EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, February 13, 1997

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[English]

The Chairman: Pursuant to Standing Order 108(2), the industry committee has now reconvened to continue its study of credit cards.

I'd like to welcome our guests. You represent between you many different businesses, and we're very, very happy that the Retail Council of Canada was able to get you here.

I want to treat you as one witness in terms of proceeding, so what we'd like to do is have an opening statement, and then go around the table and the members will ask questions. If you feel from time to time that a question is directed to a specific witness but that you'd like to add something, feel free to. Just get the attention of the chair.

A technical thing: this is televised and it takes a minute for the cameras to catch up to an intervention. If you just jump right in, it takes a second to find you, and so forth. If you go through the chair it will technically give us a chance for things to be done properly.

Peter Woolford is the senior vice-president of the Retail Council of Canada. I take it that you in some sense are the leader of the gang, so perhaps you can lead off with an opening statement. As I said, I would prefer the opening statement to be brief, as the members usually have lots of questions and the two hours go by very quickly. Thank you very much.

Mr. Schmidt (Okanagan Centre): Could you have him introduce the other members, please?

The Chairman: Oh yes. Mr. Woolford, could you please introduce the other members?

Mr. Peter Woolford (Senior Vice-President, Retail Council of Canada): Yes, I will, sir.

Thank you, Mr. Chairman. I do have a very brief opening statement I'd like to make. We've agreed amongst ourselves as well that we would have only Retail Council make a statement, and let the individual members respond in the questions and answers.

[Translation]

I have tabled a copy of our presentation in French.

[English]

I've also provided an English version for everybody here, so that it is available in both official languages.

[Translation]

I can also answer your questions in French.

[English]

I'd like to introduce my members now. Alan Goddard is vice-president of corporate affairs for Canadian Tire Corporation Limited. Marco Marrone is vice-president of customer development for Canadian Tire Acceptance Limited. Steve Knight is the national manager of operations and innovation for Sears Canada. Bruce Clark is director of quality performance and risk management for Eaton Credit Corporation. Bob Hogan is the senior vice-president, credit and financial marketing services, for Hudson's Bay Company, and I am vice-president of the Retail Council.

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Mr. Chairman, thank you for the opportunity to appear here. We think these are very useful hearings you are having. The question of credit is one that does need an airing from time to time, and I think the hearings themselves serve an educational purpose for Canadians, for industry, and for members of Parliament.

I was at the hearings yesterday, Mr. Chairman, and one of the issues that came up several times as the consumer representatives were talking was one very dear to our hearts, and that is the diversity and complexity of the market for credit services. That's a point we wanted to emphasize to the committee this morning ourselves. There is a wide range of credit services available to Canadians, and in making comparisons amongst them, it is important to look at more than simply the one factor of the card. There is a wide diversity of factors that consumers and analysts and those who are watching the marketplace must take into consideration.

From our point of view, retail cards differ from other cards along at least eight different axes: the cost of funds used to underwrite the activity; the grace period that is offered to consumers; a variety of ancillary or marketing features sometimes offered with the card; the number of cards actually issued by a retailer; the size of the outstanding balance on the average card; the portion of cardholders who pay the full balance on time; the default rate the credit card company experiences; the payment by merchants of fees to the credit card issuer; and finally, any annual fee that a cardholder must pay to the card issuer.

I would stress at this point as well that retail cards are a very tiny portion of the credit card market. You heard from the banks on Tuesday, I believe it was, that customers charged almost$68 billion to bank cards in 1996. In contrast, the business done on retailer credit cards issued by the four companies here with me today totalled roughly $8 billion, or one-eighth of the volume that was done on bank credit cards.

If you take the data that the banks offered to the committee, that roughly 30% of all retail purchases are made with credit cards, that means retailer credit cards account for only 4% of all retail transactions. So it is a very tiny portion of the market.

I'd like to turn now particularly to appendix A in our submission. One of the things the committee had asked in previous years, and again this time, was for a fairly careful accounting of costs and expenses and profits in the business of credit card lending. We've taken you at your word. Our members opened their books to us in confidence. We have gathered this material and assembled it for the committee here. To our knowledge, this is the best, clearest insight we can give you into the credit card business that is offered by retailers.

The data we have there show that about a quarter of the cost that retailers incur comes from the cost of money; the rest is a variety of other charges. I think the most important line there to draw to the committee's attention - and I will be returning to this - is the bottom line. This is not a terribly profitable activity for retailers. They earn roughly 3.6% on their balances that they are extending credit on to their customers.

The rate charged by retailers to their customers has been about 28.8% for many years - we freely acknowledge that. What they actually receive - the true average yield - reflects the fact that they do extend free credit to customers, and they do offer customers the opportunity to pay out interest on the lower balance if the customer has paid off over half of the balance in the month preceding.

That was one of the recommendations of the committee from before - that the consumer should have the opportunity to have interest charged on the lower balance rather than the total transactions on the card. That's something that retailers have offered for many years, and they've continued to do so.

We also need to recognize - and this came up at the committee yesterday fromMr. Conacher - that retailers are credit card granters who do not charge merchant fees to the operator of the service. That is, the transaction fee that merchants and restaurants and other businesses pay to a credit card operator are not charged in respect of retailer credit cards. Again, that's simply a difference we would draw to the committee's attention.

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In terms of funding the credit card operations, it's important to recognize that retailers are not financial institutions. That means they must borrow money on the open market. They fund their credit card operations through a mix of long- and short-term funds, and as a result it means the cost of their money is somewhat sticky. It does not fluctuate as quickly as it can for those organizations that can fund it internally.

I'd like to again refer you to appendix A. We can show you there that the cost of money for retailers, as a result of lower bank rates, has come down by about 50% in recent years. The contrast I would draw to that, and one of the most important drivers in retail credit card costs, is the dramatic and unprecedented increase in bad debts. We have seen those go up by over 250%, from 2.3% to 5.7% - a huge increase. This in itself has effectively eliminated almost all the benefits we got from the lower cost of borrowing.

The other area where this bad debt problem has emerged is in the increase we see in the other expenses category. Within that we find a number of other costs related to the growth of bad debts, such as credit counselling, credit investigations, legal fees, contributions firms make to credit counselling bureaus, and those sorts of costs.

The only other element I would note for the committee here is that we've also seen a significant increase in fraud. If the committee wishes to talk with us further in the question and answer period, we'd be glad to give you some further information in those areas.

There are a couple of other key points that distinguish the retail card from other forms of credit. The balance the customer carries on the card is significantly lower. The data provided to you by Industry Canada showed that the average balance for a bank card is around $1,500. The balance for a retailer card is around $450. That means the administrative costs, all the overhead costs, have to be carried on a lower base of borrowing. There are economies of scale. There are also far fewer retailer cards issued by any retail company than by a large financial institution.

Finally, retailers offer a grace period that is somewhat longer than other cards - usually thirty days versus twenty-one. All of that leads us to the bottom line that shows retailers are earning, on average, about 3.6% on their credit card sales. That means a return on capital employed of about 3.6%.

Various people over the years have urged a cap on rates and have talked about trying to encourage retailers to bring their rates down. You can see there really is very little room for that here. We have a little over 3% return to the companies. That is far below the kind of rate you would get even on Canada Savings Bonds, which are completely risk-free.

I'd like to talk very briefly about the issue of consumer choice - the marketplace in which these cards operate. I would note first of all that retailer cards are only one of a wide variety of payment options. Again, this issue came up around this table yesterday afternoon. We see a broad range of alternatives such as cash, cheques, debit cards, smart cards, as well as credit cards. Within the credit card area, of course, there's a wide range of formats of credit card.

One of the other points I would draw to your attention is that in 1994 a survey showed that 90% of the people who hold retail credit cards also hold bank credit cards. So when the customer appears to make a credit purchase at the point of sale, nine times out of ten he or she already has another credit option in his or her purse.

We support the concerns of the office of Consumer and Corporate Affairs about caps, and again I would draw your attention to our bottom line that retailers are earning 3.6% on the capital they employ in this business. There's not much room for movement there.

One of the issues that was before the committee at its previous hearings was the question of disclosure of information. To our knowledge, our members are fully complying with the requirements set out by the committee and the government with respect to disclosure of information at the time of signing up the customer and sending him or her a card.

Equally, if the customer has lost the original information or wishes more information it is provided either on a routine basis with the statement, or is available through services such as 1-800 numbers. Our members provide information to Industry Canada's quarterly information bulletin, which was a recommendation of this committee some years ago. We certainly share the concerns of the committee with the level of awareness of Canadians about interest rates, and would be happy to work with the committee on that issue.

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We understand the committee members would like to see the administrative charge rate displayed on the front of credit card statements, and our members are here today to promise you they are willing to make that change and present the interest rate on the front of their statements so the customer is aware of it up front. We see that at least as a signal of our good faith in working with the committee here.

We would also be very happy to work with consumer groups the committee would recommend to us, such as the Consumers' Association of Canada, credit bureaus and other groups that are interested in this area from the consumer perspective, on a consumer education initiative in this area. We would strongly support that and be happy to work with them under the guidance of the committee.

I would like to summarize very briefly. Of the many industries in Canada that have appeared before your committee over the years, the retail industry is one that understands perhaps better than most the circumstances Canadians find themselves in today. Every day the consumer is in a retail store, and our members understand the pressures and economic difficulties Canadians face. They see it in the consumers' relentless search for the best product at the lowest price with the best service. They see it in the weakness in sales and they see it in the tough competitive conditions they all face.

This tough climate does extend to the provision of credit services, and as I think we've shown, this is a competitive industry with a wide range of options, where the retail trade is earning a very modest return on its investment. We also want to stress that this card is offered primarily as a service to customers. It's an adjunct to the primary business of retailers, which is selling merchandise. Retailers are not first and foremost credit-granting institutions - they are merchants that sell products, and the cards they offer are there to facilitate their consumers' purchases.

Those are my opening remarks. I would stress again we are interested in working with the committee and other parties to enhance the education of Canadians. We'd be glad to answer any questions members may have.

The Chairman: Thank you very much, Mr. Woolford. On behalf of the committee, we appreciate your putting some ideas and recommendations on the table that you're willing to work on with us. I think that's a good step forward.

[Translation]

Mr. de Savoye may ask his first question.

Mr. de Savoye (Portneuf): Thank you, gentlemen, for your presentation. I would also like to thank you for having supplied, in Appendix A, a history of your fees. However, I would like a more global idea of your activities.

All of your sales are not credit card transactions. Some of your sales are in cash, or on credit cards from the major banks. Globally, I would assume that for some years now, you have been experiencing, as have other businesses, a drop in consumption.

Can you tell the committee, not on an individual basis because I am not speaking of a company in particular, but for your companies as a whole, what percentage of profit you have managed to maintain on all of your operations? I know that for Greenberg, things have not been extraordinary, but on average, in your companies, what percentage of profit have you managed to maintain on your sales? I don't mean credit, but sales.

Mr. Woolford: The profit margin that we calculate in the companies is expressed as a percentage of sales. In this case, we estimate that the profit margin for the industry is about 2% of all sales. If the Canadian industry has sales totalling about $160 billion, the profits are about 2% of this amount. That does not compare with the figures that we have given here, unfortunately, because we have constructed a balance sheet which shows the elements of the interest rate. We cannot therefore compare these two figures.

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I feel, however, and this is not an impression based on specific data, that for the retail industry, the profit margin calculated on the capital is about 10%. If I am mistaken, I hope that the companies will tell me immediately. If we compare that to our presentation, I estimate that for the retail trade, the profit margin is about 10% on the capital.

Mr. de Savoye: But the real answer that you gave us earlier, is that your return on sales is 2%. We can therefore start from that point to make comparisons. I would point that the return on credit card sales allows you to make 3.6% more.

Mr. Woolford: No. What I was trying to say, is that this 3.6% is the margin on the capital and not on the sales. Therefore, it is 3.6% on the capital.

Mr. de Savoye: I apologize. In Appendix A, you have indicated costs, and you say that the net return before tax is 3.6%. Therefore, the figure of 3.6%, is the net return before tax from the money you must advance on sales, is that not correct? Had there been no sales, there would have been no credit. And if there is no credit, there is no 3.6%. So you make 3.6%.

Therefore, I go to your store with my card, be it from one of your companies or from somewhere else. I buy $100 worth of goods. You make $2 on the sale and, then, after subtracting your administrative costs, you will have an additional return of 3.6%. If I do not pay my bill after 31 days, since the total stated administrative costs is 28.8%, I will have to pay 28.8% in interest, divided by 12, because it is calculated on a monthly basis. You therefore make an additional return of 3.6% on that sale.

Consequently, from the $100 which I spent and did not repay after one month, you will have a return of 5.6%. Unless I am mistaken, you will also have avoided paying 2% to MasterCard or Visa since I have used your card. Therefore, in your case the difference now comes to 3.6% plus 2%, plus a further 2%, in comparison with using major bank cards.

In fact, what you are giving your customer, namely a credit card for a major store, is aimed at insuring customer loyalty, encouraging customers to return to your store because they don't have to pay cash. If a customer can pay cash and has access to other credit, he could easily go to another store, pay cash or pay with Visa or MasterCard.

However, as you know, if someone is stuck and does not have much money, he will be strongly tempted to do business with your company since this little plastic card you have provided will enable him to make a purchase immediately of clothes or some other article, for example, and pay for it on a monthly basis at a rate which in fact comes to 32% a year.

Since you make 2% on your sales and 3.6% on credit, I would like to know whether you are in fact working in the field of sales or financing.

Mr. Woolford: That is very different because, I as explained, the 3.6% rate is based on the amount of other sources of financing.

Second, the amount of 3.6% is the return on the capital used. In the calculation, you omitted all the sales made, completed and paid for by customers before paying any interest. Approximately 62% of all sales are paid for within the month following the purchase of a product.

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Finally, about 90% of all our customers have in their pockets or purse a credit card from a financial institution. Therefore, 90% of all our customers are able to chose between our card and that of a financial institution.

Mr. de Savoye: Could I please stop you there? I think that the other members of the committee would like to share this experience with me. You can confirm whether this is the case. I think there's someone here from Eaton's.

Eaton's offered me a card last summer because I don't have one any longer. When it was offered to me I was told that if I took it, the product I was going to purchase would automatically be fully ensured for one year and replaced free of charge if anything went wrong.

I might have been tempted if I hadn't been aware of the possible consequences of such an offer. You say that people have a choice, but you do in fact try to seriously influence that choice. By the way, I should point out here that the young person who made that offer to me is an excellent salesman and I would like to offer sincere congratulations to your personnel service.

[English]

The Chairman: Excuse me. I don't normally intervene when a member asks questions, but there are two important issues here in the time left remaining for Mr. de Savoye's questions.

Did you want to finish your explanation? First, it's very important for all the members of the committee to understand how you calculate your returns. I wonder if you could deal with that, and then perhaps after that, Mr. Clark might want to respond for Eaton.

But I think we should deal with the main issue first, Monsieur de Savoye, and get the response straightened away.

Mr. Woolford, I think you got halfway through your answer.

Mr. Woolford: Thank you, Mr. Chairman.

I will go back to what we have said, which is that the net yield before tax that we show there is in fact the return that companies make on the capital they have borrowed, the capital they employ in this operation. And that compares most directly to a return on capital for their retail business. In that area, on the traditional sales in retail stores, the return on capital is around 10%.

What I was trying to get at in response to Monsieur de Savoye's point at the end is that you really can't compare 3.6% on sales on credit cards to 2% on sales generally in stores, because what that 3.6% does not include as its base is all that return that retailers get 0% return on because the customer has paid the money back to the retailer within the month that it has been incurred. They pay their cards off in full before the end of that month.

The Chairman: All right. Thank you. I think we're going to be returning to this point.

Mr. Goddard.

Mr. Alan Goddard (Retail Council of Canada): Perhaps I could come at this from another perspective. Mr. de Savoye makes a very good point. When we sell a piece of merchandise to a customer on credit, first of all, we've had to buy that piece of merchandise. We have money tied up in that piece of merchandise and we do not receive the money at the time of sale. We receive a promise to pay us at a later date. In addition to that, we've also extended credit to the customer by borrowing money from the bank and using the money borrowed from the bank to pay for the merchandise for which we are extending the credit to the customer.

There are two elements of cost here, the primary one being, of course, the funding that we've provided to the customer to purchase the product with, which is another way of looking at that. You can't add a return-on-sales number to a return on capital employed. They're two different expenses for our business.

The Chairman: Mr. Schmidt.

Mr. Schmidt: Thank you, Mr. Chairman. I have a couple of questions that have to do with the capital employed.

First of all, is it true - and I may have misunderstood you - that the money extended on the basis of the credit cards issued by retailers such as the Bay or Canadian Tire is all borrowed capital? What proportion of that is not borrowed?

Mr. Woolford: When we asked our members about that, we found that there really is a nominal amount of money that they put in as equity for their acceptance operations or credit card operations. The great majority is borrowed. I don't have hard data on that. If you're interested, I will try to get that from our members and bring it back to the committee, but my understanding is that the vast majority of the funding for credit card operations is debt money.

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Mr. Schmidt: Would it be in the area of 75%, 90%, or 95%?

Mr. Woolford: I don't know at this point, but I will certainly get back to you.

Mr. Schmidt: How much would be borrowed? Do you have any idea? We have the vice-president of at least three wings of pretty big retail operations who do the credit operations. Surely you gentlemen know what proportion you borrow.

The Chairman: I am wondering if you could just rephrase the question in terms of what's proprietary or not. Maybe you could ask them what strategy the companies have for that or whether their strategy is internally generated or externally generated.

Mr. Schmidt: I'm sure they do both.

The point is that I want to know how much of their money is involved and how much is borrowed. The implication that is given in terms of appendix A is that by far the major part of the money lent by virtue of a credit card is borrowed money that comes from elsewhere. You really have flow-through operations.

Mr. Woolford: I've just been hearing my members.... They can answer for themselves, but what I'm hearing is that almost all of the money is borrowed. There is really only a nominal amount of equity in the corporation. I will ask any of my members who wish to respond directly for their companies to answer.

The Chairman: Would you like to have a comment?

Mr. Goddard: For instance, I can give you a number that we've set aside for 1997 of about $190 million to finance receivables in terms of our borrowings. In other words, we're going to borrow that kind of money to finance growth in our receivables from the acceptance business.

The reason it appears to be hedging is that when you borrow money, it's a matter of borrowing money for a wide range of purposes in our business, whether it's building new stores, financing receivables, or other areas. You could say we're investing our cashflow into expanding our stores, which is where we're investing our equity and cashflow. Financing our receivables is borrowing the money in order to facilitate that sale of merchandise. The equity is being reinvested in the growth of our business, in other words, our stores.

We're in the midst of a major expansion program to reposition 250 of our stores across the country. That's taking all of our cashflow from year to year to put into that, along with another$200 million to $300 million we're borrowing to build the new stores on top of financing receivables, which is additional borrowing.

Mr. Schmidt: I appreciate this, Mr. Chairman, but the other part of this question has to do with the request of the Retail Council. I believe it was this spring or last fall when you asked for access to the Canadian payment system. If in fact it's as you just said, why would you want to have access to the Canadian payment system?

Mr. Marco Marrone (Retail Council of Canada): Maybe I can respond to that.

We talked about consumer choice when making a purchase at a retail outlet. In the retailer's position, it's having a choice of where to conduct that transaction. It was really a look at whether there were ways that the cost structure from the payment side could be lowered in the longer term. That was the real point of that. We're looking at the cost structure and how we could manage to get that cost more efficient in processing a sale or a transaction with the financial payment system.

Mr. Woolford: Perhaps I could add to that, Mr. Schmidt.

One of the reasons the Retail Council appeared before the Competition Tribunal was about a concern that in fact the large financial institutions were not giving us fair, competitive access to payment services. What we discovered as we talked with our members and the Bureau of Competition Policy was that in fact there appeared to be a certain restraint of competition in that area.

In fact, at the end of the day, the Competition Tribunal did agree. It got the Interac association to consent to a decree in which they offered some limited opening of their operations to outside parties.

In our view, that opening was not enough, and we sought leave to appear before the tribunal to take that case forward. Our concern really was that, as outsiders, we are essentially being given a ``take it or leave it'' proposition on payment services. There isn't a fair playing field, and there certainly isn't a competitive element in that area. That's the principal reason why we wanted to become more implicated in the payments process. We are major users of it and we want to be sure that we're getting competitive access to those services from financial institutions.

Mr. Schmidt: A related question to that has to do with the source of this borrowed money.

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I understood what Mr. Goddard said about this sort of composite access to credit. I'd like to know whether you sell paper directly, like a Canadian finance corporation paper or Eaton Corporation paper, or is the source of your funds banks or other financial institutions? Who are the lenders to your operation?

Mr. Goddard: All of the above.

Mr. Schmidt: So you use a variety of access to -

Mr. Goddard: Absolutely, for medium-term, short-term and long-term borrowing.

Mr. Schmidt: So to summarize this, then, when you go to the market for credit facilities, you use that money in a variety of things, such as to expand stores, buy land, finance inventory, underwrite credit cards, and to do a variety of these things. So you would not be able to differentiate between what comes out of credit cards and what proportion is going to each of these areas.

Mr. Goddard: No, I thought I did that a moment ago. Our cashflow is flowing completely into our capital investment program. That's the equity we earned at the end of the year. After tax, we reinvest that into our expansion program. We also borrow a certain portion of money to reinvest in that expansion program. The balance of our borrowing is to finance the receivables we have.

Mr. Schmidt: It seems to me, Mr. Chairman, that this really has put into question the veracity of that 3.6%. That's what it really does.

You see, on the one hand, you argue very explicitly that all this money is borrowed and that you have all this cost to it, so therefore we get 3.6%. But in fact, you just finished telling us that you actually use this money for a whole bunch of other things.

So I really doubt that number. I don't know if you've actually been able to show - at least you haven't shown me yet - whether that number is an actual number, because you said we can't run it that way.

Mr. Goddard: I guess it's a matter of choices. We either don't have adequate funding to finance our expansion and frankly expand our stores and create employment across the country, or we borrow to finance our receivables. In this particular case, the cashflow is going into the growth of our business through expanded square footage in our stores and we're financing our receivables through borrowing.

The Chairman: Mr. Schmidt, perhaps you could ask the other two witnesses. Mr. Hogan and Mr. Clark, could you perhaps elaborate on your own operations?

Mr. Robert Hogan (Retail Council of Canada): Thank you, Mr. Chairman. One way we sort of look at the cost of finance as it's assessed against the credit operation is basically that our total company has long-term and short-term borrowing and the costs related to that. Those costs are averaged over the assets that are used within the company.

So what you see here in appendix A is what represents a percentage of the actual dollar costs of finance put against the receivables that were funded. Calculated out, it computes into roughly the 6.6% cost of money you see here. So it's really the pooling of the cost of finance to the retail business that is then allocated to the assets that are employed in that business.

Mr. Schmidt: Mr. Chairman, I'm sure that's right. I don't have any trouble understanding what we have been told. That isn't the problem.

The problem is that the numbers here do not tell, I think, the accurate story. To finance a land acquisition, plant expansion, or inventory is quite different from lending, extending credit, to somebody who has few assets and presents a credit card. These are not comparable issues, yet they're all lumped together into one thing and then there's a return drawn out of here. Somehow it seems to me, Mr. Chairman, that we are not being told the whole story here.

The Chairman: Mr. Woolford, would you like to make a general response. Then we'll go on to the next question.

Mr. Woolford: I'll take a cut at that. Our members do know precisely how much money they have borrowed for their credit card operations.

Mr. Schmidt: That's what we asked, but we couldn't get an answer.

Mr. Woolford: No, no, I think we were looking at this from opposite ends. That's why I wanted to come in.

Mr. Schmidt: Oh, okay. Well, stay in, then.

Mr. Woolford: They do know precisely how much of their borrowings is allocated to credit card operations.

Mr. Schmidt: Well, that's what I asked, but I couldn't get it.

Mr. Woolford: Just let me finish. Let me try the general one, and then maybe we can go back and ask these folks.

Mr. Schmidt: Okay. Fine.

Mr. Woolford: If there are borrowings for land, buildings, or inventory, that is not loaded in here. There is no borrowing on this sheet in respect of any activity other than credit card acceptances. I think that was your concern.

Mr. Schmidt: Then I'd like to refer to Mr. Goddard.

Mr. Woolford: I think we were misunderstanding each other there.

Mr. Schmidt: Okay, maybe.

Mr. Woolford: The companies borrow a bag of funding.

Mr. Schmidt: Can I ask the question again and have it answered?

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Mr. Woolford: Okay, the companies borrow a bag of money -

The Chairman: Mr. Woolford, with the indulgence of the rest of the committee, I'm going to allow this question to be answered by Mr. Goddard again. Then we'll go on to the next person.

Mr. Goddard, did you want to make sure we all understand each other on this point?

Mr. Goddard: Yes, I'm sorry, I was asked a general question about the corporation and its borrowing processes: does it borrow long-term, short-term? I thought I had provided an answer to that general question.

My answer to the question is specific to this document. We provided input because it is confidential, along with the other companies, on the basis of the moneys we borrow and the cost of those borrowings to finance our credit card business only. No other borrowings are included in that, and 100% of it is borrowing to finance our credit card business.

The Chairman: Okay, thank you. You'll have an opportunity to return to that.

Mr. Bodnar.

Mr. Bodnar (Saskatoon - Dundurn): Thank you, Mr. Chairman.

First of all, I wonder if I could ask your courtesy of giving short, quick answers, to the point, because I'm limited in my time.

I'll deal first with the three major companies that are before us here today. Do any of the three companies charge interest from the date of sale rather than giving a 30-day grace period? What about Canadian Tire?

Mr. Hogan: No.

Mr. Bodnar: The Bay? Eaton's? Is it all 30 days?

A voice: Sears.

Mr. Bodnar: Oh, Sears...sorry.

Mr. Stephen Knight (Retail Council of Canada): Sears does not go from the date of purchase.

Mr. Bodnar: When we look at appendix A and at the overhead expenses...and let's take postage, first of all, for 1996. You have 1.2. I take it that's 1.2%.

Mr. Woolford: Yes.

Mr. Bodnar: That's 1.2% of what?

Mr. Woolford: That is the calculation that is 1.2 percentage points of the 24.6%. What we've tried to do is deconstruct the return. We get a revenue that is 24.6% of our receivables. Then, so that we're on a simple base, what we have done is simply give you the percentage points of that, which are allocated to each of those line items. So of the 24.6% that we receive in return, 1.2 percentage points go to postage.

Mr. Bodnar: So I take it that we can take 24.6%, your true average yield, yet 24.6% is really your gross revenues on the lending of money.

Mr. Woolford: Yes.

Mr. Bodnar: So on those gross revenues, 5.7% of that is bad debt. Percentage-wise, you're looking at bad debt of about 20%?

Mr. Woolford: It has been astronomical in recent years. It has been of great concern to our members. One of the things we have seen as a result of this is that they have tightened up on their acceptance of new card business and the extension of credit to existing cards.

Mr. Bodnar: All right. We've had the figure thrown around and you've done it quite often, saying your yield on capital is 3.6%. I can tell you that I disagree with you.

Yield on capital is the cost of borrowing money plus your profit. Your yield on capital is really 10.2%, because if you did not borrow money and simply had your capital, you would be getting a return of 10.2% on your investment. Do you agree?

Mr. Woolford: The problem is that the retailers don't have that money. They must borrow it.

Mr. Bodnar: That's not the point. The point is, if you're talking of return on capital, you have to take the cost of borrowing plus your profit, and that total is the return of capital.

Mr. Woolford: If you want to put it that way, yes, but I would draw to your attention that it is still a relatively poor rate of return.

Mr. Bodnar: Well, I guess we can disagree, because if I could borrow $1 billion and get a 3.6% return on it after all expenses, I'd be pretty happy.

The Chairman: Mr. Goddard.

Mr. Goddard: Another way to look at it is that we tie up that amount of money with a return of 3.6%. To bring it down to my terms, would I buy a bond or a debenture - in other words, tie up my money - that would yield me that kind of return? I guess it's not very competitive, even in today's lower interest rate markets. But the reason we're in that business is, frankly, to facilitate transactions and sell merchandise, so we take a return on that money we have invested that is lower than we could get if we simply bought debentures or bonds with it.

.1015

Mr. Bodnar: You're saying 3.6% is lower.

Mr. Goddard: Yes.

Mr. Bodnar: But sir, that's the whole point. If you have that money and put it into a bond or debenture, that would be your money and you would be getting a 10.2% return because you wouldn't have the cost of borrowing to take into account.

Mr. Goddard: But you must take that -

Mr. Bodnar: The only reason you have 3.6% here is that you've had to pay for the cost of borrowing.

Mr. Goddard: I agree with you. That's a very real cost.

Mr. Bodnar: Okay.

With respect to what Mr. de Savoye was saying...and I must admit that I think everything here is so intrinsically intertwined, it is difficult to separate, not only when you issue a card and entice someone like me when I come to Canadian Tire and when I start drooling over some of the merchandise that is there.... I often call Canadian Tire ``Tools-R-Us''.

First of all, you have a card and you entice a person like me to buy on that card. Second, you obviously must have a profit on that merchandise or else you wouldn't be in business. And as Mr. de Savoye pointed out, you don't pay the 2% to Visa or MasterCard that you would pay. You managed to salvage that. Third, by my not paying within 30 days, you end up getting a return of 28.8% or, as you say, a true value of 24.6%. And I say that those three things, intertwined and working together, give a fairly good and reasonable return to a retailer.

Mr. Goddard: All I can say is that there are two things. First, we offer a choice. You can come into our store and you can use a debit card, Visa, MasterCard, cash, a Canadian Tire credit card or our new Options MasterCard to pay for your purchase. We do entice you to come into our store and make a purchase. We're delighted with that, but we want to offer you as many choices as we can for making that purchase.

The other point is that if our rates were lower by 3.6%, we'd be breaking even. If we were below that, then we'd be losing money in extending this credit.

Mr. Bodnar: Sir, if this is such a bad business and if your rate of return is so bad, I can't even believe that the retailers are in this business. Why don't you leave everything up to the financial institutions and Visa and MasterCard? Let them take care of it, because this is too bothersome to you.

Mr. Goddard: We do a lot of research with our customers to try to give them what they value most, and our research indicates that they see our card as a convenient alternative to these as well. They see it as another line of credit with certain features. For instance, they can accumulate options points, which they can use to reduce future purchases, and if they are a heavy purchaser and a good customer of ours at Canadian Tire, they see value in that.

That's the only explanation I can give you, because you are right when you say there is a spread in that rate.

Mr. Bodnar: One point I wanted to cover was the retailers who are mostly in international operations as well.

Let's use Sears as an example. How does the Canadian operation compare to your American operation in credit cards, for example, in the rates that are charged, the repayment, etc.?

The Chairman: Mr. Knight.

Mr. Knight: I'm not completely familiar with all of the terms and conditions of the Sears, Roebuck company card, but I do know the basics. With respect to that, their rate is somewhat lower than ours. However, it gets back to the dynamics of the card and the fact that they have an average balance, which I believe is just slightly over twice what ours is. So their rate of return is really based on the average balance that consumers are carrying on that card as well. They are not completely comparable cards.

Mr. Bodnar: Can you make the details of the cards used in the U.S. available to us so that we are able to compare the Canadian ones to the American?

Mr. Knight: I certainly can.

The Chairman: You have one more question, Mr. Bodnar.

Mr. Bodnar: Do you feel that if you eliminated your own cards your retail sales would still remain at the same level? Would they go down or not? There must be a reason why you started these cards.

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Mr. Woolford: Perhaps I could try answering that from a general point of view and then let my members answer as they see fit.

One of the principal reasons retailers have offered cards is that it is simply an adjunct to the business of selling merchandise; it is a service to the customer.

What the committee should remember here is a bit of history. Retailers offered credit cards long before financial institutions did. They were one of the first forms of credit card offered in Canada many, many years ago.

Mr. Bodnar: [Inaudible - Editor]

Mr. Woolford: Well, what I'm trying to do is give you a sense of this.

They were the only card around. They started there because there was no alternative. So it's a business they got into at a time when they were the only game in town. Other competitors have emerged into the marketplace.

That's one reason they started in it. The reason they stay in it is really twofold: first, it does support sales in the store; and second, it builds a relationship with the customer. You get to know a little more about your customer. You market to them through the use of the card. You build a sense of loyalty. Does it attract the customer back to the store? We hope so.

Mr. Bodnar: So then it does increase sales.

Mr. Woolford: It does have the effect, retailers hope, of drawing sales from a competitor over to their store -

Mr. Bodnar: Thank you.

Mr. Woolford: - and that is worth while.

The Chairman: We now return to Mr. de Savoye.

[Translation]

Mr. de Savoye: I would like to ask two or three questions, and then give you time to answer them all.

First, between 1988 and 1996 your bad debts increased from 2.3% to 5.7%. In fact, they more than doubled. Are you the victim of those people who have gone bankrupt or to some degree the cause? In other words, are you shooting yourself in the foot?

Second, with monthly interest rates of 28%, annualized to 32%, are you pushing yourselves out of the market?

[English]

Are you pricing yourself out of the market?

[Translation]

Third, what do you think of this full-page advertisement placed by Sears in the Journal de Montréal on Wednesday December 11 1996? The advertisement, which I could table with the committee, reads as follows: ``Until Sunday only, use your Sears card and get double points on your Sears Club''. That was before Christmas. What they didn't say, was that at the end of January, you'll be paying three times more interest. You have a social responsibility. I would like to hear your answer.

[English]

The Chairman: Your questions are getting so much better - right to the point.

Mr. de Savoye: If the answers could do the same -

The Chairman: Mr. Woolford, perhaps you can start and other members of your group can join in.

Mr. Woolford: If I may, Mr. Chairman, I'd like to take sort of a general crack and then let some members, including Sears, obviously, respond to the questions.

[Translation]

First, Mr. de Savoye, we are in fact victims because the credit cards provided by retailers account for only 4%, that is a tiny proportion, of the retail market.

Mr. de Savoye: I am sorry, Mr. Woolford, but if 5.7% of debts are considered bad debts, that means that almost six out of the 100 of your credit cardholders go bankrupt since the debt is considered bad. Either you have a very poor judgement or you are leading these people into bankruptcy.

Mr. Woolford: No. What I mean is that we do not create bankruptcies because of our cards. Our cards account for only 4% of the retail market, and Canadians do most of their spending in the retail market. Less than 4% of all purchases are made with our cards. That is a tiny part of the market.

Furthermore, the increase in bankruptcies is due far more to other factors than the retail market, such as unemployment and economic restructuring. There are some forces operating in our economy which are very strong and very powerful. Compared to them, a credit system representing only 4% of the market has a very small impact.

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As we explained in our presentation, credit cards offered by retailers are just a service to customers. We are not financial institutions; we do not want to operate like a bank or finance company. We simply offer a service related to the sale of goods. It is a way of helping customers and creating a link with them. It is not a way for companies to generate significant profit. As we have shown this morning, profits are quite small. There are many other places in the capital market where it would be possible to obtain a profit margin far higher than 3.6%.

Mr. de Savoye: I'm sorry, but you couldn't possibly try to get that 3.6% return with money which you do not have. The money that you do have and you borrow to obtain this 3.6% is in fact being endorsed for you by those poor people who at the end of the month are unable to pay back what they owe. That is the sad reality of the situation.

[English]

The Chairman: The time is just about up. Do any of the other members of the group want to respond to any of those three questions raised, or do you feel Mr. Woolford covered the point? Is there something you'd like to add? Mr. Knight, would you like to respond to the tie-in between promotions and credit card ownerships and discuss that?

Mr. Knight: Yes. Speaking specifically to that point and also to the advertisement you brought with you today, it really gets back to customer loyalty and the use of, in this case, the Sears credit card. We're rewarding our consumers for using that card and we do not extend any extra credit to those people who come in to purchase in those periods. We have very stringent credit policies that we follow. We have a very loyal customer base that sees that as a choice. When our customers went into the store during that week or during those periods when the double points were awarded, they could have used any credit card with any other offer. It's just a promotion to use the card and a reward for the use of it.

The Chairman: Thank you. Mr. Clark, did you have your hand up?

Mr. Bruce Clark (Retail Council of Canada): Yes, I did. I just want to add one further point of clarification on the question of bad debt. We certainly, as a retailer, are concerned about the significant increases in that one function of our business, and as a result we've done some fairly in-depth analysis of the components of the bad debt and the type of person who has fallen into those circumstances.

It is very clear to us that there is a series of symptoms happening in the marketplace. There are people who have held cards with Eaton's for five to fifteen years or longer. We've been in this business a very long time. We're seeing that a good number of those cardholders, who in the past have been completely current with us and never missed payments, in the last year or two have gone from a current status to a bankrupt position.

In terms of whether we are a victim or a cause, I don't believe it's really fair to say we are either. There are factors in the environment that are contributing to this kind of situation, which we have never in our experience seen before.

The Chairman: Thank you. That's a very helpful extra piece of information.

I want to go to Mr. DeVillers and then back to Mr. Schmidt.

Mr. Woolford: Could I make one final quick point?

The Chairman: Yes, just a very quick intervention.

Mr. Woolford: Within the bad debt area there is fraud, and we have also seen the level of fraud go up dramatically in recent years. I wouldn't say it is driving the bad debt numbers, but fraud has become an increasingly important problem for both retail credit cards and all other forms of credit.

The Chairman: Thank you.

Mr. DeVillers, welcome to the committee.

Mr. DeVillers (Simcoe North): Thank you, Mr. Chair. I brought in a private member's bill in June 1994 to cap interest rates on credit cards and deal with the method of calculating interest, to allow credit for partial payment.

I realize your cards do that, so that wasn't part of the bill. But on the issue of capping the interest rates, my bill was proposing a cap for retail credit cards of 18.5% above prime lending rates of the bank, on a floating rate. I'd like your reaction to that. Why don't you think that would be fair or reasonable?

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Also, I'd like your reaction to the fact that 35 of the 50 jurisdictions in the U.S. have legislated caps for interest on credit card rates. I obviously couldn't sign on to the initiative of the members of Parliament that led to these hearings, which was a letter requesting voluntary reduction of the interest rates, because I believe we should have legislated caps. I'd like your argument against caps.

Mr. Woolford: The answer to that is contained again in annex A of our submission. If you were to take 18.5% and add the current bank rate of - what is it? - about 4%, it would take you to about 22%. At that point, retailers would be earning less than 1% on their credit card balances as a profit. That would almost completely eliminate any profit they make at the present time in this business.

Mr. DeVillers: Yes, but what about the comments of my colleagues, Mr. de Savoye andMr. Bodnar, on the other incentives? And I think Mr. Goddard admitted that for retailers there are other reasons for having credit cards, in that they induce more sales, volumes increase, they are a service to customers, etc. Is there no room for that as part of your incentive, or as Mr. Bodnar asked, why are you in the credit card business?

Mr. Woolford: As I said, it's primarily a service to customers. You do want to earn at least a minimal return on the money that is borrowed and on the credit you extend to your customers. There is a significant element of risk there.

What we see in fact is that retailers, through the pressure of competition, are enjoying a very modest rate of return on that credit card business. A cap would take it down almost to zero. A cap of the size you are talking about would take it today down almost to zero.

Mr. DeVillers: Well, it would be always, because it would be a floating rate over whatever the rate is.

Mr. Woolford: Yes, but at the present time, they would be in effect almost at a zero rate.

Mr. DeVillers: Then how do they function in the U.S. with legislated caps?

Mr. Woolford: I'm not that knowledgeable about the United States. My understanding is that one of the practices of retail operations - and there are other credit card operations - is to locate in states that do not have a cap and issue their cards from there. They get around it in a variety of other ways, by charging other charges and fees, so what you see is a credit card that goes under the cap but has a large annual fee.

It's a little bit like a balloon in the States; if you squeeze it in one place, it pops out somewhere else. The difficulty they have had is that while some states have put caps on, those who offer retail credit card credit have been able to get around it in a variety of ways.

The Chairman: Mr. Goddard.

Mr. Goddard: The only thing I would add to that is that when one starts to inject oneself into an open market situation, it can create a situation where caps in fact become a floor.

Right now I don't think it would change the behaviour very much, when you look at the wide range of credit card rates. They go all the way from, frankly, our rate - and we've tried to explain why our rate is what it is - down to much lower rates on bank cards, which would fall inside the cap you are describing. But it really eventually will cause people to introduce other methods if they want to remain in this business.

We have assets, which we have at the pleasure of the shareholders, whether they're borrowed or equity, to go back to Mr. Schmidt's point. We're required to manage these assets and earn on behalf of the shareholders a return that is considered a reasonable return for their investment in our company.

In looking at the return we make on this business, I don't exactly know and it's very difficult for us to break out the value of having our own card to facilitate transactions, but it does have a value to us. I take that point. I don't know what the value is. I do know that we tie up this amount of money, and we really feel we need to make at least a reasonable return on that capital employed.

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Mr. DeVillers: My last point is that your figure of 5.7% shown here for bad debts has a significant impact on your return. I think I heard Mr. Woolford indicate that measures have been taken to tighten up the credit and I commend you for that.

In doing research for my private member's bill, I dealt with a couple of consumer associations, l'Association coopérative d'économie familiale de l'Outaouais and Service d'aide au consommateur in Shawinigan. It was the position of both of these consumer groups that credit was too easily available and was causing tremendous hardship for consumers.

Exactly what measures have been taken? And if they're successful in lowering that bad debt rate, would it change your position vis-à-vis the interest rate?

Mr. Woolford: If I could direct you to page 6 of our submission, sir, in the last line of the third bullet point we report that decline rates have increased from the 20% to 30% range to the 35% to 50% range. There's been a dramatic tightening in the accessibility of credit through retail credit cards, both for new cards and for credit card limit increases. In the last little while, what we have heard from our Retail Council members is that they have tightened up the access to credit quite dramatically.

Again, with the chair's permission, I invite my members to give you examples of just how they do that. The bottom line is that we have tightened access quite dramatically.

Mr. DeVillers: If it has the desired result of reducing the bad debt rate, would that affect your position vis-à-vis the interest rate? It has been at 28.8% for quite some time now.

Mr. Woolford: Depending upon what happens to the other cost factors as well...we're living in an environment where a lot of things are changing. If retailers start to earn a much higher level of profit, I think you would see some movement. But unfortunately, what we have seen over the last ten years is that their margin of profit on this business has effectively gone nowhere. It has stayed at a very low rate.

Mr. DeVillers: Thank you, Mr. Chair.

Finally, I'd just like to echo the comments of my fellow committee members on the figures.I think they are presented in a very favourable point of view.

The Chairman: Thank you.

Mr. Goddard, just before I turn this over to Mr. Schmidt, and if I could have the indulgence of the committee, one of the things you argue is that you're maximizing choice for the customers. One of the things we argue is that at the same time you are running the risk of confusing the customer as to the true cost.

Let me use the example of Canadian Tire. You get into the line-up at a Canadian Tire store, and whether or not you get your 3% money or 4% money is based on how you pay, but that's not known to you until you get into the line-up. In fact, if you pull out the wrong card you've just added 3% to your cost.

Mr. Goddard: If you pull out a Canadian Tire card you'll receive the option points, which are equivalent to Canadian Tire money.

The Chairman: If you pull out the Visa card you lose the money.

Mr. Goddard: That's correct.

The Chairman: That's correct. Is it clear to the customer that he's just paid an extra 3% to use that card?

Mr. Goddard: We believe it is. We certainly promote it great deal.

The Chairman: Stand in line with me one day.

Some hon. members: Oh, oh!

Mr. Goddard: Oh, we do...and with respect to that, does the cashier make that point with you? Probably not. However, we do promote it through in-store signage and in a wide variety of other ways.

The Chairman: We're just trying to weigh some of the incidentals.

Mr. Goddard: I take your point. I understand.

The Chairman: We're all consumers. And we say to ourselves, is this really maximizing? We don't want to intervene in a process where we feel that people are looked after, but if we ourselves as customers get confused then we have a responsibility to relay these points to you.

Mr. Goddard: I certainly take your point, sir.

The Chairman: I've interfered with Mr. Schmidt's time already. Thank you.

Mr. Schmidt.

Mr. Schmidt: Thank you, Mr. Chairman.

Mr. Goddard said 100% of their retail credit was financed with borrowed money. Is that true of the Bay and Eaton's as well?

Mr. Hogan: In the Bay's case, it is certainly almost all -

Mr. Schmidt: So it's almost...so how much?

Mr. Hogan: I would say over 80%.

Mr. Schmidt: How about Eaton's?

Mr. Clark: I think the experience is that it's not too far off that. It is a very high percentage of financed funds.

Mr. Schmidt: And at Sears?

Mr. Knight: I'm not sure of the exact number because that's managed by our treasury function. However, I would anticipate that it would be not too dissimilar to that of the other retailers.

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Mr. Schmidt: The reason for the question, Mr. Chairman, is that the 3.6% return could be interpreted as a reward for taking the risk, I suppose, because it's not your money really. You're on the hook to whatever lender you got the money from, but really it's not your money. It's somebody else's money that you're re-lending to a third party, and I think it's rather significant that we recognize that.

Also, I think we need to recognize that the increase in business in your firm is directly related to whether you do or don't have these credit cards. You don't know exactly how much it is right now, but when you - ``you'' being now the retail industry - pioneered the whole business of credit cards, that was a major boost to the sales volume in your respective industries, throughout all of them. That immediately increased the overall consumption by people in the country and had a direct economic benefit.

Now that we've got to the point where just about everybody has a credit card and everybody is running maybe not at maximum but they're running a long way, there is this great big talk now about people not buying enough. Is that because the credit cards are at their maximum? Is this now your fault or are you partly responsible for the fact that people can't buy any more?

Mr. Woolford: I'll take a cut at that and start with two simple facts: 62% of all customers pay off 100% of the balance every month; another 18% pay over half so that they can take advantage of the lower charge of interest on the lower balance every month. So around 80% of the retail customers are showing a lively awareness of how to reduce their costs.

The second fact I would go back to is that retail credit cards account for only 4% of retail sales. It is a very small portion of the market, and it just doesn't make sense to suggest that this is driving behaviour in the market.

Mr. Schmidt: No, I was going beyond your credit cards. I was going into the more general field; you're quite right.

The issue here definitely now comes into something that I think came out yesterday. I was rather surprised to hear that the Consumers' Association almost suggested, didn't say it in so many words but clearly implied, that credit is a right. I must be granted credit.

If that's the case, then is it any wonder that we have some difficulty with the increase in debts and in bankruptcies? The assumption under that is that everybody knows how to manage credit, and it's quite different managing credit from managing cash. Maybe it shouldn't be that different, but in the minds of people it's very different.

So I think the question now comes to you and also to the financial institutions: how do we help our customers, our consumers, learn how to manage credit? We entice them to buy all kinds of things and we entice them to use our credit cards, and there are option points and a whole bunch of other stuff, but what about this other partner, which is their responsibility to live up to the obligation they've incurred?

The Chairman: Mr. Goddard would like to get in.

Mr. Goddard: One way - and we're certainly open to suggestions and working with the committee and outside organizations to improve this - is that we work with a credit counselling organization, and when a customer who is in arrears with us comes to us and agrees to go and seek that counsel we allow him or her to work out with the credit counselling organization a repayment schedule for the debt, based on their particular financial circumstances. We agree to that. We waive the future interest on it, and we remit back to the credit counselling organization 15% of the debt that's collected, in order to sustain them in their operation. So we do work with counsellors in that.

I'm not suggesting we can't do more; we certainly can do more.

The Chairman: Mr. Clark.

Mr. Clark: As a further point to that issue, really I think it comes down to the whole role of education and what we can do as retailers and business people to ensure that our consumers understand what they have and what they're getting into.

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First of all, though, I would like to say that in my view, having been in the industry quite a while, and I think from the perspective of most of my associates here, credit is a privilege as opposed to a right. It's something that has to be earned.

Mr. Schmidt: Oh, I agree. But that's not what we got yesterday.

Mr. Clark: Yes, and I was surprised to hear that.

Mr. Schmidt: Yes, I was, too.

Mr. Clark: There is a whole series of qualifications and processes one uses these days to ensure that the person granted credit will be able to manage it in some reasonable form.

We mentioned the credit counselling services, but there is another association we have jointly been involved with as retailers and as other types of credit granters over the years, which is known as the International Credit Association. The particular one I'm involved with is the International Credit Association of Greater Toronto. It's an association of members whose key mandate is credit education in Canada.

We have been evaluating a variety of options over a good number of years to try to find the ways and means to ensure that disclosure happens - that communications to consumers at all levels takes place on a regular basis but most importantly at the youth level, and specifically in this case, at the high-school level.

In the document that was provided this morning, there is some overview information about this particular initiative. It is one we've been working on since approximately last summer. It's something we're really excited about as an opportunity, because it provides the current CD-ROM interactive-based kind of format of educational learning, but can be broadly used at the high school level. It's beginning in Ontario at the grade 10 level.

The process is really interesting. The format is one of teaching the principles of what you would do as you go through the process of building, financing and owning a home. One of the key modules, and the reason for the interest by the International Credit Association, is called credit management.

It is very well done and explicitly talks about options and credit - how one arranges a mortgage and how one arranges building materials if you are building a house. Beyond that, it looks at the whole question of credit cards in general - how to use them, when they should be used, and when they maybe shouldn't be used and a whole variety of other things along that line.

We're working in conjunction with a variety of functions to get this off the ground. The Ministry of Education and Training in Ontario and the Canada Mortgage and Housing Corporation are involved in that. We are trying to put this together in a way that will, at a very early stage in the process, allow our young people to understand the values of credit and using it wisely. We think that's a very important initiative for us.

The Chairman: Thank you very much, Mr. Clark, and thank you, Mr. Schmidt. Mr. Clark,I think we'll be following up with you on that point, because we're interested in exactly how to deal with this question of training and education about credit.

Mr. Woolford: Mr. Chair, that's in appendix B of our submission.

The Chairman: Mr. Shepherd.

Mr. Shepherd (Durham): Thank you. I've gleaned from a lot of the testimony to date that about 40% of the people in our country can't afford to buy the stuff you're selling. If I look at your trend line for bad debts, from 1988 to 1990 they went up by 73%. From 1990 to 1991, they went up by 10%. From 1991 to 1996, they went up by 65%. You people have a problem. If that kind of a trend line continues, you might as well start giving the stuff away.

We hear a lot in the retail sector about cascading taxes, and I want to talk about cascading credit. When somebody comes to you, I want to know what kind of measures you take to scrutinize that person. I know you belong to the Credit Bureau and go through that process. What's the test to you? Is the test the fact that people have been known to pay before, or do you have an income test or an asset test? What restrictions are you making on an individual basis? How do you ensure there isn't a heavy degree of cascading, in other words, people don't have five or six different credit cards all over the place?

I don't believe in this consumer loyalty. I think you're just into promoting sales. I don't think there is such a thing as consumer loyalty, quite frankly.

I want to know from you, instead of worrying about doing counselling courses - which is after the fact because the guy already has the problem - how are you restricting the access to credit in the first place?

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Mr. Woolford: Could I make a general comment, Mr. Chair, and then I'll see if the members want to respond.

Again, I would refer you back to the same point in our submission where we have shown from data provided by our members that turndown rates and restrictions on increases in limits have increased quite substantially in response to this problem.

We are very concerned about the bad debt and the fraud problem. So one of the things all of our members have done is tightened up their practices. I'll leave it to them to describe just how they go through that process, but we have heard from all of our members that they have tightened up very dramatically.

The Chairman: Mr. Shepherd, perhaps you could refer it to Mr. Clark, because he mentioned the bad debt issue and trying to deal with that.

How do you deal with the question of limits then?

Mr. Clark: Limits are managed in a couple of ways.

At the initial application time, when that is reviewed, we do in fact utilize the information provided on the credit application form. There's certainly a process of using the Credit Bureau data, going directly to the Credit Bureau to see how an individual is managing other bills and other debts.

Mr. Shepherd: You're talking about the payment of debt, though. I'm talking about his ability to pay. Are we looking at his income and his assets or are we just looking at the fact that he has had a habit of paying his debts?

Mr. Clark: It really is a composite approach that's taken. It's fairly sophisticated, using scoring models. It is based on interpreting income level through employment type, length of employment, status of home ownership, and some of those things. All of that is taken into consideration with the actual Credit Bureau report, which then gives you the more global view of how that individual has acted to date.

Mr. Shepherd: The bottom line is that if this worked, you wouldn't be showing me these figures. It doesn't work. Whatever it is you're doing doesn't work.

Mr. Clark: As I said earlier when we talked about the situation with bad debts and especially bankruptcies as we've seen them, a lot of our damage, if you will - the losses we've seen - is not coming necessarily from the new people we're putting on the books this year or even last year, but in fact from people we may have had as Eaton cardholders for some 15 or 20 years.

Mr. Shepherd: So what it tells you is you need an ongoing system of monitoring people, not just the first time they ask you for a card, but every year, to monitor their access to total credit.

Mr. Clark: Without getting into great detail, in this area we are using quite sophisticated programs that have in the past worked extremely well for us. Where I would agree with you is that the severity of the situation in the market today is saying we need to look even further and try to find some new opportunities to find ways to control areas that need to have those controls put in place.

Mr. Shepherd: Have you ever had a situation where a consumer was paying on his bills as agreed and you came along and said, look, you have too much debt; we should reduce your credit limits? Never, right?

Mr. Clark: No, we have done that.

Mr. Shepherd: You have done that?

Mr. Clark: Yes.

Mr. Shepherd: You have reduced people's credit limits even though they're paying as agreed?

Mr. Clark: Yes, because of other factors, generally.

The Chairman: Thank you very much, Mr. Shepherd.

[Translation]

Mr. de Savoye.

Mr. de Savoye: Yesterday, we heard from Mr. Paquin, representing the ACEF de l'Outaouais. He presented a table which committee members will remember. The table listed the 12 cases which his association dealt with in January. They involved 27 credit cards and represented a debt load of over $40,000. Half of these credit cards came from major stores, Sears, Zellers and Canadian Tire, and their balances stood at $10,000, that is one quarter.

Although you think that you have just a small fraction of cards in circulation, one specific example, namely that of the ACEF de l'Outaouais located in Hull on the other side of a river, shows that you account for half of the cards owned by these people and one quarter of their problems. Were you aware that your cards were involved in such a high proportion of cases where families were in financial difficulty because of credit problems?

[English]

Mr. Woolford: Again, Mr. Chair, it's difficult to respond to specific cases like this, where all we can do is work from -

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[Translation]

We can only base our position on the data available to our group of retailers. We know that approximately 62% of all our customers pay their bills in full every month.

Mr. de Savoye: You are therefore not aware of those figures and facts which I just quoted to you. You were not aware of that. That answers my first question.

When I was in business, my customers had 30 days to pay even though, like you, I had to pay my employees every week and also pay the rent. I had a line of credit at the bank on which I was paying quite a high interest rate at the time. If my customer didn't pay me after 30 days, I also charged him administrative costs to offset my own credit administrative charges. However, I never considered making a profit on my line of credit. My line of business was the sale of information system consultant services. I was not selling financial services.

Mr. Goddard said earlier:

[English]

``We really feel we need to make at least a reasonable return on that capital employed.''

[Translation]

If I understand correctly, you are also working in the area of financial services.

The Chairman: Mr. Goddard.

[English]

Mr. Goddard: We are in the business of selling merchandise to our customers and extending a range of choices for payment. One of them is our proprietary credit card, in which we employ a tremendous amount of capital on which we make a return. Actually the return in our particular case, pre-tax, is 2%. The chart you see is an amalgam of all. After tax it's 1%. That's the return.

[Translation]

Mr. de Savoye: Would you not agree that the service you provide to a customer with a credit card exists to enable you to fulfil your primary role, which is to sell products in your stores, not to make extra profits on loans, not through cash but through credit? Are you not changing your business and moving into financial services. With 3.6%, I think that you are now involved in that area.

Mr. Woolford, what is your primary role and why are you not satisfied with just breaking even on credit?

Mr. Woolford: The primary role of retailers is to sell goods. In seeking that objectives, we offer customers various ways of obtaining goods and services and paying for them. We offer them the possibility of paying us in cash, with debit cards, checks or credit cards. Credit cards issued by retailers are a service and a way of establishing a link with customers. I would agree that first and foremost it is a way of promoting retail trade. We have to borrow money, and as we showed to you this morning, that is why our retailers must in return receive a minimal amount.

Mr. de Savoye: That is not necessary.

Mr. Woolford: We are in business to make a profit.

Mr. de Savoye: Also on that?

Mr. Woolford: Yes, of course, you make a profit on your operations. In the retail area, we also seek to make a profit.

[English]

The Chairman: Thank you very much, Mr. Woolford.

We go now to Mr. Bodnar and then to Mr. Schmidt.

Mr. Bodnar: Thank you, Mr. Chair.

I thank Mr. Lastewka for trading with me from my latter position, since I have to leave early.

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Gentlemen, I think I've finally figured out your list here, and let me tell you what I can see. In schedule A, in 1996, you have 24.6% as your true average return. I believe you said that is equivalent to gross profit. The other percentages are a portion of the 24.6%.

Mr. Woolford: No, it's not gross profit, it's the margin.

Mr. Goddard: It's gross revenue.

Mr. Bodnar: Okay, and the other numbers are a portion of the 24.6%.

Mr. Woolford: Yes.

Mr. Bodnar: That is the problem. When you show 3.6 -

Mr. Goddard: No.

Mr. Bodnar: Just let me finish my question, sir.

Mr. Goddard: You made a statement that's not right, sir.

Mr. Bodnar: Let me finish. I haven't finished my statement.

Mr. Goddard: Sorry.

Mr. Bodnar: That 3.6%, as a net yield, is 3.6% out of 24.6%. Out of 100%, you have a 14% return, yet you have been telling us that you have a 3.6% return, which is not true. Then, when we get to cost of money at 6.6% - because you gentlemen say that 20% of your money is your own money - if you take that and add it on to 3.6%, you have 10.2%. And 10.2% out of 24.6% is a 40% return on your investment. You have given us funny numbers to play with, and I don't appreciate that. That's more of a statement, not a question.

The Chairman: Would somebody like to respond to this? Thank you, Mr. Goddard.

Mr. Goddard: I'll try to have a go at it, and I'll try to keep it simple.

On our balance, we receive 24.6%, of which 1.2% is postage and so on, and down to the bottom, they add up to a total of 21.0%. That leaves a balance of 3.6% of the outstanding balances that comes to our bottom line. I don't know whether or not I've answered the question, I'm just trying to describe this chart. We're certainly not trying to mislead anyone with this information in any way. On the contrary, in terms of opening our books to the way in which the economics of our business works, we felt it was certainly a higher level of detail than what has been presented by other credit card managers.

Mr. Woolford: Could I add a word, Mr. Chair?

The Chairman: Please.

Mr. Woolford: I would just echo what Mr. Goddard has said. What we've tried to do is show you the return that we received on the receivables that retailers have made available to their customers. The great majority of those receivables comes from borrowed money, so we work on that basis down until we get to 3.6%.

Sure, if you take 3.6% as a percentage of 24.6%.... That's not the way it works. You have to work off the base of the money that the retailer.... I think we've been fairly clear on this.

Mr. Bodnar: That's not what you've done. You made those figures add up to 24.6%. You're either working off one base, or you're working off another. Now you're telling us you can combine the two. That's what's wrong with your numbers. Your numbers don't add up properly.

Mr. Woolford: No.

Mr. Goddard: Perhaps I can give an example. Let's assume, for a moment, that we loan $100, and the revenue coming in to us is $24.60 in this case, or 24.6%. We then pay all of the bills required - the cost of money and the overhead expenses - to manage that particular loan. I'm trying to keep it simple. We end up with $3.60 on the $100 that has been loaned.

The Chairman: Any other...?

Mr. Bodnar: That doesn't explain it at all, because these numbers were not made to be a portion of the $100. We were told that these numbers were made as a portion of the 24.6%.

Mr. Marrone: No, if you look at the bottom -

Mr. Bodnar: That's what doesn't make sense in these numbers.

Mr. Marrone: If you look at the bottom, it says, ``All figures are expressed as a percentage average receivables''. To address Alan's point, if you have $100 outstanding, you're going to earn $24.6, and you're going to end up with a net yield of $3.60 before tax. It's based on the amount borrowed by the consumer.

The Chairman: In your internal around-the-board-table discussions, when you're explaining the credit card operation, you're saying that you can expect to net $3.60 out of your credit card operations if you're talking about $100.

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Mr. Goddard: If you're talking about $100, to use my example, I think the key is the note at the bottom that all figures are expressed as a percentage of average receivables - in other words, the amount of money we have extended in the form of a loan to our customers.

The Chairman: Your second statement to your CO is that hasn't changed much in the last five years. From an historical point of view, when you're the dominant force in the credit market...was it much different in the 1950s and 1960s? Do you have enough corporate history in your heads about this?

Mr. Goddard: No, I don't.

The Chairman: What about the guys from Eaton's or the Bay?

Mr. Hogan: Mr. Chairman, back in 1968 to 1970 the credit card operations actually operated in-house at a bit of a loss. The specific direction was to try to break even so the cash-paying customer did not have to support the credit side of business. From the early 1970s through to the 1980s, in the numbers you now have in appendix A, the service charge rates applied were lower than the 28.8%, but the net bottom line was still around the 3% to 3.5% of receivable level.

The Chairman: Okay, thank you.

Mr. Schmidt, please.

Mr. Schmidt: Thank you. I find this discussion a very interesting one and rather educational as well. I think some of the information you've given us has been very enlightening and worth while.

I'd like to ask why you are still in the credit card business if only 4% of the retail is accounted for by your business. It's almost on a cost recovery basis but not quite - you're making money on somebody else's money. What would happen if you quit?

Mr. Goddard: I don't know whether I can answer that question. As I was saying earlier, we do an awful lot of research into what our customers want, not only with respect to our stores and our merchandise but also with respect to our credit program. It comes through loud and clear on an ongoing basis that there's a convenience factor and - in spite of Mr. Shepherd's comment - a loyalty factor that really exists with our card.

My only conjecture is that one of the major drivers is that it's an alternate line of credit to Visa or MasterCard, which 90% of our customers also have. We know that approximately 9 out of 10 people who come into our store have either a Visa or a MasterCard or both, in addition to a Canadian Tire card. But they like the options point program. They like the idea of purchasing, hopefully paying off their bills on time experiencing no interest, and using the points to acquire future purchases at a lower price. We wouldn't be in that business if we didn't think it helped facilitate a transaction and sell products.

Mr. Schmidt: You also complicated the issue by doing it, but I guess that's life. It's just more complicated than it used to be, and you're in that kind of business.

I really want to ask you what responsibility you have as retailers and as a retail council to the prevention - and that was really the question I was leading up to before, and then Mr. Shepherd asked that question - of getting into an overloaded situation with regard to credit, the exposure to indebtedness. That's really at the heart of this. I don't think it's really in your interest to have people load themselves to that point. It's not in the interest of society, and it's not in the interest of family life, it's not in the interest of building communities to do this.

Solving it afterward solves nothing. Helping people get out of a jam solves nothing. How do you get to the point where we prevent the catastrophe from developing in the first place?

.1110

Mr. Woolford: There should be no question -

Mr. Schmidt: And let's not go through the education thing again, okay?

Mr. Woolford: No.

We do feel a responsibility for that. It is a concern of our members. We have been talking with the Consumers' Association of Canada, as Ms Daly Todd said to you yesterday. Our members do work with credit counselling services. We have taken a number of initiatives, both as the Retail Council of Canada and as individual companies, to try to enhance the awareness of consumers about the wise use of credit and what their options are. So in what you said was a complex area, we are trying to do what we can as providers of credit. As well, our members have tightened up on their practices in response to -

Mr. Schmidt: Yes, but with all due respect, I can tell where this is going.

With all due respect, your advertising campaigns, your publicity blurbs, and the flyers that come out on a weekly basis - or it almost seems as though they come out on a daily basis now - do not deal with ``be careful''. They deal with ``buy more, buy another credit card, look at the options you get with this one''. That's what the information is. That's what we're getting.

And I'm asking you if you do not have a responsibility. You people are excellent merchandisers. You know exactly how to get people to part with their money, and that's great stuff. Now, how in the world do you get them to manage their credit in the same way?

Mr. Woolford: I'm not quite sure how to answer that. Retailers are in the business of selling merchandise and we think our members are good at it. It is a vicious battle for market share out there today. We see it every day in the paper. We see the difficulty that retailers are having making a living in the market today. They have to compete very aggressively for the consumer dollar. In their battle to stay alive, I don't know how they can also say, ``Oh, by the way, we'd really like you to come to our store, but don't shop.'' Or ``We'd really like you to come to our store but don't use the credit card -

Mr. Schmidt: That's not what I'm saying at all.

Mr. Woolford: Let me try to finish this. I'm not trying to make light of your concern, because it is a genuine one.

These firms are competitors with each other. They would beat each other over the head for a point of market share. They would do everything they can to take business from a competitor, and that drives them into this very aggressive marketing posture. That's a reality of life.

How then do you cut through that with a message that tells people to be careful? I'm not sure how you do that, other than working with groups that have credibility with consumers, working through schools, and working to try to get the message across in a more professional and more reasoned way. It's very difficult to send out cautionary messages at the same time as you're trying to sell merchandise. It's just a conundrum that we have to deal with. I'm afraid I don't have a clear answer for you on that.

The Chairman: Thank you, Mr. Woolford. This is a key issue that we do have to come to grips with.

Mr. Marrone, do you want a final comment? After that, I'm going to go to Mr. Lastewka.

Mr. Marrone: Yes, thank you.

I think it's important in the education front - and it's one of the challenges we have - to note that in some of the statistics I've just seen recently, 75% of consumer debt is still within the area of mortgages. As we said before, retailer credit is about 4% of retail sales. It's a smaller portion of the debt. However, it's still important for us to look at what you've mentioned. But there are bigger pieces to it than just the retail portion.

Mr. Schmidt: We're not talking about... [Inaudible - Editor]

The Chairman: Thank you very much.

Mr. Lastewka.

Mr. Lastewka (St. Catharines): Thank you, Mr. Chair.

I appreciate how you've spelled out the cost of procedures for cards. I think that's very good. I'm very much alarmed about the bad debt and the column for ``other'' - and when you add those two columns together - because in your notes you did mention that both columns include fraud. I'm concerned about that because in the end the innocent consumer loses, and our objective has been, first, to try to make sure that consumers know exactly what they're getting when they get their cards. You did mention that you were positive you were making the information very clear and so forth.

The area I've been concerned with is the indication to the consumer of how many purchases he's made to date and of the amount of interest he's paid to date. When someone has a loan or mortgage, at least once a year the financial institution gives that message to the lender so that they know they've only paid so much off their own and the rest is on interest, to get the message about interest that the consumer has paid.

.1115

I wasn't clear and I haven't heard anything here. Do you notify your cardholders of the purchases to date and the amount of interest they've paid to date, at least once a year? Or is there any communication in that manner?

Mr. Woolford: This is an omission I made in my opening remarks. I would direct you to page 9 of our submission, the sixth paragraph. There we talk about putting the administrative rate charge on the front of credit card in the last sentence:

We are also prepared to discuss the matter of providing customers with an annual total of administrative charges paid.

When you're dealing as a customer with a mortgage or with a loan, there is a regular monthly relationship with the financial institution or the lender. Your mortgage payments come off every month. Retail cards don't work quite that way. Sometimes a customer will use a card for two or three months and then stop. They may incur a balance that they carry for a period of time and then pay it off and stop using it. It isn't quite a monthly process for all customers. So what we do need to do is work through how you communicate that information correctly and clearly to the consumer. We are certainly prepared to work with the committee in finding a way of doing that intelligently for consumers, that they can understand.

The consumer has used a card for, let's say, two months, has incurred a balance, has paid some interest and then hasn't used it for a year. You want to be sure they understand what that means when they get an interest summation at the end of the year. Or if they have paid interest in one month, have paid off their balance in every other month, again you want to be very clear so that they understand what has happened over the course of the year.

Mr. Lastewka: I'm more concerned about having it very clear to the consumer on their purchases how much interest they've paid. You very clearly specify what your rate is; it's well known, and so forth. What about the format? Are your formats similar?

I get questions that one financial institution calculates it this way and shows it this way, and someone else does it differently. I'm always looking to the point of giving that message, that communication you talked about earlier, to the consumer, who can read it very clearly whether they have the Sears card, the Canadian Tire card or the Bay card. They have it all in front of them, and they know how to interpret it.

Mr. Woolford: My understanding is that with every statement, consumers do know how much is the principal, how much money they have spent, and what the amount of the service charge is - please correct me if I'm wrong, my members - and secondly, the method of calculating that administration charge is laid out on the statements. So the consumer does have that information.

That was a recommendation of the committee in, I think...was it 1987, Mr. Chairman? I think that led to significant changes in restructuring of the statements that retailers put out. So that is there.

It is a lot of information. We recognize that. It's complex. We're dealing with a complex product here and so it takes a fair amount to explain to the consumer how this operates, but I think our members are trying in good faith to make that as clear as they can.

Mr. Lastewka: I take it from the discussion we had today.... I personally got a couple of different messages yesterday when the Consumers' Association was here, but one of the messages I got was that the cards are given away too freely and that's part of the rise of bad debts and personal bankruptcies.

Do you have any figures on what amount of your cards were tied in with someone who has personal bankruptcy? Do you have any percentages?

Mr. Woolford: Those aren't data we collected on behalf of our members. I don't know if individual companies have that information.

Mr. Lastewka: I know the card isn't the only thing, but I'm interested to find out, of x number of personal bankruptcies, the number of credit cards involved.

Mr. Woolford: What I can say is that in talking with the Consumers' Association and with other groups that watch this, they say if someone gets into trouble they max out on everything they have. So if they have a card, if they have a line of credit at the bank, if they have a loan, if they have a mortgage, they get into trouble right across the face of things.

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I don't think that answers your question. I simply don't know if my members have any sense of how many bankruptcies their cards are involved in.

Mr. Marrone: Statistics Canada does issue the number of bankruptcies in Canada, but does not come out and say the amount of bankruptcy per bankruptcy. It's hard for us to really get that data on what portion of the debt that was bankrupted was related to our cards.

Mr. Lastewka: And it's usually not one card or one reason.

Mr. Marrone: Right.

The Chairman: One last question, Mr. Lastewka.

Mr. Lastewka: I want to talk about some of the people. I'm going to mention the Price Club, but I want to tell you up front that I don't want to be American. I guess their credit card is around 12%. Why can they do it at 12% when yours is at 28%? What are you doing to try to get that 28% down so that you can be more competitive with the financial institutions?

Mr. Woolford: I can't speak for Price Club. They are members of the Retail Council through our Quebec affiliate, but I don't know much about the specific terms. I would expect it's a different card. It offers different services and a different payment arrangement than what you would find on the other retail cards.

The Chairman: Mr. Goddard.

Mr. Goddard: Maybe I could comment on that. I'm not familiar with that specific card, although in just reading a description of it, my understanding is that it's what they call a co-branded card. It's backed by the Bank of Nova Scotia, so I would say it's a bank card with their particular name on it, in the same way that you can get a Visa card with the Ford name on the front.

The big difference in the economics between a retail merchandising card and a bank card is the average outstanding balance. To put it into perspective, the average balance on a bank card runs at approximately $1,200 at any time. The average outstanding balance on a retail card would run in the $400 or $450 range. The cost of administering both of those cards on a regular basis is very similar. So when you have a cost of administering that is similar and you're receiving a percentage of a smaller balance, that percentage has to be larger in order to equate to a smaller percentage on a larger balance, if you follow what I'm saying.

One of the reasons rates are lower on a bank card than they are on a retail card is that the average balance outstanding - and consequently, the charges against that balance - result in a larger dollar volume to cover your costs in that particular example. That's one of the reason why Canadian Tire, for instance, has recently launched another card called a Options MasterCard card, which is at a lower rate. But that Options MasterCard card cannot only be used in 425 Canadian Tire stores, it can be literally used in 12 million outlets worldwide. The average balance on that card is therefore much higher, which enables one to offer a lower service charge on that card. It's purely the economics of the difference.

The Chairman: Thank you very much.

I'm going to ask Mr. de Savoye, Mr. Schmidt and Mr. Shepherd to be short, because I wantMr. Murray to have his full five minutes. He hasn't been into it yet, so I want to preserve his time in our short remaining time.

[Translation]

Mr. de Savoye: Gentlemen, there is no doubt that everyone wants the retail business and the companies you represent to prosper. That is necessary for jobs and the economy. You provide services to society.

However, I do worry for you. First, I see that from 1988 to 1996 you were not very effective in limiting your losses caused by bad debts, nor in maintaining your overheads at appropriate levels. In fact, the more the Bank of Canada lowers its interest rates, the more inefficient you become. I have a problem here.

You say that you make 28.8% on every $100 of sales, but in fact this particular sale costs you only $98. You borrow only to cover your costs, not to cover your profits? At least I hope so. Therefore, in fact, your rate is not 28.8% on what you borrow, but 29.4%. I would like you to respond to that.

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Second, given your figures and the 4% made up of credit sales using your cards, 8% of your total profits on sales comes from the credit revenue you generate, not through credit sales but rather interest on the credit. Those are your figures. This is a simple calculation.

However, that 8% comes from people who are unable to pay their outstanding account at the end of the month. I am worried about you. When those people stop using your credit cards because they understand that the costs are too high, you will lose 8% of your revenue. Things will be difficult for you.

In 1994 Mr. Manley asked you to make an effort. In so far as I know, you haven't done so yet. Does Mr. Manley misunderstand your situation or is there something in your particular area which should be improved?

Mr. Woolford: There is no doubt that the retail industry is going through a very difficult period. Sales are dropping. Many companies are going bankrupt. Many retail companies are doing their best to protect their profit levels.

With credit, we offer customers an attractive way of paying. We offer a service providing a minimum profit level for the companies concerned. That does of course worry us.

Second, you compared our difficulties and those of banks. It would be better to compare our difficulties and those of the economy as a whole.

Like Canadians in general, we have gone through very difficult economic times. The unemployment rate is very high. There are many Canadians who have had to change jobs, lost their homes or gone bankrupt as a result, caused by economic restructuring. In this context there has of course been an increase in losses related to our credit cards. In our view, this is far more closely linked to major forces in the economy rather than to the drop in bank rates. We are trying to reduce those problems.

People mentioned that there's been an increase in potential customer rejection rates and a credit limit imposed on people who already have a card. Therefore, we have tried hard in this area. Are we satisfied with what has been done? No. With a bankruptcy or bad debt rate of around 6%, we consider that there is a problem and that worries us. We are continuing to work on this. As Mr. Clark said, we are continuing to examine ways of assessing customers, adjusting the amount of credit offered, and of course the card itself.

From our viewpoint, we consider that the problem we have is due to major economic forces. That took us somewhat by surprise because the situation is very different from what it was in previous years. We are working to correct the situation. It will take time and hard work to do so. We consider that we are working at it. We have begun the process and we will continue.

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[English]

Mr. de Savoye: Thank you.

The Chairman: Thank you very much.

Mr. Murray, thank you for being so patient.

Mr. Murray (Lanark - Carleton): Thank you, Mr. Chairman.

We were told this morning that retail credit is offered as a service to customers and as an adjunct to the other business of retailers. I believe all the companies represented here, with the exception of Eaton's, are public companies. Is that correct?

I think I'll start with Mr. Knight. Could you tell me what contribution to earnings your credit operations made in your last fiscal year, compared to your other retail operations?

Mr. Knight: That's actually at the back of our annual statement, and I'm sorry I didn't bring one with me. We do actually have segmented reporting in which we discuss both the assets employed in each one of the businesses, such as merchandising and our credit operations, and the income statement related to that. I can certainly provide you with that.

Our new annual report, although we've disclosed our earnings, will be available in about a month or so, just after our shareholders' meeting.

Mr. Murray: If you're not able to give me an exact figure, can you ballpark it?

Mr. Knight: I'm sorry; I can't. But it is published and I can get it for you.

Mr. Murray: Okay, perhaps you could provide that to the committee.

Mr. Knight: Yes, I'll send you that.

Mr. Murray: How about Mr. Hogan of the Bay? Would you have a sense of what contribution you make to earnings?

Mr. Hogan: I don't know how it breaks down, but the total retail business has not been that profitable over the last few years, and our credit operation, while it delivers some profit, has not been extremely high. So the comparison is not good and the specific breakdown I can't give you today. I don't have it. I don't know how 1996 is ending up at this point. I'm sorry I can't help.

Mr. Murray: I don't mean to be disrespectful, but I find it strange that senior management in charge of credit operations wouldn't be aware of the contribution it makes to the profitability of the corporations represented here.

Mr. Goddard: Canadian Tire's is 4%.

Mr. Murray: Thanks very much.

Looking at these figures again in appendix A, it's 3.6% net yield. I'll go back to Mr. Hogan, just because I'm familiar with the Bay's ``Bay bucks'' program, I think it's called. I don't have a Bay card myself, so I'm not sure how much is returned, but is it not something like $4 or $5 for every $100 one spends on their Bay card that is returned in the form of Bay bucks to the customer?

Mr. Hogan: On the Bay card dollar, we return $5 to every customer who has purchased more than $100 in that one month. They will get a $5 coupon back, which can be used again in the store.

Mr. Murray: So taking into account the slim profit margins we've already heard about in retailing operations, when one is given cash to spend in the store, that would further reduce that 3.6%? Or are the Bay bucks included in the 4.2% ``other'', as a promotional item?

Mr. Hogan: Yes, they are included in the ``other'', with the promotional dollars.

Mr. Murray: Would that be the same as Sears points?

Mr. Knight: Yes.

Mr. Murray: And that's a relatively recent phenomenon, in the last two, three, or four years?

Mr. Knight: Actually Sears club points have been in existence for about 10 years.

Mr. Murray: And Bay bucks for how long?

Mr. Hogan: Bay dollars have been around for about three years.

Mr. Murray: Okay. So in other words, of that jump to 4.2%, a sizeable amount would be this promotional item.

Mr. Hogan: No, not a sizeable amount. Only 50% of those dollars that we send back are redeemed and used against other purchases when they're brought back in.

Mr. Murray: Okay.

I know we're pretty well out of time, but I just want to ask why 28.8% is a magic number. It's been around for a long time. Is that the amount the market will bear? Is that essentially the reason retailers have gone to 28.8% rather than 27.5% or 30% or 29%? Why is that magic?

Mr. Hogan: I don't want to speak on behalf of the others, but one reason is it's very divisible by 12 and it helps the monthly rate. In the past it went down to different levels, such as 24% and things that were divisible by two. When we made this change, 28.8% just happened to be the best number, instead of 28.2% or something like that.

Mr. Goddard: I'd like to respond to this question as well, if I might.

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The costs as outlined in appendix A, if you look at them, are within a very narrow spectrum. In other words, postage is about the same for all of us; communications and telephone rates tend to focus; payroll.... I think we have a very efficient labour market in Canada, so that the cost of a person managing a telephone or managing credit is in a very thin band in terms of the costs. Bad debt is an experience we're all sharing in the same range. As for the other costs, promotion is where there might be some variation, but they represent a relatively small portion of the total.

So the cost structures in administering the business are very similar. The margin, as you see, at 3.6% is not that much, so you could assume a coalescence around a number in that area -

Mr. Murray: I'm sorry to interrupt, and I know we're very short on time here, but that 28.8% has been around for a long time - before certain promotional programs were introduced - and I'm not convinced yet that it's not what the market will bear; in other words, that there's a psychological breaking point at perhaps 29% or 30% where people would throw up their hands and say, I'm not going to take that card.

This word ``collusion'' was used yesterday, talking about credit issuers, and I'm not suggesting collusion here necessarily, but it's strange that 28.8% is the figure that everybody seems to arrive at.

Mr. Goddard: Just to speak to that word, as was said earlier, if you look at the total amount of credit being extended by banks, it's approximately $67 billion. The total amount of credit we're extending is approximately one-eighth of that in terms of its total. With rates on the bank cards ranging anywhere from 10% to 19% or 20%, plus ours at where we are, there is a tremendous amount of competition.

I'm in a bit of a quandary as to how answer your question in that sense, because as I said earlier, the the loyalty we seem to experience from our customers in using the card continues despite that spread. There is a great deal of competition in the marketplace. That is what I'm saying.

The Chairman: Thank you, Mr. Murray.

We'll have one last question from Mr. Schmidt and Mr. Shepherd and Mr. Lastewka. Will that be okay?

Mr. Schmidt: Thank you, Mr. Chairman.

My question has to do with fraud. There are some indications that this has been on the increase considerably. Could you comment on how serious the problem is, and on what you believe is the cause of the problem?

Mr. Woolford: Certainly it is a serious problem. I will leave it to my members to give you their own experiences.

Mr. Marrone: Maybe I'll start. Fraud is an industry-wide problem with credit cards, and over the last couple of years fraud has increased by about a third for our organization, specifically.

Mr. Schmidt: A 33% increase?

Mr. Marrone: Roughly. Sometimes it is even hard to denote that it is a fraud, because fraud can happen at the application level - we're taking steps to try to monitor that. Fraud can happen when a card is lost or stolen; we're seeing fraud now as cards begin to get duplicated. I think with a tightening of the economic situation, individuals are looking towards other ways of obtaining goods and services, and fraud is a result of that. So there are many reasons why fraud is increasing, and many different ways fraud is perpetrated, as well.

The Chairman: Thank you. Mr. Shepherd.

Mr. Shepherd: Thank you.

This is a credit card kit, a campus kit, and I'm getting back to my issue of credit cascading. It says here that all you have to have is $1,200. You tick off these little boxes, and these students end up with six cards.

I guess in spite of what Mr. Goddard was saying, if his company decides to get tougher in the credit granting area, I might just jump across the road and use my Visa card at the Home Hardware or Home Depot and buy the same hammer, because the hammers are identical.

Is there a role for government to set some kind of standards in the area of granting credit, that everybody would play with?

Mr. Woolford: That's very hard to do. Government has at its disposal really only very blunt instruments, and it's very difficult for the public sector to move into an area that is as unique and individual as each Canadian. I'm sure that each of my members here has credit cardholders who at first blush would not appear to be good candidates to hold that card. It may be someone who's held a card for many years, and that person has continued to be a good credit risk, has used the card responsibly.

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It is very difficult for government to come into that relationship and say, for this reason, this type of person can have credit; and for that reason, that type of person cannot have credit.

It's hard to do that in the abstract. My sense is that you are better to leave that in the hands of those who will lose money if they make a bad decision than to try to take responsibility for deciding who will get credit, especially at the bottom end.

If you recall, Ms Daly Todd yesterday talked about the dangers of tightening credit in such a way that in fact you drive people away from credit cards for whom that is the only source of credit for which they might be eligible.

The Chairman: Mr. Goddard, just a final comment on this.

Mr. Goddard: I share your concern, Mr. Shepherd. I truly do. We certainly are not in the business of attempting to grant credit to people and then having them go bankrupt or get into really serious credit problems. It's self-serving, because if they're in that situation they cannot purchase merchandise from our stores and they can't operate. So we share the concern with respect to that area.

The tests we use are very, very broadly used in terms of granting credit. They have a whole grid of different dimensions with respect to the profile of a person and our past history with the individual and the history of these individuals. Huge samples are used to determine what the most likely creditworthiness characteristics are for a person.

I don't know that the government could adopt a system that's any more stringent with respect to trying to identify who is a more creditworthy individual than another and what kind of credit can be granted than ours, because we are in fact attempting to grant credit to people who don't end up in trouble, but are able to pay their bills.

The Chairman: Thank you very much.

Mr. Lastewka, you had a brief question.

Mr. Lastewka: Yes. Mr. Goddard mentioned the issue of loyalty and so forth, and in the review of the bank cards we noted the wide range of cards, from basic to the different types of ``frill'' cards.

Has the group discussed or does it have available just a basic card without the frills, without the extra costs that are in promotion and so forth, for the good of the consumer - to get a lower rate, to build up loyalty, to increase the number of customers returning back to your stores - but having a basic card?

Mr. Woolford: At this point anyway, our members have not gone into that part of the market. They have stayed where they are with the full-service type of retail card they have today.

When you look at the costs they face, even if you were to remove the ancillary services, you would still be looking at a very high-cost operation. It would be difficult for them to move away from that, unless they had an affiliation with a financial institution, which some retailers have chosen to do.

The Chairman: Thank you.

I'd like to thank the witnesses, and I'd like to just speak for a minute to you. We came across some good testimony here, particularly from Mr. Clark, with your example on education. If you don't mind staying for a minute, I'd like to follow up with you afterwards.

On the question of the interest rates, if I can speak here, the government has gone to considerable lengths in its mind in the last couple of years to reduce interest rates. I spent the first three years of this government in the finance area, and a number of measures were taken, at a lot of hardship for Canadians, to take the cost of money down and save Canadians as taxpayers literally billions of dollars. It's a little bit of a frustration for the members of Parliament, not understanding fully your industry - and we really appreciate your coming here today - to see your interest rates where they are, and stuck where they are.

We all appreciate, from past testimony and past investigations by this committee in the last decade, that one does not step easily into the governance of interest rates in the private sector. I just want to leave you with the message, though, that this is a continuing sore point. As we watch your industry - and you come to us on a number of issues, ranging from tariffs and everything else, to make sure you can effectively operate - we also look back at you sometimes and say it probably would help consumers if they were able to deal with the issues somewhat differently than they can right now.

I'll just leave you with that message. You have to make your own decisions, but we'd like to leave you with the message that this is an ongoing concern of parliamentarians, and any further consideration would help us in our deliberations before we submit our report.

Thank you again for coming in.

Mr. Goddard: Thank you very much.

The Chairman: The committee is now adjourned until Monday evening, when we will meet for the consideration of Bill C-91 and the appearance of Minister Manley.

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