Sympathy for the…
Posted by Dalton48 on 26 Feb 2007 at 09:23 pm | Tagged as: Current Events
I’ve been following the bank fees issue with some interest.
First, because the NDP caucus dug up an easily understood, populist issue for once, only to see it fall flat thanks its semi-articulate leader.
Then, because the Canadian Bankers Association‘s defence of the fees for electronic banking is so embarrassingly thin. There’s competition in the Canadian personal banking market? Please. This is the best laugh I’ve had all month:
Competition and consumer choice are the hallmarks of Canada’s financial services industry. [...] On ABM access alone, banks compete with each other, other financial institutions and independent operators, through two ABM networks – INTERAC and The Exchange Network – vying for the business of institutions and customers.
I’m betting the flack who wrote that had to do some websurfing to find out what the name of the Interac “competitor” network was.
The CBA’s executive summary of the issue is even better:
The pay-for-use system is a common practice among
other businesses and governments of all levels.
Businesses, including banks, charge for the services
that they deliver. In addition to taxes, governments
at all levels also charge fees for services, for example:
•An extra $10 to pick up a Canadian passport
instead of having it sent to your home.
•In Ontario, a $1 convenience fee for self-serve
purchasing of a vehicle validation sticker
through a ServiceOntarioKiosk.
•In the City of Ottawa, a $33 fee to change the
name on your water bill.
I’m not quite sure what the thinking was here. If it’s to show how reasonable it is to collect fees from customers or, as government knows them, taxpayers, I’m not sure it works. If, on the other hand, the idea is to align bank fees — transaction fees for the unavoidable transactions one makes from one’s bank account, such as paying bills, depositing, transferring, and withdrawing funds — with objectionable and infuriating surcharges, generally widely disliked by the public — mission accomplished!
Thoughtfully, the CBA sums up what the preceding list was supposed to show in a concluding bullet point with a menacing subtext:
•Our pay-for-use system means that, unlike some
other banking systems, Canada does not bury the
price of services in the price of credit or other products
and services.
No, no, you don’t bury the price of services in the price of credit or other products and services — you just, as you’ve just told me, charge me twice!
(I also like the use of “Canada” to represent “banking system”. “Canada” on its own generally refers to the federal government — yet another sly way the CBA’s brief tries to align its industry with acceptable government practices.)
After a complaint from American Express in 1996, the Canada Competition Tribunal made recommendations that led to the Interac network being opened up to more members and being moved to a cost-retrieval model. However, the Tribunal also provided for the original charter members to earn back their initial investment in the switch technology, estimated t be $16.8 million, less fees collected to that date.
Now, the Interac Association collects fees from its members, which cover its operating costs. The members charge fees and surcharges, a fraction of which cover the fees they pay to Interac. Generally, you pay whether you’re in the branch or at the machine. If you don’t pay a per-transaction fee, you pay a monthly fee for unlimited transactions. And if you’re not paying anything, the money that’s sitting in your account is earning paltry interest while it’s being lent out at a rate three times higher.
And all that would just be common sense and the story over, if it weren’t for an inexplicable comment thread on the Globe and Mail. If you’re unfamiliar with the commenters on the Globe website, prepare yourself. You’ve never met a more pinched, angry, self-righteous group of malcontents in your happy life. They blamed babies for not planning ahead for their passports. And here, they’re falling over themselves to defend the banks in their battle against lazy, demanding customers who don’t realize that ATM fees are good for them.
I don’t know why anyone pays banking fees. I’ve been with President’s Choice Financial since they started up. No fees, ever, telephone banking and internet banking come as standard. I use my debit card constantly and never get charged for it, and I can use any CIBC bank machine free of charge. I’ve got limited patience with consumer complaints, because there are alternatives that are equally convenient with no downside. Let the market decide. Right now banks charge high fees because people are too lazy to make a phone call to switch. If people started leaving them in droves, they’d rethink.The concept of paying to use Interact or access my money has always been abhorrent to me.
Nothing wrong with the CIBC. I bank there because my father banked there, because his father banked there, although they tried to foreclose on him during the Depression and he was bailed out at the last minute by Mitch Hepburn’s progressive farm legislation. So it’s a tradition.
Let the market decide? What are you, some sort of Communist?
There is a downside to PCF in that there are just a few services they don’t have that you might not want to be without. For me, the issues are mainly international: their ATM card isn’t connected to any networks outside Canada, you can’t buy foreign currency from them directly, and as I recall they’re not equipped to accept deposits in foreign currencies either.
There may be other services relevant to other people. The game as far as the big banks (incl. CIBC…) are concerned is that as long as there are a few services you need that you can’t get through PCF, you have to keep at least one account with them, etc., etc.
Also as an aside, when I re-joined PCF as a joint-account holder in 2003, they slapped an absurdly long hold period on deposits. I don’t know whether they’re doing that to everyone these days or whether their computer thinks I’m an unusual risk for some reason. Obviously it’s in their interest to do it widely, since it means they have guaranteed access to your money for a certain period.
I’ve had no problem depositing cheques in American currency directly into my account, or withdrawing money in Europe with PCF. But yeah, you can’t buy foreign currency from them. But who does that, anyway?
As for the “tradition” of CIBC…well, dear, my grandfather was in a union for 35 years. It doesn’t mean it’s a good idea.
PC Financial just doesn’t make sense for lots of people, either because their banking needs are more complicated, because they don’t have a lightly-staffed banking pavilion anywhere nearby, or because some transactions (certified cheques, large withdrawals) have to be conducted by mail. Plus, there are lots of people who don’t live anywhere near a CIBC branch, negating the positive advantages of having free transactions at CIBC bank machines. I hope we can agree that people who pay banking fees are not all stupid? Because otherwise, this will become a mere shadow of the Globe’s comments page. 26% of Canadians were using internet banking as their primary banking method in 2005, so there are a lot of people out there who are not and will never be comfortable with a virtual bank.
In a heavily-regulated oligopoly where the only alternative includes an entirely different delivery method for most people it might be more than a bit harsh to say people are “too lazy” to switch. Not to mention — why should they have to? The entire idea of having automated services was to reduce the cost of offering retail services by cutting staff.
As for the warm feelings about CIBC — well, apart from owning Amicus, which runs PC Financial, there are *lots* of things wrong with CIBC. Significant and astonishingly regular breaches of Canadian privacy laws, erroneous transfers of information to Revenue Canada, computer glitches galore, an impressive role in the Enron affair, leadership issues, and if I’m not mistaken, a disappointing stock performance as well! but I have always liked their colours…
Solution: PCF + ING Direct. Between the two you can do practically anything. I joined both the moment they came on the market and have had no complaints. Moreover, ING is always offering new products, all of which beat the heck out of the offering from the traditional banks.
I cannot see any logic in staying with the big six, except perhaps wanting to keep the status quo and contribute to their ever increasing record profits. Which is great, because the mutual funds I own hold lots of the bank stocks, so I am grateful that people out there are funding my retirement. Hee hee.
As for the “tradition” of CIBC…well, dear, my grandfather was in a union for 35 years. It doesn’t mean it’s a good idea.
We’re closing in on nearly a century of perverse consistency, between the three of us. It would be a pity to wreck it now -
But if you’re staying with a bank such as CIBC because you like the warm fuzzies of going into a physical building, or becaue you’re doing something more complicated involving changing Swiss francs from your numbered account into yen, then I think it’s fair to charge you extra for the privilege. Just as I accept that I’m going to get dinged a couple of bucks when I take out Euros in Spain by PCF — it’s a special service that obviously has some costs associated with it, and I don’t use it more than a couple of times a year, so fair enough.
I’ll agree that not everyone who uses a big six bank is stupid, though I’d wager that the vast majority of people aren’t doing more than using a debit card, keeping their money in a savings account, paying bills and writing the occasional cheque, the vast majority of the time. And these people are throwing their money away on fees (and I appear to be married to one…hmmm…). But so what? If they’ve been convinced by the banks’ ad campaigns or by a sense of “tradition” or what have you that they’re getting an OK deal, that’s their business.
Interesting re. PCF foreign currency deposits and ATM withdrawls. I think that may be new… unless, of course, you were doing it years ago…
I stick with the Royal only because they once made a stupid error which ended up converting my main account into a fee-free account in perpetuity. If they ever take back that decision, I’m so out of there.
Hate CIBC. They’ve successfully delivered me exactly one Visa card in the last fifteen years without major hassles. The other times were head-explodingly stupid and bothersome experiences. I keep the card because of the Aeroplan points, but it’s barely worth it.
Oh, and they’re loaning your money out at a whole lot more than 3x what they’re paying you in interest. Take CIBC: average interest paid on bank accounts at the moment looks like about 0.2% and mortgages are in excess of 6%. So it’s closer to 30x. Nice work if you can get it.
Bravo with the fee-free Royal bank account! I once had one of those too, then they took it away and I left.
Not that I am the type of customer they want. What they want are people like my parents, who are willing to pay exorbitant fees because they need someone to hold their hands whenever they need to do a transaction, and have a mortal, irrational fear of PINs and machines.
It will be interesting to see whether the present fee system will continue as the older generation passes away and most consumers become computer savvy.
Incidentally, what’s available in the US gives a good idea of what banks are capable of doing in a competitive market. When I banked with Bank of America (which I chose for complicated reasons having nothing to do with the competitiveness of their fees), they had an account with unlimited (self-serve) transactions and no monthly charge as long as (1) you have a monthly direct deposit into the account, (2) you keep a certain minimum balance, and (3) you don’t use the tellers more than twice a month. I don’t think any Canadian bank offers the same combination of unlimited transactions and no monthly fee.
In a truly competitive market, we wouldn’t be choosing between what’s currently on offer through the big banks and PCF.
The present fee system will expand to include things like PC Financial.
When bank machines were expanded significantly to replace teller service, many services were free at the ATM but a charge was levied for counter service to try to influence user behaviour.
Then, once a majority of people had made the transition to using ATMs and self-service banking, fees were introduced for basic ATM services that had been free before.
The next logical step, if there were a mass migration to PC Financial, would be to introduce new user fees on PC financial banking. Don’t forget it’s owned by CIBC, and most likely subsidized by fee-for-service banking in other parts of their retail business. (I tried to look this up, but since CIBC took Amicus in-house as part of its direct banking unit, there’s little broken-out information.) I can’t imagine why they would give up on any significant, permanent basis the extra revenue stream of fees because of any savings in operational costs… because history shows they didn’t before.
Yup, then I will switch to the new competition that offers a better product. I have no loyalty to any brand.
In other words, it’s about the oligopoly, not the technology…
My understanding of the US situation is that there has been actual fee-based competition as new or expanding institutions (e.g., Washington Mutual) undercut the larger old-style banks on fees, while offering essentially the same services.
Or, perhaps, the highly regulated chartered banks, which enjoy enormous privileges and pricing power as part of a very small oligopoly, will have their ability to charge excessive fees reined in with the new federal budget March 19 — a more effective (and efficient) way of handling the situation in a market which is not open nor truly competitive. Market rules only work in actual markets.
Is there currently a regulatory body for banks other than Dept. of Finance? Regulating prices in a non-arbitrary way is somewhat complicated, as one of my relatives could explain at length.
Oh yes, they have their own regulator, the Office of the Superintendent of Financial Institutions (OSFI: http://www.osfi-bsif.gc.ca/), which administers the Bank Act. The Bank Act is up for its five-year review this year (or next?) which is why bank issues are particularly in the news. But I’d imagine Flaherty would aim for some gentlemen’s (and they are nearly all gentlemen — for more details, see the report from the organization whose board I sit on, Women in Capital Markets: http://www.wcm.ca) agreement with the banks, in return for something they’d like included in the Bank Act.
I’d almost blocked this out, but I took a short course on the regulation of financial institutions during my MBA, taught by a former Superintendent. Fascinating in one way, but not in another (3 hours of monotone lecturing, no visual aids whatsover).
The next logical step, if there were a mass migration to PC Financial, would be to introduce new user fees on PC financial banking.No, it wouldn’t. The next logical step, if big banks are losing customers because they’re tired of fees, would be for big banks to lower their fees. PCF’s point of difference is No Fees. It has no other advantages (and some disadvantages, like no fuzzy bank tellers). There is no logical case for what you’re suggesting. There’s a very compelling case, though, that if big banks start bleeding customers, they’d entice them back. I think big banks are probably laughing their asses off, marvelling at the magnificent scam they’re perpetuating, that people pay to access their own money. I would be. It’s also why I invest in big banks but keep my money elsewhere.
I admire your optimism, but have to disagree. PC Financial is part of a big bank, and there’s no incentive for CIBC to ultimately lose out on fee revenue.
Why would they get involved with PCF in the first place, then? Unless they see a competitive advantage in fee-free banking. Because if they don’t take advantage of customers such as myself, then I’m going to a competitor, such as ING. And if PCF start charging me fees, I’m also going to a competitor. It doesn’t make sense.
I suspect why CIBC went into no-fee banking is to capture a part of the market that has a higher risk profile. As long as it is making enough profit in lending to off-set retail banking losses, PCF will remain viable.
There is also brand and prestige. I once asked my aunt, who works at Scotia, what she thought about PCF as competition. She snorted; no one will bank there because it is so declassé.
Guilty as charged; I still feel sheepish when I pay with my PCF MasterCard when dining at fine establishments
So for those who prefer Gold and Platinum cards, special privilege accounts, etc., they will put up with the fees.
Re. PCF, one thing I didn’t mention is that when I rejoined them (in 2003, after previously having been a client say 1999-2000), they slapped on absurdly long hold deposit periods for cheque deposits through ATMs. Now I’m not sure whether this is because they thought I was an unusually bad risk (I could see how some computer might have come to this conclusion in 2003), or whether it was part of a general policy they were starting to implement of holding on to your money for 10 business days (I think) after you make a deposit which of course is an indirect service fee. They are loathe to remove this hold even now so I am inclined to suspect the latter.
Cynically, PCF can be seen as an attempt to avoid competition from upstarts offering genuine low-fee or no-fee full-service banking. It’s a way for CIBC to say, see, we’re giving people an alternative, nevermind that the alternative on offer is much worse than what’s available in the genuinely competitive market south of the border.
As an aside, it’s interesting that no other bank has started up a PCF-style operation or online-only banking option.
Genuine competition is the word here. I am secretly worried that one day PCF will disappear, as there is no truly viable alternative. One reason PCF works is because it can piggy-back on CIBC bank machines. I cannot see any other upstart with as extensive a network of ATMs.
The question was, what would happen to fees as older, computer-averse groups die off and computer-savvy young people take over.
If everyone, or an overwhelming number of people, moved to PC Financial — for some odd reason, so overwhelmed by hatred of bank fees that every single person was willing to set aside the fact that they don’t live anywhere near a Loblaw, or a CIBC bank machine — the other big banks would indeed come up with parallel internet/ATM-only offerings to keep their customers.
And then, once everyone had made the switch to no-fee internet-only accounts, and there was a calculation that no more switching was likely to happen, all the banks, including PC Financial, would introduce new user fees on these accounts.
Why? Because they can. It’s not a market other players can enter freely, so there’s no reason to pass on savings to bank customers. It’s exactly what happened during the switchover to self-service banking. There’s no way in an oligopoly for the consumer to win in the end, because in the end the consumer has extremely limited market power.
In a market with no barriers to entry, this scenario would end with no account fees for anyone, because there would be the threat of new entrants on the horizon, but that’s not what we have in Canada.
Interestingly, when CIBC introduced this model in the US through supermarkets there, it crashed and burned — because the market is competitive and customers can have both the services they want and reduced or no fees on their transactions.
My guess as to why none of the other big banks offer this type of service with a retail partner is that it simply doesn’t make them money, and they’re worried about cannibalizing their own business. BMO introduced internet-only mbanx, which lost them money (as far as I remember — techboy may know more). If CIBC felt that it was losing more of its own customers to this service than it was gaining from its competitors, I’m sure it would wind it down. Canadian Tire is planning to offer retailing banking services through its stores, but is using the ING Direct model, which requires you to have a bank account at another institution through which you transfer funds. I’d imagine they looked at the PC Financial model as well, because of the attractiveness of having a partner with a large ATM network, but, for whatever reason, the banks didn’t bite.
But maybe they will. Look at Britain, where both Sainsbury’s, Tesco’s and many other institutions have started up operations similar to PCF.
It’s a glass half-empty/half full thing, but I only see growth in this area.
mbanx shot itself in the foot by charging $13 a month. Interesting idea; very poor execution.
I think it would be a serious growth industry if someone were minded to set up a self-service bank (like PCF), with access to traditional teller services for a (fairly substantial) per-transaction fee. The operative phrase in TMQ’s post way back up is “the vast majority of the time.” There are probably large numbers of people (like myself) who rarely go into a bank branch but who don’t want to be entirely without a right to in-person teller services. Without the threat of new entrants, though, there is really no incentive for the big banks to go this way. They make much more if they can make you pay on the basis that you have a right to be using teller services all the time–despite the fact that most of us have no interest in doing so.
I had to look into the UK banking scene since I’m now so much more interested in this whole subject than I was when I first posted. A few interesting pieces:
A short research report on the progress of supermarket banking in the UK after 10 years:
http://www.europeancardreview.com/bankingreport/Banking-at-the-checkout.pdf
And a very recent (last week) Reuters article on a report suggesting that free banking for current account customers is likely to end within two years:
http://www.reuters.com/article/bankingfinancial-SP-A/idUSL2113684820070221
This one gives some background on the high penalty charges being levied on the lending side that the Reuters story mentions the banks may have to scrap/reduce:
http://money.guardian.co.uk/news_/story/0,,2019090,00.html
Anyway, little did I know that there was a huge sea change underway in British banking, but it’s reached a crisis point, it seems — type in “bank charges” and “Britain” for a snapshot!
Sorry for not responding to this topic, earlier, which I find professionally as well as personally interesting since most of my work is bank-related. I should note however that (a) I have a crappy memory for auxiliary details and (b) everything related to retail banking has been auxiliary to all of my work so far, most of which has been in bank finance departments (building databases and gears, not even looking at the data). So with all that, I’m not massively more informed on this topic than the man on the street. However, I can make the following comments:
BMO and CIBC made the first jump towards alternative banking models as a response to being gradually squeezed into invisibility by TD and Royal, who feel no particular competitive pressure from them. CIBC invested fairly heavily in “white label” banking, which basically puts another brand name over the top of CIBC systems (e.g. PCF). As far as I know their retail operation is pretty cost-efficient, so they may actually be making some money from PCF, though I expect it’s nothing like what they expected when they made the original investment. PCF was intended to be just one of a whole string of “white label” brands, and the fact that it’s really the only one suggests that the experiment hasn’t been seen as a success at the upper levels.
As for BMO, their MBanx idea was a good one but their retail systems are badly outdated and a lot of the flashy internet stuff was just a front end. Behind the scenes, people were still pushing paper to do a bank transfer, for example. So their costs were way higher than their transaction fees, which still might have been ok if they’d attracted the high volume of sophisticated customers that they’d forecasted, which they didn’t. So not much joy in MBanx land, hence its early demise.
Royal has the clear technical edge generally, and would probably be able to make any of these things work if they could convince all of the relevant internal decision-makers that it would be worth their time. They obviously don’t feel any particular need to, at least in Canada. They may make other decisions in the US, but then, all the banks have completely different operations in the US with different processes, technology and price structure behind them, so it’s really only at the senior management levels that their US operations could be considered a part of the Canadian parent.
Scotia is way, way, way behind on the technology, but they have a decent client service relationship and the most conservative clients in the country. They are notoriously stingy with their investments in infrastructure, so they’ve avoided a lot of the expensive experiments that CIBC and BMO have made. On the other hand, any kind of serious price pressure from the other major banks would probably be enough to kill them. Good thing there’s not much competition!
TD? Still struggling to manage their costs, and as their competitive branding is based on having the most customer-friendly service in the business, they’ll probably never get them down to the level of the others. It’s still been a pretty successful model for them so far.
Now going to look at Dalton’s UK links…
Very interesting roundup of the capacity of Canadian banks — thanks, TB!