Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 3 - Evidence, March 26, 2009

OTTAWA, Thursday, March 26, 2009

The Standing Senate Committee on Banking, Trade and Commerce met this day at 10:35 a.m. to study on the credit and debit card systems in Canada and their relative rates and fees, in particular for businesses and consumers.

Senator Yoine Goldstein (Deputy Chair) in the chair.


The Deputy Chair: I welcome you this morning to the continuation of the committee's study with respect to the credit card and debit card system in Canada, as well as the cost and fees as are related especially to enterprises and to consumers.

The committee was charged with undertaking this inquiry after the Senate adopted a motion that had been put forward by one of our esteemed colleagues, Senator Ringuette, to have our committee study this very timely issue.

I want to explain this item, which is not a piece of jewellery. It is a symbol of the Canadian HIV/AIDS Legal Network seeking a change of Canadian legislation to encourage providing anti-HIV and anti-AIDS drugs to developing countries. I am committed to that change, so I wear this. It is also a pretty piece of jewellery and I think my wife will want to share it with me.

To tell us more about the subject with respect to credit issuers, we are pleased to have witnesses from Desjardins Group before us in our first hour.


To talk more about this morning's subject, we are delighted to have with us during our first hour, from Mouvement Desjardins, Mr. Patrice Dagenais, Director, Planning and Product Development, as well as Ms. Susan Murray, Director of Government Relations, whom we have also heard from in different circumstances. Welcome to the both of you.


We will also hear from Credit Union Central of Canada in our first hour, as represented by Brigitte Goulard, Vice- President, Policy, and by Douglas Whelan, Director, Payments Policy.

Before we start, I would like to identify the senators who are here this morning. To my left is Senator Ringuette, who initiated this study. To my left physically, but not politically, in the corner is a very good friend and colleague, Senator Oliver from Nova Scotia. Senator Duffy, whom you all recognize from a previous life and who is a very welcome addition to the Senate, is here this morning as is Senator Fox from Quebec. I, of course, am from Quebec. At the moment, we are a minority, Senator Fox, but a vocal one. We can almost say that Senator Ringuette is on our side because she is francophone and anglophone and I imagine speaks many languages.

Susan Murray, Director, Government Relations, Desjardins Group: Thank you for the invitation to speak to the committee today on your study of the credit and debit card systems of Canada. We are delighted to have this invitation and appear with our partners from Credit Union Central of Canada. We will limit our presentation to five minutes because we want to give as much time as possible to answering questions and to provide as much information to you as we can this morning.

Desjardins is the largest integrated financial cooperative in Canada. With over 5.8 million in members and over $150 billion in assets, it is the largest financial institution in Quebec and sixth in Canada. The Desjardins Group of companies include Desjardins Financial Security, Desjardins General Insurance Group and Desjardins Securities.

The cooperative difference is the foundation on which the caisse and the Desjardins Group operate. The 5.8 million members collectively own the Desjardins Group and share in the surplus earnings.

Our mission is to contribute to the economic and social well-being of our members and we believe that money should be at the service of our people.

I will now turn to my colleague, Mr. Dagenais, who will talk about card services at Desjardins.


Patrice Dagenais, Director, Planning and Product Development, Desjardins Group: Mr. Deputy Chair, as regards payment cards, Desjardins operates, on the one hand, as a cards issuer to its clients, who include consumers, self- employed workers and businesses; and on the other hand, as an acquirer of payment transactions in the case of its small, medium, and large business clients.

The Deputy Chair: Mr. Dagenais, your words are being translated. Our interpreters are exceptional, but they would like you to speak more slowly, if possible.

Mr. Dagenais: As regards credit cards, Desjardins has been issuing for the last 30 years or so a range of Visa-related products. The products are varied and meet the needs of our diverse clientele. Today, we serve more than three million cardholders, who are often caisses Desjardins members, as well as several Credit Union, and business clients across Canada.

With respect to debit cards, Desjardins serves nearly six million debit card clients.

In serving merchants, Desjardins operates throughout Canada as an acquirer of payment transactions for debit cards, Visa, MasterCard and other credit cards. We provide services to more than 50,000 merchants.

Like all other financial institutions, Desjardins has recently invested substantial amounts of money in modifying its payment systems to support new smart card technology. Upgrades have now been completed and the roll-out phase will continue over the course of the next two or three years. This year's biggest challenge is convincing the entire market to adopt the smart card, which will require a change in consumer behaviour, especially for PIN credit cards that are used for transactions. As a result of this shift, merchants will have to change their cash registry systems so that they are compatible with this new technology.

We must ensure that we move quickly to address the numerous problems of interoperability, which are to be expected with the launch of any new product in a system structured according to a four-party or global model. Roll out of this new product is in the early stages, after several years of work. During this phase, we will also see some structural changes to corporate payment networks as well as the launch of several new initiatives, such as virtual transactions, new forms of debit, and new credit products that the market is only beginning to absorb, albeit with some difficulty. My presence here is proof of that.

Bill Gates once said that people tend to overestimate what can be accomplished in two years' time when implementing any new technology or product, but always underestimate what can be achieved in 10 years.

That is why I am surprised to see these strategic changes to the payment industry being implemented so quickly without any in-depth explanations being provided to the various stakeholders, namely the four parties involved in the payment system, i.e. consumers, financial institutions that are card issuers, institutions that are payment processors or acquirers, and merchants, as to the rationale for these changes, particularly the benefits of these changes.

However, that does not mean we have to throw out the baby with the bath water. Are things so urgent that everything has to be overhauled at this difficult juncture?

For example, 20 years ago, Desjardins was among the pioneers in Quebec and in Canada to set up a debit card payment system that was then called direct payment Desjardins. This was established before the introduction of the pan-Canadian Interac network to which Desjardins transferred its brand user rights to the debit service.

Desjardins did not ask other financial institutions to launch the same product or demand that one of these institutions change its system to accommodate us. We worked with different market stakeholders, at their pace, and the roll out took much longer than five years.

Since then, Canadians have widely adopted the Interac payment system, which is a shared service. Today, Interac has become one of the most preferred methods of payment because 50 per cent of purchases are made with a debit card. Canadians are also among the most frequent users of debit cards in the world. Retailers also acknowledge the practicality in this type of payment which has simplified their own operations by eliminating the use of cheques at their points of sale, and improved their efficiency from an operational and money-management standpoint.

Today, retailers are arguing for keeping the status quo and Desjardins fully understands the rationale for their stand, even more so given that the Canadian debit network is often cited as a model example for foreign markets and is the envy of foreign payment organizations.

Proper functioning of these payment systems means that competition between the actors who make up the payment system should be open. There must be competition, everybody agrees on that, but there also has to be a high level of collaboration because the success of current systems is due in large part to collaborative work between the institutions to deal with the on-going chaos wrought by fruitless new initiatives that have the potential to increase costs for merchants and confuse consumers who always end up on the hook for all costs associated with the payment service.

At Desjardins group, we believe that money exists to serve people, never the reverse.

The Deputy Chair: Thank you, Mr. Dagenais. We will now hear from representatives from the Credit Union Central of Canada and I would ask you to hold your questions because the two will be speaking more or less on the same topics. I understand that this is also how you wish to proceed.


I do not hear any objections.

Before we continue, let me welcome three senators: Senator Massicotte from Quebec. We briefly established that equilibrium between Quebecers and others when he arrived only to find that equilibrium is imbalanced when Senator Moore, a stalwart of this committee came along. We also welcome Senator Greene from Nova Scotia, a place of origin which has become a majority around here.

Brigitte Goulard, Vice-President, Policy, Credit Union Central of Canada: Thank you for allowing us to speak on the study of the credit and debit card system in Canada.

My name is Brigitte Goulard and I am the Vice-President of Policy with the Credit Union Central of Canada. I would like to introduce my colleague, Douglas Whelan, Director, Payments Policy.

Before addressing the issue, allow me to begin by making a few preliminary remarks regarding the role of Credit Union Central of Canada and, more generally, the credit union system in Canada.

Canadian Central is a federally-regulated financial institution that operates as a national trade association and finance facility for its owners, the Provincial Credit Union Centrals and, through them, for approximately 440 credit unions across Canada. With over 1,700 branches serving more than 5 million members, over 21,000 employees and holding more than $114 billion in assets, credit unions represent an important component of the Canadian economy. We like to consider ourselves the dependent of Desjardins outside Quebec.

Although the global economic downturn experienced in the latter half of 2008 continues to present challenges for credit unions and their members, we are pleased to report that our performance for 2008 will go on record as one of the most successful years ever for the Canadian credit union system. Our financial position remains strong and we have maintained our share of the market in step with growth in the Canadian population.

There is a common misconception in certain parts of Canada that credit unions are small, operate only in rural communities or are reserved for employee groups or special interest groups. Nothing could be further from the truth. Credit unions in Canada come in all shapes and sizes and operate in almost every community. Actually, the only financial institution in more than 380 communities in Canada is a credit union. Credit unions are the first choice for a significant percentage of the population. In fact, one in three Canadians is a member of a credit union or a caisses populaires. We believe these numbers reflect the strong cooperative values of the system and the commitment of the system to the economic development of the communities.

Charitable donations, employee participation, worthwhile causes and scholarships and bursaries are all part of the contributions that Canadian credit unions make everyday. In fact, in 2007, Canadian credit union community involvement reached $35.8 million.

In view of the questions raised yesterday during the committee hearings to financial literacy, I would like to say a few words on the credit union commitment to literacy programs. Credit unions, as community-based institutions — and, in several communities, as the only financial institutions — have been called to play a key role in the establishment of financial literacy programs and have developed numerous programs geared towards the general public, school children and young adults. Canadian Central therefore supports the federal government's initiative to develop a national strategy on financial literacy as announced in Budget 2009.

The Chair: Thank you, Ms. Goulard. Mr. Whelan, before we commence, I was remiss in not introducing our very special, efficient and competent clerk, Dr. Line Gravel, as well as the parliamentary research people, Marc-André Pigeon and John Bulmer. We do not operate alone; we operate with very wonderful translators and stenographers without whom we could not exist.

Douglas Whelan, Director, Payments Policy, Credit Union Central of Canada: Thank you. Canada's credit unions provide a broad range of consumer card services to their members, including both debit cards and credit cards. Credit unions are primarily card issuers, meaning that they provide cards to consumers but are not significant providers of transaction acquiring services to merchants.

Visa products are offered by some credit unions and MasterCard by others. Approximately 600,000 credit union members have obtained a credit card through their association with their credit union.

Credit unions use a variety of different business models to provide credit card services to their members. Each credit union makes its own decision regarding which card products and services they will offer, how they will deliver them and which suppliers they will use, based on what best fits their business situation and the needs of their members.

For example, one credit union issues credit cards directly to their members and maintains control of the service relationship with the member, the terms and conditions of the card service, design of the card, marketing, pricing, fees, interest rates and ownership of the card balances. Only the back office processing is outsourced to a third-party service provider.

Most credit unions, however, have completely outsourced their credit card services to a third-party financial institution. In this situation, it is the third party that issues the card, manages the customer relationship, sets the terms and conditions of the card service, controls the card design, marketing, pricing, fees and interest rates and owns the card balances.

With regard to debit card service, Canadian credit unions have issued approximately $3.5 million proprietary debit cards and are members of several ATM and debit payments networks. Credit unions affiliated with Canadian Central have access to AccuLink, the national credit union system's proprietary network of over 1,700 surcharge-free ATMs across Canada. Credit unions in British Columbia, the Atlantic provinces, and many in Ontario are also members of the Exchange Network — a national network that includes credit unions and other financial institutions and provides surcharge-free access to more than 2,000 ATMs across Canada.

Credit unions have access to Interac membership and services through the group memberships provided to them by Canadian Central or Central One or through direct membership with Interac. Credit unions also have access to international ATM and debit services networks, including MasterCard, Cirrus, Maestro and Visa Plus. It is important to note that each credit union individually determines which of these debit services they will provide to their members at what price and puts in place the service delivery models and appropriate supplier relationships that best fit the needs of the credit union and its members.

This individuality is both a reflection and a reminder that credit unions are locally based organizations delivering services that match the unique and diverse needs of the communities they serve. To continue meeting these needs, Canada's credit unions need access to the broadest possible range of products, suppliers and delivery models for debit and credit card services. This kind of flexibility is consistent with an open market environment that provides competitive choice for credit unions and for their members. It also includes support for preserving a strong, domestically focused payments delivery channel as provided by Interac.

As locally based organizations, credit unions respond to the unique needs of the communities they serve. Nationally, the success of Interac shows that it is similarly well positioned to respond to the unique needs of Canadians. As the card services market is transformed by the introduction of chip and other new technology, it will become even more important to preserve the capability to develop and deliver card-based services focused on the needs of Canadians and the characteristics of the Canadian marketplace. For Canada's credit unions preserving flexibility and competitive choice in card services becomes more critical to ensuring that they can continue to meet the needs of their members.

We thank you once more for the opportunity to address you today and would be pleased to answer any questions you might have.

Senator Oliver: Ms. Goulard, you indicated that you were pleased to see in the economic statement that there will be a national strategy on financial literacy. What are some of the things that you would like to see in that strategy? What advice would you give to the government on what you would like to see them do to roll them out nationally?

Ms. Goulard: I realize that the FCAC has been heavily involved in financial literacy. It is not as though the government has done nothing regarding financial literacy. It has been a piecemeal approach whereby many provinces and certain organizations have done things. I am sure there are very good programs but it would be nice if more people had access to the information or to the programs.

I believe that a task force is being established. Credit Union Central has put forward names from our credit union that we believe should be part of the task force. It would be nice if the task force could do a survey of everything out there in all communities of all provinces on what tools work best and what programs work best. In that way, all people could access to those, rather than access being limited to a small group here or a small group there. That would be a useful tool for the credit union system.

Senator Oliver: The unusual thing about a credit card is that it is a Mr. Dagenais, you said that you have had Visa for 30 years and that you have 3 million cardholders. The unusual thing about a credit card is that it is a bit of an unusual bank instrument. Normally, when a person does business with the bank, they want to take back some kind of security, starting with a promissory note or accounts receivable or other asset. However, in this case, credit cards are unsecured. We have learned that credit card balances have risen since 2004 by 40 per cent. In Canada today, there is about $49.9 billion outstanding on card balances. Some senior bankers say that the rate of default on those balances will increase seriously over the next few months.

With these unsecured balances, many of which are likely to default, what will you do to ensure that you have some protection as an issuer?

Mr. Dagenais: We do not have any guarantees. We have a good strategy in that we are more conservative and prudent when we grant loans.

Senator Oliver: Does that apply to the 30 million card holders?

Mr. Dagenais: No, that applies to my three million card holders. We have a good relationship with our members, six million of whom are in Quebec, so we know a lot about them. Generally, they have their loans and their savings with us. We know more about our members, so we are secured by those facts.

Senator Oliver: What is your current card default rate of your three million cardholders?

Mr. Dagenais: The current default would be lower than the average in the general marketplace.

Senator Massicotte: What is the percentage?

Mr. Dagenais: I do not have the exact figure, which varies each month. It is on the lower end of the general market rate.

Senator Moore: What is the range?

Mr. Dagenais: We can provide that to the committee.

The Deputy Chair: If you could provide that to us, we will circulate it to the members.

Senator Oliver: Have you outsourced any of your payment processing or is it all done in-house?

Mr. Dagenais: It is done in-house.


Senator Massicotte: I have a brief comment to make. It is very strange to see how the world is moving forward in leaps and bounds. Twenty or twenty-five years ago, my father-in-law was a member of the Desjardins Group board of directors and very much involved in the credit debate. He was against it. The world has changed significantly because today, the industry is worth billions of dollars. In fact, he still is against credit cards.

Earlier, there was some discussion about making sure that credit users fully understand exactly what the conditions are. This is a big issue, and a lot of work has to be done. Are your three million users aware of the interest rate charged on their credit cards? What percentage of your users carries a balance at the end of the month and what is the interest rate charged on credit card balances?

Mr. Dagenais: There are several questions to answer. As regards your first question, all cardholders are notified of changes to the interest rate. All of our cardholders are aware of any changes made to interest rates.

Senator Massicotte: With a 30-day notice?

Mr. Dagenais: Yes. We even send a notice to users who have not used their card during that month to explain if the interest rate has changed and we send them a new contract that sets out the new terms under the new interest rate.

Every month, there is a note on the back of their statement indicating the interest rate and how the interest is calculated. On the front of the statement, the interest rate charged to the client is clearly stated.

With respect to rates, the balance carried by most people varies between $600 and $1,000. People do not carry huge balances on their credit cards. Rates can vary between 9.9 per cent and 19.5 per cent. When credit card users have a balance of more than $1,000, we recommend to them a lower interest rate to better manage their personal finances. We have strategies, and we really try to give cardholders reduced interest rates, particularly those who carry a higher balance.

Senator Massicotte: What percentage of your clients pay off their balances?

Mr. Dagenais: Most cardholders pay their monthly balance. Approximately 60 per cent pay off the entire balance each month.

Senator Massicotte: We were told that on average, 40 per cent of Canadians do not pay off their balance. Has Desjardins noted the same thing?

Mr. Dagenais: Yes, but the average balance is very low.

Senator Massicotte: When a cardholder's balance goes above $1,000, and you call the client, why do you not tell him that the interest rate he is paying is too high, and that he should take out a loan at four or five per cent? Why not suggest a rate?

Mr. Dagenais: We do not call our cardholders systematically, the product is available and the rates are posted publicly. We make no secret of the rate charged.

Senator Massicotte: Does the consumer clearly understand that the rate in effect is 19 per cent?

Mr. Dagenais: We carry out studies regularly on account statements. We always endeavour to make our statements as clear as possible. Are there any improvements that could be made in this area? Drawing up a statement is a rather complicated process. It may seem straightforward, but it is a very complex process.

Senator Massicotte: Is the rate of 19.5 per cent clearly indicated, in bold face?

Mr. Dagenais: It is very visible. We were not able to focus on the red print, but the rate is very visible on the statement. It is very important to us that the cardholder is fully aware of the interest rate he is paying.

Senator Massicotte: As you know — and I imagine that this applies to your institution — if a cardholder misses the deadline to pay off a credit card balance, the interest then becomes cumulative. Is this also the case with your credit cards?

Mr. Dagenais: Yes.

Senator Massicotte: Are your clients also aware of that?

Mr. Dagenais: Our clients have always been aware of this fact. This is not something new. It is clearly explained in the contract extending variable credit. It is standard practice.

Senator Massicotte: Are your users aware of this? When I look at credit card contracts, the print is very fine, and the font is very small. It is not very obvious. Do you know if consumers are indeed aware of this practice?

Mr. Dagenais: Yes, users who pay interest are aware.

Senator Massicotte: They are aware that the interest is cumulative and retroactive?

Mr. Dagenais: Yes. Those who always pay off their balance in full may notice this less, but those who have an outstanding balance are aware of this practice.

Senator Fox: I did not fully understand what you said about variable rates ranging from 9.9 per cent to 19.5 per cent.

Mr. Dagenais: For different products. A typical product has an interest rate of 19.5 per cent. I would say that the typical interest rate on a regular product is 19.5 per cent. As soon as a person carries a high balance, we suggest to the client a reduced-rate card. Rates for this card are low and hover around 11.5 per cent.

Senator Fox: Is this standard practice within the Canadian banking system, or are you the only ones who suggest this option?

Mr. Dagenais: I cannot say if other financial institutions do so, but it is a rather widespread practice.

Senator Fox: So then, is the outstanding balance converted into a loan?

Mr. Dagenais: No, it is similar to a credit card, except that the interest rate is lower.

Senator Fox: When you say that if a cardholder pays off the balance within the required timeline, no interest is charged, I am assuming this applies exclusively to the purchase of goods and services, and not to cash advances?

Mr. Dagenais: Exactly, it is similar to a cash advance.

Senator Fox: You say that a large portion of your cardholders pay off their entire balance each month. How are you able to profit from those who pay? One is inclined to think that profit is made from the annual credit card fees. Without those fees, one would tend to assume that those with less money pay a higher rate, and pay for those who have more money. That would go against the Desjardins philosophy. There is something that I do not understand in your philosophy, and I am hoping that you can explain it to me.

Mr. Dagenais: With respect to credit, revenue is derived from three sources. First, there is billing of interest charged to cardholders. As you stated, not everyone pays off their entire balance at the end of the month. There is also revenue called interchange, which is a sharing of the premium paid by a merchant and the acquiring and issuing institution.

Senator Fox: There is no Robin Hood?

Mr. Dagenais: The poor should not be the ones who have to pay.

Senator Massicotte: Then, in this case it would be the opposite. Does interchange represent a very significant portion of your profits when you calculate all of the costs involved? Is this where you derive most of your profits, or do they really come from the interest rate charged?

Mr. Dagenais: It is a source of revenue in terms of profit, but it is highly variable. Profits are our revenues less our expenditures. This represents a significant source of income.

Senator Massicotte: What does it represent?

Mr. Dagenais: I cannot answer that question.

The Deputy Chair: I wonder if we could instead ask a question regarding proportions. Can we talk in terms of proportion?

Senator Massicotte: I will decide if I am satisfied with the answer afterwards.

Mr. Dagenais: I know that proportions are confidential data. Each financial institution may have a different strategy.

Senator Massicotte: What is Desjardins' total credit card volume?

Mr. Dagenais: Several billions of dollars, approximately $15 billion.

Senator Massicotte: Fifteen billion. All things considered, that really is a substantial amount.

The Deputy Chair: Do you wish to complete your supplementary question?

Senator Massicotte: I will have more questions later on.

Senator Fox: Does the remittance system apply to credit card loans?

Mr. Dagenais: The remittance system?

Senator Fox: The Caisses do use such a system?

Mr. Dagenais: We pay out dividends to our members.

Senator Fox: Yes.

Mr. Dagenais: We pay out dividends to the Caisses. All of our members' surplus earnings are returned to the Caisses. They can pay out part of those earnings as member dividends. They are not paid out directly, but the Caisses do have that option.

Senator Fox: So these are dividends paid out to members. A cardholder who is not a member would not be entitled to that dividend, is that correct?

Mr. Dagenais: That is correct. However, the vast majority of our cardholders are members, whether of the Credit Union or Desjardins Group.

Senator Fox: The other financial institutions appear to be making considerable efforts to sell credit cards to people other than their regular banking clients. Do you advertise your credit cards to people other than your members?

Mr. Dagenais: That is to say that the majority of our cardholders are members, and our strategy is to work more closely with members than with the general public, which is not to say that we do not conduct advertising campaigns.

Senator Fox: If you were to advertise to the general public, what would be the advantage of owning your cards? I do not suppose it would be the interest rates.

Mr. Dagenais: No, but some of our product terms, such as Accord D financing, which is unique to Desjardins, are not offered by our competitors.

Senator Fox: As senators, we receive a lot of letters — perhaps not as many as Senator Ringuette, who is the instigator of this study — and people are often puzzled when reading the financial pages and seeing the interest rates on credit cards and how the Bank of Canada rate and rates on guaranteed investment certificates are steadily declining. They wonder why the money rates are declining while credit is just as expensive as before. Why would credit card rates not decrease when money appears to be cheaper to come by although harder to find?

Mr. Dagenais: Paradoxically, I would not say that money is cheaper. There are enormous liquidity problems among financial institutions, which are rebuilding their inter-bank loans at the rate that was generally agreed upon among financial institutions.

Indeed, the Bank of Canada has decreased its rates and made considerable efforts to bring down market rates.

The fact is that, although rates have declined, there are now more risk premiums.

Senator Fox: Allow me to interrupt you. You said that the rate on non-performing cards was extremely low, subpar. To date, the standard is approximately one per cent. It is hard to justify that by saying that the rate is low.

Mr. Dagenais: I am not talking about bad debt, but about risk premiums on loans between financial institutions. These risk premiums are something new. In fact, the cost of funds has not decreased all that much. The situation is such that the system will likely improve over the next few months — we really do hope so — but as we speak it is not possible to determine whether the cost of funds will decrease.

Senator Fox: The cost of money that you raise whether through deposits or the sale of GICs has decreased considerably. Not too long ago, one of your members could have earned four per cent on a GIC.

Mr. Dagenais: With four per cent mortgage rates, I know that there are significant challenges. I would say that there are challenges. We cannot automatically assume that the cost of funds has decreased. We are not sure whether that will be the case over the next few months.


Senator Duffy: I welcome the witnesses. The credit union movement has been part of the Duffy family for 50 years, which says something about all of our ages.

Starting out in Charlottetown, P.E.I., the first bank account I had was at the credit union and my family were all members. The people at the credit union knew us intimately. They knew everything about us, as you testified earlier. I am wondering now, when I watch the entire banking section, how much knowledge it is possible to have of those clients, given the numbers of customers you have. For example, is it possible to get a credit card from your caisse without actually meeting someone face-to-face at the branch?

Mr. Dagenais: Yes.

Senator Duffy: How do you know about that person if you have never even seen him or her in person?

Mr. Dagenais: There are several ways. As we say, in Quebec we have 5 million to 6 million members. We know a lot, because people have a relationship with Desjardins.

Senator Duffy: If they are already a customer, they can get a card. At some point, if they are a member, have they met your staff?

Mr. Dagenais: You are right; in the past they have met our staff. If not, there is a credit bureau where we can check their payment history.

Senator Duffy: I am thinking in terms of education. Do you target students at university? Their first credit card comes from the caisse; it is part of what they get as a freshman. Is it possible for students to receive credit cards without ever meeting a caisse official?

Mr. Dagenais: It is possible. We prefer that they meet with someone, but it is possible that they can get a student card with us. We issue many credit cards to students, and we have discovered that they are good users of cards. It is not true to say they are not good users of cards.

Senator Duffy: Do they have financial knowledge?

Mr. Dagenais: They have financial knowledge. They use the card properly. That is not the challenge for them at first. Perhaps afterwards they will have challenges, after finishing their schooling. However, when they are in school, they use the card properly.

Senator Duffy: With regard to marketing to senior citizens, we have all seen an avalanche of direct mail, particularly from American-based banks, but not only from them. Do you do similar kinds of mass mailings, and do you target senior citizens?

Mr. Dagenais: We do not do mass mailing because our business development is within the membership of Desjardins. However, we have strategies for people who are in various stages of their lives. We try to be a good companion throughout their lives.

Senator Duffy: My colleague mentioned Gordon Nixon from the Royal Bank, who says he is more concerned about rising defaults from credit cards than mortgages in our current economic climate.

How would you rate personal bankruptcies related to credit cards compared to what you are seeing in the marketplace today in terms of mortgages?

Mr. Dagenais: We do not know the extent of the financial and economic crises we are in. Like everyone else, we work hard to ensure that we will not put more people into problems. As I said, our strategy is different from that of others. We do not expect people to not pay. We are not searching for delinquent people. We are searching for good customers.

Senator Duffy: Sometimes they find you.

Mr. Dagenais: Yes.

Senator Duffy: Mr. Whelan, what is the sense in the rest of Canada?

Mr. Whelan: I do not have the facts or numbers to compare mortgage versus credit card delinquency rates. However, I would say, similar to what Mr. Dagenais has said, credit unions are there to provide services to their members. They typically do not mass market indiscriminately for credit cards. When they are looking to sell a credit card, it is to gain a new member as well. A credit card is part of the service they provide. They are seeking to gain a new member as opposed to individually selling a card. Because of that and because the portfolio of cards tends to be focused on a group that they know, they tend to have delinquency rates that are less of a concern.

Senator Moore: Senator Fox asked a question. I am not sure I understood the answer, Mr. Dagenais. He asked whether you issue cards to non-members. Do you or do you not?

Mr. Dagenais: I do.

Senator Moore: You mentioned you have three million cardholders and 60 per cent pay off the balance each month; 40 per cent do not, which is 1.2 million cardholders. You mentioned, in response to Senator Massicotte's question, that once a cardholder's balance is over $1,000 per month, you suggest that they move to a lower rate arrangement or card.

This is part of the education process. How do you do that, and generally what happens?

Mr. Dagenais: As I said, the majority of our receivables by cards is $800, so a large majority is under $1,000.

Senator Moore: Are you saying that of the 40 per cent that do not pay the cards off each month, many of those are under $1,000?

Mr. Dagenais: Yes, many of those are under $1,000, for sure.

Senator Moore: What per cent would be under?

Mr. Dagenais: I do not know the exact percentage.

Senator Moore: It probably floats a bit each month but is there a range? Is there some kind of statistic you can give us?

Mr. Dagenais: I do not have that kind of statistic. It varies every month.

Senator Moore: If it was even half, you would be contacting 600,000 people a month.

Mr. Dagenais: We do not contact them.

Senator Moore: How do they know?

Mr. Dagenais: We advertise our product. The product is known. It is not hidden.

Senator Moore: If the advertising — through whatever medium — is how a customer would know if their balance is more than $1,000, do they have an opportunity to come to Desjardins Group and apply for a lower-rate loan? Is such awareness strictly done through public advertising?

Mr. Dagenais: Last year, we did a large-scale advertising for one of our cards, which is 9.9 per cent interest. We sell that through the ``caisse populaires'' to ensure everyone has access to that product. We advertised our low-rate products.

Senator Moore: What kind of response did you get?

Mr. Dagenais: It was great. It is a good product and we believe in low-interest credit cards.


Senator Massicotte: To follow-up on Senator Moore's question, does the financial institution have a policy or responsibility to contact cardholders and offer them lower-rate credit cards?

Mr. Dagenais: We do not systematically contact all our cardholders to offer them reduced rates.


Senator Moore: You mentioned you have a number of students who are cardholders and that they are responsible card users. What per cent of the 3 million cardholders are students? Would that be 10 per cent?

Mr. Dagenais: Less than 10 per cent.

Senator Greene: On the one hand, I think it is commendable that you are offering lower rates to people with higher balances. However, to what extent might that be an incentive for people to carry higher balances?

Second, what are the differences in services between a card at 9.9 per cent interest and one at 19 per cent interest? In other words, if you are offering cards at different interest rates — 9.9 on the one hand and 19 per cent on the other — what do people receive in terms of services?

Mr. Dagenais: They do not lose benefits but they pay an annual fee. That is the difference. To answer your question, we do not see a correlation between the use of the card and a lower interest rate. It is not linked.

Senator Greene: I think a lower interest rate might be an incentive for some.

Mr. Dagenais: Yes, but from what we have seen, it is not to a great extent.

Senator Ringuette: I am pleased that you are here. Welcome.


You indicated to the committee that your student clients made excellent use of their credit cards, whereas a federal government official told us exactly the opposite yesterday. I was surprised by her comments, but I am pleased to hear you confirm that your student members are responsible users. Your testimony is completely different from what we heard yesterday.

I would like to raise another issue. When your clients carry a balance on their credit cards, you offer them a lower- rate card. Last December, however, the Bank of Montreal came out in the newspapers stating that its clients who had problems paying their balances for two consecutive months would see their interests climb from 19.9 per cent to 24.75 per cent. Your customer approach appears to be completely different from what the major banks have stated publicly.

What are your thoughts on these two approaches to dealing with clients?

Mr. Dagenais: I will not comment on the dealings of other banks. There is a market, and people react in different ways. Since we work mainly with our members, and our members regularly conduct business with the caisses, we must adopt an approach to doing business that can be defended in the market and that respects our values.

Senator Ringuette: What is the interest rate on a Desjardins personal line of credit?

Mr. Dagenais: As of today, it varies between 8 per cent and 10 per cent, but we can confirm those figures because the data are published.


Mr. Whelan: Each individual credit union would set that based on their products, services and cost.

Senator Ringuette: Mr. Whelan, would you say that your group supplies a similar 8 per cent to 10 per cent interest rate on a personal line of credit?

Ms. Goulard: It is difficult for us to say because there are 440 credit unions and we are three levels up. Our members are the provincial centrals. Credit unions are the members of the provincial centrals. It would be difficult for us to be able to give an estimate of what the interest rate would be on a line of credit.

Senator Ringuette: Therefore, you cannot give us an estimate on what you charge on a personal line of credit and you probably cannot give us an estimate on what you give on personal savings accounts, is that right?

Ms. Goulard: We are not a financial institution in the sense of a retail financial institution, so we do not have lines of credit.

Senator Ringuette: Do you not gather the data from your membership?

Mr. Whelan: To gather data on individual rates and services of credit unions would be fairly difficult. Each credit union needs to be competitive in its own market.

It is important to note that the customers of credit unions are also its shareholders and owners and they have tremendous opportunity to affect the types of services that are delivered, not only at a basic rate by patronizing those services, but they also have access to the senior management and board of the credit union. They can vote in elections that determine the board of directors of a credit union and they can participate directly in the governance of the credit union by becoming a member of those committees and boards to affect those services.

Therefore, I think it is fair to say that the rates and services they offer need to be competitive within the market they serve.


Senator Ringuette: Mr. Dagenais, what is the rate offered by the Desjardins Group?

Mr. Dagenais: The rate is published, so we will get back to you with the exact figure.

Senator Ringuette: Yes.

Mr. Dagenais: Earlier, I gave you an approximate rate, but it varies from day to day.

Senator Ringuette: Canadian charter banks are currently offering 0.1 per cent. Do you have a similar rate?

Mr. Dagenais: Did you say 0.1 per cent?

Senator Ringuette: Yes, 0.1 per cent for savings accounts with balances of between $3,000 and $5,000.

Mr. Dagenais: The rates are published. We will provide you with an exact listing. That would be easier.

Senator Ringuette: I would now like to address the issue concerning Interac. You are two of the 60 participants in the Interac movement?

What are your thoughts on the situation today and going forward? Most Canadians are relatively satisfied with the debit card system here in Canada. You are aware of the situation in foreign markets where there has been cut-throat competition among debit card stakeholders.

As a participating member of the consortium, I would like to hear your views on the development of Interac in the near future, in comparison to other markets, to the competition.

Mr. Dagenais: That is an excellent observation. There is not much to say for the time being because all stakeholders are currently determining what they want to do with Interac. I can tell you, however, that Desjardins is supporting the growth of Interac. We were a founding member of Interac in 1984. We created direct payment in 1989. We are firm believers in Canada's current direct payment system. We also championed this way of doing business. Canada is the second-largest debit user in the world after Norway. Debit use is becoming a national treasure.

Now, we are not alone in discussing its future. There are a number of stakeholders, and we have to work together to chart the future course.


Mr. Whelan: The credit union system is also a founding member of Interac. We strongly support Interac as a continuing service provider in the Canadian marketplace and do everything we can to ensure that it has the ability to compete in the new and emerging world.

Senator Ringuette: I understand the competitive nature of the service. You are familiar with Star Alliance in the U.S. Are you fearful that if a cap per transaction is not in place on debit cards Interac will face mass marketing from two giant debit card producers?


Mr. Dagenais: I think that debit cards and credit cards are very different. In order to use a debit card, you need a banking transaction account. In Canada, there are few financial institutions with a large number of transactions accounts. It is these financial institutions that will determine which major players will get to enter the Canadian market. That will not be left up to foreign firms; Canadian businesses will make those decisions.

Senator Ringuette: When you consider that 94 per cent of the Canadian credit card market belongs to two players, that could give you an idea of things to come.

Mr. Dagenais: Are you referring to Visa and MasterCard?

Senator Ringuette: Yes.

Mr. Dagenais: In fact, competition in that market is more complex. With debit, financial institutions must have a large number of transactions accounts for it to be worth their while. The major financial institutions with such accounts are Canadian. They will decide which competitor will come out on top. Will it be Interac, Visa or MasterCard? Let us not shirk our responsibility, the decision will be made in Canada.


Mr. Whelan: Beyond what has happened elsewhere in the world, there are a couple of key differences, one being that there is nothing in the world like Interac. Other domestic debit systems have not experienced the kind of success that Interac has had and have not provided the same kind of service that it has provided for Canada.

Our concerns would be more that Interac has the tools it needs from a structural and governance perspective to compete in the new world. Will there be competition from Visa and MasterCard on the debit side? Absolutely. As we move towards chip technology, that is likely inevitable. Our main concern is to ensure that Interac has the tools it needs to remain competitive in that new world.

Senator Ringuette: When MasterCard representatives met with me in my office, they told me that the current Interac system was very unsecure and easily compromised. What is your response?

Mr. Whelan: Interac has set a mandate for moving toward new chip technology and has a clear timetable for implementing chip over the next few years. Many institutions are already down that path, including the Desjardins Group and the CUCC. It is a good question to ask of Interac when their representatives appear before the committee.

Senator Moore: Interac is not-for-profit. As indicated by your comments, you think it should be for profit. Is that correct?

Mr. Whelan: I believe that Interac needs to change its structural and governance model. Exactly what that model should be is under considerable discussion. Certainly, it does not have the tools in its current format to earn its current structure to deal with the impending competition that it will face.

Senator Moore: Do you think the competition would happen if it remains not-for-profit?

Mr. Whelan: The competition will happen in either case. The move to chip technology introduces the possibility of great competition. It will level the playing field, if you will, and introduce new competition. Interac needs the tools and it depends on what those tools are.

Senator Ringuette: Most members of this committee were surprised when a witness from the Competition Bureau advised us that they were investigating Visa and MasterCard, like an investigation in the U.K. and in Australia. As credit card issuers, were you aware of this investigation?

Mr. Dagenais: No, I was not really aware of it but in every country in the world, there is an investigation related to interchange, so I cannot say that I am surprised to learn of the investigation.

Senator Ringuette: Why do you think investigations of this nature are happening around the world?

Mr. Dagenais: Likely, it is because of the changes to the industry. Visa is now a corporate entity, whereas it used to be an association of banks.

Senator Ringuette: You said that there have been changes in the industry.

Mr. Dagenais: People question things. The merchants have questioned that.

Senator Ringuette: Of course, they have questions when they see increases of 40 per cent in their fees. How do your merchants feel when they have fees in their monthly statements if the customer is high-risk, is close to or exceeding his or her credit card limit and so forth? The merchant has no knowledge of that information when the client presents a credit card. The merchant is also helpless in regard to the quantity of premium cards out there that are at 9.5 per cent and 9.9 per cent. They have no say in that. I know you do not sign the contract with the merchants. It is a very complex network.

Mr. Dagenais: We do sign contracts with merchants. We have merchants.

Senator Ringuette: You do?

Mr. Dagenais: We do have merchants.

Senator Ringuette: This is very interesting.

The Deputy Chair: Senator Ringuette, I do not want to stop this part of the inquiry, but we have people representing the consumers and we have a time limitation. If your question is very quick, by all means ask it.

Senator Ringuette: I can probably make a deal with Mr. Dagenais to meet privately so I can seek answers to my questions.

The Deputy Chair: That is an excellent solution.

I want to thank you all for excellent presentations and your cooperation, which we appreciate.

We will now change our panellists.

Good morning, ladies and gentlemen.


The second part of our meeting this morning will deal with the perspectives of consumers on credit cards, a key component of Senator Ringuette's motion.


Canadian consumers have embraced credit cards at a rate that ranks among the very highest in the world. According to the Bank for International Settlements, there were some 64.5 million credit cards in use in Canada in 2007. I would imagine that amount has increased, which means an average of in excess of two cards per every man, woman and child in Canada.

With the advent of the financial crisis, many are concerned that households may well be increasingly burdened by rising credit card interest rates, shorter interest-free grace periods and greater reliance on credit cards as a technique of credit rather than of payment.


More could be said about the perspective of consumers. We are pleased to welcome today representatives of Option consommateurs: Genevieve Reed, Head of Research and Advocacy, and Anu Bose, Head of the Ottawa office. I would like to thank you for assisting us in our study. The floor is yours.

Genevieve Reed, Head of Research and Advocacy, Option consommateurs: Mr. Vice-Chair, allow me first to thank you for the opportunity to share our thoughts on the principal concerns of consumers with regard to credit and debit cards. With me today is Ms. Anu Bose, Head of the Ottawa office, and we will be sharing the presentation.

Option consommateurs was established in 1983. We are a non-profit association whose mission is to promote and defend the interests of consumers and ensure their respect. We speak to both federal and Quebec regulations and policies. We have been interested in the financial sector for a number of years. We conduct research, engage with financial organizations, organize educational events and present the interests of consumers to decision-makers.

But above all, as a cooperative association for family finances, or ACEF, a broad-based movement in Quebec, we meet on a daily basis with consumers who face serious budget problems. These are people of all ages and from all walks of life who are overburdened with debt.

I have two examples to give you our perspective as a consumer association: the husband is a chartered accountant, and both spouses work, with good salaries, earning approximately $100,000, and with sizeable credit card debt. The husband has already taken out a consolidation loan of $40,000, but has added another $30,000 on another credit card. As a result, he has a $70,000 consumer debt. The couple does not have any assets, not a house, a car or an RRSP. Their indebtedness increased over the years. Nothing extravagant, mind you, but they indulged in outings, restaurants and the like. The couple was simply living beyond their means, thanks to the availability of easy credit.

Here is another case: This man retired five years ago. He was a school principal. In retirement, his income decreased by 20 per cent a year, or approximately $15,000. Having maintained the same lifestyle during his five years in retirement, he has accumulated a total debt of over $50,000 on his credit cards and lines of credit. During his working life, he had never had an outstanding balance on his credit card and had an impeccable credit record. He declared bankruptcy a few days after our meeting. He said that this was the most difficult thing he had ever experienced; experiencing bankruptcy at the end of his career was for him a worst-case scenario. And the current recession is making life even more difficult for Canadian consumers. There has been an increasing number of personal bankruptcies in the past year, and over 80 per cent of the debt of those who have declared bankruptcy comes from credit cards — over 80 per cent!

The savings culture has given way to the credit culture. We have to put an end to the belief that indebtedness is the sole responsibility of consumers.

Many practices of the credit card issuers increase the imbalance between consumers and businesses. Commercial practices, such as the real cost of credit, must be regulated. We are talking about how to calculate and measure the impact of minimum payments, over-limit fees and other late-payment penalties, changes to interest rates, appropriation of payments, retroactive interest, cash advances, unilateral changes to contract terms, as well as advertising, in-store solicitation and usurious rates of interest.

Furthermore, there must also be controls regarding the lender's responsibility — and Mr. Dagenais from Desjardins spoke about this earlier — such as the obligation to disclose information, the duty of counsel and an evaluation of borrowers' capacity to repay their debts.

Europe and the United States even have adopted legislative measures to regulate the cost of credit and the responsibility of lenders. Why has Canada not done the same?

Take the example of minimum payments. Minimum payments are the smallest amount that a cardholder must pay each month in order to meet his obligations. Obviously, consumers who pay only the minimum amount will be charged interest on the total amount of their purchases.

In the course of an on-going study, we have been able to establish that minimum payment amounts have declined steadily since the early 90s, from five per cent of the balance to three per cent at the start of this decade, and to as low as two per cent in 2008.

The major inconvenience of this on consumers is also the principal benefit for card issuing companies. The lower the minimum payment, the greater the interest paid by consumers. In fact, since consumers' payments are applied first to the interest then to the fees and finally to the principal. The smaller the payment, the less principal is paid down. By reducing minimum payment amounts, credit card issuers maximize their profitability on the amounts loaned, because this ultimately increases interest payments on the principal without having to increase interest rates.

Let me give you an example: if a consumer has a $1,000 balance on a credit card at an interest rate of 18 per cent and pays only the monthly minimum without conducting any other transaction during the month, the decrease in minimum payment amount from 5 per cent to 2 per cent extends the repayment period three-fold, from 5 years to 19 years, and the interest increases five-fold, from $382 to $1,900, all that on a principal amount of $1,000.


Anu Bose, Head of the Ottawa Office, Option consommateurs: Regarding over-the-limit fees, credit card issuing institutions are highly sophisticated businesses, as I am sure senators are aware. For example, they have in place surveillance systems over the purchasing practices of their customers, so they can detect apparent fraud or credit card cloning.

Even so, it is not uncommon for a client to have charges temporarily blocked if he or she has made unusual use of a credit card. To have access restored, the client must only contact the financial institution and confirm that, indeed, it was he or she who made the purchases.

While the institutions have the means to block customer transactions, almost all credit card-issuing institutions allow transactions over the credit limit for which the customer has applied. They then levy over-limit fees, which vary between $10 and $35, averaging at $20. They could also alert a customer, just as they do in the case of possible fraud.

We believe it is a good thing to regulate the terms of credit card contracts but even better is to instil a sense of corporate responsibility in our banks and financial institutions. Measures are needed to address the basic imbalance between lenders and borrowers, especially in times like these. These measures could include, above all, lending institutions' responsibility to assess a consumer's capacity to service debt and to promptly inform the consumer of the consequences if he or she fails to make the payments. It also includes an obligation to provide correct information in clear and simple language at the very outset of the contract and then on an ongoing basis and at points of sale.

Financial institutions have the resources to assess their customers' debt service capacity but often they fail to ask the right questions or they conduct a very faulty and, if I may say, pre-emptory analysis of the information provided.

I know that senators have raised the question of debit cards, so allow me a few words on that subject. We at Option consommateurs have studied electronic payments for several years and have come to the conclusion that self-regulation is not working and does not adequately protect Canadian consumers.

The delegation of the supervisory authority to the private sector has resulted in a major democratic deficit because consumers' interests cannot be appropriately represented as they are in a convention, parliamentary or regulatory setting.

The Canadian Code of Practice for Consumer Debit Card Services, a voluntary code adopted in 1992, has proven to be of very little value. While the service fees for automated banking machines and other forms of electronic payments keep rising, financial institutions have never found it important to release information on the real cost of consumers using or their delivering these services.


Ms. Reed: Financial institutions and companies that issue credit cards and debit cards are increasingly abandoning their economic and social responsibilities and calculating risk based solely on interest rates and fees. The current system is leading to debt and excessive debt, undermining consumers' purchasing power and, in some cases, causing serious health problems.

Therefore, Option consommateurs recommends that the Department of Finance conduct an in-depth study on electronic payments. It must identify the roles, responsibilities and obligations of the various stakeholders, and set the benchmarks needed to establish a comprehensive electronic payment legislative framework.

We also recommend that the Competition Bureau investigate the practices used by Visa and MasterCard.

We recommend that the government regulate and monitor the business practices in the area of credit and disclosure of information, including the calculation and impact of minimum payments, over-limit fees and other late-payment penalties, changes in interest rates, appropriation of payments, retroactive interest, cash advances, unilateral changes to contract terms, as well as advertising and in-store credit solicitation.

We also recommend that the regulations regarding business practices related to the cost of credit also include ways to ensure lenders act responsibly.

Finally, we recommend that the government ask financial institutions to disclose the real costs of using automated teller machines and other forms of electronic payments.


The Deputy Chair: Thank you, Ms. Reed, and thank you, Ms. Bose. I assume you are willing to take questions at this time.


Senator Massicotte: We have not received your recommendations in writing.

The Deputy Chair: Will you be providing us with them?

Ms. Reed: Yes.

Senator Massicotte: That would be useful. The overall trend in industrialized countries is to ensure that, for such transactions, people have a clear understanding of the facts, interest rates and the like, but can exercise full discretion as to whether or not they make a transaction. The basic premise is that consumers are sufficiently educated to decide whether or not to buy a product. But I have the impression that your recommendations go further than that. Your assumption is that consumers do not have enough information or lack awareness to make their own decisions, and you are asking the government to implement terms and conditions or benchmarks to prevent consumers from making such transactions.

Am I mistaken in mentioning that concept?

Ms. Reed: Needless to say, we are not against more education and information. The studies conducted by the Federal Reserve in the United States have shown that information is all fine and well, but perhaps what is needed is less, but better information because people do not know what to look for in the excessive amount of information, particularly in the financial sector. That would be part of the solution.

Another part is that, according to Statistics Canada, 42 per cent of Canadians between the ages of 16 and 65 are at level 2 of literacy. That means that they have a low level of skill in understanding written texts. That rate amounts to half of the Canadian population, and everyone agrees that the lack of literacy skills is generally related to a diminished financial capacity.

Unfortunately, there are few statistics on Canadians' financial capacity. I believe the CFC is currently working on that issue. I think we have to keep those things in mind.

Senator Massicotte: With regard to education and transparency, the mission of consumer protection organizations is to ensure that consumers are informed and to demand increased transparency from financial institutions. Your last comment does reflect reality, but it goes contrary to world trends.

You say that ordinary Canadians do not have enough information to make their own decisions and that the government, as a responsible parent, should help them avoid mistakes and make sure they pay their balances.

Is that not a bit drastic? You say that the facts are contradictory, but do you not think that by helping consumers, the government will be interfering with how people manage their finances?

Ms. Reed: What we are looking to accomplish here is to reduce the imbalance between the information held by consumers and that in the hands of businesses. That is what the measures we have set out will help to do. These are fundamental measures that will take effect in the United States in 2010. This is basic information concerning minimum payments and the disclosure of information.

For me, those two things go together. Yes, we need information, but we also need safety measures to protect the average consumer.

Senator Massicotte: What strikes people the most is the interest rate. Have you considered that the credit holder may not be aware that the interest rate is 19.5 per cent, or the highest rate at caisses Desjardins? And when you examine a statement from Caisse populaire Desjardins, are you satisfied with the way the information on the interest rate is disclosed?

Ms. Reed: Last year, we did a study on the readability of statements. The study was conducted on a group with low literacy skills. And when you see the figures, you see that about half of the Canadian population understands. The readability, comprehension and intelligibility of a statement go hand-in-hand. I think that statements need to be reviewed in their entirety, be it the way they are advertised, or the information in fine print, and not just information on interest rates.

It is also important to note that people do not understand how credit cards work either. Understanding the interest rate is fine, but a person must also understand the cost of borrowing in a context of a difficult situation. We are currently facing tough times, and consumers may turn to credit to make ends meet between two jobs or because they are on unemployment insurance.

People must know the ins and outs. They must know what a minimum payment is and know where that leads. People are not aware of those things. If information is provided when the credit card is issued and if the information is clearly visible on the statement, I think consumers can then make better decisions.

Senator Massicotte: What studies are you referring to? What studies confirm that credit card users are unaware of the conditions?

Ms. Reed: If we are talking about literacy, it is in terms of readability.

Senator Massicotte: Is there a study that confirms that some users do not understand the terms of their credit cards?

Ms. Reed: That is a good question. I do not know. You could undoubtedly find a study like that. But one thing is certain. There are people in this very room who do not know how a credit card works. I am convinced of that.

Senator Massicotte: Senator Fox says that he pays his balance every month.

Ms. Reed: That is what we want, but Senator Fox is undoubtedly highly educated and informed.

Senator Massicotte: He is not part of the half of the population that is illiterate.

Ms. Reed: I do not dare comment on that.

The Deputy Chair: If the mandatory minimum percentage on credit cards were increased, what effect would that have on consumers? At present, the minimum is 2 per cent, and if the consumer only pays 2 per cent of the balance each month, he will go on paying forever.

Ms. Reed: That is correct.

The Deputy Chair: Would it harm the consumer in any way if the minimum were increased and if consumers were required to pay more to be a little more sheltered from this interest rate?

Ms. Reed: We are trying to say that a series of measures need to be adopted. This is not just about regulations based on the terms of the contract, but also about the responsibility of the financial institutions that issued the cards to ensure that people are able to pay off their credit cards.

The cases I have been talking about are real cases. These are people who are already in debt and who were offered a $50,000 limit. We feel these things are unacceptable. Mechanisms exist to prevent that, and there are institutions that seem to do that. We heard that in part this morning.

Senator Hervieux-Payette: I would like you to tell us a little bit more about the fact that 80 per cent of individuals who went bankrupt in 2008 did so for the most part due to credit card debt. I want to make sure we have understood clearly.

Ms. Reed: There are several liabilities in a bankruptcy, and 80 per cent of this debt is related to credit cards.

Senator Hervieux-Payette: So it is 80 per cent of 80 per cent. It is important to know that, because we had the impression that there was not much of an impact. I look at the way financial institutions extended mortgage credit. The result is that the global financial system is in jeopardy because people who were supposedly competent extended credit to people who were not in a position to assess the risk they were taking.

You are young, but you probably know that in the 1980s, the Bank of Canada's base rate exceeded 15 per cent. I do not recall the interest rate on credit cards going up to 40 per cent. Normally, that would be the case if we applied the same standard today.

At the time, representations were made on the subject of credit cards. This is not the first time we have heard these kinds of complaints. Except that today, it is more difficult to explain to our constituents that with 0 per cent interest at the Bank of Canada, the rate is as high as 24 per cent, whereas when the base rate was 20 per cent, interest rates never hit 40 or 45 per cent.

What in the system has changed and led people to say earlier that it was due to one risk or another? It seems to me that the financial system has not changed all that dramatically. Apart from the fact that financial institutions want to make more profits and that this is a significant source of profit for shareholders; the situation at Desjardins may be a bit better because members are shareholders, but in the other banks, that is not necessarily the case.

How do you explain that gap? It seems to me that you give the right interest rate to those people who can pay and a higher interest rate to those who cannot. So the most vulnerable people are the ones who are keeping the financial institutions going.

When you examined the question and heard from all of the consumers who use the system, did you conclude that it would be a good idea to look at both the base amounts and the credit limits? My colleague and I have studied the issue of interest rates on all loans, including companies that provide credit at usurious rates of up to 120 per cent. Do you have another solution that might reduce the risk for consumers?

Ms. Reed: You are asking a major question. Given the resources we have as a non-profit organization, so far all we have been able to say is that, yes indeed, credit card interest rates have remained relatively stable despite a drop in interest rate.

The only assumption we have come up with is that financial institutions have decided that the best way to manage risk would be to give absolutely everyone credit cards. It is an assumption that I have unfortunately not had the means to confirm. That would certainly assist us in understanding why they would have forfeited their social responsibility as lenders by offering an interest rate superior to prime.

That said, we have no other choice but to denounce the way that institutions, when people exceed their credit limit, will, first, charge fees and second not warn consumers. That is what we were saying. It is incredible, people get warnings if there is a risk of credit card fraud but they do not get any warnings if they are at their limit or have exceeded it because, of course, companies could then charge fees. So in our view, it is not because they do not have the means to inform people.


The Deputy Chair: The following question is more philosophical than immediate. In 2003, this committee studied in some depth the bankruptcy and insolvency system in Canada. We came to certain conclusions with respect to the need to protect consumers, in a sense, against themselves because there is a social need to do so.

That theory is ``risque créé,'' created risk, which was promulgated and dealt with at the beginning of the 20th century in France by Professor Levy-Bruhl. The theory is that society requires certain systems in order to operate. For instance, it requires workers to work in factories where there is some risk of injury. Early on in France and later on in Canada and elsewhere, we developed a system that recognized that by developing a system of security whereby the state, rather than the individual, would pay workman's compensation for workplace injuries.

In effect, we socialized what was more an economic and social problem than a legal problem. We took it out of the realm of legal. We did the same thing with automobile insurance.

The credit system is also a fact of life and yet we maintain a traditional model of creditor and debtor with a lack of equilibrium between the two. I am being a bit too philosophical, I suppose, for today's purposes.

Can you see a change in the model that would have the effect factually of protecting those who need protection against themselves? How would you see doing that? You might want to think about it and send a written response to the committee. I am interested in your response. If you want to know more about the theory, I would be happy to discuss it with you.


Senator Ringuette: First of all, I am very interested in receiving information as to the way in which Europe has regulated the cost of credit. Could you send that information to our clerk because I think we should review the regulations introduced in Europe to that effect.

Second, someone mentioned the way in which financial institutions use the system to generate profits through credit cards. Apparently the ratio is the following: each dollar a banking institution provides for credit cards and credit card balances generates $20.

Do you have any studies wide-ranging enough to confirm this fact? We have to be realistic, but I do not believe any financial institution is going to tell us where their profits come from or the percentages. We more or less depend on organizations like yours to provide accurate figures.

Ms. Reed: We would like to provide you with those figures. First of all, as I said earlier on, it is a question of resources. Second, it comes down to access to information. There is a reason why we ask the Office of the Superintendent of Financial Institutions and others within government to provide us with figures on the real cost of debit cards because that is an area where fees are constantly on the rise. This information does not appear in annual reports. We review them and would like to understand what they are based on. Who is paying to have access to his or her own money? A slightly crazy idea to begin with, I must admit. Someone does need to look into why things are as they are today.

Senator Ringuette: That is certainly a fundamental issue for consumers, in terms of inter-bank charges applied to SMEs when buyers make purchases with their cards; there are a host of fees ranging anywhere from 2 to 3 per cent of the cost of the purchase.

Did you know that the contract signed by the merchant with the technology transfer company prohibits him from offering a two per cent discount if customers pay cash? Do you know what effect that has on costs to consumers? First of all, people paying cash pay the same amount for a given product than people paying with their credit cards. In reality we now have a system whereby because of the current credit card system in place, consumers paying cash actually pay more for the goods they buy. And merchants have no control. If they offer electronic credit card purchases they are not allowed to provide a discount for clients paying cash. Have you ever looked into this?

Ms. Reed: Actually we now have funding to carry out research. We have tabled a research project on this very issue and we will have an answer for you by the end of the month of April. For the time being I cannot answer that question, but if I receive the funds to carry out this research, I will be able to answer it.

Senator Ringuette: You will be able to provide us with the findings from your research?

Ms. Reed: Of course.

Senator Ringuette: I do not know whether this fact might have appeared in your research, but we have noted — I do not know to what extent — that when it comes to intense marketing campaigns, for points cards, did you know that when customers accept these cards which do not cost them any more than other cards, that the cost to merchants is substantially higher when these points cards are used?

Ms. Reed: If you are referring to credit solicitation and advertising techniques, I have a few examples to give you of the way in which people get solicited in stores or by mail. We consider that to be another very serious problem.

We are currently looking into five credit card-related practices. I referred to this earlier on, the drop in the minimum payment required, initial sign up rates, cash advance cheques, rebates on purchases and payment holidays which are, of course, not interest free. We are currently analyzing all these practices and our report will be available shortly.

Senator Ringuette: Are you in contact with the Financial Consumer Agency of Canada?

Ms. Reed: With the FCAC? Yes.

Senator Ringuette: You spoke of changes to marketing strategies.

Ms. Reed: I would like to remind senators that credit is a shared area of jurisdiction. That can cause problems. It needs to be harmonized. We would wish for there to be a floor provision for all electronic transactions. That is the reason why we are calling for regulations on electronic payments. The Currency Act dates back a long time and has not been updated. Credit card payment methods are not mentioned in the in the act. This must absolutely be updated within the legislative framework.

The problem is the following: Credits and contracts are under provincial jurisdiction and financial institutions come under federal jurisdiction. So, we find ourselves in a maelstrom when we want to change things.

Senator Ringuette: I think it is easier to initiate change at the federal level and to then convince provincial counterparts to follow suit. There is an issue of leadership which should be addressed at the federal government level.

I must say I am very pleased with the information you have provided today. I also noted that in your recommendations you called for a more in-depth analysis of Visa and MasterCard. Yesterday, the Competition Tribunal confirmed that there was indeed an investigation underway.

Ms. Reed: We will be following the issue with great interest.

Senator Fox: You raised the issue of jurisdiction which is a constant concern in Canada. Are there discrepancies between federal and provincial regulations which are harmful to the consumer? Ideally they should be complementary, but do they run counter to one another?

Ms. Reed: There is a contradiction in how interest is calculated on credit cards. There are two calculation methods referred to as M 1 and M 2. In Quebec we use only one method whereas in the rest of Canada, the process is regulated under the Consumer Protection Act and a different method is used.

Senator Fox: Under provincial legislation?

Ms. Reed: Not under legislation but rather under FCAC rules. And that has a significant effect on consumers because under one rule, interest payments are calculated monthly and based on monthly purchases and under the other, as soon as people have not paid the entire balance on their card all other purchases are subject to interest from the first day the purchase goes into the balance. It is a real problem.

Senator Fox: Is there a solution to that?

Ms. Reed: Harmonization and federal legislation are required.

The Vice-Chair: Am I to gather that the system used in Quebec is less harmful to consumers?

Ms. Reed: I believe Quebec consumers are better protected in some instances. However, I will not deny that we have class action lawsuits underway against some financial institutions. If, however, Quebecers must deal with federally chartered financial institutions, I can say that we are now before the courts attempting to ensure these institutions comply with provincial, not federal, legislation when they have dealings in Quebec. That is currently the situation.

The Deputy Chair: Like they say in English, it is a Pandora's box.

Ms. Reed: Everything is in the public domain, either way.

The Deputy Chair: I thank you for your assistance and the valuable information you have provided. Perhaps we will have an opportunity to speak to you informally or even formally during the course of our ongoing investigation. The committee will be convening again next Wednesday at 4 p.m. to continue its investigation.

Ms. Reed: It would be a pleasure to provide you with further information.

The Deputy Chair: Thank you so much.

(The committee adjourned.)