Over the years, concerns have been repeatedly voiced by organizations serving or advocating for low-income individuals about the impact of relatively expensive cheque cashing services on these Ontarians, particularly those in receipt of government assistance. Several Canadian jurisdictions have taken legislative initiatives to ensure that recipients of government cheques can access these funds at low or no cost (see Appendix C).
The issue of fees for cashing government cheques raises the following questions:
The answers to these questions are important in determining whether reform is necessary, and if so, what reforms would be both practical and effective.
The situation and the issues are complex, and in some cases, only limited information is available. During the LCO’s public consultations, it became clear that stakeholders have different perceptions, not so much as to whether the payment of fees for cashing government cheques is an issue of concern, as it was generally agreed that this is a pressing issue, but of the source of the problem. The core issue was variously characterized as the profound poverty and lack of social supports for certain segments of Ontario society; barriers to mainstream financial services; predatory practices by AFS businesses; or lack of financial awareness and poor choices by some individuals.
The following section attempts to address these issues by outlining available information regarding the users of cheque cashing services, barriers to the use of mainstream financial services and the key features of the cheque cashing industry.
A. Cost of Cashing Government Cheques in Ontario
The cost of cashing a government cheque in Ontario may vary considerably depending on the source of the cheque cashed, the institution cashing the cheque and local arrangements. Cashing a government cheque may involve low or even no charges or it may involve considerable expense.
1. Banks and Credit Unions/
Banks and credit unions will cash cheques for account holders, subject to their cheque hold policies. The major banks all now offer basic banking accounts for under $4.00 per month. Services offered with these accounts include the deposit and withdrawal of cheques (for details, see Appendix F). Account holders may therefore access cheque funds for a very minimal charge. Some banks also offer “pay as you go” fee structures for those with branch accounts: for example, Royal Bank or Bank of Montreal account holders who choose a pay-as-you-go fee option will pay $.75 to cash a cheque of any amount.
Federal government cheques of up to $1,500.00 may be cashed without fee at any bank (regardless of whether the person holding the cheque is an account holder) upon production of a piece of identification that has both a photo and a signature, or of two pieces of other acceptable identification. Federal law specifically exempts banks from cashing such cheques where there is evidence of illegal or fraudulent activity with respect to the cheque.
As well, a number of Ontario municipalities have entered into informal agreements with local banks or credit unions to facilitate the cashing of social assistance benefit cheques without charge. Under these agreements, the social services delivery agent agrees to indemnify the financial institution in cases of fraud, and in return the bank or credit union agrees to cash Ontario Works program cheques without charge, whether or not the cheque holder is an account holder, upon the production of appropriate verification. The verification required differs depending on the agreement; some require the same type of identification as is used for cashing federal government cheques, while others permit cheques to be cashed based on the presentation of a letter produced by the social service provider.
2. AFS Businesses
Government cheques may also be cashed at AFS businesses. Cheque cashing businesses charge a range of fees for this service. Usually fees include both a flat “item” or “transaction” charge and a charge calculated as a percentage of the value of the cheque being cashed. Generally, there is no difference in the fee charged for cashing government, payroll or personal cheques. For example, as of July 2008, Money Mart and Cash Money each charged an item fee of $2.99 plus a percentage fee of 2.99 of the face value of the cheque, while Cash House charged $1.49 plus 2.49%. The fee for cashing a $500 cheque would therefore be $13.94 at Cash House and $17.94 at Money Mart or Cash Money. A lone mother of two young children cashing her monthly social assistance and Ontario Child Benefit cheques for $1,510 at Money Mart or Cash Money would pay $48.14 per month to cash her cheques, for a total annual charge of $577.67 per year.
3. Informal Cheque Cashing
Finally, government cheques may be cashed as an ancillary service by retailers such as bars or convenience stores, or occasionally by landlords. Data on such services are limited. However, based on information provided to the LCO by stakeholders, the fees for such informal cheque cashing services may vary greatly, from minimal to exorbitant. In some cases, the cheque casher will require that the funds from the cheque be spent in-store. This practice appears to be relatively rare in urban centres in Southern Ontario, but may be quite common in remote communities, particularly in Northern Ontario.
B. Impact of Cheque Cashing Fees: Users of Cheque Cashing Services and Recipients of Government Benefits
Who uses cheque cashing services? In attempting to assess the impact of fees for cashing government cheques, it is helpful to consider available information about three groups: users of AFS businesses in general, users of cheque cashing services and those who are cashing government cheques in particular. There has been significant research on users of payday loan services, some research on persons who use cheque cashing services, and very little research on persons cashing government cheques.
These groups overlap: payday loan users also frequently use the cheque cashing services provided by AFS businesses, for example. However, they are certainly not identical. By virtue of having employment income, payday loan customers and individuals cashing payroll cheques differ in important respects from persons who rely on government cheques for subsistence. The Canadian Payday Loan Association (CPLA) prohibits members from providing payday loans on the basis of social assistance payments; however, it appears that some organizations that are not members of the CPLA do provide such services to social assistance recipients.
Further, it is important to remember that the provincial Government issues a variety of cheques and not all persons receiving government cheques are low-income, while some persons cashing payroll cheques may very well be.
1. Users of AFS Services
A number of studies and surveys have examined the characteristics of customers of AFS businesses, usually with a focus on payday loan services.
Use of AFS outlets is relatively rare among Canadians. A 2005 survey conducted by Ipsos-Reid for the Financial Consumer Agency of Canada (FCAC) found that only seven per cent of Canadians have used an AFS business.
Studies agree that users of AFS businesses overall are more likely to be young and low-income. The Ipsos-Reid survey found that AFS users were more likely to be young, low-income and urban (the latter likely reflecting the current distribution of AFS locations). A Statistics Canada study of Canadian payday lending patterns based on the 2005 Survey of Financial Security found that young families (families with the major income recipient between the ages 15 and 24) were three times more likely to have used payday loans than families whose major income recipient was aged 35 to 44. Use of payday loans was also found to be associated with lower levels of education. Low-income families were twice as likely to have used payday loans. Particularly vulnerable were families with bank balances of $500 or less, as well as families that did not have credit cards. Almost half of those using payday loans reported that they had no one to turn to for financial assistance in the face of financial difficulties.
Users of AFS services are also disproportionately likely to be found in Northern regions, at almost double the rate of Canadians in other regions (13 per cent, compared to seven per cent).
According to the Ipsos-Reid survey, the most frequently used alternative financial service was cheque cashing (57 per cent of users), with 25 per cent of AFS customers using payday loans services. Surprisingly, one-quarter of AFS customers reported using these businesses to cash a federal government cheque – which may be cashed without charge at any bank upon presentation of appropriate identification. Supporting these results, a 2006 survey found that fully 31 per cent of all those using cheque cashing outlets over the previous year did so in order to cash a federal government cheque. Neither survey asked users about cashing provincial or municipal government cheques; presumably this would also be a significant proportion of the cheques cashed. The 2006 survey went on to note that 40 per cent of those using non-bank services to cash cheques did not know that the fees were higher than those offered by mainstream financial institutions.
The Ipsos-Reid survey found that AFS consumers cashing federal government cheques were substantially more likely to be young and low-income than other AFS customers (who already are more likely than the average to be young and low-income).
Interestingly, evidence given in a hearing before Manitoba’s Public Utilities Board in 2007 indicates that a very substantial proportion of persons cashing cheques through Money Mart have no account with a bank or credit union – perhaps as many as one-third of these customers.
2. Impact on Recipients of Government Cheques
Government cheques may be issued for a variety of purposes, including employment and payment for business services. Wages to Ontario public servants are for the most part paid through direct deposit and therefore make up a relatively small proportion of cheques issued. For the fiscal year 2007-2008, the Ontario government issued 693,861 cheques for direct operating expenses.
There are also a number of benefit programs for which cheques may be issued. In the fiscal year 2007–2008, the Ontario government issued 1,732,426 cheques related to transfer payments. The top programs for which cheques were issued were as follows:
1. Ontario Child Care Supplement (OCCS): This program provides low-income Ontario families who have children under the age of seven and who meet other eligibility criteria with a monthly supplement to assist with child care costs. The program is integrated with the federal Canada Child Tax Benefit. The OCCS is currently in transition with the introduction in July 2008 of the Ontario Child Benefit (OCB), and will gradually be phased out.
2. Ontario Disability Support Program: This program is fully described in the following section. Note that cheques for the Ontario Works social assistance program are not included here among cheques issued by the Ontario Government, as those cheques are issued by service delivery agents.
3. Vehicle Plate Refunds: Drivers who move out of Ontario and have more than three months remaining on their license plate validation may apply for a refund.
4. Guaranteed Annual Income Supplement (GAINS): This program provides a guaranteed minimum income to Ontario seniors, in addition to the federal Old Age Security pension and Guaranteed Income Supplement, through monthly payments of up to $83.00 per month.
5. Northern Ontario Travel Grants: These travel grants are funded by the Ministry of Health and Long Term Care to help defray the transportation costs for eligible residents of Northern Ontario who must travel long distances within Ontario or Manitoba to receive medically necessary insured specialty services that are not available locally.
6. Integrated Tax Administration System: The Ministry of Revenue administers Ontario’s tax statutes, tax credits, and tax benefits (such as GAINS, the OCB, and the OCCS).
Of these transfer payments, the Northern Ontario Travel Grants, Tax Administration payments and Vehicle Plate Refunds are occasional payments, and apply across all income groups. The OCCS, GAINS and social assistance payments, however, are targeted to low-income groups, are recurring payments, and are essential to their recipients’ economic security.
LCO consultees overwhelmingly focused their concerns on recipients of social assistance benefits, emphasizing the limited income and vulnerability of this group of Ontarians. Further information on Ontario’s social assistance programs and the impact of cheque cashing fees on this group is therefore provided below.
In the Province of Ontario, social assistance is a shared responsibility between the provincial and municipal governments. Ontario provides two main social assistance programs: Ontario Works, and the Ontario Disability Support Program (ODSP). The Ontario Works program is the general social assistance program, and is governed by the Ontario Works Act, 1997. Ontario Works is delivered by Municipal Service Managers, District Social Service Administration Boards (SSAB), and First Nations communities, the governments actually issuing the cheques and overseeing the day-to-day administration of the program. The ODSP provides income support and benefits to persons with disabilities and their families who are in financial need. This program is delivered by the Ministry of Community and Social Services. 
As of March 2008, there were 372,018 beneficiaries of the Ontario Works social assistance program, approximately half of them (187,481) members of sole-support parent families, approximately one-third (108,638) single individuals, and the rest couples without children. There were 332,627 beneficiaries of the ODSP, over half of whom are single individuals. There were also 22,420 families receiving the Assistance for Children with Severe Disabilities Benefit. In total, in March 2008, almost three-quarters of a million Ontarians were receiving social assistance benefits.
It is difficult to estimate how frequently social assistance recipients use cheque- cashing outlets, although certainly social service providers believe it to be a very common experience. The Ministry of Community and Social Services reported to the LCO that although a substantial proportion of social assistance payments are provided electronically (four million payments per year), it produces over three million social assistance cheques each year. The Waterloo SSAB estimated that approximately 50 per cent of Ontario Works recipients in that municipality were currently receiving payments via cheque; in Thunder Bay, this figure was 80 per cent. The Thunder Bay SSAB surveyed a sample of cheque recipients for the month of March 2008, and found that 36 per cent of all cheques issued were cashed at an AFS outlet and seven per cent at other non-bank locations, such as convenience stores or pawn shops. These figures indicate that a very sizeable number of social assistance recipients may be regularly paying significant fees in order to access their government benefits.
The deep poverty of social assistance recipients may itself be one of the reasons for the use of cheque cashing services. The Thunder Bay SSAB submitted that the root cause of the use of payday loan and cheque cashing outlets is poverty:
Social assistance rates are currently inadequate to meet the basic needs of Ontarians that require support. The reduction of Ontario Works and ODSP rates by 20% and the subsequently declining rates (relative to inflation) have created a situation of dire poverty for many Ontario children and families.
As a result of their low income levels, persons dependent on social assistance urgently require access to their funds as quickly as possible; in these circumstances, the immediacy of access provided by cheque cashing outlets becomes of prime importance.
In terms of benefits, a single person receiving assistance through Ontario Works is currently entitled to a maximum of $560 per month ($6,720 annually), combining shelter and basic needs allowances. A single person receiving ODSP is entitled to $999 per month ($11,998 annually). A lone parent with one child under the age of 12 can receive a maximum of $1,180 per month ($14,160) under Ontario Works (when combined with the OCB) or $1,680 per month ($20,160 annually) from ODSP (when combined with the OCB). For context, the 2007 Low Income Cutoff pre-tax for a single person was $14,914 for rural areas and $21,666 for large urban areas; the 2007 Low Income Cutoff pre-tax for a lone parent with one child was $18,567 for a rural area and $26,972 for a large urban area.
Many submissions pointed out that, given the extremely low incomes of recipients of social assistance benefits, payment of fees for cashing these cheques is oppressive. The Public Interest Advocacy Centre stated that:
Considering that the majority of persons using these services are vulnerable low-income consumers, such as parents on welfare or the disabled, this clearly suggests that the added fees are both oppressive and regressive… This is further substantiated by a National Council of Welfare Report in 2005 which found that welfare incomes across Canada continue to be well below the poverty line, coming in at less than two-thirds of the poverty line for all households in all jurisdictions in 2005 … With the already low income these individuals receive, it is more than illogical for them to surrender a substantial portion of their social assistance cheques for added fees.
A single person receiving $560 per month ($6,720 per year) in benefits, who spends $20 per month, or $240 per year to cash those benefits is therefore spending over the course of a year approximately two weeks worth of his or her benefits simply in order to access them. Because the budget is very small to begin with, the impact of cheque cashing fees on the ability to afford the necessities of life may be large.
C. Financial Capability and Access to Information
A recurrent issue in discussions regarding AFS businesses is the degree to which consumers who use these services are exercising an informed choice. One of the purposes of Ontario’s recently passed Bill 48, the Payday Loans Act, 2008, (see Appendix B) was to ensure that consumers have the appropriate information to understand the risks and responsibilities associated with payday loans. Similarly, it is appropriate to ask the extent to which users of cheque cashing services, and in particular, individuals cashing government cheques, understand the costs of this service and the alternatives available.
The ability to understand and apply information about financial issues and to plan for the future may have a significant impact on an individual’s life. As financial products, services and options are becoming more and more complex and access to credit becomes easier, financial literacy is becoming increasingly important. As the FCAC states:
To be able to access and effectively use the most basic financial products and services, such as chequing or savings accounts, credit cards, debit cards, on-line banking, consumers must have sufficient levels of knowledge and must know their rights.
Financial capability is important for low-income individuals, who have only a small margin for error as they can ill afford to lose any potential financial benefit. However, few organizations provide financial advice to low-income individuals.
It is difficult to assess general levels of financial capability in Canada. A 2006 survey conducted for the FCAC found that while a large majority of survey respondents felt informed and confident that they had the required knowledge to make ordinary financial decisions, a majority acknowledged that most information about financial matters was hard to understand, and over 40 per cent indicated a need for further education. A sizeable proportion of financial consumers do not feel informed about their rights with respect to financial institutions. Three-quarters of respondents did not know whether it costs something to cash a federal government cheque: only 22 per cent knew that it is free of charge.
Levels of financial capability may well be lower among low-income individuals than in the general population. Social service providers that the LCO consulted emphasized that social assistance recipients often have complex needs and may receive inadequate support to meet those needs. The Thunder Bay SSAB stated that many Ontario Works clients are underserved by the mental health, addictions and development services systems and require greater supports than are currently available:
The assumption is generally made that persons in receipt of social assistance are capable of independent living and are able to make rational choices concerning their banking arrangements; however, we have found many clients have fallen through significant cracks in the health care system and are struggling to cope with basic activities of daily living. For these clients, making and maintaining banking arrangements would require third party support and guidance.
Government and non-profit social service organizations that the LCO met with during its consultations indicated that some of their clients face challenges with technological, financial and basic literacy. They may have difficulty accessing and understanding information about bank charges and services, and in understanding the relative costs and services of AFS and mainstream services. For these individuals, technology like ABMs and debit cards may be a barrier rather than an opportunity, and print information regarding financial services and options may be of little help. In these situations, the type of respectful personal assistance potentially rendered by tellers is crucial.
The LCO heard repeatedly that low-income individuals are confused about the costs and services associated with basic banking services, and may prefer cheque cashing services because charges are up-front, one-time and easy to understand.
The LCO also heard that the front line staff in organizations assisting low-income individuals are themselves often not particularly confident of their financial literacy skills and have insufficient knowledge of rights and services for low-income individuals. They are therefore concerned that they are often unable to provide clients with the information and advocacy that they require with respect to financial services. As Professor Jerry Buckland points out, because of the way that various welfare programs are structured, such that current and future welfare payments change as one’s income rises, there are particular challenges in providing helpful financial advice to low-income people. Bank staff must be aware of these challenges if they are to provide advice that meets the needs of low-income individuals.
Some communities, such as newcomers or Francophones, may face additional linguistic and cultural barriers in attempting to access information about financial services. The Centre Francophone de Toronto pointed out that cultural and linguistic barriers exacerbate the other barriers that their clients face in accessing mainstream financial services:
Our clients must overcome many barriers, including those of language, culture shock and mostly financial concerns. They find it harder and harder to integrate since the labour market is out of their reach. Most of them rely on nothing else but welfare cheques and financial assistance from the government. Since they can not open a bank account either because they do not know their rights or due to bank requirements, they have to turn to payday loan or cheque cashing services. 
Centre Francophone de Toronto
The Ontario Federation of Indian Friendship Centres indicated that it is important to have culturally appropriate services available for Aboriginal persons. The Nishnawbe-Aski Legal Services Corporation told the LCO that for information about financial services and options to be meaningful, it must be presented in the language of First Nations communities, and with respect and understanding for cultural and historical differences.
Persons with mental health issues may also face unique barriers to information. The Centre for Addiction and Mental Health (CAMH) pointed, as an example of what can be done to overcome such barriers, to the pioneering work of the Provincial Alliance Credit Union, which has partnered with CAMH to provide accessible financial services to this community.
The FCAC has undertaken significant initiatives to understand the financial information needs of Canadians, including low-income Canadians, and to find effective methods of providing this information. They have, for example, undertaken surveys of levels of consumer awareness of financial services options and their rights and responsibilities as consumers, partnered to produce a 2005 Symposium on Financial Capability, developed plain language and interactive tools to increase consumer awareness, and made efforts to educate financial institutions on their responsibilities.
D. The Mainstream Financial Services Industry
As noted earlier, most Canadians do not pay fees, and certainly do not pay high fees, to obtain funds transferred by cheque: through their accounts at mainstream financial institutions, they receive their funds at no or very low charge. Why then do many individuals, including a significant number of recipients of government benefits, use AFS businesses in order to receive their funds? The question is especially pressing because, as is clear from the previous section, those individuals paying significant cheque cashing fees are often those the least able to afford these costs. To fully understand the issues surrounding fees for cashing government cheques, it is important to look at not only the AFS sector that provides formal cheque cashing services, but also the broader context of the mainstream financial services sector where most Canadians receive services.
Canada, and Ontario, has a strong mainstream financial services sector that for the most part serves consumers well; however, recent years have seen rapid growth in the AFS sector – a trend that has been the source of considerable comment and conjecture. There are Ontarians who use both mainstream financial services and AFS, and others who use only one or the other. The following section explores some key trends and issues that have been identified with respect to the mainstream financial services industry.
The mainstream financial services sector is an intricate web of institutions, regulatory bodies, laws and services. As a result of its vital role in the economy and in the lives of consumers, the financial services sector in Canada and Ontario has in general been heavily regulated and superintended. Due to the complex, multifaceted and frequently shifting policy considerations relating to financial services, legislation and policy in this area are also complex and ever changing.
Ontarians currently access mainstream financial services through a range of institutions, including banks, credit unions, trust companies and loan companies. In Ontario, the financial services sector is dominated by banks, and in particular by the “Big Five” that have their headquarters in the province: Royal Bank, Toronto Dominion, Scotiabank, Bank of Montreal and the Canadian Imperial Bank of Commerce. The banking industry is heavily regulated in Canada and subject to significant superintendence. For example, the FCAC has a mandate to monitor all banks and federally incorporated or registered insurance, trust and loan companies and cooperative retail associations for compliance with federal legislation and to promote the adoption of policies that ensure consumer protection.
Credit unions have a long history in Ontario, developing in the early 1900s as a response to difficulties consumers and farmers faced in obtaining credit. Modelled on the cooperative system, credit unions are established by consumers for the purpose of meeting their needs. Because of the dominance of the banking industry in Ontario, the credit union movement has a relatively low level of visibility, although it plays a vital role in providing financial services, particularly in rural and Franco-Ontarian communities. In urban centres, credit unions often are associated with specific ethnic communities or occupational groups. Currently, approximately 13 per cent of Ontarians have a membership with a credit union, and credit unions have about five per cent of the deposit-taking market in Ontario. Credit unions are generally provincially regulated, and like banks, are subject to significant regulation and superintendence.
The last few decades have seen very rapid change in the financial services industry. When considering cheque cashing, perhaps the most important development has been the rapid technological change that has resulted in the explosion of electronic banking. This includes the introduction and widespread adoption of credit and debit cards; the ability to conduct financial transactions online, over the telephone, or most commonly via ABMs; and the continued growth in direct deposit programs. The growth in electronic banking has implications for access to financial services and for the role of cheques in transferring funds (and the consequent necessity for cheque cashing services).
Rapid changes in the financial services industry have increased consumer choice, but have also led to increased complexity and sometimes to confusion on the part of consumers. There is a plethora of institutions, services and options available, requiring greater sophistication on the part of consumers. While the rapid pace of innovation has increased ease of access for many, the LCO heard from organizations working with low-income individuals that consumers who are not technologically literate may find themselves left behind. Recent surveys by the FCAC found that a sizeable proportion of financial services consumers do not feel well informed about their rights and responsibilities, a majority felt that most information about financial matters is hard to understand, and a substantial minority felt powerless in their dealings with financial institutions.
It has been noted that the public, for a variety of reasons, has higher expectations of financial institutions, and in particular of banks, than they do of other businesses, and tends to see them as shouldering a higher degree of public responsibility. Over the past ten years in particular, there have been a number of reforms to the banking system to address public concerns, including enhanced requirements regarding public disclosure and notification, access to services and protection of privacy and personal information.
2. Use of Mainstream Financial Services: Patterns and Barriers
A number of the submissions to the LCO emphasized that the issues associated with cheque cashing fees cannot be understood or addressed without considering the relationship between low-income communities and the mainstream financial services sector, and the nature and impact of financial exclusion. This involves a consideration of broad issues of income disparity, economic marginalization, and the role of financial services in individual and community well-being.
This Project deals with a relatively discrete issue: the effective transfer of funds from government to individuals. It is beyond the scope of this Project to deal with all of the broad concerns related to financial exclusion and access to financial services. However, the issue at hand cannot be understood and addressed without considering this broader context.
As outlined in the previous section on users of cheque cashing services and recipients of government cheques, these individuals are disproportionately likely to be both low-income. To understand the reasons for the use of cheque cashing services, the impact of cheque cashing fees and the practicalities of potential reforms, it is essential to understand the relationship between these individuals and the mainstream financial services industry. This section briefly outlines some of these elements.
Financial Exclusion and the Unbanked/Underbanked
The term “financial exclusion” has been variously defined, but generally speaking, an individual may be considered to be financially excluded when he or she lacks adequate access to, or information about, basic goods and services provided by the financial services sector or government. In Canada, financial exclusion has been mainly considered through the phenomenon of “unbanked” or “underbanked” individuals – that is, those who have no or insufficient access to mainstream financial institutions such as banks or credit unions. Persons who are unbanked or underbanked may use either informal financial services (such as those provided by family and friends, or by grocery stores and landlords), or AFS institutions like cheque cashers, payday lenders and pawnshops.
The mainstream financial services sector provides well for the vast majority of Canadians, who have little or no difficulty in accessing financial services. Trends towards electronic banking have actually increased ease of access for many. The number of unbanked Canadians is hard to measure with accuracy, given that those who are most likely to be unbanked are also those who are most difficult to reach by standard survey methodology. Most estimates place the percentage of unbanked Canadians at between three and five per cent – that is, about one million Canadians. This is relatively low, compared to, for example, the United States, where the figure is generally estimated to be at minimum ten per cent.
While the number of unbanked or underbanked in Canada is relatively low, for these individuals, financial exclusion may have a significant impact. Individuals who are unbanked or underbanked may pay high costs for basic financial transactions, are vulnerable to unregulated or predatory practices, and miss out on access to services and benefits that would be of material benefit to them. The cumulative effects of financial exclusion may ultimately reinforce social and economic marginalization. Research for the Task Force on the Future of the Canadian Financial Services Sector found that a strong majority of Canadians viewed access to basic banking services as essential. Access to cheque cashing services was viewed as essential or important by 95 per cent of Canadians, and access to a basic chequing account was viewed as essential or important by 85 per cent of Canadians.
Unbanked individuals are, not surprisingly, more likely to use cheque cashing services. For example, note the estimate provided by Money Mart during Manitoba’s hearings on setting fees for cashing government cheques, that up to one-third of their cheque cashing customers are unbanked. 
Not all Canadians are equally likely to be unbanked. For example, the percentage of unbanked individuals may be significantly lower in Quebec than in the rest of the country and higher in northern Canada.
There may also be religious or cultural barriers to mainstream banking services. For observant Muslims, religious requirements forbidding, for example, the payment or receipt of interest may mean that they do not have access to appropriate financial services, and may therefore find themselves unbanked or underbanked. Recently, there has been growing interest on the part of financial institutions in developing sharia-compliant products and services.
Most importantly, financial exclusion is closely associated with low income. Some have estimated that as much as 15 percent of low-income individuals may be unbanked. A 1995 Environics study found that eight per cent of individuals with incomes below $25,000 did not have access to banking services. In 1998, the government of Saskatchewan estimated that between 55 and 60 per cent of its social assistance caseload was unbanked. While there do not seem to be any recent studies of levels of financial exclusion among low-income Canadians, the social service agencies that the LCO met with confirmed that in their experience, low-income individuals continue to be disproportionately likely to lack a relationship with a mainstream financial institution.
In recent years, there have been significant efforts to make it easier for low-income individuals to open bank accounts. The major banks all now offer low-cost basic banking services. A basic bank account offering standard withdrawal, transfer and bill payment services costs less than $4.00 per month. The requirements for opening a bank account in Canada were simplified in the 2003 Access to Basic Banking Services Regulation. Generally, two pieces of identification from a prescribed list must be provided, although one piece may be sufficient if the identity of the person seeking the account is confirmed by a client in good standing with the bank or an individual in good standing in the community where the bank is located. Additional identification may be required if bank staff have reason to question the identity of the person seeking to open an account.
Banks are not required to open bank accounts in certain circumstances, such as where it is believed that the individual plans to use the account for illegal or fraudulent purposes; opening the account would subject other customers or employees to physical harm, harassment or abuse; the individual refuses to consent to the bank verifying the identification presented; or the individual has a history, within the previous seven years, of illegal or fraudulent activity in relation to financial services providers. Where a bank refuses to open an account, it must give written reasons and provide information on how to contact the FCAC.
The FCAC is responsible for monitoring the compliance with access to banking requirements and regularly undertakes “mystery shopping” expeditions to assess progress. In 2004-2005, mystery shoppers were successful in opening a bank account in 84 per cent of their attempts. The FCAC noted that the main reason for refusal to open a bank account was uncertainty on the part of bank employees about identification requirements, and in a number of instances, banks required identification in excess of what was required by the Access to Basic Banking Regulations. The FCAC also noted the very low rate of compliance by the banks with requirements to provide written reasons for refusal.
Why are low-income individuals disproportionately likely to be unbanked? A number of reasons have been offered. The LCO heard from a number of organizations working with low-income individuals that their clients may find bank accounts superfluous, as they are left with a zero balance at the end of each month. At very low levels of income, individuals by necessity may operate in a cash economy, focused on immediate, day-to-day needs, rather than on planning for the future. Some individuals find that having their monthly cash in hand assists them with their survival budgeting. Other issues include attitudinal barriers, identification requirements, cheque hold policies, hours of operation, and location. The following sections outline each of these potential barriers to opening and maintaining an account with a mainstream financial institution.
In order to prevent fraud, personal identification is required both to open a bank account and to cash a federal cheque at a bank where one is not an account holder.
Efforts have been made to reduce and simplify the requirements for identification. Under the 2003 Access to Basic Banking Services Regulations, persons seeking to open a bank account must present two pieces of identification. At least one of the pieces of identification must be from the following list:
The second piece of identification may be from the above list or may be:
· an employee I.D. card,
· a debit or bank card with name and signature,
· a Canadian credit card with name and signature, or
· a current foreign passport.
If a second piece of identification is not available, the person seeking to open the account can have someone known to the bank confirm his or her identity.
Many of these documents are expensive to obtain (e.g., driver’s license, passport, birth certificate), require complex paperwork or pre-suppose access to financial resources (e.g., employee I.D., debit cards, credit cards). As well, persons who are leading transient lifestyles or who are struggling with mental health issues may find their identification lost or stolen, and if they do not have a fixed address may have difficulty in replacing identification. Not surprisingly, low-income individuals may find they have insufficient identification to open a bank account. Persons without immigration status are also highly unlikely to be able to meet the above identification requirements.
The 2007 Street Health Survey of 368 homeless adult Torontonians, conducted for the City of Toronto between November 2006 and February 2007, found that 50 per cent of those surveyed did not have a Social Insurance Number, and 29 per cent did not have proof of citizenship (such as birth certificate, citizenship card or record of landing).
The Nishnawbe-Aski Legal Services Corporation told the LCO that older members of First Nations communities may have particular difficulties in accessing identification. Some individuals never had their births registered. Others were “renamed” upon arrival in residential schools, and therefore have inconsistent identification.
A number of studies have identified difficulties in accessing identification as a barrier to financial services. The Task Force on the Future of Financial Institutions recommended that governments take steps to ensure that all Canadians have access to low-cost identification, in order to improve access to financial services. The LCO heard widespread frustration and concern about the lack of low-cost, accessible identification for Ontarians.
Because lack of identification may create a barrier to accessing many services, several non-profit organizations run “identification clinics” to assist clientele in obtaining identification. As well, municipal social assistance programs often have initiatives to help individuals to access identification, either through funding the cost of obtaining identification, or by providing administrative assistance. Social service agencies may also develop partnerships with local credit unions or banks to provide letters of verification of identity to supplement or substitute for inadequate identification.
Several provinces and territories provide individuals who do not need or cannot meet the requirements for a drivers’ license with a low-cost alternative photo identification that qualifies under the Access to Banking Regulations. For example, Saskatchewan Government Insurance provides a $10.00 photo identification card and New Brunswick provides a similar card for $9.20 (a complete list is available at Appendix E).
Currently, Ontario does not provide any low-cost alternative photo identification for individuals who do not have driver’s licenses that meet the requirements of the Access to Banking Regulations. However, in June 2008, the Ontario government introduced Bill 85, the Photo Card Act, 2008. As part of a set of broader initiatives to provide Ontarians with an alternative to the passport and to encourage cross-border travel, the Bill would permit the Ministry of Transportation to issue photo identification cards to Ontario residents who do not hold a driver’s license. The Bill would also enable the Ministry to issue enhanced photo identification cards that include citizenship information, which will facilitate cross-border travel. Ministry documents indicate that, should the Bill pass, the photo cards are expected to be phased in by 2010. It is anticipated that the cost of the basic photo identification card will be $35.00, and the cards will be valid for a period of five years.
In most parts of Canada, persons seeking to open an account may also present their provincial health care card as identification. Since the passage of the Ontario Health Cards Number and Control Act in 1991, Ontario has placed restrictions on the use of health cards as identification. Currently, section 34(4) of Ontario’s Personal Health Information Protection Act (PHIPA) prohibits any person from requiring the production of another person’s health card, unless that person is providing provincially funded health resources or if a third party is collecting the information for purposes related to the provision of provincially funded health resources to the card holder. It also prohibits the collection or use of health numbers by persons who are not health care custodians. At the time of the passage of the Health Cards Number and Control Act, the Ontario government indicated that the right to individual privacy and confidentiality of health information outweighed the convenience to business and other organizations of “having yet another way to establish the identity of individuals”. As well, the government was concerned to avoid the development of a pattern of usage of health cards for purposes other than their intended use: the delivery of health-related services.
While PHIPA does not prevent individuals from voluntarily producing their health cards as identification, because financial institutions cannot record health numbers for identification purposes, financial institutions do not collect or use the health card for the purpose of establishing identity. As the provincial health card is a free and near universal photo identification, the Canadian Bankers Association has pointed to this prohibition on the use of the Ontario health card as identification as an unintended barrier to access for low-income persons.
Many organizations suggested that restrictions on the use of health cards as identification be eased; others, however, felt that there were privacy concerns related to the use of health cards, and suggested that it would be more appropriate to explore other means of providing Ontarians with access to low-cost identification.
Cheque Hold Policies
Account holders generally may cash cheques at their bank or credit union, subject to cheque hold policies. In order to prevent fraud, financial institutions may place a hold on funds deposited by cheque to allow time for the cheque to clear. For example, the institution may need to make sure that the person or company who wrote the cheque has enough funds to cover the cheque; to make sure that the person or company who wrote the cheque has not put a “stop payment order” on the cheque; and to verify the cheque details with the person or company who wrote the cheque to ensure that it has not been altered. Under the Cheque Holding Policy Disclosure (Banks) Regulation, banks are required to provide account holders with information regarding their cheque hold policies.
Cheque hold policies vary from institution to institution. Banks and credit unions may apply different hold periods depending on the source of the cheque – for example, if it is drawn on the same bank, on another Canadian financial institution, on an American institution, or on a foreign institution. Institutions may also consider whether or not a cheque is ‘encoded’. The customer’s ‘creditworthiness’ may be taken into account – for example, the length of time that the customer has been an accountholder with that bank, the current status of the customer’s existing accounts, and the customer’s credit history with the bank.
Efforts have been made to reduce the length of holds placed on cheques. The Canadian Bankers’ Association indicated to the LCO that:
The consultation paper suggests that bank cheque hold policies are one of the factors that influence consumers’ use of alternative cheque cashing services such as payday lenders and pawnshops. However, it should be noted that less than one per cent of deposit accounts are subject to cheque holds. Banks may apply a hold on funds deposited by cheque to manage risk. If they don’t, banks are giving the depositor immediate access to the funds despite the fact that the cheque settlement process takes several days or longer to complete. Since April 2007, banks have committed to limiting the maximum hold period on cheques to seven days. The hold period will be further reduced to four days once electronic imaging and electronic settlement is fully implemented.
As the Canadian Payments Association will begin rolling out cheque-imaging across the country in the fall of 2008, it is anticipated that cheque-clearing times will continue to improve.
However, many stakeholders emphasized to the LCO that cheque hold policies are a significant barrier for low-income individuals, who are generally operating under very tight cash-flow requirements and cannot wait to access their funds. As the Thunder Bay SSAB stated:
By the end of the month, many Ontario Works families simply cannot wait for three days for a cheque to clear, due to a simple lack of funds. Although it makes little rational/economic sense to persons with money left in the bank at month’s end, the paying of a high fee to immediately cash an inadequate cheque becomes an essential and self-perpetuating practice for the poorest of families.
The LCO heard from organizations working with low income individuals that, while in practice cheque hold periods may in most cases be quite short, where individuals hear that holding periods may be “up to” five days, the risk that they could be without access to their funds for the maximum period of the hold may act as a deterrent to depositing the cheque. It was the opinion of many consultees that cheque holds, together with identification requirements, are the two most significant issues limiting the use of mainstream financial institutions by low-income individuals.
A survey conducted for the FCAC in late 2006 reported that nine per cent of respondents holding a bank account reported problems with their institution’s policy of holding funds when depositing a cheque.
In our society, negative attitudes towards low-income individuals, and in particular towards those in receipt of social assistance, are widespread. Like all of us, low-income individuals want to be treated with respect and dignity. A significant number of organizations working with low-income Ontarians informed the LCO that their clients tend to find mainstream financial institutions intimidating and impersonal, and therefore may be reluctant to deal with them. As well, several organizations indicated to the LCO that there is a significant need for sensitivity training for front-line staff in mainstream financial services on issues related to disability (particularly mental health issues), racism, newcomers and low income.
A recent study on the use of AFS businesses in Winnipeg reported concerns about lack of respectful and courteous treatment of low-income individuals by some mainstream financial institutions. The study stated that respondents “commented on feeling alienation and discrimination; they often expressed feeling mistreated and disregarded by the bank tellers because they received social assistance.” Similarly, another recent survey regarding the financial service choices of residents in low-income inner-city neighbourhoods in Toronto, Vancouver and Winnipeg reported that Toronto survey respondents were significantly more likely to feel disrespected at mainstream financial institutions than at AFS businesses, describing mainstream banks as aloof and uninterested in providing help.
As well, a consultee whose organization provides financial literacy training and support for low-income Ontarians informed the LCO that bank staff are often unaware of the entitlements and circumstances of low-income individuals, and may provide inappropriate or inadequate advice to individuals seeking assistance; this individual recommended that staff of financial institutions also receive training on resources and financial planning for low-income individuals.
In the February 14, 1997 Agreement Between the Federal Government and the Major Banks on Access, the banks committed to remind staff of the need for all customers to be treated with fairness and respect, and to provide more information and training to low-income groups to help them become more knowledgeable about and comfortable using banking services.
While credit unions, as community driven organizations, could play a significant role in reaching out to low-income communities, given their relatively low profile in Ontario, this potential is currently relatively unrealized.
There are a number of banks and credit unions that have, on a local basis, made efforts to reach out to low-income and marginalized communities. The Royal Bank’s two Toronto “Cash & Save” outlets are an excellent example. Located in low-income communities, these institutions are associated with local organizations serving low-income communities, and provide accessible and relevant storefront services, such as low-cost cheque cashing and money orders. As noted earlier, the Provincial Alliance Credit Union has partnered with CAMH to provide financial services to clients of that organization and operates within that institution. Also of interest, some banks in northern Ontario communities have engaged Aboriginal outreach officers to develop connections with the local Aboriginal communities.
Hours of Operation
There has been a general move away from in-person banking and towards electronic banking through ABMs and online banking. For many Canadians, financial services are more accessible than ever, as technology enables them to access their accounts and carry out transactions virtually 24 hours per day. A recent survey by the FCAC found that almost half of the respondents used online banking, and 94 per cent had a bank debit card. For these consumers, access to physical bank branches has diminished in importance.
Generally speaking, most bank branches are open only on a very limited basis on evenings and weekends, although the Canadian Bankers Association indicated that many branches are extending their hours and opening on Saturdays and even Sundays in order to meet customer needs.
For individuals who are unable to use technology to access financial services, whether because they cannot afford the technology or for other reasons, access to in-person financial services remains vital. The LCO heard from some community organizations that for these individuals, the limited hours of service offered by the majority of mainstream financial service businesses outside of regular business hours may be problematic.
Garnishment and Set-Off
The Ministry of Community and Social Services and some SSABs informed the LCO that some low-income individuals may be deterred from using direct deposit, or from maintaining any accounts with banks or credit unions, by concerns that their monies may be garnisheed or seized due to outstanding debts.
Presentation of cheques for cashing does not create a creditor-debtor relationship that would permit banks (or other institutions cashing a cheque) to seize a social assistance cheque presented for cashing only.
The courts have also rejected attempts to garnishee social assistance benefits while in the hands of social assistance administrator. A case decided prior to the enactment of the current provisions of the Ontario Works Act and the Ontario Disability Support Program Act, rejected an attempt by a creditor to garnishee social assistance at source, stating that garnishment of social assistance benefits was contrary to public policy:
The purpose of the General Welfare Assistance Act is to assist people in need by providing them with sufficient monies for shelter, food, clothing and other basic necessities. They are given partial or total welfare assistance because they have few or no means. To permit garnishee proceedings would take the monies that are deemed necessary to sustain families, thereby putting them back into a position of need. The province through these administrative boards would be required to provide additional funds to replace that which has been taken or to let these people either starve or go without shelter.
Currently, both the Ontario Works Act and the Ontario Disability Support Program Act, 1997 state that financial assistance provided under those Acts is not subject to garnishment, attachment, execution, seizure or receivership under any other Act, with the exception of deduction of amounts for support orders under the Family Responsibility and Support Arrears Enforcement Act, or any prescribed government debts. This applies even where benefit payments have been directly deposited into an individual’s account at a financial institution. Social benefits do not lose their character and become liable to seizure merely because they are deposited in a bank account.
However, where there is already money in the account into which the benefit payments are deposited and the monies are therefore co-mingled, there may be difficulty in ascertaining which amounts are protected, and in these circumstances, funds may be seized or garnisheed.
The above-referenced provisions of the Ontario Works Act and the Ontario Disability Support Program Act do not specifically protect these funds from ‘set-off’, which arises where parties have mutual debts or cross-obligations, and it is not clear whether the provisions apply. The most common situation where set-off occurs is where an individual in receipt of government benefits has a credit card debt with the same bank where benefit payments are deposited: in these cases, the bank’s right of set-off will likely be governed by the provisions of its contractual agreements with its customer (e.g., the cardholder agreement).
There has been considerable research and public policy discussion regarding physical access to mainstream banking in remote, rural and low-income urban areas.
Remote and Rural Communities
Without a doubt, residents of remote areas of Northern Ontario lack access to financial services, as they do many basic services. In many remote communities, particularly First Nations reserves, there is no mainstream financial services provider: residents must make do with ABMs (often “white label” ABMs) or non-depository services provided by general stores or other businesses. The Nishnawbe-Aski Legal Services Corporation informed the LCO that only a small minority of the First Nations communities belonging to the Nishnawbe-Aski Nation have access to a mainstream financial service provider.
Lack of accessible mainstream financial services may have serious consequences for these communities, as became apparent with the distribution of the residential school settlement funds. Following the distribution of funds, there were reports of Aboriginal claimants paying expensive fees to local stores and other intermediaries that would cash cheques in communities not served by mainstream financial institutions.
Similar issues exist in parts of rural Ontario. Bank branch closures have had a significant impact on rural communities: the Public Interest Advocacy Centre found that between 1989 and 1999, 45 per cent of bank branches in rural Canada had closed.
The problem of access to financial services in rural and remote areas has been widely acknowledged. In 2001, the Bank Act was amended to require banks to provide advance notice to customers of bank branch closures. The first National Rural Conference sponsored by the Government of Canada in 2000 identified access to financial resources for rural business and community development as a top priority for action. Initiatives included the amendment of the Co-operative Credit Associations Act to permit credit unions and caisses populaires to form national retail associations and a pilot project, since abandoned, to provide over-the-counter financial services to rural residents through Canada Post outlets.
Low-Income Urban Communities
Recently, significant research has been carried out on physical access to banking services in low-income urban communities. Concerns have been raised that low-income urban communities receive less service from mainstream financial institutions and have been disproportionately affected by bank branch closures, and therefore have few choices for accessing financial services beyond the AFS businesses that are over-represented in these areas. Important research on these issues has been carried out in Toronto, Winnipeg and Vancouver by ACORN, the United Way of Toronto and Professor Jerry Buckland of the University of Winnipeg.
During the summer of 2008, the LCO undertook a location analysis for bank branches and cheque cashing outlets for the city of Toronto (see Appendix D). The focus of the analysis was on formal cheque cashing and not on AFS businesses more generally or pawnbrokers, so there may be some discrepancies between the results of the LCO’s mapping exercise for Toronto, and those of other organizations, such as the United Way and ACORN. The LCO also mapped the locations of bank branch closures in Toronto since 2002.
Based on this review, generally residents of low-income neighbourhoods have access to a physical bank branch within one mile. Caution should be exercised in drawing conclusions from this, however, as a mile may be a considerable distance for persons who have limited access to transportation, particularly in the winter months or where they are accompanied by small children, or they have mobility-related disabilities. Moreover, it is true to say that there are areas of Toronto where cheque-cashing outlets have a more prominent and visible presence than do mainstream financial institutions.
Not surprisingly, bank branches are noticeably clustered in Toronto’s financial district, while cheque cashing outlets are concentrated in low and medium income areas, particularly Parkdale, the surrounding Junction, Crescent Town, and the Weston region. One noticeable exception to this is the very dense concentration of cheque cashing outlets along Yonge Street between College and Wellesley, a high income neighbourhood which is also a heavy traffic corridor and a central location for many social services. Cheque cashing outlets also tend to be concentrated along main traffic corridors, and may therefore border high income areas.
No noticeable pattern appeared in mapping bank branch closures since 2002. The greatest density of bank branch closures was in the financial district, which may reflect the fact that bank branches were particularly dense in that area to begin with, or perhaps a greater use of online and other electronic banking services by financial services consumers in this vicinity.
E. The Alternative Cheque Cashing Industry
The cheque cashing industry is a relatively recent phenomenon, and continues to grow and evolve. This section outlines some of the key features of cheque cashing in Ontario, including the types of institutions providing cheque cashing services, the key features of cheque cashing services, the relationship with the rapidly expanding payday loans industry, and the economic aspects of cheque cashing.
Cheque cashing takes place as both a formal and an informal service. Small businesses may cash cheques for customers, not as part of their official business functions, but as an additional service for customers of their official services, often as a means of accessing payment for these services. Payment may or may not be required for this informal cheque cashing. Formal cheque cashing is provided as an official business service, for set fees, and in a professional manner. Formal and informal cheque cashing therefore operate under different dynamics and raise different concerns.
1. Informal Cheque Cashing
Alongside the formalized cheque cashing services provided by AFS businesses there continues to exist an informal cheque cashing economy, which predates the formal AFS sector in Canada.
There is a long history of informal cheque cashing by grocery stores, pawnshops, landlords, and other small businesses. However, it does not appear to have been the subject of much research, and almost all the available information about informal cheque cashing is anecdotal.
With the rise of electronic banking, including credit and debit cards, and direct deposit, cheques have declined in importance as a method of transferring funds. It is likely that the prevalence and importance of informal cheque cashing have also declined. However, informal cheque cashing may continue to play an important role in rural or remote communities where access to any kind of formal financial services is very limited.
Informal cheque cashing may often operate as a benefit to low-income individuals who otherwise might have difficulty accessing their funds. However, persons working with low-income communities have at times expressed concerns about possible abuses by informal cheque cashers. For example, stories have surfaced about grocery store owners who cashed social assistance cheques, but required recipients to place a fingerprint on the cheque and provided ten per cent of the value of the cheque in the form of in-store food vouchers. There have also been stories of landlords cashing social assistance cheques and taking rent payments and vague “charges” off the top, so that the intended recipient of the funds received almost nothing. It is impossible to know how widespread such abuses are; individuals may not be aware that anything improper has taken place, or may be embarrassed to acknowledge what has happened. Given the vulnerability of the population concerned and the involvement of public funds, even if only a small number of individuals or businesses were operating in such a manner, it would be cause for serious concern.
Operating as it does in an almost invisible manner, informal cheque cashing is difficult to monitor and therefore also difficult to regulate. Some have therefore voiced concerns that solutions to the issues raised by fees charged for cashing government cheques not have the unintended effect of pushing cheque cashing into the informal sphere. Given the limited information available about informal cheque cashing and any abuses associated with it, it is difficult to assess the weight that should be accorded to such concerns.
2. North West Company
The cheque cashing services provided by the North West Company’s Northern Stores across Northern Canada have evolved in a unique context, and differ from both informal cheque cashing and the AFS businesses operating mainly in urban areas.
A study conducted on behalf of the Financial Consumer Agency of Canada (FCAC) found that Northern residents were the most likely of all Canadians to have used a cheque cashing service. Indeed, they were almost twice as likely as the average Canadian to have done so in the past year: 13 per cent of Northern residents had done so in 2006, as compared to seven per cent of all Canadians.
As noted earlier, remote communities in Northern Ontario suffer from a dearth of many vital services, including financial services. Frequently, banks do not operate in such communities, and nor do major AFS businesses.
In many communities, the only financial services available are through ABMs (often white label), or the Northern Stores operated by the North West Company. In 2000, the North West Company operated over 200 retail outlets in Canada, 27 of them in Northern Ontario. These outlets provide a wide variety of services to residents, including retail shopping and some basic financial services.
Financial services provided by the Northern Stores include cheque cashing, money transfers, white label ABMs and prepaid mastercards. North West recently launched a new service whereby customers can deposit cheques at any of the company stores and then make debit purchases or get cash from an ABM. Placing money on the card costs $3.00 and each debit transaction costs $1.00.
As with informal cheque cashing services, the role of businesses like the Northern Stores in remote communities has been little discussed in most studies or debates regarding access to financial services and cheque cashing fees. As the sole provider of financial services, Northern Stores have a unique relationship with these communities, which are highly dependent on the continued availability of their services.
In November 2006, the North West Company intervened in the hearing of the Manitoba Public Utilities Board on setting rates for cheque cashing fees. The North West Company indicated that its cheque cashing services operate quite differently from those of the AFS industry, and are significantly less expensive. It stated that:
The North West Company is looked to by its communities to act as the province’s bank account. I think that that’s an important point here. The Province of Manitoba does not send cash through the mail. It is not, when it issues cheques, sending out coins or bills, it is sending out cheques and for those areas of the province where there are no banking institutions the communities look to the North West Company to be the source of cash …. Suffice it to say, we’re looked at, however, to make sure there’s sufficient cash in communities when the Province issues its cheques, whether they’re child tax credit cheques or whatever the cheques are.
LCO staff who called Northern Stores were told that the standard cheque cashing charge is 1.5 per cent of the value of a cheque. However, this may vary from store to store: for example, one Northern Store contacted by LCO staff does not charge for a cheque under $49.99 and charges a flat $3.00 fee for cheques over that amount. The LCO heard from the Nishnawbe Aski Legal Services Corporation of individuals being charged cheque-cashing rates of up to ten per cent of the value of the cheque.
3. The Formal Cheque Cashing Industry
The formal cheque cashing industry is of relatively recent provenance. Money Mart, which continues to dominate the formal cheque cashing business in Canada, first opened its doors as a specialized cheque cashing business in 1982, with an outlet in Edmonton, Alberta. Ten years later, it was reported that Money Mart had 92 outlets in Ontario alone. Today there are an estimated 750 businesses providing formal cheque cashing services in Ontario. These are mainly found in the larger cities, such as Toronto, Hamilton, Ottawa and Windsor. However, cheque cashing businesses have been expanding to smaller centres as well. Money Mart states that it currently has an outlet in every centre with a population of 40,000 or more, and there are cheque cashing outlets in small urban centres across southern and central Ontario, such as Cobourg, Pembroke, Tillsonburg, Petawawa and Thorold. However, formal cheque cashing businesses are not currently present in small rural communities.
Most cheque cashing businesses offer a range of services targeted to low and moderate income consumers, including payday loans, wire transfers, money orders, tax preparation and refund, and stored value debit cards. Newcomers in particular may be drawn to the wire transfer and money order services, as important to their needs.
In contrast to mainstream financial services, the formal cheque cashing industry and the AFS industry as a whole is the subject of little regulation or superintendence. As is outlined later in this Report, some provinces have recently moved to regulate cheque cashing fees and there is a general move across Canada to regulate payday loan services, including recent legislation in Ontario. However, there is no overall regulatory framework for the AFS sector as a whole, comparable to those for banks and credit unions. Superintendence of AFS businesses has generally relied on voluntary compliance with industry norms. While mainstream financial institutions are seen as having a certain level of public responsibility, no such expectations have been placed on the AFS sector.
Some observers predict continued rapid growth for these businesses in Ontario, speculating that recent initiatives to regulate payday loans will remove uncertainty about the legality of the business model and spur increased investment and expansion, particularly from large America chains. It has been reported that one major player in the cheque cashing/payday loan industry has plans to place outlets in every Ontario community of 7,500 or more.
The formal cheque cashing industry has been controversial almost from its inception. In 1984, during a debate in the Ontario Legislature, a Member of Provincial Parliament referred to these businesses as “parasites on the poor”. At that time, the Minister of Community and Social Services stated that “any amount deducted from the cheque of a disadvantaged individual may be considered excessive by an enlightened society”. The Ministry also committed to a number of steps to address the impact of cheque cashing fees on social assistance recipients, such as working with unbanked individuals to ensure access to mainstream financial institutions, consideration of a direct bank deposit system for social assistance benefits, and development of a pilot project with the Province of Ontario Savings Office to increase access to financial services in remote parts of the province.
In January 1989, a Resolution was adopted by the Legislative Assembly of Ontario that government, municipalities and banking institutions should work towards entering into an agreement whereby social assistance recipients could be provided with identification cards that would give them easy access to banking services without having to resort to cheque cashing services. Shortly thereafter, a private member’s bill was introduced that would have prohibited any person from charging a fee for cashing a cheque issued by the governments of Canada, Ontario, or a municipality. This Bill did not progress past first reading.
Another private member’s bill was introduced in November 1991. Bill 154 similarly prohibited the charging of fees for the cashing of government cheques. At his statement introducing the Bill, MPP Gilles Morin touched on many issues that continue to resonate today: difficulties among low-income individuals in obtaining and maintaining identification, difficulty cashing cheques at banks, low social assistance rates, and the high costs of cheque cashing services. Unusually for a private member’s bill, it received second reading, and was reported back to the House for third reading following committee. However, it was never passed. The government, while acknowledging as valid the concerns actuating Bill 154, declined to move it forward. Instead, the government stated that it would work with the Canadian Bankers Association to address identification issues and to develop an indemnification agreement. It also referred to efforts to increase the number of social assistance recipients who received their benefits through direct deposit. Concerns were expressed that if legislation was passed without other measures in place to ensure access to mainstream services, cheque cashing would simply go underground, as consumers would have nowhere to go.
4. “Convenience Based Financial Services”
The rapid growth of AFS businesses has led to considerable speculation regarding the reasons for the popularity of these services among consumers, given the relatively high cost of AFS services compared to that of mainstream financial services. To what degree are consumers making an informed choice among meaningful options?
Certainly, some users of AFS outlets appear to have few alternatives: in the Ipsos-Reid survey referenced earlier, seven per cent of AFS users indicated that they used these services because they did not have a bank account and another seven per cent indicated that they had a poor credit rating or had declared bankruptcy. For other consumers, however, the level of choice available is less clear-cut.
National Money Mart Company describes the services it provides as “convenience-based retail financial services”. When surveyed, customers of businesses like Money Mart overwhelmingly cite the convenience of these services as the reason for selecting them. In a 2007 Pollara survey conducted for the payday loan industry, 75 per cent of users of payday loan services ranked these businesses first in terms of “convenience”, while 19 per cent ranked banks as most convenient (only three per cent identified credit unions as most convenient).
The term “convenience” connotes ideas of ease and comfort, as well as the notion that the choice of service is one of personal preference among a number of comparable alternatives. Given the debates about who uses AFS outlets and why, it is helpful to break down, as far as is possible, what users of these services mean by the term “convenience”. Surveys of users of AFS businesses generally identify four factors as making these services “convenient”:
Speed of service: In the survey conducted by Ipsos-Reid in 2005 for the FCAC, 25 per cent of those surveyed who had used AFS outlets for cheque cashing or payday loans cited as their primary reason “faster/more efficient/needed money immediately”. The survey conducted by Pollara for the payday loan industry found that 51 per cent of those using payday loan services did so because of the “quick and easy process”. A telephone survey of cheque cashing customers carried out by Discovery Research of Kelowna, British Columbia for National Money Mart found that speed of service was one of the top three reasons why first time users went to Money Mart.
Hours of operation: AFS businesses are often open evenings and weekends: Money Mart notes that its stores are usually open 9 a.m. to 9 p.m., or even longer. In the Ipsos-Reid survey, 18 per cent of users of AFS businesses gave as their primary reason for use “more convenient hours/they’re open evenings and weekends”. The Pollara survey found that payday loan businesses ranked much more highly than banks or credit unions in terms of hours of operation and the Discovery Research survey of cheque cashing customers found that the top cited reason why first time users went to Money Mart was that the banks were closed. In its submission, Money Mart noted that approximately 40 to 45 per cent of all government cheques cashed by its businesses in Manitoba in 2005 were processed outside of the hours when banks are traditionally open. Since bank account holders may access funds immediately at all hours through ABM services (providing their cheques are not subject to cheque hold policies) the importance of hours of operation to users of cheque cashing services is not immediately clear. It may perhaps relate to the role of cheque hold policies or to the importance of personal service to some clientele.
Location: In the Ipsos-Reid survey, 5 per cent cited the “convenient” location of the AFS business. The Pollara study found a much higher percentage of payday loan users citing location as the most important reasons: 18 per cent. The Discovery Research survey of cheque cashing customers found that convenient location was one of the top three reasons for first-time users selecting an AFS business. Given the fact that most AFS businesses are located within one mile of a mainstream financial institution, this factor is difficult to interpret.
Welcoming Attitude: Users of AFS outlets generally rank them very highly in terms of respectful and welcoming customer service. An Environics Research Group study of payday loans customers found that 92 per cent were satisfied with their treatment by customer service representatives and 87 per cent were satisfied with the overall customer service experience. The Discovery Research survey indicated high levels of satisfaction with the friendliness of the tellers. In its submission, Money Mart noted that customers consistently cite the friendly and welcoming store atmosphere as a reason for using their services. The LCO heard from organizations working with low-income individuals that the relative informality and the personal service offered by AFS businesses may make them less intimidating to their clients than mainstream financial institutions.
The notion of convenience raises the issue of choice: to the degree that consumers are simply choosing the most appealing of several financial service options, the use of AFS businesses is unlikely to be a matter of pressing public policy concern. However, the issue of choice in this situation is a complex one.
The users of cheque cashing services are not homogenous; nor are low-income individuals. There are differing levels of knowledge, empowerment, need and disadvantage. Undoubtedly, there are customers of AFS businesses who are in a position to freely choose between the available financial services options, understand the choices they are making, and can afford to pay for their convenience. There are also customers of AFS businesses who are, for a variety of reasons, unbanked and have no other options when cashing a cheque.
As discussed in the earlier section on financial literacy, there are some consumers of cheque cashing services who do not fully understand the costs they are paying for the convenience of AFS services, or the alternatives available to them. Individuals who do not understand the fee structure for bank accounts or who do not have the mathematical or financial literacy skills to calculate out the annual cost of cashing their cheques at a cheque cashing outlet are not empowered consumers.
One must further question what the notion of “convenience” really means for the most vulnerable consumers. The notion of choice must be evaluated in the context of the situation of the consumer and the available options. For individuals for whom accessing the funds from a cheque immediately means the difference between a meal today or waiting to eat until tomorrow, speedy access to funds is more than a matter of convenience. While it may make sense in the long term, for example, to deposit the cheque in an account and wait one or more days for the cheque to clear, short-term immediate needs may well seem most pressing. Similarly, for individuals with limited access to transportation or limited ability to pay for public transportation, the availability of services within easy walking distance becomes a more important factor than it is for those with easy access to transportation or electronic banking services. If one must pay $4.00 for a return trip by public transportation to a bank, the charges for cashing a cheque at an AFS business begin to appear reasonable by contrast.
5. Relationship with the Payday Loans Industry
The cheque cashing industry has rapidly diversified, so that cheque cashing is now generally not a stand-alone business. Businesses that offer formal cheque cashing services do so as part of a suite of financial services, including most prominently payday loans, but often also foreign currency exchanges, money orders, money transfers, and tax refund loans. It appears that cheque cashing now plays a much less prominent role than it formerly did in the services provided by AFS businesses. As the formal cheque cashing industry is so closely aligned with the payday loans industry, it is important to give some brief consideration to the relationship between the two services.
A payday loan is a short-term small principal loan made to the borrower upon the guarantee of a post-dated cheque or pre-authorized debit. Canada’s payday lending industry has grown very rapidly since its beginnings in the early 1990s. It has frequently been the source of controversy, since when all fees and expenses are considered, the effective annual rate of interest can be very high, far beyond the 60 per cent set as a criminal rate by section 347 of the Criminal Code. Some have characterized the payday lending industry as essentially a predatory business, charging excessive rates and entrapping low-income Canadians in a cycle of debt. Others, while agreeing that the industry requires regulation, see payday lenders as meeting a need that is not being met by mainstream financial institutions.
There has been a move across Canada to regulate the payday loans industry. The federal government has amended the Criminal Code to add section 347.1, which exempts payday lenders from its criminal interest rate provisions if the loan is made in a designated province. A designated province is one which has taken legislative measures to protect recipients of payday loans and limit the cost of borrowing. British Columbia, Manitoba, Saskatchewan and Nova Scotia have passed payday lending legislation that meets the requirements for federal designation. The Canadian Payday Loan Association (CPLA), which represents 21 payday loan businesses, has supported the move towards regulation, calling for a national regulatory framework for payday lending that will both protect consumers and allow for a viable industry.
Ontario recently passed Bill 48, the Payday Loans Act, 2008, which will, when in effect, meet the federal requirements for designation. As is described in more detail in Appendix B, Bill 48:
· requires all payday lenders and loan brokers to hold a license,
· prohibits concurrent and “back-to-back” loans,
· restricts default charges, and
· creates a mechanism for developing a maximum cost-of-borrowing cap.
The provisions of the legislation will be enforced by the Consumer Protection Branch of the Ministry of Government Services and Consumer Affairs, which will conduct inspections and respond to consumer complaints. The Bill also creates a fund to educate the public regarding rights and responsibilities under the Act, as well as with respect to financial planning in general.
When introducing Bill 48, the government identified four objectives:
· addressing the sources of sustained poverty in Ontario,
· increasing confidence in the integrity of the payday lending and furthering Ontario’s capacity for sustained economic growth,
· providing all Ontarians with a solid understanding of the risks and responsibilities that come with being a consumer, and
· protecting consumers from all walks of life who occasionally rely on payday loans to help them deal with short-term financial crises.
The move to regulate the payday lending industry and the form it has taken appear to be a reflection of a fairly broad, though not universal, consensus that these businesses are a permanent part of the financial services landscape.
Payday loan and cheque cashing services are in some ways closely related. As noted above, most formal cheque cashing services also provide payday lending services (although not vice-versa – there are a number of specialized payday lending companies). The business models for cheque cashing and payday lending services are similar: providing quick, convenient, friendly and easy access to cash for those who cannot afford to or do not wish to wait, or who have no alternative means of accessing these financial services. Cheque cashing fees may make up part of the overall fee package for a payday loan.
There is likely some significant overlap between persons who use cheque cashing services and those who use payday lending services. However, far more Canadians have used cheque cashing services than have used payday loan services (one study showed that seven per cent of all Canadians used a cheque cashing service in 2006, as opposed to the two per cent of all Canadians who had used a payday loan service). The Ipsos-Reid poll conducted for the FCAC found that 57 per cent of those who have used AFS outlets used the cheque cashing service, compared to 25 per cent who had used the payday lending service.
It appears that some persons in receipt of social assistance do seek and obtain payday loans. Although the CPLA’s Code of Best Business Practices prohibits its members from providing loans to persons in receipt of social assistance, not all payday lenders are members of this Association. In discussions related to Bill 48, the Government has stated that it will consider separate cost of borrowing limits for payday loan recipients who are in receipt of social assistance.
6. Economics of Cheque Cashing
Some have suggested that the fees charged by the formal cheque cashing industry are excessive, and that these businesses are, in effect “preying on the poor”. There is little public information about the economics of the Canadian cheque cashing industry. Available data on the economics of the AFS industry generally focus on payday loan services. While more data are available about the American cheque cashing industry, this information must be applied to the Canadian situation with caution, as the American cheque cashing industry is significantly older, larger and more mainstreamed than its Canadian counterpart.
As noted above at section III.E.3, in Canada, formal cheque cashing services are almost invariably provided as part of a spectrum of services provided by the larger AFS businesses. These businesses continue to show growth. In 2004, Ernst and Young LLP conducted an important study for the Canadian Association of Community Financial Services Providers (a precursor to the CPLA) of the costs of providing payday loans in Canada. The study found that while payday loan providers on the whole are earning returns on equity that are comparable to other segments of the financial services sector, several companies are not making adequate returns and are being forced to discontinue offering payday loans. Further, the largest operators have the lowest costs, while the smaller operators have the highest costs. A study by Professor Jerry Buckland concluded that, with the exception of two anecdotal instances, he had not found substantive data to support the view that the AFS sector was earning “above-normal profits”. He hypothesized that high fees by AFS outlets may reflect the expensive and risky services these businesses offer. 
It is difficult to determine what proportion of the AFS sector is comprised of cheque cashing services, and of that, what portion of cheques cashed are government cheques. In its ruling on rates for cashing government cheques in Manitoba, the Manitoba Public Utilities Board concluded that cheque cashing makes up a secondary source of revenue for AFS businesses (behind payday loans), and that the cashing of government cheques makes up only a fraction of the overall volume and range of cheques being cashed. One American study indicated that government cheques made up only 16 per cent of all cheques cashed by American cheque cashing businesses.
In considering the fees charged for cashing cheques, the most frequently given reason for the current fees is the level of risk associated with this service. There are risks associated with cheque cashing, whether of fraudulent activities or of insufficient funds on the part of the payor. Of course, with government benefit cheques, only the former is a risk. For example, fraud might take the form of altering or forging cheques. Mainstream financial institutions manage these risks by providing cheque cashing services only to account holders (except where there are indemnity agreements in place), and by identification and cheque hold policies. Cheque cashing businesses take on a higher level of risk of fraud.
It is difficult to assess the level of risk associated with cashing government cheques. One American study found that 0.5 per cent of the face value of cheques bounce, but after collection, net losses are only 0.2 per cent. In 2002, the Financial Service Centers of America, the cheque cashers’ trade association, reported that less than one per cent of cheques presented to cheque cashers are returned, and between 80 and 90 per cent of these are ultimately collected. A Canadian study by Professor Jerry Buckland, based on data from Dollar Financial Group, found that returned cheques amounted to less than one per cent of the total face value of those cashed. Of this, almost three-quarters were ultimately collected, leaving a net write-off of 0.2 per cent of the total face value of cashed cheques. 
These figures do not differentiate between government benefit cheques and other types of cheques, such as payroll cheques. However, since government cheques present the risk of fraud but not of insufficient funds, it seems likely that they would make up a relatively small proportion of returned cheques. The LCO was unable to obtain any specific statistics related to the risks of fraudulent cashing of government cheques. However, government social services providers indicated that, in their experience, the risk is relatively minor. The Waterloo SSAB told the LCO that it has had an indemnity agreement in place with a local bank for Ontario Works payments for approximately 20 years, and only once has that indemnity agreement ever been called upon. Social service providers pointed out to the LCO that government benefit cheques are generally not attractive targets for fraud because the amounts are so small: the return on fraud would be disproportionate to the required effort. Business cheques are a much more attractive target.
Figures on the risks of cashing cheques do not reflect the costs of attempts (successful or not) to collect on returned cheques. In its submission, Money Mart did not provide any figures on the risks or costs associated with cheque cashing, but did state that its experience is that “if a cheque is dishonoured it is far more difficult to collect from government than from a corporation”.
Any consideration of the economics of cashing government cheques should take into account the cost to taxpayers of funds that are intended to provide for the basic necessities of vulnerable Ontarians being instead spent on cheque cashing services to transfer funds between the government and these individuals. The Thunder Bay SSAB, based on a survey of its clientele, found that in the month of March 2008, 36 per cent of the cheques it issued to Ontario Works recipients were cashed at AFS outlets for a fee, and another 7 cashed through pawnshops or convenience stores. It estimated that almost $10,000 was paid in cheque cashing fees by Thunder Bay SSAB clients in a single month, with an estimated annual cost of $120,000 in this single, relatively small district. Based on this, the amount of government payments being funneled to cheque cashing fees is likely to be significant.
F. The Need for Reform
Not all those using AFS businesses in general, and cheque cashing services in particular, are vulnerable consumers: while there is definitely a significant segment of the customer base that merits that description, studies show that these businesses attract moderate as well as low income users. Where individuals have reasonably accessible alternatives to the use of high-cost cheque cashing services, are aware of their available options and of their relative costs, and the financial impact of the costs is not punitive, there is no pressing public policy concern.
However, recipients of government cheques are by and large vulnerable consumers. In particular, the incomes of recipients of social assistance benefits are generally extremely low, far below Canada’s Low Income Cutoff. Given their poverty, the fees charged by cheque cashing services have a significant impact. A monthly fee of $15 or $20 may not seem like much to most Ontarians, but for individuals whose annual incomes are under $20,000, an annual savings of $200 could make the difference in obtaining winter clothing or paying utility bills. One could also make the argument that these costs represent a very ineffective end use for government funds. There are no precise figures on how many social assistance recipients are using cheque cashing services, but the available information suggests that the numbers are substantial.
It is not clear that those persons paying fees to cash their government cheques are aware that AFS fees are considerably higher than what they would pay at a bank or credit union for a similar service. Studies conducted by the FCAC show that a significant number of financial consumers do not feel well informed about their rights with respect to financial institutions. Further, many low-income individuals face linguistic, cultural, educational, or disability-related barriers, or a combination of these, to accessing and understanding the information they need to make choices about financial services, and in particular about cashing their government cheques.
Further, in some cases, low-income individuals do not have reasonable alternatives available for accessing their government funds. One must keep in mind that those living in deep poverty are generally in a day-to-day struggle for survival. Long-term planning is difficult and the focus is most often on immediate and urgent needs. A bank account may well seem superfluous to those who rarely, if ever, have money left at the end of the month. The very fact of poverty limits choices: for example, while in the long-term it may be wiser to open a bank account, the immediate cost of obtaining identification may make that option unattainable in practical terms.
Despite some significant efforts by governments, financial institutions and social service organizations to reduce barriers to mainstream financial services, more remains to be done. The barriers vary depending on location and circumstance – for example, individuals in remote communities frequently lack physical access to a mainstream financial institution, while homeless persons in urban communities may lack the identification to access services – but barriers do exist, and may leave recipients of government funds with few viable alternatives to the use of a relatively expensive AFS business.
Finally, the importance of reliable and trustworthy financial services to individual and community well-being is well-recognized, and is the basis for the considerable regulatory and superintendence framework governing banks and credit unions. The AFS sector is relatively new and has not been the subject of similar government oversight, although that is beginning to change. In ensuring that recipients of government funds can access those funds at reasonable cost, the ongoing role of AFS businesses must be acknowledged, and steps taken to ensure that consumers of these businesses have similar protections to those that currently exist for customers of mainstream financial institutions.
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