We need a national strategy to deliver on the federal government’s promise to make “financial services more accessible, more useful and more affordable.” We need a national strategy to guarantee equal access to basic banking services for all Canadians at a fair price. We have a suggestion, or three.
A national strategy is doable. It has been done before. We did not keep the national Small Loans Act (1939-1981) prohibiting high cost lenders from preying on the poor because the banks wanted a piece of the consumer lending market. In 1981, the federal government repealed the SLA and replaced it with Section 347 in the Criminal Code prohibiting lending rates above 60% per annum. When payday lenders entered the Canadian scene in the early 1990s, charging then upwards of 1200% interest, the feds didn’t prosecute. Rather, the feds exempted the payday lenders from the 60% cap, handing it off to the provinces to deal with the issue.
Consumers face a variety of high-cost consumer lending choices variously regulated by a patchwork of provincial and territorial legislation. Regulated payday lending rates are considerably lower than when these companies first opened, but at even the lowest regulated rate of $15 for $100 borrowed for 2 weeks, consumers are still paying 390% interest – well above the 60% usury cap in the Criminal Code. So, who would ever pay such an exorbitant rate?
Consumer loans and credit cards at the mainstream banks and credit unions are much cheaper than a pay day loan. Perhaps some borrowers don’t understand just how expensive it is to take out a payday loan. Perhaps others are simply willing to pay for the convenience and better customer treatment. A 2016 ACORN study provides evidence that it is the inability to access these lower cost options combined with a pressing need to cover the cost of everyday living expenses and emergency medical expenses. The Financial Consumer Agency of Canada found similar results. The payday loan is not a choice for most customers - the payday lender is a lender of last resort for many Canadians of modest means.
The poverty penalty implicit in our current consumer finance system is unacceptable. The “haves” can access low cost consumer credit while the “have nots” pay 20 times more for each dollar borrowed just to do what we all need to do occasionally – cover expenses until the next income payment arrives.
A national strategy that ensures all Canadians have access to safe, accessible, and affordable short-term credit is straightforward to implement. In our new book Payday Lending in Canada in a Global Context (Palgrave MacMillan, 2018), we recommend the following threefold approach.
1. Enhance access to mainstream banks and credit unions with appropriate financial products. Credit unions have taken the lead in developing financial inclusion and credit products that can reduce reliance on payday loans. But their smaller size restricts the scope of these efforts. Mainstream banks must step up to offer more accessible financial products in more accessible locations by staff that are trained to work with people who have only modest financial means.
A critical piece of our recommended national strategy is the inclusion of overdraft protection on all low-cost bank accounts. We need to ensure all Canadians have access to reasonably priced, short-term credit for bridging an occasional gap between spending needs and income flows. Thanks to efforts by the Financial Consumer Agency of Canada, Canadians now have guaranteed access to low cost bank accounts. It is a simple and straightforward extension of the existing national policy to include a requirement that these low-cost accounts come with a small amount ($500) of reasonably priced overdraft protection.
2. Reinstate postal banking. Postal banking is the second action needed to enhance access to basic financial services. We can easily use the existing network of postal outlets to reinstate access to basic banking services to people across Canada. Thousands of Canadians and Indigenous Peoples in remote communities are closer to a post office than they are to a bank or credit union, and the post office has remained in the poorer areas of the cities that the banks have been leaving.
3. Ban Payday Loans. Once overdraft protection is extended and postal banking is in place, the third phase of the national strategy would be a ban on high cost loans. Reinstating a universal application of the usury cap on consumer credit costs would do it, ideally with a lower maximum interest rate of 30 - 40%.
With our threefold national strategy, basic banking services – an essential service for everyone – would become accessible, useful, and affordable for all Canadians.
Donna Borden, ACORN National Fair Banking Campaign Leader, firstname.lastname@example.org
Jerry Buckland, Menno Simons College, Canadian Mennonite University and University of Winnipeg affiliate, email@example.com
Chris Robinson, is a Fellow of the Financial Standards Planning Council and a Professor of Finance at York University in Toronto, firstname.lastname@example.org
Brenda Spotton Visano is a Professor of Economics and Public Policy at York University, email@example.com
Find out more about ACORN's fair banking campaign here.