Access To Basic Banking Service Ensuring A Right to This Essential Service CCRC Position Paper #2 (October 1997)

I. BACKGROUND

(a) How Several Barriers Limit Access to Basic Banking Service

Financial institutions play a central role in the modern payments system which is administered by the Canadian Payments Association (CPA). However, in order to benefit from this system one must have an account in a financial institution. Only by having an account can one draw cheques or take advantage of electronic payments. In contemporary society one can argue that access to basic banking service is a necessity.

Yet, a study released in June 1996 by ACEF-Centre of Montreal concluded that 3% of Canadian adults do not have an account with a financial institution. Other surveys have shown that low-income Canadians are even less likely to have an account. A Environics poll, conducted in 1995, found that eight percent (8%) of consumers with an annual income of less than $25,000 (which according to 1994 Statistics Canada data would mean at least 400,000 Canadians) do not have an account.

Why are there individuals without accounts with financial institutions? Undoubtedly there are those who have chosen not to open an account. However, one cannot ignore the empirical evidence that if one is poor one is less likely to have an account.

The ACEF-Centre study concluded that there are several reasons for consumers not to deal with financial institutions. These are: the number and nature of identification documents needed to open an account; withholding of funds; increasing service charges; the disappearance of branches from some neighbourhoods, and; a lack of consumer knowledge.

Regarding the issue of identification, it should be noted that people with low incomes tend to have few identification documents (generally a health insurance and a social insurance card as well as a birth certificate). Given the identification requirements of financial institutions (many require photo ID) it has not been uncommon for low income individuals to be excluded from opening an account on the basis of not having adequate proof of identity.

Another factor contributing to the lack of financial services for individuals is the hold placed on cheques prior to the funds being released to the depositor. Cheques, including those issued by a level of government, are often held for a period of six (6) to 10 days. This is clearly much longer than the Canadian payments system requires to clear cheques.

Since low-income families generally have little or no savings, holding a cheque for that period of time results in a cash crunch. People in that situation must consider alternatives if they are to pay for such necessities as food and rent. Consequently, we have witnessed the exponential growth of cheque cashing firms such as Money Mart (which opened in 1983 with 16 outlets and today has over 130 outlets). Additionally, today there are about 150 cheque cashing enterprises in Canada collectively cashing cheques with a value in excess of $1 billion annually.

An additional factor discouraging low-income Canadians from opening accounts with financial institutions are user fees. No one is saying that financial institutions should open accounts at a loss. However, financial institutions continued refusal to disclose cost data makes it impossible to determine whether consumers are being gouged or whether bank service charges reflect a fair return for financial institutions. In particular, the banks unqualified refusal to provide their cost/revenue data for the services they provide, in the same way similar other regulated industries do, can only be interpreted as the banks having something to hide. If not, the banks would be more than willing to provide sufficient information in order to disprove their detractors.

A recent practice which has also affected the ability of low-income Canadians to open accounts with financial institutions is the closing of branches in low-income areas. This pattern also affects senior citizens and the physically disabled who are not as mobile as other citizens in many cases. While no business can be forced to operate a money-losing subsidiary, the unique role of banks coupled with their regulatory protection from competition means that banks should be required, at the very least, to disclose a branch's net income prior to shutting it down.

(b) The Federal Government's Response: Inadequate to Solve the Problem

On February 14, 1997 Mr. Doug Peters, then Secretary of State for Financial Institutions, announced a series of guidelines (agreed to by only the major banks) regarding access to basic banking services, as follows:

1. Limiting to two the number of pieces of identification required to open a bank
   account or cash a cheque, including not requiring photo identification;
2. Providing customers with greater information concerning the holding of
   deposited funds;
3. No longer using employment as a condition of opening a bank account;
4. Minimum opening deposits will no longer be required;
5. Training staff to follow the identification and holding policies and to be more
   sensitive to the needs of low-income Canadians;
6. Providing information to low-income groups on how to be more knowledgeable
   and comfortable with using banking services.

The important point in analyzing the above guidelines are that they were not enacted in legislation or regulation. As a result, the guidelines do not apply to all federally-regulated financial institutions, there is no designated government monitoring agency, and there are no penalties for financial institutions that do not follow the guidelines.

Articles in the media have appeared recently revealing that some financial institutions are using a credit check as a barrier to opening a bank account, and the CCRC's own research has found bank branches that still ask for photo identification and minimum balances before they will open an account. These practices represent a violation of the understanding reached between Mr. Peters and the Canadian Bankers' Association (CBA). In particular, for customers who do not need or want an electronic banking card, requiring a credit check before opening an account is not justifiable, as there are ways that financial institutions can minimize their risk of losses with regard to all of the services they provide to such customers.

Given that they are occurring seven (7) months after the guidelines were agreed to by the federal government and the CBA, these practices highlight the need for specific and enforceable measures to ensure that all bank branches provide access to basic banking services for all people residing in Canada.

In other jurisdictions, the right to access to basic banking services has been enshrined in law. For example, in France if a French resident can prove that two banks have rejected them as clients the Banque de France will select a bank which is then mandated to accept the new client. Also, in the U.S. many states (such as Illinois, Massachusetts, Minnesota, New Jersey and New York) require banks to offer minimum services to the population at large.

These basic services are commonly referred to as lifeline banking. The principle behind legislating access to basic banking services is the recognition that a bank account represents a basic need. The key questions for Canada to be answered are: What services should a financial institution provide with a basic account? and; What fee should a consumer be charged for such a no-frills account?

One possibility to consider is the State of New York Banking Law which sets a maximum monthly fee of $3 (US) for an account allowing for eight (8) withdrawals per month. If a bank in the State of New York can profitably offer low cost no-frills accounts there is no justification for a Canadian chartered bank or other financial institution refusing to offer the same type of services to Canadians.

With regard to the practice of requesting authority to conduct a credit check when opening an account, financial institutions which have this requirement state that they need to know a person's credit history in order to determine the level of risk of opening an account for the person. However, if a customer does not need or want access to an automatic banking card when opening an account, every transaction by such customers will be reviewed by an employee of the financial institution, and as a result each employee can ensure that the institution's risks are covered in terms of how each transaction is handled. Therefore, people opening accounts without banking cards should not be required to authorize the financial institution to conduct a credit check.

In addition, financial institutions should be prohibited from using a poor credit rating as a reason to refuse to open an accounts for anyone, including people who want to use automatic banking services. For anyone who opens such an account, whatever their credit rating, the only risk to the financial institution the account holder can cause on their own (without an employee of the financial institution making a error in processing a transaction) is if the account holder deposits a bad cheque or an empty envelope into their account through an automatic banking machine, and then withdraws funds on the fraudulently deposited amount. To eliminate this risk, financial institutions can simply put a hold on all funds deposited by customers with poor credit ratings until the funds clear the system.

With regard to the issue of financial institutions imposing excessive holds on deposited funds, another innovation in the U.S., the Expedited Funds Availability Act (EFAA), also provides a model for Canada. This federal law governs the time period for which deposits can be withheld from a customer. With respect to in-branch deposits or inter-bank fund transfers the EFAA requires that funds be made available to the depositor by the beginning of the first business day following the deposit. This same time frame applies to U.S. Treasury (government) cheques endorsed by their payee. Additionally, $100 on the value of any cheque deposited must be made available to the customer on the first business day following the business day that the deposit is accepted (except in specific circumstances, such as large cheques and with accounts that have been overdrawn repeatedly). Additionally, it is forbidden for institutions to put on hold an amount of funds already deposited to an account corresponding to the amount of the new deposit.

The literature published by the Canadian Payments Association (CPA) makes clear that Canadian financial institutions could be held to a similar standard. This view is corroborated by an exchange of correspondence between the Canadian Community Reinvestment Coalition (CCRC) and the CPA. When asked if the CPA could meet the standards of the EFAA, Mr. Robert Hammond, General Manager of the CPA, responded in writing that "Canada's clearing and settlement system is more efficient than the system in the U.S."

CPA standards make it highly unlikely that a cheque will take more than three days to clear when it is posted from one Canadian financial institution and deposited in an account at another Canadian financial institution. As a result, even in the case of an individual with a bad credit rating, a financial institution could still release any funds deposited in less than the six (6) to 10 days many financial institutions currently hold deposited amounts.

Another issue which must be considered is what can be done to alleviate the effects of the closing of bank branches in disadvantaged neighbourhoods. Such closures have occurred in the Pointe St-Charles neighbourhood of Montreal, the Regent Park area of Toronto as well as the Downtown Eastside area of Vancouver.

The closure of many bank branches in the Downtown Eastside area of Vancouver and the resulting loss of services was addressed by the establishment of the Four Corners Bank at a significant cost to the provincial government. The creation of this bank has been controversial with members of the local community. No bank or credit union was approached by the provincial government and offered the cash subsidy (given to Four Corners) in return for providing basic banking services. Additionally, the wishes of many in the community to establish a credit union were ignored by the provincial government. This experience makes it clear that any steps taken to ensure communities have access to basic banking services must be planned in conjunction with the community and in accordance with the community's wishes.

Finally, there are those who argue that virtual banking (by telephone and computer network) will be a panacea for those without sufficient access to basic banking services through bank branches. However, it is hard to imagine low-income Canadians buying computers in order to take advantage of the opportunities of virtual banking, and even the cost of owning a telephone and paying for a telephone line has been shown to be prohibitive for some people with low incomes. Also, telephone and computer banking systems do not include cheque depositing services, an essential service most people with low incomes need. Although a direct deposit system for social assistance cheques can overcome this barrier to access for some people, such a system does not address barriers to access to other basic services, such as withdrawing cash. Furthermore, Canada's first virtual bank -- Citizens Bank of Canada -- conducts a credit check prior to allowing an individual to open a bank account. Many people with low incomes will not have an established credit record and so cannot meet this requirement.

III. CCRC Recommendations

In view of the fact that all people residing in Canada do not have access to an account with a financial institution, mainly because of barriers to access imposed by financial institutions, changes need to be made to ensure that financial institutions treat all consumers fairly in their provision of basic banking services. Therefore, the Canadian Community Reinvestment Coalition (CCRC) recommends the following:

1. All persons able to prove that they are residing in Canada, upon proof of status, should be
   guaranteed an account with a financial institution and this right ought to be entrenched in the Bank Act, the Trust Companies Act and other deposit-taking financial institutions' legislation.
2. Financial institutions should be prohibited by law from requiring authorization to conduct a credit check from potential customers who do not need or want access to an automatic banking card when opening an account, because thereare ways that financial institutions can minimize their risk of losses with regard to all of the services they provide to such customers.
3. Financial institutions should be allowed to require authorization to conduct a credit check from potential customers who want to use automatic banking services as a condition of opening an account. However, financial institutions should be prohibited by law from using a poor credit rating as a reason to refuse to open an account for anyone. In the case of a person with a bad credit history, financial institutions should be allowed to hold deposited funds until they are cleared in order to minimize the institutions risk. In almost all cases, this clearance process will take three days or less, and this time period should guide the setting of limits on the holding time for cheques and other deposits.
4. The federal government, consumer representatives, financial institutions and the Canadian Payments Association should jointly develop attainable standards regarding the crediting of cheques, including government cheques, to a depositors account. Once these have been established, legislative provisions similar to those found in the U.S. Expedited Funds Availability Act (EFAA) should be enacted by Parliament. This legislation should apply for all consumers, and should ensure that arbitrary, excessive holding of cheques is prohibited and that penalties for violating the legislative requirements are sufficient to discourage the practice.
5. All consumers should be entitled to a low-cost account option that will satisfy their basic needs and will not entail paying excessive service charges above the basic cost. This basic account should allow, each month, for payment by cheque of all utility bills and a rent or mortgage payment, and a weekly cash withdrawal, all at a fixed monthly fee. If financial institutions refuse to provide a detailed analysis of their service transaction costs and revenues so that a justifiable monthly fee for such an account can be determined, the federal government should determine a justifiable maximum monthly fee for such an account after consultation with people with low incomes and citizen groups, and enact in law the fee and the right to open such an account for all bank customers. In addition, a periodic review of the services provided and cost of this account should be conducted to ensure that the services and fee continue to match the reality of the provision of bank services and costs.
6. The federal government, consumer representatives, and financial institutions should develop a periodic, random and effective monitoring system (such as an unannounced, anonymous survey of a representative sample of financial institutions) to ensure that financial institutions comply with the legislative requirements concerning access to basic banking services for all Canadians, and should develop penalties sufficient to ensure compliance.
7. To allow for a public assessment of the withdrawal of banking services from a community or neighbourhood, deposit-taking financial institutions should be required to disclose a branchs profit/loss record and net income prior to closing the branch.
8. In areas of Canada where there are few or no financial institutions, governments should consider providing incentives or even direct subsidies to existing financial institutions to establish special branches to serve these areas. If no financial institution will establish a special branch in a particular area, governments should consider providing subsidies for the establishment of a financial institution to provide basic banking services, in consultation with the community. For example, establishing a credit union with a board of directors elected by and from amongst members of the community. The credit union structure helps ensure accountability to the community and also involves members of the community in the management of the capital that the community generates, facilitating long-term community development.
9. A financial institutions record in providing access to basic banking services should be assessed as one part of an overall system of requirements and monitoring of financial institutions performance in serving the needs of their customers, including penalties for not meeting requirements. The CCRC will set out a detailed proposal for such a system in a subsequent CCRC Position Paper.