The high cost of banking

Are you being served?

For an estimated nine million financially challenged Canadians, the answer is, “No.”

While interest rates remain pinned to historic lows, and while the country’s Big Six banks continue to rack up profit in the multibillions, a vast swath of borrowers have been cast out of the realm of conventional lending.

It isn’t news that mainstream financial institutions selectively choose to serve the credit needs of Canadians. We’re familiar with the explosive growth of so-called payday lenders across the past three decades — and the laggardly legislative moves, federal and provincial, that have somewhat limited unconscionable repayment terms and forced some increased transparency.

The regulations are insufficient and patchwork as the federal government punted the responsibility for oversight to the provinces.

But a new report from the anti-poverty group ACORN shines a light on an industry undergoing a sweeping transformation — one that needs to spur Ottawa and the provinces into action.

When we think of a cash stop outlet, we think of fast-access, small-dollar loans to be repaid upon the borrower’s next pay day. Borrow

$500 for 14 days; pay back $575.

What the ACORN report reveals is the explosive and troubling growth of instalment loans for terms running as long as 10 years and for amounts as high as $45,000.

EasyFinancial will extend as much as $15,000 in an unsecured loan with annual interest rates running as high as 46.96 per cent. The company’s aim, as stated on its website, is to become the leading consumer lender for the nine million Canadians with non-prime credit.

It’s easy to see why the company would want that, but it would be a terrible outcome for millions of people. All Canadians deserve better banking options than the egregiously high interest rates offered by alternative lenders.

Ottawa has created the regulatory environment that allows Canada’s big banks to be so profitable in the first place. In exchange, we should expect them to fulfil a mandate to provide banking services to all Canadians.

Conventional payday lenders such as CashMoney and MoneyMart promote instalment loans as a quick way to line up funds for such expenditures as home improvements and travel and leisure and a fast fix for debt consolidation. The internet, naturally enough, has provided the perfect vector so perhaps we shouldn’t be surprised by the ACORN report’s finding that instalment loans are the fastest growing credit product in Canada, making up the majority of high-cost online loans.

EasyFinancial’s parent company, GoEasy, for example, recently reported that its consumer loan portfolio had grown to $1.25 billion and forecast it would hit $2 billion by the end of 2023.

Of the borrowers surveyed by the anti-poverty group, 40 per cent said they approached banks first and were denied. That’s a problem that needs to be addressed. ACORN is rightly calling for the big banks to play a proactive role in promoting fair banking access for all.

More concretely, ACORN calls for an amendment to the criminal code to cap the maximum interest rate at 30 per cent from its current, and criminally outdated, 60 per cent. Tying a new cap to the Bank of Canada rate should offset any squawking from industry players worried about rising interest rates.

ACORN is also pushing for a national multi-jurisdictional anti-predatory lending strategy. That’s another idea that should be seized.

A reading of provincial rules and disclosure requirements reveals a mishmash of regulations and piecemeal efforts to make consumer protections more robust.

It’s not enough.

If Finance Minister Chrystia Freeland is as concerned about the pandemic plagued financial health of Canadians as she says she is, she must be watchful of how millions of borrowers are accessing credit in these times, and at what cost.

The upcoming federal budget offers a prime moment to illustrate that she is paying attention, and signal what the government intends to do about it.

Canadians deserve better banking options than the egregiously high interest rates offered by alternative lenders