Canada rate and the gap. You mentioned quite extensively that the gap isn't the only thing; there are other things involved in keeping a low interest rate.
Mr. Protti: That's quite correct, sir. That was the point we were trying to illustrate, and why we put diagram four on the table, about credit card cost components.
Quite a variety of factors go into establishing the rates that will be charged. Cost of funds is obviously an issue, as well as customer defaults and delinquencies; fraud losses; the cost of benefits, which my colleagues from the banks here have talked about; administration costs; and risks associated with extending unsecured credit, because that's what we're doing with the credit card business. No one is asked to put up any collateral.
All of those factors are the generic factors that go into deciding what sorts of rates are going to be charged.
Mr. Lastewka: So if the bank rate does go up once or twice in the future, it won't necessarily be the reason the low interest rate should go up immediately.
The Chairman: Mr. Vessey, you can make one last quick intervention on this point and that's it.
Mr. Vessey: Competition is going to drive it. You've even heard some of the sniping that goes back and forth across this table. He isn't going to take a cardholder away from me.
Some hon. members: Oh, oh!
The Chairman: Mr. de Savoye, and after him Mr. Ianno.
[Translation]
Mr. de Savoye: Mr. Vessey, you say that consumers do not pay a spread; they pay an interest rate. That is true, but the bank is the one that makes a profit on the spread. So let's look at the spread. In 1981, the Bank of Canada rate was 17.93% and MasterCard and Visa were at 22%. That was a 4.07% spread. In 1997, 16 years later, the Bank of Canada rate is 3.25% and Visa, to quote the figures from the Consumers Bureau, is at 16.5%. That is a 13.25% spread. In clear terms, either you are three times less productive, or you are making at least three times as much profit, or you were very bad administrators at the time and you lost an awful lot of money.
There is something inherently wrong. When I buy a more expensive suit, I get a better-made suit. When I buy a more expensive car, I get a better quality car or a car with more options. But when I pay higher interest rates on your cards, I'm taken to the cleaners. There's something that doesn't work right in your system.
You also said that your friends at other banks had created a market. Your friends at the other banks are not creating a market. One hundred and fifty members of this House are doing something to ensure that market forces will apply to credit cards. Once again, I ask you this: Why has the Bank of Canada rate dropped dramatically? You increased your spread threefold: that is 300% inflation on your spread. How do you account for that? Are you making more profits or are you less productive? Where does the truth lie?
[English]
Mr. Vessey: I'd be pleased to respond, given that I have been in the credit card business my whole life.
First, with the length of history we've had, there is no doubt that back in the 1970s the credit-card-issuing businesses of the collective financial institutions here were not profitable. In fact they lost a great deal of money. We can call that poor management if you want, or we can just call that the introduction of the new product if you like, but there was no profit in those products. That's a generally known fact in the industry that was around at the time.
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I think that moving forward is certainly.... If we want to go back over the terms and over the periods of time referred to, the loss rates in these particular vehicles have been driven up dramatically. When I say dramatically, I would suggest that over the period of time you've used to create your point they've been driven up by 300 basis points.
I would then go back over some of the other issues that I talked about before. Fees were actually in place. In fact, I think when fees were introduced by most of the financial institutions here, they were in excess of $20 a card. Competition drove them down to around $12. I think the Bank of Montreal introduced a card with zero fees, which then created a different marketplace. There have been huge changes in the way these particular products have operated. And I'll go back to my previous point: tremendous segmentation is going on.
I won't deny for a moment that the work of the members of Parliament has increased the awareness in the low-rate credit card market. There's no doubt about it. I won't deny it. But I would also indicate that I think some of the members at this table have introduced low-rate cards as long as three years or three and a half years ago. When my friend beside me here and myself -
[Translation]
Mr. de Savoye: You mentioned that low-rate cards were introduced on the market three years ago. Mr. Weseluck told me that low-rate cards only represent 7% of cards issued. I have a question for you.
How much money have banks invested collectively in advertising low-rate cards, and to make an intelligent comparison, how much are you currently investing in advertising for RRSPs?
Mr. Protti: We do not have the total amount each bank invested to promote low-rate cards. It is clear that it must be in the millions of dollars. I remind you of the comment one of my colleagues made 15 minutes ago; 7% progress in the space of four years represents considerable progress in a market that is as competitive as this one.
[English]
Mr. Weseluck: Just as another point, of the new accounts being opened, it's 15%, so actually it's taking off even more. Even though 7% is the total, the newer accounts are larger than that overall base. Going back to Mr. Regan's point, that's another reason why we included examples of 1994 information - and actually 1992 information - to show that these cards have been out there for five years and they have been publicized. That was the reason for a time line of material.
The Vice-Chairman (Mr. Lastewka): Thank you very much.
Mr. Ianno.
Mr. Ianno (Trinity - Spadina): I want to concentrate on a different perspective, on the low end, that one-third that's trapped month to month. I'm curious about it. For that segment of the population that has difficulty and has to pay interest on the amount - it really is the 18% plus - when they come and ask for a loan, what rate is given to them on the loan if they succeed in getting a loan without collateral?
Mr. Vessey: I would answer that in two ways. First, understand the difference in the instruments. When somebody comes in to apply -
Mr. Ianno: I'm sorry. You were telling me to understand....
Mr. Vessey: I'm trying to make a clarification between the two kinds of loans, between a credit card loan and when somebody comes in and applies for a loan.
Mr. Ianno: I'm asking about those who apply for a loan.
Mr. Vessey: Yes. For those who apply for a loan, when we can sit down and look...it will depend on that person's standing and their credit history.
Mr. Ianno: I see. Their credit history is a factor.
Mr. Vessey: Absolutely.
Mr. Ianno: At what rate would you lend it to them if they have some difficulty making payments but still make them?
Mr. Vessey: Prime plus 4%. And I'm sorry, I don't have the policies.
Mr. Ianno: Prime plus 4%. What would that be at today's prime rate?
Mr. Vessey: It would be 8% or 9%.
Mr. Ianno: That's 8% or 9% compared to 18%.
Mr. Vessey: Not 18% -
Mr. Ianno: No, 18% is your credit card.
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Mr. Vessey: No, I don't think that's anybody's credit card at this table.
Mr. Ianno: What is the standard credit card?
Mr. Vessey: It's 16.5%.
Mr. Ianno: I'm sorry, 16.5% versus 18% - big difference. So we're talking double anyway, right?
Mr. Vessey: Yes.
Mr. Ianno: The students who come, without any job history and no income - what rates do you charge them on your credit card?
Mr. Vessey: First, I'd make a couple of points.
Mr. Ianno: It's okay about the points. I only have five minutes. Please answer the question.
Mr. Vessey: When you issue a credit card, though - it's an important fact to understand - you issue it for a lifetime. That card goes out, and we never review the credit again. So if anybody gets into trouble over the life of that card, the financial institution that has the card issue experiences a write-off.
When you issue a term loan, you are looking at a loan that has a finite period of time for 12, 24, or 36 months. You can assess the risk that's associated with that.
Mr. Ianno: Excuse me, it's a nice long answer, and I haven't a lot of time here.
The Vice-Chairman (Mr. Lastewka): I would ask that you ask your question, let him answer it, and if it gets too lengthy I'll review it.
Mr. Ianno: Will you give me more time, Mr. Chairman, if it's your determination that it's too long?
The Vice-Chairman (Mr. Lastewka): I want to make sure that the question is asked and then the answer is given.
Mr. Ianno: What I'd like to know is if that student who comes and asks for a credit card, who you encourage to get a credit card.... And the maximum, is it $500 or $1,000? What's the number generally, $500? If that student comes and asks for a loan for $500 for a 36-month term, how do you determine whether that individual should receive a loan or not?
Mr. Vessey: I guess under the standard, usually $500 loans are relatively small and relatively rare in request.
Mr. Ianno: Would that student be able to get the loan without any income or job?
Mr. Vessey: No.
Mr. Ianno: No. And if you were to give that student a loan, it would more than likely be at 8% to 9%, as you stated earlier, or plus prime?
Mr. Vessey: I'm not sure where the question is going.
Mr. Ianno: You're not sure of the question? The question is if that student came and asked for a loan at one of the banks for a 36-month term, the rate at which you would give the student the loan would be the 8%, if the student qualified.
Mr. Vessey: That's correct.
Mr. Ianno: More than likely, because the student has no job, the student would not qualify. But on the other hand, they would more than likely qualify for a credit card at 16.5% to 18%, without a job. Is this, in effect, a form of higher interest rate encouragement so that people are caught in paying you a lot more and double the amount?
Mr. Vessey: No, I don't think so. I think Rob very eloquently pointed out earlier that's not our intention in the credit card business.
Mr. Ianno, we do an awful lot of student loans that are not of the government-guaranteed nature, which some of us participate in a great deal, not only with yourselves but the provinces. We do an awful lot of student loans for students who do not qualify for the government programs that are sponsored -
Mr. Ianno: What government programs are we talking about?
Mr. Vessey: Student loans.
Mr. Ianno: The government guarantees your credit card -
Mr. Vessey: No, I was talking about the pure student loan programs.
Mr. Ianno: I'm not talking about the student loan programs. I'm talking about your credit card that you offer to students who otherwise would not be able to get a loan, and if they got a loan, the credit card would be double the rate of interest they'd pay.
The question I have is, aside from students, how many more of my constituents can't get a loan for $2,000 yet are given a credit card at the maximum of $2,000 at double the rate, from 8% to 16% or 18%? What are we doing to ensure that these people who are living month to month and have difficulty are not being taken advantage of?
Mr. Vessey: First, there's a statistic that I hope will help you: approximately 50% of the people who come in to the financial institutions represented - and that number may vary - do not get a credit card when they apply for it. I get the impression that we give these things to everybody who walks through the door.
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Mr. Ianno: The dogs get them.
Mr. Vessey: I'm sorry. Inside CIBC, the approval rate of the applications that started the process to the ones that get cards issued.... About 48% of the applications are not issued cards. They are declined. And I think you will find - and I'd ask you to check by a nod of heads - that the numbers are very much consistent around.
I'm not trying to say we haven't made some mistakes in the past on pre-approvals, on list generations where we had data on one file that we assumed was right, or where someone tried to play a trick on us with a particular credit bureau, a name, or something like that. But I don't want to leave the impression here, Mr. Ianno, that we issue cards to just anybody who walks into our organization. I'm sorry; we don't.
Mr. Ianno: So what is the percentage turn-down rate?
Mr. Vessey: I just finished saying that.
Mr. Ianno: It's 48%?
Mr. Vessey: In my organization, it's 48%.
Mr. Ianno: So you're talking about your organization. I'd like the CBA to answer, so we're dealing with the industry at large.
Mr. Protti: We would not have that sort of information.
Mr. Ianno: Can we get that data?
Mr. Protti: It would be different from institution to institution.
The Vice-Chairman (Mr. Lastewka): Can we hear what it is from whoever is here?
Mr. Livingston: It's more than 50% at TD.
Ms Fershko: It's more than 50%.
Mr. Ianno: They are refused credit cards?
Mr. Pearce: Ours is slightly better, I believe. I think we turn down about 45% of the applications we receive. It's not materially different, admittedly.
Mr. Ianno: And are most of those people who are applying for credit cards working?
A witness: [Inaudible - Editor].
Mr. Ianno: Yet a student without a job can get a credit card?
Mr. Livingston: Students have proven to be the sorts of customers we want to have. They perform very well. It's a good education for them. They want them; they find them useful. They are one of the best risk categories we have.
The Vice-Chairman (Mr. Lastewka): Okay. We're going to carry on. Thanks, Mr. Ianno.
We'll go to Mr. Murray.
Mr. Murray (Lanark - Carleton): Thank you, Mr. Chairman.
I'd like to take a look at the overall effect on the economy of credit. I know it's been touched on by some of my colleagues already.
I have a quick question before that, which doesn't relate directly to cards. Have the fees that merchants pay changed over the last few years?
Mr. Pearce: Yes, down.
Mr. Murray: It's gone down.
Mr. Pearce: Certainly in the MasterCard world it has gone down consistently for the last 24 years that our institution has been tracking fees from merchants. It was said earlier that we charge 2%, 3%, or 4% to merchants. I believe that was a question from this side. The average fee paid by merchants is under 2% in the MasterCard world today. It's frankly well under 2%, and that's close enough. They've been tracking down consistently for 24 years.
Mr. Murray: So in other words, it's not a big consideration when one looks at the overall costs of goods and services in the economy.
A lot of us would agree that there are good reasons to borrow and bad reasons to borrow, if one is a consumer. Good reasons are often things such as mortgages or loans for RRSPs or to earn income. I would think most people would agree it's bad to borrow for everyday purchases, which is essentially what you're doing if you're running a balance on a credit card: you're borrowing money to buy certain things.
Again, I'm trying to get an idea of how this affects the overall economy at this point rather than individuals. You may have already given us this figure and I missed it, but do you know the total amount of interest paid on all bank cards in any one year? Is that a figure that's ever been...?
Mr. Protti: I don't have that number, but just to try to bring some perspective to this, the total consumer debt stands at about $470 billion, I think. Interest rate charges on credit cards represent about $19 billion of that, so we're in the order of 5% to 6%.
Mr. Livingston: Well, no. That would also include money where there is not interest being charged, so you need to take probably one-third off that.
A voice: Yes, you'd take about $6 billion off that.
Ms Fershko: Another figure was thrown out earlier of about one-half or one-third being trapped. Whereas about 45% of all credit cardholders maintain a balance at any point in time, the number who chronically maintain a balance - and this does not imply they are in economic trouble - is really only around 16%.
Mr. Murray: Can we get a composite picture of those people who do end up in that situation of being chronic, if you will?
Ms Fershko: Many of them are fairly affluent.
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Mr. Pearce: People who borrow consistently on credit cards represent all classes of people in Canada. It is almost counter-intuitive. You would think people who borrow on credit cards would generally be people who have to borrow on credit cards. That has not been proven in data with the Bank of Montreal.
Mr. Vessey: There are two other points that I think are important when we look at total debt levels and compare them to the United States. First, mortgage debt here in this country is much larger than in the United States. So when we look at 92% against income, they're more important figures when you look at the servicing capability of consumers. Most of our debt in this country is mortgage debt, which is quite healthy. That is a substantial change from what you see in the United States.
There's a final point I'd make, Mr. Murray. We've been concerned with the loss rates, just as these members are. I would caution that this is anecdotal, but we're working on numbers. When I look through my business, the biggest driver of the problems we're facing with credit losses isn't total debt or jobs in the economy, it's marital breakdown.
We see families - your constituents - making an average income of $55,000 to $65,000 a year where there is marital breakdown. They then have to raise their families and pay for two homes, credit card payments, mortgage payments and everything else. That's when I think your constituents are coming into your offices saying they are having problems, because that's when we're facing them.
I don't have the statistics yet to prove that, but I can guarantee you when we look at the behaviour, along with the fact it's no longer socially unacceptable to file for bankruptcy - which it used to be 10 or 15 years ago - those kinds of things all bunched together, along with unemployment and the changes in the economy, are driving what we've seen.
The Vice-Chairman (Mr. Lastewka): Thank you. We'll go to Mr. de Savoye for three minutes.
[Translation]
Mr. de Savoye: Do banks have a moral conscience? All these gadgets, these air miles, these gifts, these points, all these benefits that are attached to marketing these higher rate credit cards are essentially paid by people who cannot pay their whole account at the end of the month.
I understand that you want to promote your products, that you are in competition, but are there not limits on how you obtain market shares when you know very well that the least well-to-do in our society are bearing the brunt of your profit hunt?
[English]
Mr. Protti: I'd like to answer that.
Banks employ 206,000 people across this country. There are 8,000 branches in 1,800 communities. They are the backbone of the financial community in this country.
We have 680,000 small-business customers. We have $62 billion outstanding in loans to small-business companies across this country. In the United Way campaign in Metropolitan Toronto, $1 out of every $5 raised came from banks and bank employees. That number is true right across this country.
I don't think you have to ask whether or not we have a moral conscience or a social conscience. We have been in business for 100 years. We're here to make the country function. We have been a keystone to making this country work financially. We will continue to be that keystone for the next 100 years.
Ms Fershko: Needless to say, I support everything that was just said. I think if you met some of the people in the local communities, you'd know how committed they are to their communities. But I'd like to take it back more to the head office group.
All of us here deal not only in credit cards but in other types of cards. I think the greatest proof positive that we're interested in the consumer is our whole development of debit cards, because they allow choice of payment with the same ease as with credit cards. They allow you to pay here and now and not incur any debt, and we don't make nearly the profit we do on credit. So if we were -
Mr. de Savoye: [Inaudible - Editor].
The Vice-Chairman (Mr. Lastewka): I want Mr. Regan to have a short question.
Mr. Pearce: Underlying the question was the view that if somebody doesn't carry a balance on his or her credit card from month to month and never pays us interest, we lose money on that account. That is in fact not true. We can still make money on accounts where people do not borrow from month to month. The underlying assumption of your question that borrowers are subsidizing people who get frequent flyer points and get to travel is not supported in fact.
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Mr. de Savoye: I didn't think you were making that much money.
The Vice-Chairman (Mr. Lastewka): Mr. Regan.
Mr. Regan: Thank you, Mr. Chairman.
I'm surprised and pleased to get to ask another question.
First of all, on the point of the rates being tied to the Canadian prime rate and the comment from Ms Fershko that in the U.S. there are all kinds of ways in which the banks ding their customers in other ways, I know that a lot of customers in Canada feel they get dinged a lot as well by various charges in relation to this or to other kinds of credit and services.
However, it does seem to me that the fact there is a different system in the U.S. still does not mean that in Canada you could not have the rates of credit cards tied to the prime rate and moving up and down with the prime rate. If it's more revenue you need, you raise it a point or half a point or a quarter of a point or whatever to get those dings that they're getting in the U.S. That's not an excuse for not tying it to the prime rate and showing it clearly to consumers in that way.
Let me ask you this question. For those banks that have a low-interest credit card, how many people apply for the low-rate card each year, how many are approved, and how many are rejected compared to the applications and the approval and rejection rates for higher-interest rate cards? Can you give us that information?
Mr. Livingston: I can give it to you generally. In terms of the approval rate, they're not dissimilar. We turn down slightly in excess of 50% on the high-rate cards. We turn down slightly in excess of 50% on the low-rate cards. As we were referring to before, it tends to be a cross-section of customers: people who want points or low-fee cards are a cross-section of customers and people who borrow are a cross-section of customers.
Numbers of applications would be a tougher number to come up with, but it would be in the hundreds of thousands.
Mr. Regan: Could you give us the numbers later?
Mr. Pearce: I don't have the numbers on turndown rates, but I believe it would be what David said. It would probably be similar to the rate for our standard-rate cards and standard-rate applicants.
The point to make is that the vast majority of people who are moving into low-rate cards are existing customers who move from standard-rate cards into low-rate cards. So the people who are getting low-rate cards typically have had high-rate relationships or higher standard-rate relationships with the Bank of Montreal. So the number of new applicants coming in the door is not the great determinant of the number of people carrying low-rate cards.
The Vice-Chairman (Mr. Lastewka): Thank you very much.
I would like to thank the witnesses for this afternoon's discussion, debate, and information session.
Mr. Protti, I appreciate your offer to follow up on some of the items you mentioned during the afternoon.
At this time I'll adjourn the meeting until Wednesday, February 12. The meeting will start promptly at 3:30 p.m. in Room 253-D, Centre Block.
Thank you very much.