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Bankers fight to keep card rates up

Issuers battle behind the scenes to influence buget

Eoin Callan, Financial Post Published: Monday, January 26, 2009

Bank lobbyists are fighting a rear-guard action to dissuade the government from taking aim at high credit card interest rates and fees in tomorrow's federal budget.

Bankers were cautioned about a week ago the Conservatives were considering tackling concerns raised by consumer and small businesses groups about price gouging.

The warning reflects political sensitivity to criticism of the banking sector that has surfaced during public consultations and constituency-level soundings after state intervention to support the financial system.

As Ottawa prepares fresh measures to bolster credit markets, stimulate investor demand, and bail out industry, it is mindful of the growing potential for a backlash as Canadians wrestle with their own personal debt loads.

But industry lobbyists are aggressively opposing any meddling in the complex mechanisms they use to set rates and transaction fees for credit cards, a profitable business line that the government currently has no authority to scrutinize or regulate.

"When you have a banking system that has performed so well in the midst of a global crisis, perhaps better than any in the world, why would you burden it with a new extra layer of regulation?" asked one person in the industry.

The banking lobby has successfully faced down past efforts to regulate credit card rates or to force disclosure of how fees and prices are set.

But the issue has gained fresh momentum since retailers reacted angrily to a sudden increase in the fees collected from merchants by banks each time they process a Visa or Mastercard payment, which the Retail Council says cost Canadians a total of $4.5-billion in "hidden fees" last year.

Jack Layton, leader of the New Democratic Party, said the credit squeeze had put many retailers and small businesses in a position where excessive rates and fees could have a material adverse impact on the future of their enterprise.

"We favour stronger regulations to prevent banks from charging unfair credit card interest rates and transaction fees," Mr. Layton said.

In the Senate, influential Liberals on the banking committee are also rattling their sabres, though it would likely take the weight of House of Commons to overcome entrenched industry opposition to the status quo.

The simplest first step for Jim Flaherty, the Finance Minister, to take if he chose to tackle concerns over credit cards would be to mandate the finance committee to hold hearings.

The initial goal would likely be to conduct an audit and compel the banks to disclose their costs, revenues and profit margins on credit card services, information they have long refused to share.

But bankers and lobbyists have been arguing any foray into an area of their business currently beyond the reach of the federal government presages an attempt to increase the burden of regulation.

Yet reflexive arguments against new regulation are losing some of their political force as the global financial crisis prompts deeper examination of the different functions banks fulfil in the economy.

Credit cards are an example of a commercial enterprise that also doubles as basic service, according to Duff Conacher, chairman of the Canadian Community Reinvestment Coalition.

"There are a lot of things you cannot do without a credit card any more. You can't really travel -- book a flight, rent a car, or stay in a hotel -- without one," he says.

That, he argues, makes the profit margins on the services a matter of public interest.

Mr. Conacher says one example of an industry practice that is unlikely to stand up under scrutiny is banks charging interest on 100% of a monthly credit card balance after most of the loan has been paid off.

"Let's say you go into a branch thinking you owe about $1,020, and make a payment of $1,022, but actually you owe $1,023. Then because you still owe $1, they will keep charging you interest on the original principal -- $1023 -- even though you've paid off more than 99.9% and only owe $1.

It doesn't work that way with most loans, so why credit cards?" he asks.