June 26, 2003

Gouging Together a Living

How banks get away with making you pay for your savings account

by Dru Oja Jay

The Dominion - http://www.dominionpaper.ca

Most Canadians don't need to be told that bank fees are rising, while interest rates paid on deposits--even in long term savings accounts--have diminished to the point of being inconsequential. Since the early nineties, the "big five" banks in Canada (Toronto Dominion, Royal Bank, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, Bank of Montreal) have been accelerating a collective move away from traditional retail banking, which is based on the premise that depositors lend their money to a bank and receive interest and certain services in return.

Instead, the trend has been to charge increasing service fees while moving customers into areas more lucrative for banks such as credit cards, mutual funds, money market accounts, and stock market investments. Simply storing money in chequing and savings accounts is no longer a considered as a mutually beneficial arrangement; it is now a service to be paid for.

For example, Royal Bank customers pay up to $1.25 for each cheque used, and can pay up to $1.50 when withdrawing money from a non-Royal Bank tellers machines. Similar fees apply to deposits, Interac transactions, and teller visits. One always has the alternative to pay a higher monthly fee for a set number of "free" transactions. Such fees are typical of other big five banks.

Meanwhile, interest rates on savings accounts under $5,000 are all but nonexistent. Royal Bank, for example, pays 0.1% on savings accounts under $5,000. Rates reach 2% on deposits of $10,000 or more: still below the rate of inflation, which hovers at just over 2%. Again, other banks offer similar rates, with some variation.

For customers who want to keep pace with inflation, much less learn interest, there are mutual funds, money markey accounts, and stock portfolios, all of which the banks manage for a fee. For an annual administrative fee, these customers receive personal advice and higher returns. Other customers receive unsolicited complimentary "visa cheques" in the mail; as the fine print informs those who care to look, any use of the cheques carries a hefty 17.5% interest rate. To keep record profits coming in, banks must leverage their "brand" in as many ways as possible to sell their customers a wide variety of financial services.

At first glance, this state of affairs is baffling. There are five different banks in Canada, each with hundreds of outlets across the country. Given that a large number of customers are annoyed at paying just to have an account, surely they would compete with one another for customers by offering lower fees and higher interest on deposits? The situation seems even more strange when one notices that competing banking services from Presidents Choice and ING Direct offer no-fee banking and Interac service, with interest rates well above inflation on any amount (2.75% and 3%, respectively). Many community credit unions offer similar benefits.

So why do Canadians overwhelmingly stay with the big five banks? Do the CEOs of the big five sit in smoke filled rooms and conspire to raise fees? As it turns out, they don't need to.

"People bank based on convenience; what's close to home, school, or work: that's where they have their bank," says Duff Conacher. Conacher chairs the Canadian Community Reinvestment Coalition, a collection of "anti-poverty, consumer, community economic development, labour and small business groups" that advocates for bank accountability in Canada.

Conacher cites a 1998 study by the federal Competition Bureau which found that fewer than 1% of Canadians had ever switched banks. "You're not going to switch to save $10, if you have to drive ten minutes to get to your branch." Perversely, the recent new competition from virtual banks like ING Direct and President's Choice seems to be partially responsible for new fees and ever-increasing credit card interest rates. "They've lost some of their customers, but they don't think they're going to lose any more, so they're gouging their remaining customers," says Conacher. The reason for this is decidedly simple: "baby boomers on up will not do their banking electronically," so virtual banks are out of the running.

Of the bricks-and-mortar banks, none has any incentive to try to compete with the others. "You're not going to lower your fees as a bank," explains Conacher, "and then open up a whole bunch of branches, because you're going to have costs from opening up the branches, and you're going to have lower revenues from reducing your fees, so you're going to lose money... unless you get an enourmous number of people to switch over."

Data from the Canadian Bankers Association seems to suggest just the opposite. Between 1997 and 2000, the number of people employed in Canadian banks declined in every province except for Ontario, Alberta, and British Colombia. The latter two saw modest increases, but over 16,000 new banking jobs emerged in Ontario, and 8,000 new workers were hired outside of Canada. Unless Ontario represents an exception to the move to more automated, this trend suggests that banks are pouring resources into high-end services on Bay street, while cutting back and automating everywhere else.

The problem, says Conacher, is that despite a clear lack of competition in many retail banking areas, banks are regulated as if they were competing. Having multiple competitors doesn't make a market competitive, he says. "The measurement of competition is based on whether companies can steal customers from each other based on what they do, in terms of price or quality of service... if you have record profits year after year, it's a direct sign that there is no real competition."

The simple answer, according to the Canadian Community Reinvestment Coalition (CanCRC), is to regulate the financial services industry in the same way that some utilities and telephone service providers are regulated. Conacher: "For each line of service (teller banking, self service, telephone, and internet banking)--we know they track their profit margins for each of those sectors-- they should be required to disclose the profit margin. If the profit margins are higher than 15-20%, it should automatically trigger a review by the regulator, and possibly force a lowering of interest rates [or fees]."

Ironically, such practices might be better for everyone in the long run. According to Conacher, the record profits from alleged price gouging allowed the banks to lose millions of dollars on bad investments in Mexico, Argentina and the telecommunications industry, as well as companies like Enron and Worldcom. If regulated, competitive profit margins might force the banks to be less cavalier with their customers' money in the future.

But profit margins on specific services aren't the only thing that CanCRC would like the banks to disclose. According to www.cancrc.org, "banks have refused to disclose detailed information about their lending to women, minorities, in low-income neighbourhoods or specific regions of Canada." Without this information, there is no way to determine with certainty whether banks are discriminating against certain groups, or denying financial services to certain demographics. Critics have argued that banks deny access to individuals with low incomes by demanding kinds of identification they are not likely to have before granting an account, among other tactics.

In the current political climate, however, it is unlikely that the government will force the banks to disclose any information, much less attach consequences to it. Instead, the principle discussion among banks and the government centres around mergers, which would almost accelerate the processes described above. Canadians are left with few alternatives: the virtual banks, and community credit unions. However, the former are not an option for many people with low incomes; households with internet access are much more likely to be of better means. Community Credit Unions often offer their members some degree of democratic accountability from management through an elected board, but they are often not in accessible locations, and require dedicated individuals and organized groups to get started.

"It's a tough issue, because everyone has a minute amount of outrage about it," says Conacher, "no one is going to dedicate their life to working on [this issue]." But, he explains, there is a very simple way of collectivizing the ubiquitous minute outrage: "The government would require the banks to enclose a one-page pamphlet when they mail out a bank statement or a credit card bill. The pamphlet would invite you to join a group that would watch over the banks. That pamphlet would reach 20 million people for a very low cost. If only one percent joined, you'd have a group with 200,000 members. We've done a national survey, and people have said they're willing to pay $30 as a membership fee. So you'd have a group of 200,000 members and a $6 million annual budget. Then you'd have collectivized outrage, and you'd see the government change their position right away."

As it stands, the banks wield an enourmous amount of influence with the current government. In additions to the hundreds of lobbyists that work Parliament Hill on their behalf and two recent Liberal Junior Finance Ministers who were career bankers, banks gave at least $233,000 to the national Liberal party in 2001, more than any other industry or group (this and other data on donors is available at elections.ca).

Conacher says this explains why the simple plan to piggyback a consumer rights group pamphlet on bank mailings has not been implemented. "They haven't rejected it, because they know there's no reason to reject it. They haven't said anything publically about it... even though Martin's own task force recommended it, and so did the House committee and the Senate committee that reviewed Martin's task force report."

While groups like CanCRC continue to attempt to draw attention to issues of competition and accountability, mainstream debate on the issue of banking regulation has taken an opposite tack. Judging by two recent Globe and Mail articles, the debate is about mergers, and the dispute is not about whether they will happen, but when.

Last November, Michael Den Tandt wrote in the Globe "In 1998, bank mergers seemed likely. Now, they're virtually inevitable. Jean Chretien, on this as on a number of other key economic files, is fighting the historical tide. Everyone seems to know it but him." The argument for bank mergers seems to rest squarely on the need for the banks to be "globally competitive". This argument, however, doesn't become urgent until we believe that further NAFTA integration is inevitable, "ultimately forcing Canada to remove the 20-per-cent ownership limit that now prevents foreign banks from buying controlling stakes in Canadian institutions." Without the "historical inevitability" of deepened free trade, the big five banks might just have to settle for competition amongst themselves, a proposition that is at once less lucrative, but better for Canadian consumers who want consistant service and better for small businesses that see loans drying up with the further consolitation of banks.

Mainstream debate seems to leave out altogether the massive popular opposition to bank mergers in 1998, when the banks last formally proposed to merge. Only the NDP is strongly opposed to further bank mergers in Canada. Lorne Nystrom, the NDP Finance critic, wrote the following upon the conclusion of hearings on bank mergers in the House Finance Committee: ega bank mergers have never been, and will never be, in the public interest. "When four of the largest Canadian banks proposed to merge in 1998, it took a year of public hearings, protests, $4 million, five reports and the Competition Bureau to convince then Finance Minister Paul Martin that leaving one or two large private banks in control of the nation's credit was bad for competition, bad for jobs and bad for communities, and, therefore, not in the public interest... The Canadian banking system is one of the most concentrated systems in the world. Six largest banks account for more than 85 per cent of the assets of our banking industry and have even increased their share of deposits from 70% in 1997 to 73% in 2001. What could possibly improve if only two or three banks controlled the banking business?"