However, an examination of this relatively narrow issue touches on a number of quite broad social policy issues. It is not the purpose of this Project to address or resolve these complex issues, but they are an essential part of the context of this Project. The issue of cheque cashing fees cannot be understood or addressed without considering these wider trends and factors, which will be touched upon throughout this Report.
A. Poverty Reduction
Recipients of government benefits are disproportionately low-income, as are customers of cheque cashing services in general. Social assistance recipients in particular have extremely low incomes, far below Canada’s Low Income Cutoffs.
Given these low income levels, the fees charged by cheque cashing businesses may have a very significant impact on the finances of these customers. For example, a social assistance recipient who is living on $560 per month can ill afford to spend $20 of that in cheque cashing fees. An annual expenditure of $240 on cheque cashing fees could have a significant impact on access to clothing, food or other necessities.
The decisions regarding financial services made by individuals with extremely low incomes by necessity often respond to immediate needs. Pressing short-term needs for immediate cash may require individuals to make decisions that actually cost them more over the long term.
Ontario’s provincial Government has made a commitment to tackle poverty. A special cabinet committee has been established to develop a focused strategy for reducing poverty. This includes achieving better results from publicly funded programs and services, and developing effective partnerships between individuals, communities and government.
Initiatives to address fees for cashing government cheques can assist those living in poverty by ensuring that they can access more of their government benefits, encouraging stronger relationships between low-income communities and mainstream financial institutions, and ensuring that government funds aimed at benefiting the most needy do so more effectively and efficiently.
B. Regulation of Alternative Financial Services
Ontario’s mainstream financial services sector, which includes banks, credit unions, and trust and loan companies, is extensive, well-established, and significantly superintended and regulated for the benefit of individual consumers and the community as a whole. The Alternative Financial Services (AFS) sector is relatively new and is rapidly expanding and developing. It provides a range of services targeted to the financial services’ needs of low and moderate income consumers, who may be comparatively underserved by mainstream financial services. Until recently, it has been subject to very little regulation or superintendence. This has led to concerns about consumer protection, particularly given the importance of financial services to the wellbeing of consumers and the vulnerability of many of the consumers served by AFS businesses.
Recently, there has been a move across Canada to provide basic consumer protections and regulation with respect to certain alternative financial services, in particular payday loans. Ontario’s Bill 48, the Payday Loans Act, 2008, which recently received Royal Assent and is expected to soon come into force, creates a licensing, complaints and enforcement scheme for payday lenders, as well as a mechanism for setting lending rates. Similar legislation has been enacted in several other provinces.
A number of provinces, specifically British Columbia, Saskatchewan, Manitoba and Quebec, have introduced or passed legislation regulating in various ways the cheque cashing services offered by the AFS sector.
C. Low Income Communities and the Mainstream Financial Services Sector
Cheque cashing fees must be understood in the larger context of concerns regarding financial exclusion and access to mainstream financial services by low-income and marginalized communities. Most consumers do not pay high fees to cash cheques; they receive relatively low-cost services through their accounts with banks or credit unions (see Appendix F for an overview of basic banking fees).
A small but significant portion of the Canadian population is “unbanked” – that is, does not have an account with a mainstream financial institution. This number is generally estimated at between three and five per cent of the population as a whole, with a much higher estimated incidence among low-income populations, including recipients of social assistance. Individuals who are unbanked receive most of their necessary financial services either from the informal economy or from AFS businesses, thereby paying higher rates than the general populace for their financial services.
The relationship between mainstream financial institutions and low income communities was the subject of considerable discussion during the LCO’s public consultation on this project, with many social service providers and advocacy organizations emphasizing the importance of developing measures to encourage use of mainstream financial services institutions by low-income individuals.
D. Diversity and Differential Impact
Recipients of government benefits and low-income individuals in general, are not homogenous groups. Financial exclusion and fees for cashing government cheques will impact differently, depending on the communities affected. In contemplating the impact of fees for cashing government cheques, the specific needs and circumstances of the following groups should be considered, keeping in mind that individuals may be members of more than one of these groups.
Women: Approximately half the beneficiaries of the Ontario Works social assistance program are lone-parent families, most of them headed by women. This issue therefore has a significant impact on these families, which tend to be the most economically vulnerable of all families and the most likely to experience poverty over the long term.
Persons with Disabilities: There are well over 300,000 persons with disabilities who are in receipt of Ontario Disability Support Program benefits and who may therefore be directly impacted by fees for cashing government cheques. Persons in receipt of Workers Safety and Insurance Board benefits may also be affected. In particular, individuals with mental health related disabilities often face unique and substantial barriers, such as stigma or lack of legal capacity, in accessing mainstream financial services.
Aboriginal Persons: Aboriginal individuals are disproportionately likely to be low-income, whether living in urban centres or First Nation communities, and may face cultural or attitudinal barriers when accessing financial services. There are additional geographical barriers for First Nations individuals living in remote communities.
Newcomers: Newcomers to Canada are disproportionately likely to experience low-income. A recent report by the Ontario Association of Food Banks notes that one-third of all Ontarians forced to turn to food banks are newcomers. They may also face linguistic or cultural barriers to accessing mainstream financial services.
Youth: As is discussed in detail at section III.B.1, several studies have shown that users of AFS outlets in general and of cheque cashing services in particular, are more likely to be young and to have few assets or social networks to rely upon. This particularly affects young families.
E. Financial Services and New Technology
The financial services sector continues to undergo rapid technological change. The development of electronic banking through automated banking machines (ABMs), direct deposit, online banking and debit cards creates opportunities for some consumers, and challenges for others. For some, electronic banking offers increased convenience, choice and flexibility, as financial services can be accessed at almost any time, from any location. For others, who do not have the resources to access online banking, or perhaps the technological or other forms of literacy to access the new options comfortably, the decline in importance of in-person services may reduce ease and convenience.
Cheques are declining in importance as a financial instrument, as payments are increasingly made through direct deposit, online banking or debit cards. Governments have been experimenting with new forms of payment, such as direct deposit, and most recently, benefit cards, with the hope that new technology can be turned to the benefit of their low-income clientele. Nevertheless, for the foreseeable future, a significant segment of the low-income community will continue to access their government funds through cheques, and will continue to require low-cost means of accessing those funds. (For further information regarding receipt of government benefits via cheques, see section III.B.1)
F. Effective Allocation of Risks and Responsibilities
There are necessarily costs and risks associated with the transfer of funds from government to individuals through financial institutions. Most notably, there is always at least some risk of fraud. There are also administrative costs. A key question for consideration is the fair and effective allocation of these costs and risks.
Unfortunately, as there has been very little study of these costs and risks and little information about them is publicly available, they are difficult to assess realistically. Certainly, costs and risks will be greater or lesser depending on the payment option selected. For example, direct deposit and benefit cards can significantly reduce administrative costs for government, as well as opportunities for fraud.
The various methods of transferring funds allocate costs and risks differently among government, financial institutions and payment recipients. Indemnity agreements, for example, shift the costs away from payment recipients towards government (and thereby taxpayers) and to some degree financial institutions (depending on the particulars of the indemnity agreements). The cheque hold policies of mainstream financial institutions reduce risk for financial institutions, but reduce the ability of payment recipients to access funds immediately. The fees charged by AFS businesses pass the costs associated with the risks on to the consumer.
G. Informed Choice
To the degree to which consumers of AFS cheque cashing services are making informed choices among a range of financial service options, the payment of fees may arguably be considered a matter of individual preference rather than of public concern.
The notion of informed choice has two components: meaningful alternatives and sufficient information to evaluate those alternatives.
First, for a real choice to exist, consumers must have reasonable options available. For example, if in remote locations there is only a single provider of financial services, consumers have no meaningful alternatives. This brings us back to the issue of access to mainstream financial institutions touched on earlier.
The second component is that the choice must be informed. Consumers must have the necessary information and skills to make a reasoned decision. Where information is not available to consumers, for example with respect to costs of various methods of accessing their government funds and available options, or where consumers do not have the literacy skills, or the technological or financial knowledge to understand the information provided, consumers will not be in a position to make informed evaluations regarding financial services, even where meaningful alternatives exist.
With respect to fees for cashing government cheques, the question becomes whether recipients of government benefits have both meaningful alternatives and the skills and information necessary to choose between them, as only then can these consumers be said to be making an informed choice to use cheque cashing services.
Upon first glance, the issue of fees for cashing government cheques appears simple, but in reality it is the result of complex, intersecting social trends. The effects of low income levels, together with rapid evolution of technology and the financial services sector, have left some consumers behind, paying relatively high fees in order to access what most consider basic financial services. The issue is particularly pressing where these low-income consumers require these financial services in order to access government income-support. In this scenario, low-income consumers are bearing most of the risk and responsibilities attendant on the transfer of government funds: the question is whether this is a fair or effective result, and if not, how it can be addressed.