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A chance to make banking better

31 May 2016
The 2016 federal Budget announced a forthcoming review of Canada’s banking legislation that will be an important opportunity to strengthen financial inclusion and protection for people with low incomes in Canada.
Specifically, the federal government announced it will postpone the deadline for a mandatory 5-year review of Canada’s Bank Act until March 31, 2019 and give Finance Canada $4.2 million to consult with Canadians on potential changes to Canada’s banking and insurance legislation.

While 2019 may seem a long way off, this likely means that public consultations will begin in late 2017 and Finance officials will start work on their own analyses even sooner. More importantly, it means that there is an opportunity to take a long look at the financial inclusion and protection needs of Canadians with low incomes and to make recommendations to the government on how we can strengthen these critical aspects of Canada’s banking system.
Canada’s current Bank Act has done a lot to promote access to basic banking (deposit accounts). By best estimates, only 0.5 per cent of Canadian adults don’t have a deposit account with a bank or credit union. This is a real accomplishment by international standards, but this figure is nearly four times higher for low-income Canadians at 1.9 per cent according to Statistics Canada, and much higher according to a 2012 World Bank survey that placed it at 9 per cent for Canadians in the lowest income quintile. If we combine Canadians with no bank account and those who have a zero-balance in their bank account, this figure rises to an estimated 13 per cent of Canadians -- mostly urban poor (Buckland and Dong, 2008: 253). 
These facts suggest there is still work to do to ensure people with low incomes are fully included by our financial system. As financial markets, products and services continuously evolve, we also need to ensure that the rules governing them do too if we want to achieve an even playing field for everyone. The forthcoming review is an opportune moment to look at two key issues:
  • What products and services do people need to be fully financially included in Canada today?
  • How do we ensure access to an appropriate suite of basic products and services that foster financial inclusion and financial wellbeing for Canadians with low incomes?
Owning a deposit account is an important first step but, in today’s world, we all need access to a broader basket of financial products and services to manage our finances effectively and to participate fully in the marketplace and community life. In addition to a basic bank account, this basket includes: 
  • Affordable and secure financial transactions 
  • Affordable credit (including small dollar loans) 
  • Secure vehicles to save and build assets 
  • Expert guidance to help set financial goals, make financial plans, and solve financial problems. 
While many of us struggle at times to find the right financial products and services to meet our needs, people with low incomes have far fewer options and often lack access to safe and affordable options that meet their needs. Some of the issues they experience include:
Financial institutions have a unique role to play – and responsibilities – when it comes to delivering safe, affordable and reliable financial products and services for all Canadians, including those with low incomes. Innovative new technologies, products and services can help to achieve a safer, more inclusive financial marketplace. For example: 
  • Designing accounts to make it easier for people to avoid penalties and extra fees
  • Adopting simplified product labelling (like the Mission Asset Fund’s Financial Facts label)
  • Enabling consumers to set their own predefined spending limits. 
  • Sending text messages (e.g.  transaction alerts, balance checks) to help manage spending
  • Sending real-time messages when consumers make sub-optimal choices (e.g. using an out-of-network ATM) 
  • Limiting the number of times a consumer can be charged the same fee within a given timeframe before contacting them to offer education, information, or alternative products 
  • Offering safe, easy-to-understand options for overdrafts (e.g. line of credit or linked checking/savings accounts).
To make progress, though, financial institutions need to embrace this aspiration and regulators need to set principles and standards that reflect the fact that everyone seeking to move from poverty to opportunity must first be financially included. There is no path out of poverty that does not pass through this gate. 
For innovative examples of principles and standards, we have only to look to our American neighbours. The Compass Principles were developed by the Center for Financial Services Innovation in the United States with feedback from financial services providers, consumer advocates, policy makers, regulators, and other sector experts. The principles are:
  • Embrace inclusion to responsibly expand access.
  • Build trust by developing mutually beneficial products that deliver clear and consistent value.
  • Promote success by driving positive consumer behavior through smart design and communication.
  • Create opportunity by providing options for upward mobility.
These aim to inspire a ‘race to the top’ by financial services providers, encouraging them to think creatively about how their products can better serve their customers’ needs, as well as their own bottom line.
Also in the U.S., all four national banks have recently signed on to new National Account Standards developed by the BankOn program. Low-cost, low-fee, no-overdraft financial products that meet these standards are now available at almost 11,000  bank branches across the country including Chase, Citi, and Bank of America. Wells Fargo has committed to do the same by June 2016 across its 6,200 nationwide branches. 
All sectors have a role in strengthening financial inclusion and protection – not just our financial institutions – and many people with low incomes will require more assistance than a bank or credit union alone can provide. However, a new consensus on the minimum that people need and can expect from financial institutions to ensure their financial inclusion, is a good place to start. 
As the Bank Act Review approaches, we look forward to participating and involving our stakeholders in this important national conversation.