Everyone has a plan until they get punched in the face, said “Iron” Mike Tyson.
Ramesh Siromani, the executive vice president of cards, payments and transformation at RBC, probably had a plan when he appeared as a witness at the House of Commons Industry committee on Monday. It likely involved honeyed words about how RBC “helps clients thrive and communities prosper,” while offering “value, convenience and choice.”
But then he got punched in the face by Conservative MP Michelle Rempel Garner.
To be fair, being a bank executive at a parliamentary committee looking into credit card practices was never going to be much fun.
All the witnesses looked as if they’d rather be having dental surgery, as question followed question, each more loaded with the presumption of guilt than the one before.
But Rempel Garner’s line of inquiry was particularly brutal — and effective.
Siromani also sits on the board of Interac, the bank-owned payments-system provider that runs e-transfers that allow users to send, receive and request money electronically.
Financial institutions charge their clients a fee to send an e-transfer and, in turn, are charged a smaller fee by Interac to facilitate the e-transfer.
Rempel Garner asked if it is true that Interac charges banks between six and 14 cents for every transaction, with the amount based upon the volume of transactions.
That fee schedule is not available to the public.
Siromani said he is not sure how the pricing mechanism works, although he conceded that larger volumes generally mean a better unit cost in most lines of banking.
The Conservative MP — gobsmacked that a board member didn’t know how his company’s pricing works — then turned to the charges paid by customers. That generally amounts to between $1 and $1.50 per transaction, although many banks hide those fees in the maze of other account charges.
She said that if Interac charges a maximum of 43 cents a transaction to the bank, but consumers are charged anywhere between $1 and $1.50 “that’s a big profit margin.”
Besides concerns about price gouging, she raised the issue of restricted competition.
Rempel Garner pointed out that if big institutions are paying six cents a transaction because of volume-based pricing, it raises questions about competition in the banking sector. That’s because smaller institutions would presumably have to pay Interac at the higher end of the fee scale.
Siromani must have breathed a sigh of relief when Rempel Garner’s time ran out. But he looked as comfortable as a penguin in a sauna when her colleague Adam Chambers picked up where she had left off on Interac’s pricing model.
The banker continued to maintain that the board does not discuss pricing matters, leaving that to an independent committee of the board. (The Interac board includes members from the six biggest banks and a credit union, but also includes three “independent” directors and the company’s chief executive).
“Interac is a unique Canadian financial institution and over the years it has been innovative and brought fantastic payments products into the market,” Siromani said.
That may well be the case, but Rempel Garner and Chambers are on to something here.
Chambers, the MP for Simcoe North, said he has heard anecdotally that the largest institutions are paying six cents a transaction for a service that customers are forking out up to $1.50 for. Siromani did not contradict him.
Chambers said that the two financial institutions with the highest volume thresholds are RBC and TD, who provided the co-chairs of Interac when the pricing mechanism was first structured.
He suggested this constitutes “an inherent conflict of interest.”
The two MPs have since penned a letter to the Competition Bureau asking it to use its expanded powers to investigate whether Interac is using its dominant market position to engage in anticompetitive behaviour.
The potential problem, they explained, is that the big banks effectively own Interac and can influence the facilitation fee it charges, to the detriment of smaller firms.
“The issue is one of transparency and governance,” they wrote.
The implications for the banking industry go far beyond the case of e-transfers.
Canada has some of the highest financial service fees in the world — and it is clear that the Conservative party has them in their sights.
There is an almost assumed understanding between Ottawa and Bay Street that as long as the banking sector provided financial stability, it could charge what it likes.
In their ninth year in government, the Liberals have indicated that action is coming on so-called junk fees: capping the amount banks can charge for not having sufficient funds in your account. It would also like to see low-cost bank accounts become more readily available.
But during the bulk of the Trudeau government’s time in office, Canada’s bankers have been making out like Canali-clad bandits.
Public financial statements show that bank fees of all kinds — to open an account, close an account, to send and receive money and for not having enough money in an account — amounted to $17 billion last year.
A report this year by Alberta consultancy North Economicscontrasted the Canadian banking sector to that of the U.K. and concluded Canadians are overpaying to the tune of $8.5 billion. We are paying more for inferior services and slower innovation, compared to Britain and Australia, the report said.
Chequing-account service fees are more prevalent in Canada (eight in 10 consumers in Britain do not pay a service fee), non-sufficient-funds fees are around 10 times higher, overdraft fees are significantly more expensive, and, unlike in either the U.K. or Australia, Canadian customers are forced to pay a $3 “convenience fee” to use another bank’s ATM.
“We conclude that these outcomes demonstrate instances of market coordination between Canada’s major retail banks,” the report said.
Oligopolistic co-ordination does not require active agreement between banks — in fact, that’s illegal. It just needs an understanding between firms, in which each bank expects the others to react similarly.
No wonder Siromani was silent on the pricing matrix at Interac: to have discussed it with the other major bank representative on the board could be seen as collusion.
The North Economics report suggested a raft of reforms, from reorganizing financial-services regulation to transferring the responsibility of switching banking providers from customers to banks.
But the most pertinent recommendation for the e-transfer case is that banks should be required to demonstrate that charges and fees are aligned with the cost of providing the service.
It would need a banker with a good head for figures to calculate the annual profits made on the one-billion-plus e-transfers Interac handles each year, but it would likely be a very long number that contains nine zeros. Estimating the cost of doing that business requires considerably less financial acumen.
Twitter.com/IvisonJ
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