Your Money: Access to basic financial services

CARP supports fair and equitable access to basic financial services, regardless of income status and age.

Having access to basic financial services at banking institutions is something the majority of us take for granted. But an increasing number of Canada’s retirees and working poor are not eligible for bank accounts or are simply alienated by mainstream financial services. Reasons vary, from low income to inadequate employment status, resulting in the inability to ensure cash flow through an account. Many people on a limited income simply cannot afford the monthly fees charged by banking institutions and yet are later forced to pay many times more for alternative financial services. Others simply have no time to get to the bank before it closes.

In recent years, cheque-cashing businesses and Payday loan outlets have grown exponentially in Canada. These alternative financial services have increased their presence in low income neighborhoods and their exorbitant fees and interest rates on loans contribute to the growing gap between rich and poor. Fees and interest charged on a two-week loan – when combined and calculated as an annualized percentage rate – ranged from 390 to 891 per cent, far exceeding the 60 per cent usury rate set out in the Criminal Code. The industry would say that they are providing a service that the banks simply are not and they need to charge these rates because of the risks they take.

Payday loan outlets are specifically criticized by anti-poverty advocacy groups for perpetuating the ‘debt-trap’ effect, where consumers initially take out a minimum loan that often increases as they become regular customers. The result is that low income people who need the most help are the most negatively affected. Meanwhile, major Canadian banking institutions do little to help those trying to help themselves and their families.

Many of the people who do not access mainstream banking services are unaware of their disadvantage. The 2005 Financial Consumer Agency of Canada survey shows almost half of the individuals utilizing alternate financial services believed the interest rates charged were not higher than those charged by financial institutions.

Having equal access to banking services would help them make better choices over the longer term.

“Major banks look down their noses at these usurious practices preying upon the working poor,” says Susan Eng, Director of Advocacy for CARP. “However, they do nothing to make their own premises and services more welcoming.”

Government initiatives

It is a criminal offense in Canada to charge in excess of 60 per cent interest per annum. The law, however, is flawed. Experts say it was never intended to apply to commercial loans and has never been used to go after a Payday lender. Existing federal legislation allows provinces to regulate lenders on their own. British Columbia, Manitoba, Nova Scotia and Saskatchewan have all passed payday lending laws, setting various caps on the interest rates. These provinces also entered into indemnity agreements with major banks which allow non-bank customers to cash cheques – regardless of the issuer – for no fees with the required identification. New Brunswick is expected to pass its own law shortly.