Friday, March 02, 2007

Ottawa to Include Banks' Electronic Payment System in Probe

Financial Post, Paul Vieira, 2 March 2007

House of Commons finance committee voted yesterday to extend its probe of the banking industry to include the electronic payment system, a move one committee member said could make the ATM fee debate look like "chump change."

At issue is the two or three days it takes for a payment, done through Internet banking, to kick-in. MPs want to know why, with today's technology, that payment can't take effect immediately. They note that charges on a credit card kick in almost instantaneously.

"I don't understand why electronic payments are instant, in real time," said Liberal MP John McKay, who pushed for such a review.

"It appears to be instant. It is certainly instant when it is removed from the account. It is not so instant in terms of paying the bill."

The issue has caught the attention of the Finance Minister, Jim Flaherty.

In an appearance before the committee last month, Mr. Flaherty told Mr. McKay he would speak with the bank CEOs about the timing of electronic payments.

The commiteee is set to begin hearings on the ATM and payment issue in mid-March.

"It is worth an explanation," Mr. McKay added. "ATM fees are chump change compared to the money that goes effectively into my bank's holding account while all this processing goes on before my bill gets paid."

The examination of the payment system is the latest salvo legislators have launched against Canada's chartered banks. The banks are under heavy pressure, from Mr. Flaherty and other MPs, to reduce or eliminate the fees they charge consumers for withdrawing money from an ATM operated by another lender.

Laurence Booth, a finance professor at Toronto's Rotman School of Management, said studying the payment system could spark more public policy repercussions than the ATM probe.

"The payment system is a natural monopoly," he said. "It is clearly owned by the banks and controlled by the banks. And clearly there are public policy issues there."

The Canadian Payments Association sets the rules and standards that govern the clearing and settlement of bill payments, and counts as its members the banks. Under the current arrangement, payments go through a number of stages, starting at the consumer's bank to the billing company's financial institution, and finally to the biller's coffers. As a result, there is no integrated system.

The CPA, which oversees 21 million transactions a day, says a number of factors can slow down the payment process -- most notably the technology platforms at the respective banks and the billing company. To obtain near instantaneous online payments would require hundreds of millions of dollars invested in technology, said Roger Dowdall, a CPA spokesman.

The association operates under rules set out in law. But an Ottawa-based consumer rights group, Public Interest Advocacy Centre, said the system should be federally regulated, much like in the United States and the European Union. Moreover, the current regime, it claims, is a confusing patchwork of rules, with different regulations governing debit cards, credit cards and preauthorized bank withdrawals.
Financial Post, Duncan Mavin, 2 March 2007

The possibility that a meeting between Canada's banks and Finance Minister Jim Flaherty next week that could see a prohibition on the banks' right to charge fees to users of automated banking machines has some on Bay Street scrambling.

But moves to stop the banks charging the fees would be even more damaging for owners of so-called white-label machines, says the head of a company that operates 20% of Canada's independent ABMs.

White-label ATMs are the non-bank owned cash dispensers often found in convenience stores, bars and elsewhere.

They sprang up in the aftermath of a government tribunal in 1996 that ordered the opening up of the ATM market to companies other than banks, and permitted banks and their competitors to charge a fee to ATM users.

The white-label machines now outnumber the bank-owned machines by about two to one.

If the banks are now no longer allowed to charge fees, it could spell disaster for the industry and reduce choice for consumers, said Mischa Weisz, chief executive of TNS Smart Network Inc., in a letter submitted to the chair of the House of Commons standing committee on finance.

To compete with the banks, white-label providers would be forced to lower their fees, too, and could be forced out of business, Ms. Weisz said.

The overall number of ATMs available to Canadians would fall, and there would be a loss of income for small businesses that benefit from having the machines on their premises, Ms. Weisz said.

Meanwhile, two bank CEOs who were speaking at their annual meetings yesterday remained tight-lipped about the ATM fee showdown scheduled for Monday.

Canadian Imperial Bank of Commerce CEO Gerry McCaughey refused to give a direct answer to reporters who asked what outcome he expects from Monday's meeting, though he said CIBC has invested $125-million in the last year on improving its network of 3,800 machines to gain a competitive edge.

Bill Downe, the new CEO of Bank of Montreal, said he is "sympathetic to customer issues," but offered no specific details ahead of the meeting. "I'd hate to tell the [Finance] Minister what I'm going to tell him before I tell him [in person,]" said Mr. Downe.
Financial Post, Duncan Mavin, 2 March 2007

It is open season for bank-bashing yet again, with malcontents and politicians of every hue lining up to take potshots at the giants from Bay Street.

Currently, ATM fees are in the critics' crosshairs -- Finance minister Jim Flaherty will meet with the banks on Monday for an explanation of the fees. Last year it was the banks' desire to sell insurance from their branches that drew critical fire.

This week has also seen the emergence of another issue -- a Parliamentary committee on banking is discussing whether the banks unfairly delay processing bill payments.

With so much criticism, it's tempting to ask, 'What have the banks done to upset Canadians?'

Over the years, Canada's big banks have been beaten up over everything from exorbitant profits to merger ambitions, to executive pay, to not having enough branches serving rural customers or the urban poor.

But there is another side to the story.

The ratio of ATMs to customers is higher here than anywhere else in the world. Canada is also ahead of the United Kingdom, the United States, France and Japan in terms of the number of branches per customer, according to data from the Swiss-based Bank for International Settlements.

Also, the average price of core banking services is lower here than in many countries, including the United States, Germany, France and Australia, according to a report from global management consultants Capgemini.

Of course, the banks are very profitable, too -- the combined earnings of the big Canadians reached almost $19-billion last year alone.

Out of those record profits, the big banks pay a combined $4.4- billion in taxes and $6.5-billion in dividends to shareholders. Which means billions of dollars into the public purse and billions of dollars to Canadian investors above and beyond the index-beating returns the sector has provided in each of the past five years.

"We have a lot to be proud of in our banks," said Laurence Booth, a professor at the Rotman School of Management at the University of Toronto who specializes in the banking industry. "The Canadian banks are very efficient and as well run as any banks anywhere in the world.

In private, bank chief executives admit they are irritated that Ottawa doesn't seem to give the banks full credit for the role they play in the Canadian society as well as the country's economy.

The banks pump money into the economy through expenditure on goods and services -- including $33-billion spent on technology in the past decade -- and significant contributions to charities and other community organizations.

And they employ almost a quarter of a million Canadians who earn an average compensation package of almost $100,000 -- well above the average for the wider Canadian working population.

There are some legitimate criticisms of Canada's banks, said Rotman's Mr. Booth, particularly around the too-large profits they derive from small businesses.

But the overall level of criticism may have gone too far, he said.

"The department of finance is worried the banks are so profitable," said Mr. Booth. But, he said, "We really can't knock the banks just because they are profitable."