[Recorded by Electronic Apparatus]
Thursday, September 26, 1996
.1533 
[English]
The Chairman: The House of Commons Standing Committee on Finance is again hearing testimony on the proposed amendments to the legislation affecting Canada's financial institutions.
We're very pleased to have Mr. Brad Badeau with us this afternoon. Mr. Badeau is the senior vice-president and chief executive officer of Trimark Investment Management Inc. With him is Kathleen Young, vice-president and treasurer.
Welcome, and we look forward to your comments.
Mr. Brad J. Badeau (Senior Vice-President and Chief Executive Officer, Trimark Investment Management Inc.): Mr. Chairman, I would like to thank you and the members of the committee for providing Trimark with an opportunity to appear at these hearings today.
Trimark is the second-largest mutual fund manager in Canada, with almost $18 billion in funds under management. Trimark, and the mutual fund industry as a whole, have witnessed phenomenal growth in recent years. That has primarily been due to shifting demographics, concern about retirement, and concern about investment returns.
Mutual funds provide consumers with access to professional investment management not otherwise available to investors in small amounts. They do so in a cost-effective manner due to the economies of scale that can be achieved by the pooling of funds. They also allow for a level of diversification that small investors could not achieve on their own.
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The low interest rate and inflation environment of the 1990s has resulted in growing investor appreciation of the merits of mutual funds as a vehicle for both short-term and long-term savings. As a result, the mutual fund industry has emerged as part of the core of the retail financial services sector, though policy-makers still seem to focus on banks.
The issue I wish to speak to you about today is the lack of recognition of mutual funds as a core part of the retail financial services sector, and consumers' access or lack of access to their money fund balances via automatic banking machines and cheques.
Trimark believes that providing mutual fund customers with convenient access to their money fund accounts would have tremendous benefit. This is because money market funds are typically higher-yielding instruments than traditional chequing accounts. Also, these funds are very secure because they are comprised largely of Government of Canada treasury bills and bankers' acceptances. Unfortunately, Trimark is prevented from directly offering consumers access, and from exploring some indirect methods of access, largely due to historical government policy. As a result of various restrictions, inefficient and cumbersome arrangements have been explored that would result in increased costs to consumers.
While it is expected that payment systems access by mutual fund companies and others, such as insurance companies and investment dealers, will be discussed by the recently announced advisory committee on the payment system, of which Trimark is a member, in the white paper there are statements relating to the payment system that concern us.
Our concern is that the white paper actually went some distance toward setting policy in the period between now and the outcome of the payment system review. Specifically, the white paper said that the Department of Finance would further explore its concerns with unregulated entities or non-CPA members issuing payable-through-drafts. It went on to say payable-through-draft arrangements could have negative implications for the financial system. Accordingly, those who are contemplating entering into such arrangements should carefully consider the implications of doing do.
What are payable-through-drafts? They are like cheques in terms of appearance. The main difference is that they are drawn on non-CPA members as opposed to banks. It is possible that each one of you has cashed a payable-through-draft, as they have been issued through insurance companies for years, for example, to reimburse people for dental claims and prescription expenses.
This negative white paper statement will greatly restrict the flexibility of Trimark to develop products aimed a providing customers with high returns and liquidity. It will also likely restrict other financial institutions who wish to offer innovative products as well.
Over the past several years, Trimark has attempted to negotiate with two banks the ability to secure access to the payment system for our customers. Both attempts failed. From the banks' perspective, payable-through-drafts were an issue, partly because such instruments facilitate access more cheaply than other methods, and partly because they dispense with the need for customers to establish a separate relationship with their participating bank. From Trimark's perspective, payable-through-draft arrangements were preferable for a number of reasons. They did not require us to hand over our customer account lists to the banks. They did not require our customers to open accounts with banks and sign multiple forms. They did not pose a risk that a bank would try to cross-sell other services to that customer. And they did not require extra processing, which obviously adds cost.
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The failure to reach an agreement on access spurred us to look into the rationale for the bank's position, the influence of the CPA, whether risk was really an issue and whether policy-makers were aware of the problem. It also made us realize that the system should not require independent mutual fund companies to depend on bank competitors for access to the payment system, because it is not in the banks' interest to provide it to a mutual fund competitor.
Once we became active on the payment system issue, a few banks contacted us and suggested that we could work something out. The white paper statement, of course, virtually eliminates the possibility that banks will be accommodating in the near term as far as payable-through-drafts are concerned.
While Trimark recently signed a letter of intent to acquire a trust company that will help us achieve payment system access under current government policy, owning a trust company subsidiary does not eliminate the payable-through-draft problem. The negative white paper statement and the fact that all trust companies are members of the organization that opposed payable-through-drafts, the CPA, are major roadblocks. In addition, there would be difficulties for consumers if they were given books of payable-through-drafts but then had to stop using them because the arrangement was subsequently revoked.
Moreover, the lack of information available on the rationale behind the government's negative statement on payable-through-drafts makes it very difficult to predict whether the government's position will be reversed or was even intended to apply to financial institutions such as Trimark. The only publicly available information regarding concerns with payable-through-drafts is a CPA paper dated May 1995. The arguments in the paper do not, in our belief, withstand rigorous analysis, making it unclear whether additional information has come to light that necessitated the white paper statement.
We believe the government should at minimum acknowledge that mutual fund companies are financial institutions, and should not discourage the issuance of payable-through-drafts by such companies. Ideally the government will ultimately recognize that Trimark should be a full participant in the payment system.
I want to stress that Trimark is a regulated entity, not an unregulated entity. While Glorianne Stromberg's report highlighted aspects of the industry that caused her concern, many of her issues were with respect to dealers who sell funds and to sales practices within the industry. Mutual fund managers are registered with provincial securities commissions and are regulated by the Canadian securities administrators. There has never been a failure of a mutual fund company in Canada. That's a very significant point when we look at other companies in the financial services industry.
The regulatory regime to which we are subject is not identical with the banks' because we do not have all the risks the banks face. Our clients' money is not invested in illiquid assets that are difficult to value, like real estate loans. Clients' money never appears on Trimark's balance sheet. It is segregated in a fund that is an independent trust or corporate entity, and each client has a proportional share in the investments of that fund. Investors accept that their sole claim is on the segregated assets in the fund, that there is no guarantee on mutual funds, and that except in the case of money market funds, their value will fluctuate. This is not the case with bank deposits.
Mr. Chairman and members of the committee, we are not seeking a legislative change with respect to payable-through-drafts because there is no legislative rule preventing such drafts from being issued. These same products are available on a widespread basis in the United States, where service-oriented banks facilitate delivery of payable-through-drafts issued by mutual fund companies.
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It is unfortunate that in Canada policies and unwritten rules preclude availability of legitimate products. This is to the detriment of Canadian consumers. We believe the white paper statement needs to be clarified so as not to discourage CPA members from working with financial institutions like Trimark to facilitate the issuance of payable-through-drafts.
While the question of amendments to the CPA Act and changes to Interac are issues that the committee will likely be considering in the future, I would like to give members something to think about in the meantime. While payable-through-drafts would provide additional flexibility now, the real consumer benefits will be realized once institutions like Trimark are given full access to Interac and allowed to directly issue debit cards to customers and to explore other innovative options.
It is time that policy-makers in Ottawa recognize that mutual fund companies have become core financial service providers, that they are regulated, and that every day they compete with banks for the same customers the banks compete for.
We are hopeful that the advisory committee on payments and the task force on the future of the Canadian financial services sector will reach the same conclusion. But in the meantime, we believe that the government should not be discouraging arrangements that are common in the U.S. and that some CPA members would be willing to offer if there were no associated ``reprimands''. Providing this service would be fully consistent with the CPA Act.
Consumers are striving to maximize their investment returns in recognition of greater self-reliance for their future retirement needs. It is inexcusable for banks and the CPA to deny Canadian consumers access to higher-return products, and difficult to understand the government's support for such a position. In a rapidly evolving environment involving electronic banking, PC banking, and Internet services, two years is too long to wait until the advisory committee and task force report. The policy-makers need to act now so as not to prevent or delay Canadian financial institutions' ability to provide Canadians with needed services.
Thank you.
The Chairman: Thank you, Mr. Badeau.
Before we continue,
[Translation]
I have the honour to present to you our distinguished visitors from the Republic of Guinea:Mrs. Kerta Conte, Head of transcriptions service with the National Assembly; Mr. Emmanuel Derrick Lenaud, Executive Assistant of the Speaker of the National Assembly; and Mr. Mohamed Lamine Couré, Legal Counsel for the National Assembly of the Republic of Guinea. We wish to welcome you and thank you for your visit. We hope that you will enjoy your stay in Canada.
[English]
May I just very briefly ask you, have you had discussions with finance officials since the white paper came out, respecting this point?
Mr. Badeau: No, we have not.
The Chairman: For my part, I am very supportive of your position. I see no reason why we should not proceed to do what you suggest. But I would recommend that you start discussions immediately with finance officials, who are very open to hearing these types of concerns.
[Translation]
We'll start our questioning with Mr. Bélisle.
Mr. Bélisle (La Prairie): I'd like to thank our witnesses for their presentation.
In the second paragraph on page 5 of the French version of your presentation, you note that one of your main concerns is to facilitate the issuance of payable through drafts.
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You say:
- While payable through drafts would provide additional flexibility now, the real consumer
benefits will be realized once institutions like Trimark are given full access to Interac and allow
to directly issue debit cards to consumers and to explore other innovative options.
[English]
Mr. Badeau: We feel consumers in Canada should be given as much choice as possible in terms of investment products. With respect to the very liquid money fund products, we feel that limiting consumers' access to chequing alone will not be sufficient going into the next century in terms of providing choice to customers.
We feel there will be a substantial rise in the use of PC banking through the use of the Internet, ever-increasing use of ATM machines, etc. To us chequing is really the first step in providing consumers with more and more access to funds, while at the same time offering them as high a yield as possible from Trimark's perspective.
[Translation]
Mr. Bélisle: Do you mean that mutual funds could be bought through Interac or directly from the ATM, for example?
[English]
Mr. Badeau: It will soon be possible to buy mutual funds through instant teller machines. Some of the financial institutions in Canada, some of the major banks, have explored that for quite some time. There are regulatory issues with respect to what are called ``know your client'' rules in securities legislation that they need to get around, but we will probably see customer purchases of mutual funds through Interac machines very shortly. That is something that's quite common in the U.S. today.
[Translation]
Mr. Bélisle: Thank you.
The Chairman: Thank you, Mr. Bélisle.
[English]
Mr. Solberg, please.
Mr. Solberg (Medicine Hat): Thank you very much, Mr. Chairman.
On the face of it, your request seems very reasonable. I think it's safe to say that certainly my party would like to see more competition in the banking industry. Your presentation seems so reasonable, and I'm curious to know what possible objections the finance department has raised. I know you confess to not really knowing what the objections are, but what reasons do they give you for not wanting to pursue payable-through-drafts currently?
Mr. Badeau: As my submission indicates, they really have not given us substantive reasons to this point. That is something we are continuing to try to explore, but we really haven't gotten to the bottom of what the issues are and, almost more importantly, whether new issues have come up recently that would have caused a need to put that statement in the white paper. To our knowledge, nothing has happened recently that would have caused a change in the department's thinking.
Mr. Solberg: Mr. Chairman, I might add that I think it would be very valuable to have the finance people come back at some point so we can ask them about this specifically. Obviously it is an impediment when you don't even know what the reasons are for not having your suggestion considered.
The Chairman: I think that's an excellent suggestion, Mr. Solberg. Following that up, perhaps I can suggest something. I believe we hear our last witnesses on the white paper next Monday, September 30. We've also said that we want to have the Canadian Bankers Association back because a lot of these suggestions have affected them. Perhaps we could have the finance officials here at the same time as the Canadian Bankers Association to go over every one of these areas where there have been suggestions for changes in the white paper, including the one presented today. I think that's a very good idea.
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Mr. Solberg: You mentioned that the bankers at the CPA are reluctant to allow you on board. Although the reasons are obvious to me, what reasons are they giving you for not allowing you into the CPA?
Mr. Badeau: The major reasons that have been explained to us have to do primarily with risk and the fact that we are not regulated in the same environment as they are. We believe we are a regulated entity, and they argue that we are not as regulated an entity as they are and that they can't really control us because we are regulated by securities commissions versus the Bank Act.
The major risk issue is something called systemic risk: that if one organization fails then the whole system crumbles. It's a very easy argument to put forward and it's one that makes people feel quite uncomfortable because they don't really understand it. But there are clearly ways of minimizing such risks, and it's obviously not in their interest to have those arguments put forward.
The Chairman: Mr. Schmidt, do you have a question?
Mr. Schmidt (Okanagan Centre): Yes, I have three. First of all, are we talking about money market funds only?
Mr. Badeau: Currently we are talking about money funds only. We have looked at providing chequing accounts on something called a short-term government bond fund, which is a very liquid investment similar to a GIC. All of the securities in that fund would be government-guaranteed and it would be easy for us to provide such liquidity. But at the current time, if we can get chequing on the money fund on a cost-effective basis for consumers, that would be our number one priority.
Mr. Schmidt: You made a reference to purchasing mutual funds via ATM machines. Would that be limited to money funds as well?
Mr. Badeau: My understanding is that currently in the U.S. it is limited to money funds, but they are moving towards purchases of other funds. The issue I raised before about the ``know your client'' rules means that purchases via ATM would be only to add to an existing investment. The firm receiving the money would have to have had a relationship with you already, and you would only be topping that up. You obviously couldn't start a relationship with an institution if they didn't know who you were and hadn't gone through proper channels.
Mr. Schmidt: So at the moment we're talking in effect about buying and selling money market funds via an ATM machine.
Mr. Badeau: Right.
Mr. Schmidt: A question then arises: if a person had access to the money market mutual fund, would the mutual fund company want to have large pools of liquid capital? At the moment your bond funds, your treasury bill funds and things like that are all invested in government-backed securities. If you got into this chequing business, you'd have to have access to pools of capital on a regular, hourly basis. Would this change the operation of the money market fund as it is today?
Mr. Badeau: Point one is that we don't believe chequing would result in a material decrease in the fund's assets on a daily basis. Point two is that treasury bills, bankers' acceptances, etc., are very liquid investments. You really can't find more liquid investments than those, so for us to have to redeem funds immediately is really not an issue.
With current regulatory changes proposed by the Stromberg report, the term structure of the funds - i.e., the maturity of the investments that are in the funds - is now quite short. In the past one was able to have treasury bills that were a year in duration, and now that's going to 30 or 60 days. That results in a lot more liquidity and less chance of any change in yield in the fund if there's a substantial liquidation of the fund's assets.
.1600
Mr. Schmidt: It seems to me that your comments are based on current practice or certain experience as it exists. If I recall correctly, something like $4.9 billion, or well past the $4 billion mark, was put into the mutual fund industry in the months of July and August. Those are pretty substantial numbers. If the public would recognize suddenly that we can have the same privileges in terms of accessing our capital as we do in the banking industry, would this not change almost completely the complexion of your business? I'm not sure if it would or not.
Mr. Badeau: I don't know that it would change the complexion that much. The reason I say this is that even with a long-term equity fund today, if you want your money out, you have it in three days. So we're really talking about the difference between an hour and three days. We're not talking about the difference between an hour and two months. So this isn't like a mortgage maturing, or something like that. These are very liquid investments to start with, where the maximum time it would take for you to get your money out is 72 hours.
Mr. Schmidt: I quite appreciate that, Mr. Chairman. The point, though, is that mutual funds, by and large, are sold on a longer-term basis. They are not sold on a day-to-day, turnaround basis. The same thing applies to the money market, although everybody agrees that the money market is a shorter-term market.
It seems to me, though, that the expectation and the perception that the public has of the mutual fund industry is different from the perception they have about a banking thing. When you get into this banking function, which is really what you're talking about now, that perception will change among the public, so I think the expectation you might have now is going to change.
I'm not suggesting it's a bad change, by the way. That's not the reason for my question. My question is whether this would create a whole new demand that you currently haven't experienced, and whether it really would change rather dramatically how you would manage the actual deposit of funds on the one hand and the liquidation of withdrawal on the other hand.
Mr. Badeau: It could. Certainly we wouldn't go into this if we thought this was going to bring in, say, $10 million in additional funds. It really wouldn't be worth it for us to go out and buy Bayshore Trust and to put all kinds of effort into checking access.
So we think that consumers will want higher yield and they will want lower fees. However, that's going to take a lot of education, and it's important that we do it right. Possibly over time what will happen in Canada is similar to what has happened in the U.S. Money funds are used to a great extent for purchases of many goods in the U.S. So if we look south of the border, it may result in operational changes and it may result in the investments we purchase and the funds, but I don't think this is something that would be onerous on us and I don't think it's something that would really hurt consumers.
Mr. Schmidt: I think your prima facie case is very strong, and I support it.
Mr. Badeau: Great. Thank you.
The Chairman: Mr. Grubel.
Mr. Grubel (Capilano - Howe Sound): Mr. Badeau, I'm sorry that I was delayed and couldn't hear your full story, but I just heard enough.
I think that having Interac declared a common carrier.... Do you know what I mean? If it were legislated, if it were owned by all the users and the costs of running the system are apportioned according to use, and it's run as a collective and everybody has automatic access to do whatever they want to, this would be the kind of solution we would suggest today for all kinds of previously considered public systems like Interac. For example, electric transmission lines should also be considered to be a common carrier, owned by the users.
I discussed that with one of my colleagues, and I can't reconstruct correctly what the argument is, but there was something about an exposure, that at some point there may be a risk. If, however remote the possibility - but it's sure such possibilities will happen in the next 50 years - there will be a big crash of one sort or another, and suddenly you have a big systemic exposure, this is the justification for regulating the banking sector differently and treating the banking sector differently from everybody else.
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So the great fear of those people who come from that angle is that if we have another substitute for cash, for money, and there is a catastrophe, how can the system be insured against this? Do you have any proposals for making sure that there aren't the systemic repercussions throughout the economy, throughout the financial sector, from some sort of a failure on your part?
Mr. Badeau: I wish I had the answer to that question, but let me make a couple of points.
The first point is that I'm not really proposing at this point that we open up Interac to everyone, but certainly there are firms in the financial services business that have built up a certain amount of creditability over the years. They have a substantial amount of capital. For those firms, we believe it's very hard to use the systemic risk argument, but it's being made by the firms who own Interac. It would be one thing if the government owned Interac and then dealt with who should have access and who shouldn't. But when the people who own it are really putting forward the risk arguments, it's very hard to defend yourself.
The second point is that we ourselves are in a very ironic situation. We ended up spending$35 million to purchase a trust company in order to get Interac access, yet who is the backstop of the trust company? It's us. In many ways, a trust company with $30 million in capital is backstopped by a fund management company with many more dollars in capital. So the risk issue really hasn't been dealt with effectively to start with because a small trust company with a minimal amount of capital could get in, while a large mutual fund company in Canada with a great track record can't. So I think that if we focus too much on systemic risk, we don't move things forward.
Mr. Grubel: Well, my suggestion would be that you could somehow put your fertile brain that has created such a big company to this task of somehow thinking of some sort of a contingency reserve that could get created. It could be one in which every participant in Interac sets aside x percent of their assets and says unconditionally that they will step in if there is a failure. I'm just thinking out loud here, you know.
You should work on somehow persuading the Department of Finance and the bankers and so on that there is a solution to this crisis, that this is their fiduciary responsibility to make sure, even if it happens only once every hundred years - although it doesn't. This is my suggestion to you, rather than just having you ask for this and saying that you should be trusted because you have never gone bankrupt.
Mr. Badeau: Just one last point that I'd like to make on Interac is that at some recent hearings I believe the Canadian Bankers Association had stated that the value of transactions running through the Interac network in a day represents one-quarter of one percent of the total value of transactions running through the whole payment system. Let me repeat that: one-quarter of one percent. So really, when you look at systemic risk, we're not really looking at $50, $100 or $200. We're looking at $50 million and $100 million. So we need to keep that in context when we look at the systemic risk issue.
Mr. Grubel: The only thing that I would say is that if you and all the others who want to have access get their way, it won't stay at a quarter.
The Chairman: I take it, Mr. Grubel, that you're worried about the potential for disintermediation contingent upon systemic externalities. That's really the issue your trying to deal with.
Mr. Grubel: Those are big words there.
The Chairman: I understand your point. Thank you very much.
Again, I think you make a very strong point, and I'll be very interested in hearing the reaction of Finance officials and the bank officials when they appear before us next Tuesday, hopefully. Thank you very much for adding to our body of knowledge and for bringing before us yet one other point. We appreciate it.
Mr. Badeau: Thank you very much.
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The Chairman: Our next witnesses are from the Retail Council of Canada. Diane Brisebois is the president and chief executive officer; Ken Morrison is the president of Ken Morrison Consulting and RCC banking consultant; and Ray Bird is vice-president, credit, Sears Canada Inc., and chairman of the RCC banking committee.
We look forward to your presentation to us. We've worked with you extensively in the past, and we thank you for being with us.
Ms Diane Brisebois (President and Chief Executive Officer, Retail Council of Canada): Thank you.
I will begin with a few comments and then I will ask the chair of our banking committee to present an overview of the brief. Mr. Morrison is here with us to also answer technical questions, if there are any.
First of all, I would like to thank the committee for allowing us to appear before it. The Retail Council of Canada is the national trade association representing over 7,000 retailers in Canada. They include independent merchants, regional chains, department stores, mass merchants and discount stores. About 90% of our members are independent merchants; 10% are in the other category.
The retail industry generates $220 billion in sales a year, and our members represent approximately 65% of all those sales. Included in the council are about a hundred sectoral-specific and regional associations, and among them they represent another 10% of total sales. Our sister association, the Candian Council of Grocery Distributors, counts within its membership all the major wholesalers and retail food distributors.
Let me begin by saying that we are not here today to present our views to try to convince you that we should be considered financial institutions; in fact, we don't want to be. Our retailers would certainly like to be as profitable as financial institutions, but we do not want to be financial institutions.
What we'd like to discuss this afternoon and ensure the committee understands is the important role that the retailers play in the area of payment systems. Most of our comments will be in regards to payment systems, the act, and the association.
As you know, retailers' counters are where most consumers see, experience, and use electronic payment systems. What concerns retailers is that they have no say on how these systems are delivered, on how they can be most cost-effective, on how the technology can be integrated, and on how customer service can be guaranteed to the consumer.
With that in mind, I would ask Mr. Bird to make our presentation.
Mr. Ray Bird (Chairman, Retail Council of Canada Banking Committee): Mr. Chairman, members of the committee, ladies and gentlemen, I appear before you today as a representative of Canada's retail community, and specifically the thousands of independent merchants who comprise the Retail Council of Canada.
The Retail Council of Canada supports the broad objectives contained in the white paper. We believe, however, that to strengthen consumer protection, ease the regulatory burden on financial institutions, and to keep the legislation current with today's business environment, we may need to make important amendments to the financial institutions legislation.
As you know, payment systems have changed dramatically over the past decade. New technology has brought us ATMs, debit cards and electronic wallets. These new payment instruments have altered the role of the merchant in a sales transaction, and have substantially increased the merchant's cost of doing business.
The new payment systems operate primarily at the retailer's point of sale. However, when new systems are introduced, retailers receive little consideration. They are not consulted; nor are their concerns noted.
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Services such as Interac direct payment and electronic wallets benefit financial institutions by substantially lowering their transaction processing costs, providing new revenue sources, decreasing the customer traffic in their branches, and allowing the financial institutions to collect customer data for future sales promotions.
Retailers, however, are burdened with the cost of renting processing equipment from the financial institutions, higher communication costs, new transaction fees, staff training, and costs to alter computer system, service counters and associated equipment. These issues are of great concern to all retailers, but they are especially difficult for small independent merchants who do not have the resources to finance these changes.
Central to our support for a comprehensive review of the payment system in Canada is the concern that a few large financial institutions have become increasingly dominant in this area. They have used their market size and power to expand their financial networks into retail stores and other locations.
The large Canadian financial institutions control the voting process in the Canadian Payments Association. This allows these large financial institutions to control payment systems and standards, as well as Interac, Visa, MasterCard, and the new electronic wallet services.
We have seen the large financial institutions take control over and pose fees for activities that have not previously been part of the financial services realm. The dominant market position, the control over electronic networks, and the control over the Canadian Payments Association by the large Canadian financial institutions has effectively lessened competition from smaller financial institutions and other sectors of the Canadian business community.
The Retail Council of Canada has been voicing its concerns regarding the Canadian Payments Association since 1980. At that time the Retail Council asked that guidelines be developed to link Interac direct payment services to retailers' systems. This would have allowed retailers to manage security processes in their in-store systems, to issue debit cards to protect the value they had built in their proprietary credit cards, and to provide direct payment options that would reduce payment processing costs. Unfortunately, the concerns expressed by the Retail Council at that time were not acted upon.
Since the early 1980s we have seen tremendous growth in Interac direct payment transactions. In 1995 transaction volume increased by 111% over 1994. A similar increase is being experienced in 1996.
Retailers are the first to support the need for electronic payment vehicles, and agree fully that these instruments offer benefits to consumers, financial institutions, and retailers. Unfortunately, in Canada today the benefits of these vehicles are diminished by high cost and the reluctance of the Canadian Payments Association, and specifically the large financial institutions, to allow retailers to participate in the development of a payment system, especially in areas relating to customer service, retail operations, and cost control.
When the major financial institutions first introduced electronic payment systems, one of the major benefits they emphasized in their advertising and promotional material was that these systems would decrease the overall cost to retailers of processing sales, versus the cost of handling cheques and cash. Clearly this has not happened. To use the Interac direct payment system, financial institutions charge retailers a fee of up to 18¢ per transaction, and an equipment rental fee ranging from $30 to $50 per unit, per month. There are additional costs for electronic communication lines and changes to store computer systems, equipment, and fixtures.
These costs are in addition to charges imposed on retailers by financial institutions for business accounts and other banking arrangements. We are even seeing retailers being encouraged to provide cash advances for customers of the major financial institutions - a service for which retailers incur a cost, but for which they receive no compensation from the financial institution.
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The institutions benefit from the fees they charge to customers, from using the retailers' money at no charge to lend in the form of cash advances, and from diverting customers from their facility to the retailer, thus saving operating and servicing costs. In effect, the financial institutions are turning the retailer into a mini-bank branch at no cost to themselves.
Retailers, especially small independent retailers, find themselves in a classic catch-22. While financial institutions are reporting record profits, retailers are facing strong price competition and low consumer confidence. Retail profits are depressed. Retailers cannot afford to pass along these costs to their consumers, but they cannot afford not to. Both retailers and consumers end up paying more for what was originally hailed by the financial institutions as a way to save money.
In 1996 Canadian financial institutions will launch two ``electronic wallet'' projects. To participate, a retailer will be required to acquire separate pieces of processing equipment and ultimately to pay fees. The type of equipment and the eventual fee structure will be dictated by the financial institutions, due to the exclusive control over the Canadian payment system.
The financial institutions have not permitted retailers or third party providers to use existing technology to provide these services. Technology which is fully capable of integrating all payment functions and other activities is currently available at the point of sale. Using this technology would significantly reduce costs.
While the financial institutions are offering these new services at no cost for the first year, they are not telling the merchants what the cost will be down the road. By participating, the merchant is helping to build a demand for new services, which could result in even further eroding their profit margins while the financial institutions reap the benefits.
Retailers are important stakeholders in the Canadian financial payment system. The Canadian Payments Association Act must be reviewed and retailers' proposed amendments must be taken into account during the 1997 review of the financial sector legislation. Time is of the essence. Canada needs a financial sector structure that allows for competition and recognizes the need of all stakeholders: financial institutions, retailers, and consumers.
In its submission the Retail Council of Canada has urged amendments to the Canadian Payments Association Act. Our summary of recommendations can be found on page 19 of our submission.
We urge amendments to the Canadian Payments Association Act in order to direct the Canadian Payments Association: to change restrictive rules and standards, which impede and prevent full implementation of the Interac consent order; to immediately begin to work on its second mandate, which is to plan the evolution of the Canadian payments system; to update the definition of Canada's payment system in order to take into account the realities of new and emerging technologies and payment services since 1980; to restructure its membership to include direct retail representation in order for this stakeholder group to be involved in the planning, managing, and structuring of payment systems, those very systems that are now an integral part of operating a retail business; and finally, to make the appropriate changes to allow additional entities direct access to the payment system.
Ladies and gentlemen, on behalf of the Retail Council, I thank you very much for your time.
The Chairman: Are these recommendations intended for our committee to act on immediately, or are you taking a shot over the bow of the task force that will be looking into the CPA?
Ms Brisebois: In fact we are hoping this committee will consider the recommendations because we believe that if the other task force is studied we would be looking at some amendments or changes way past the year 2000. We're quite concerned that this is going to take a long time, and again, because of the competition, because of the technology, and because of the costs associated with payment systems through retail, we think it would be a mistake to wait that long.
We realize there are a lot of issues that need to be addressed and there are a lot of technical issues as well, but we are hoping that some of the recommendations will be taken into account in 1997.
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The Chairman: Thank you.
Mr. Bélisle.
[Translation]
Mr. Bélisle: I'd like to thank you for coming to present your views today. Before I begin, I'd like to make a short remark. This is not a reproach but I'd like to encourage you to change your approach the next time. I note that your organization is a national association, a Canadian association present throughout Canada. The brief that you have tabled today is only in English. When you next appear before the committee, I would greatly appreciate having a brief available in the two official languages of the country.
My first question is the following: on page 7 of your presentation, you say:
[English]
- In most communities across Canada, retailers have little choice other than to deal with a major
bank.
Are there any other choices open to retailers or is their only choice to have dealings with a major bank?
My second question is what exactly could the federal government do to give your retailers an alternative to dealing with a major bank? When I ask what the federal government could do, I'm thinking of amendments to the Act regulating financial institutions so that retailers do have an alternative to dealing with a major bank.
So those are my questions, are there any other choices and are there amendments that could be made to the present legislation to facilitate such choices?
[English]
Mr. Ken Morrison (Member, Retail Council of Canada): Thank you, Mr. Chairman.
On the first question, what the retail council is proposing is that substantially more competition be allowed with all organizations that hold funds for consumers in accounts from which those consumers can make purchases, that all of those institutions be allowed to participate in electronic networks and provide those types of services to retailers. That would include technology suppliers commonly known as third-party processors.
Does that answer the question?
[Translation]
Mr. Bélisle: Yes.
The Chairman: Thank you.
Mr. Grubel.
[English]
Mr. Grubel: Thank you, Mr. Chairman.
Thank you for coming. The Reform Party fully supports your view that the study of the payments association and all the other issues to be raised by the task force should have been done several years ago. It should have started so that the report could have come in next year, not in the year 2000 or whatever. It's just postponing all the hard decisions, and it is not right for Canadians.
Now I would like to ask you something that puzzles me. As a retailer, if you are accepting cheques, you have what seems to me an enormous cost. At the supermarkets I go to, people have to have special cards, double identification, and all the paperwork associated with it; nevertheless, every once in a while a cheque bounces and you have all those charges. There's the cost of tallying the cheques, taking them to the bank.
You're telling me that in a typical retail business, the cost associated with accommodating customers through the chequing system has been smaller than the cost to you of these electronic means.
Mr. Bird: I can speak to that, certainly from a volume retailer point of view and given the sophisticated systems we have for tracing customer cheques and so on.
The argument that's put forward is that you don't have as many armoured car costs, you don't have as many processing costs, but if you're a large-volume retailer and you're being tariffed on every transaction, it far exceeds the cost of NSF cheques. Yes, sir.
Mr. Grubel: I am surprised. I take your word for it. I think a lot of people would be interested in this.
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When you get your way of being able to handle these things electronically directly and bypass the banks, in a sense, nevertheless there will still be a certain risk, won't there? There will be the fraudulent use of cards, insufficient funds, or whatever. How do you propose to handle that? It's a risk the banks are now carrying for you. Aren't you somehow neglecting this, that you think you're going to get it so much cheaper but will still have to carry that risk?
Mr. Bird: We're not in any way proposing that we bypass the banks. All we're saying is let us be a player on the node, just as any other bank, the node being a participant in Interac and a clearer in Interac. We are still going to have the same PIN processing as the banks have today. We would go into that system. We would switch off to a bank. We would go against the consumer's bank account with a PIN. We would verify that transaction, would come back through our system, and settle hourly as the banks settle today.
Ms Brisebois: Let me add something to this, which is even more fundamental.
First of all, we are not saying that we should bypass financial institutions. You have to realize that the perfect example is walking into a grocery store. You walk in and there are terminals at every cash register. The store paying for every transaction is also paying to rent this machine, which cannot be rented from anyone else but a financial institution. That should be noted as well.
The system is introduced without the retailer's participation. Retailers have been dealing with POS systems for a long time. They are experts in POS systems. In fact, in many cases they will lend a lot of their information and expertise to financial and other institutions on dealing with transactions at POS.
What concerns us is that a lot of technology and a lot of standards are being introduced by a small number of participants without the knowledge or participation of those who will be delivering that service to the consumer. That is of great concern to us because our retailers have lost control of their sales counter. It's as simple as that. It seems a bit extreme, but I can assure you if you walk into a retail store today, you can see the number of machines on the counter. It's quite frightening that they had nothing to do with it.
What frightens us are the pilot studies. They invite mostly independent merchants who are losing a lot of business because of the competition to participate. They give them a new service to pilot for free for a year without that retailer knowing how much it will cost. You can be assured there will be a cost associated with it, and that is very frightening.
Mr. Grubel: Well, it's a bit of a contradiction. On the one hand you have all this competition, so why wouldn't somebody want to muzzle in with a lower price and ultimately undercut it?
A surprising parallel occurs to me. Remember when we all had to buy Bell or rent Bell telephone instruments, and how much better off we are now that suppliers can sell them directly to you? Do you see a certain parallel to this?
Ms Brisebois: I'm afraid to use that parallel for several reasons. Let me say that while we think electronic payment systems have been very useful to retailers, we think it makes essentially no sense for those who are providing the service to the end-user to have absolutely no say in how it's provided. When there is a small group of financial institutions controlling one organization such as Interac and having majority vote on an association that develops standards and guidelines for the delivery of those services, it's quite frightening. It makes absolutely no sense.
I think the Interac case, as well as a lot of other documents, proves that technology is available in other countries, mechanisms are out there that would save consumers, retailers, and all other participants a lot of money, but they're not being used.
Ken, you might want to comment on that.
Mr. Morrison: That's well stated. Retailers, in essence, should be allowed to go out and purchase or lease the equipment on their counters with complete flexibility and not have to either rent it from a financial institution or have it approved by a financial institution before they do so.
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Mr. Grubel: I think this is just another case of something we've been saying throughout these last few days, which is that we need more competition so that some new industry agent or innovator comes in and says to retailers that he has a bargain for them to do this and really take on the banks.I think that's the best solution. That would be the one I would prefer, rather than having government step in and pass a law that can then be twisted and abused, and all that kind of thing.
I apologize for having to run. I find your presentation very interesting. Thank you for your presence.
The Chairman: Thank you, Mr. Grubel, very much.
Are there other questions on this particular issue?
As I understand it, you want your customers to be able to come in to your store and buy something and have instant access to their bank account for the purchase. Is this the main thing? It's just so I understand exactly what it is we're dealing with.
Mr. Morrison: I think that clearly one of the trends that retailers support is the use of electronic payments for accessing bank accounts to make purchases, but that's not our main argument. Our main argument here and our proposals for additional changes in the 1997 legislation are to give retailers a very specific, direct role in the Canadian Payments Association for deciding how those systems work and how they will be provided.
In the days of the cheque environment, it was fine for the financial institutions alone to decide how cheques would be processed. But today, with the electronic payments, Mr. Chairman, that you described, the retailer in a store is doing a large part of the work. The retailer is accepting the card, renting or leasing the terminal, processing the card for the customer, and dealing with situations when a card does not work. Therefore, the retailer should have a very direct role in deciding how all of those processes work and what the -
The Chairman: So if we were to recommend that you should be represented on this task force that is looking into the payment system, you would be quite happy.
Ms Brisebois: No, we are already represented, so that obviously would not make us happier than we are now.
The Chairman: Okay.
Ms Brisebois: I think that we're concerned, Mr. Chairman, again, that the financial institutions will say they cannot accept other stakeholders, non-financial institutions, around the table because of such issues as privacy, and so on and so forth.
The Chairman: But you are there.
Ms Brisebois: We are going to be sitting on the committee, but that doesn't mean anything is going to change within the Canadian Payments Association Act, or within the Canadian Payments Association.
The Chairman: You have no faith in this task force being able to prevail, so you want us to short-circuit it.
Ms Brisebois: We do have faith in the process. Our biggest concern is that the process will take too long. There are also amendments needed.
The Chairman: What are the indications you've had as to how long it will take them to report?
Ms Brisebois: The indications we've had so far, based on a letter we received, is that this is going to take about a year and a half.
The Chairman: Say we were to recommend that not all of the issues have to be dealt with simultaneously, that there are some that are very urgent, and the government, in mandating the task force on the Canadian Payment System, should be prepared to set time objectives of a very short duration to deal with some of the things you've dealt with. Would that solve your problem?
Ms Brisebois: That would make us happier, yes.
The Chairman: It would make you thrilled, or just slightly happier?
Ms Brisebois: It would make us thrilled.
The Chairman: I understand. Thank you.
Mr. Schmidt.
Mr. Schmidt: That's based on the assumption that they'll make the right decision, but that's fine.
Here's the other question. I want to really lay out what it is. Do you want to be part of the Canadian Payment System?
Mr. Bird: Yes, absolutely.
Mr. Schmidt: You actually want to be on the Canadian Payment System.
Mr. Bird: We want retail representation that has a vote, some meaning.
Ms Brisebois: On the association.
Mr. Bird: On the association.
Mr. Schmidt: So that would mean that if you had a machine at your point of sale, that would tie directly into the Canadian Payment System.
Mr. Bird: Yes.
Mr. Schmidt: So that really means the equivalent of owning the Interac system. That's the practical implication of that.
Ms Brisebois: Technically.
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Mr. Morrison: I think perhaps there are two issues being raised here. One is the participation on the Canadian Payments Association by the Retail Council of Canada so that retailers are represented in developing all the standards and the processes for how these systems will work.
Mr. Schmidt: Right.
Mr. Morrison: That is really the key issue.
Mr. Schmidt: That is the key issue. That's the money supply issue.
Mr. Morrison: Retailers large and small should be participating there and deciding how these systems will work in their stores.
Ms Brisebois: In delivery.
Mr. Morrison: The delivery of the system is the key issue.
Mr. Schmidt: Just a minute now. That may be the key issue for you, but for the government the key issue is the money supply, which is really what we're talking about here in the first instance.
The payment system is -
Ms Brisebois: It's the settlement.
Mr. Schmidt: Okay, but -
Mr. Morrison: As was stated in our opening remarks, retailers do not have an interest in becoming a financial institution and a participant in the settlement process. The settlement process, as it affects the Bank of Canada's role in settlement and the protection against systemic risk and so on, is an area that retailers.... Retailers are quite willing to use the financial system for the settlement of the transactions. We're not asking to bypass that at all.
Mr. Schmidt: That would change the nature of the Canadian Payment System quite a bit. That's a major shift, and I can see why you're concerned. That's going to take time. That'll take a lot of time, because there are some real vested interests in maintaining the status quo.
Ms Brisebois: There have been for a long time.
Mr. Schmidt: Oh, you bet. I understand exactly what it is you're after. You actually wanted three tiers in there. Thanks.
The Chairman: I'm not sure there isn't anybody who doesn't want representation on the CPA, except the Reform Party.
Mr. Solberg: We'd just settle for being the government instead of being on the CPA.
I just want to make sure I understand this. Are you arguing that because Interac is basically a technical monopoly - that's basically what it is - there has to be some sort of regulation or the government has to intervene in some way to ensure that this position isn't abused? So you people, in that case, would step in and be part of the CPA. That's basically it.
Mr. Morrison: I think Interac, if I could answer that one, is only a small part of the payment system we're concerned about. It's a growing percentage of it, but consider electronic data interchange, for example, retailers dealing with their suppliers. We want a voice in saying how that will work. The credit cards, Visa and MasterCard, which are currently outside of the Canadian Payments Association, are also part of it.
A voice: Which is strange.
Mr. Morrison: It's strange that Interac is part of it but Visa and MasterCard are not part of it. So we'd like to see this brought together and redefined with a very specific role for retailers in participating and saying how these systems and services work.
Mr. Solberg: That's fine. Thank you.
The Chairman: On behalf of all members of Parliament, I think you've impressed upon us, in such a world of dynamic change where technology is outdoing itself every year and methods of doing business are evolving to meet those new challenges and take advantage of the new opportunities, that we must be a leader in the world. You've impressed upon me the necessity to ensure that we do not allow foot-dragging to deny Canadians those opportunities that lie out there, and that we should be prepared to proceed as quickly as possible with some of the suggestions you brought before us. On behalf of all members, may I thank you.
Our next meeting will be at 3:30 on Monday, September 30, when we will hear the last witnesses. After that, we propose to call back Finance officials and representatives from the Canadian Bankers Association to deal with the numbers of suggestions for changes to the white paper proposals that have been made to us.
Thank you very much.
The meeting is adjourned.