Canadians More than love two-thirds their credit of cards. adult Canadians carry one or more cards and use them to make more than 370 million purchases of goods and services annually. The balance owing currently exceeds $5 billion, despite interest rates ranging from 14.75 per cent to 28.8 per cent. Although users rarely complain, a parliamentary committee two weeks ago urged the banks, retailers and oil companies that issue cards to cut their rates by at least three per cent. The Toronto-Dominion Bank (TD) upstaged the committee by slashing its rate to 15.9 per cent from 18.6 per cent in early March. But by the end of last week other credit card issuers had not
budged, and most insisted that their rates were justifiable. “The rates now in force are a fair reflection of costs,” said Alasdair McKiehan, president of the Retail Council of Canada.
The House of Commons finance committee heard from six witnesses, five representing credit card issuers and one speaking for consumers, last November and December. In their report, the MPs rejected as impractical a legislated ceiling on interest rates. But they said that they want other banks to follow the TD in cutting rates or face an investigation for noncompetitive behavior. The committee added that monthly statements should prominently display the annual interest rate and yearly user fees. As well, credit card issuers should submit quarterly reports on rates and fees to the minister of consumer and corporate affairs. The committee also recommended that Ottawa and the provinces pass laws forcing credit card companies to adopt a common method of calculating interest rates.
But last week the report satisfied neither the Consumers’ Association of Canada (CAC), which represented users, nor the credit card companies. “The recommendations are excellent, but there is no teeth in them,” said CAC president Sally Hall. The association wanted _ the committee’s recom| mendations to be Bn's acted into legislation 1 quickly. On the other hand, Kenneth MacTavish, manager of the Royal Bank’s Visa card services, said that the government should be trying to reduce postal rates and gas prices instead of credit card rates. “I think our rates are reasonable,” he said. Meanwhile, University of Toronto historian Michael Bliss said that the committee had wasted time and tax money responding to an “old, populist antibank sentiment.” He argued that the Bank Act imposed a six-per-cent ceiling on interest rates until 1967. “It failed repeatedly,” he said. “The banks always found ways to get around it.”
The Canadian chartered banks began issuing credit cards in 1968. Over the past 10 years both the number of cards in circulation and their use have skyrocketed. By the end of 1977 financial institutions had issued eight million Visa cards and MasterCards, the two so-called bank cards. By June, 1986, Canadians were carrying 10.6 million Visa cards and 4.4 million MasterCards. During the same period, credit card purchases of goods and services, as well as cash advances, zoomed to more than $20 billion from $4 billion annually. Sears Canada Inc. has more than four million credit cards issued to the public, while Canadian Tire Corp. Ltd. has issued between two and three million cards. And Esso Petroleum Canada, one of the country’s largest oil companies, has issued just under one million cards.
The major Visa card companies, the Royal Bank of Canada, the Canadian Imperial Bank of Commerce and the Bank of Nova Scotia, all charge 18.6 per cent annually, plus annual user fees or transactions fees. To date, only the TD has bolted from the pack to cut its rate. MasterCard issuers, including the Bank of Montreal and the National Bank of Canada, charge 21 per cent without user or transaction fees. Last summer Canada Trust cut its MasterCard rate to 16.5 per cent from 18.5 and launched a promotional campaign to attract new business. The oil companies charge 24 per cent, while most of the retailers charge 28.8 per cent.
Conservative MP Reginald Stackhouse single-handedly began attacking credit card interest rates in the House of Commons shortly after other lending rates began falling in late 1985. After Tory cabinet ministers repeatedly brushed him off, Stackhouse introduced a private member’s motion last spring calling for a finance committee inquiry on the subject. “The big issue is fairness,” he said. “Nobody is suggesting credit card issuers should not be making a profit. But is it fair for the cost of money to come down as much as it has and have nothing passed on to the consumer?” Stackhouse added that the TD and the finance committee have confirmed the validity of his protest.
Indeed, finance committee chairman Donald Blenkarn said, “Our analysis shows that the banks at 18.6 per cent can afford to cut their rates and still do really well.” With reductions in the Bank of Canada rate and decreases in the interest paid on customer deposits, the banks can afford to lower credit card rates by three per cent, he said. Patricia Meredith, a financial services analyst with Wood Gundy Inc. in Toronto, said that if the six major banks cut their rates by four per cent, they would lose about $132 million a year in interest revenues. But she argued that their costs have also come down, because interest rates on savings have dropped to 4.7 per cent from about 7.5 per cent a year ago.
Spokesmen for both the TD and Canada Trust, the trendsetters in cutting credit card rates, admit that their operations will remain profitable. Said Peter Rahmer, TD general manager of Visa card services: “We are in the business of making a profit and we expect to do so at the lower rate.” He added that the bank merely responded to a long-term lowering of interest rates rather than the impending release of the finance committee report. And although other MasterCard companies are still charging 21 per cent, Canada Trust’s assistant vice-president of card services, Peter Smith, said, “We are making money at 16.5 per cent, no doubt about that.” After announcing the rate reduction last summer, the London, Ont.-based company ran a promotional campaign and received 30,000 new applicants in six weeks, said Smith.
While their competitors maintained that they were still studying the report last week, most were quick to point out that there are valid reasons for maintaining high rates. According to the Canadian Bankers’ Association, current earnings must be compared with past losses caused by sharp fluctuations in the Bank of Canada rate. In 1981 the banks recorded losses amounting to six per cent of their outstanding credit card balances, but earned 3 ¥2 per cent in 1985. At the same time, the retailers lost 2 ¥2 per cent in 1981, compared with earnings of 2 ¥2 per cent in 1985. A second problem is the cost of administering credit card operations, which involves sorting several hundred million transaction slips annually, preparing monthly statements and mailing them to clients.
Those who support existing credit card rates also argue that any reduction would result in very small savings for consumers. The most recent Statistics Canada survey shows that the average credit card debt in 1984 was $869. A four-per-cent cut in interest rates would save the user $3 per month. As well, imposing a ceiling on credit card rates would help the wrong people. Canadians earning $45,000 to $60,000 annually carry the highest credit card debts, according to Statistics Canada surveys, while low-income earners tend to pay off their balances monthly.
Retail Council president McKichan concludes that from an economic standpoint, there is no reason for credit card issuers to lower their rates. But with the TD and Canada Trust moving, and the parliamentary committee report arousing public indignation, others may be forced to capitulate and cut their rates as well.
To date, the Canadian debate over credit card interest rates has been tame compared to the turmoil occurring in the United States. American Express Co. (Amex) caused an uproar recently by introducing a new card called Optima as a direct challenge to Visa and MasterCard. Traditionally, Amex insisted that users pay off outstanding balances on a monthly basis rather than making a minimum payment plus interest. The Optima card will operate on the same basis as Visa or MasterCard, except that users will pay 13.5-per-cent interest on outstanding balances, rather than 18 per cent to 22 per cent.
Besides market forces, U.S. politicians and consumer activists are also disrupting the once-placid credit card business. A survey conducted by MP Stackhouse shows that 35 U.S. states have adopted regulations limiting credit card interest rates. Connecticut, for one, lowered its ceiling to 15 per cent from 18 per cent last June, while Arkansas’ current ceiling is 10.5 per cent. But although most states are content to legislate and regulate, Illinois state treasurer Jerry Cosentino took direct action against First National Bank of Chicago in late January. He ordered the state to withdraw $300 million because the bank was charging 19.8 per cent on its cards.
In Washington, a bill that a congressional committee is now reviewing calls for improved disclosure of credit card rates and fees. It would restrict credit charges to eight per cent above Treasury bill rates, or about 13.8 per cent. But most observers say that they expect that U.S. legislators, like their Canadian counterparts, will be reluctant to legislate a ceiling on credit card rates.
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