Thursday, February 22, 2007

On Fees, Banks to Give Flaherty a 'Win'

The Globe and Mail, Sinclair Stewart & Steven Chase, 22 Feburary 2007

Canada's major banks are preparing options for lowering the cost of automated banking machine services after Finance Minister Jim Flaherty ratcheted up his political pressure on the sector last week with a pointed letter to each of the industry's chief executive officers.

In the letter, a copy of which was obtained by The Globe and Mail, Mr. Flaherty said he had received "a number of representations" of concern surrounding ABMs, and noted that some transactions can include three layers of fees. Specifically, he indicated he would like to know what kind of discounts banks could provide to seniors and young people.

"I would be interested to know of options under low-fee retail deposit accounts, or special accounts for students or seniors," he wrote to the CEOs.

"I urge you to continue to work towards improving the system for the benefit of all consumers.

"Canadians expect their banking and lending institutions to engage in an ongoing effort to provide choice and competitive services."

Before Christmas, the populist-minded Finance Minister asked banks to justify their fees, and last month he publicly rejected their first attempt to rationalize the charges, suggesting they try harder.

The fact that he continues to press the issue has convinced many in the banking industry that they will have to cede some ground by lowering costs.

"Providing an explanation is not enough," acknowledged one senior banker. "We're going to have to really provide some more options in terms of how to reduce this one irritant cost for consumers. I suspect we're going to have to provide the Minister with a win, rather than just a reason."

The executive said he was unsure what that "win" would be, but said the bank is currently working on possible solutions. Some of these could be outlined to Mr. Flaherty when he meets with bank CEOs in Toronto early next month.

"It won't eliminate the costs -- it will reduce the costs," said the senior banker. "We'll have to come up with creative ways to see how to really convey a change while minimizing our loss in revenue."

Canada's banks have long claimed that the cost of banking here is lower than in many parts of the world. They argue that British banks subsidize their free banking network by burying the costs in other services, whether it be deposit accounts, mortgages, or other products.

If the banks do bend to Ottawa's political pressure and create new packages with lower ABM fees, there is a good chance that this lost revenue will be offset by new charges elsewhere.

"If you're going to make it less transparent, the consumer's not going to save any money," said another bank official. "We're going to get it transparently or we're going to get it non-transparently . . . It's a PR problem for the government, and it's a PR problem for the banks."

An executive at another bank conceded it is "wrestling" with the matter internally, and suggested some banks may have to examine whether there is a competitive advantage that could be gained by waiving fees -- much like Toronto-Dominion Bank subsidiary TD Banknorth recently did in the United States, in an effort to build market share.

On Tuesday, Mr. Flaherty noted he has powers under federal law to force banks to change their ABM fees but stopped short of saying he'd ever use them.

"We always are in a position given that the Bank Act is a federal statute but I much prefer to have a discussion about the goal of competition and choice in Canada," Mr. Flaherty said, adding he's impressed by how some Canadian credit unions have managed to avoid charging fees at machines.

"I like competition and choice for consumers. Among the big banks -- we'll see. I'm going to talk to them about that," Mr. Flaherty said.

Big banks represent an easy target for federal political parties because of their growing financial clout. Last year, Canada's six biggest banks reported combined profit of $19-billion, easily eclipsing the previous high-water mark of $13.1-billion, set in 2004.

Bank fees can vary wildly, but there are three types of basic charges: the regular account fee you pay when you withdraw money, which is typically waived when you do it at your own bank. If you withdraw from a rival bank, you will be charged a network access fee by your bank which can range between nothing and $1.90. The third fee is a "convenience" fee charged by the other bank you used -- a charge that can climb as high as $3 for so-called "white label" machines at convenience stores.

When you add it up, a withdrawal from a privately owned machine could cost as much as $6.15 in many cases -- and sometimes more, according to figures compiled by the Financial Consumer Agency of Canada.