Whether you’re catching a flight, opening a new bank account or picking up groceries, a small group of big names takes up most of the market share. Competition Ltd. is a Canadian Press series that explores what this means for products – and prices – in the country.
At the end of last year, Canada’s Big Six held about 93 per cent of all banking assets in the country. It’s the same share they held a decade earlier, and a decade before that.
The tight hold on the market of RBC, TD, BMO, CIBC, Scotiabank and National Bank is not from a lack of others trying.
“I’ve really defined my career over the last 15 years as sort of putting my foot in doors as they’re being slammed, because it’s really challenging,” said Andrew Moor, chief executive of EQ Bank, whose tag line is “Canada’s Challenger Bank.”
EQ is one of the many alternatives in Canada’s financial industry that have been working to diversify the landscape, but while they have made inroads, and there are structural changes in the works that could give them a boost, the near-term forecast is for even more concentration ahead.
Critics say that’s a concern because a lack of competition leads to customers paying more in account fees and being paid less interest, while also making it harder for some to get loans and slowing the pace of innovation.
“With the amount of concentration we have here, it’s fair to say that deposit rates are going to be a little bit lower, and the rates on loans are going to be a little bit higher,” said Robert Clark, an economics professor at Queen’s University who studies bank competition.
Determining the exact rate gap, and the overall competition deficit, is tricky though, as differences in products and markets make an apples to apples comparison difficult. For example, U.S. banks offer 30-year mortgage terms, while Canadian banks top out at five. Other efforts to measure the level of competition in Canada’s banking industry, through complex indexes factoring in price markups and profit sensitivity, don’t paint a clear picture of Canada being an outlier on competition.
The industry association maintains that the market is competitive, with 34 domestic banks, more than 200 credit unions, a growing number of fintechs plus trusts, life insurers and foreign-owned banks in the mix.
“As a consequence there’s a lot of access, a lot of competition and a lot of choice,” said Darren Hannah, vice-president of personal and commercial banking at the Canadian Bankers Association.
But while there may be options, those trying to compete against the Big Six say there are barriers to entry that help keep big banks profitable and in control.
“Domestic Canadian banks are the most profitable banks in the entire world,” said Moor. “Their return on equity is the highest, all of them, highest in the world, and that presumably comes from things like fees, not paying interest on chequing accounts, and that sort of thing that is an outcome of a less competitive system.”
He points to challenges of scale, such that EQ pays about seven times more per Interac transaction as the big banks since larger institutions can spread fixed costs over more transactions.
Regulatory burdens, while somewhat proportional, could also be lightened further for smaller banks to reflect the lower risks they pose to the financial system, he said.
Big banks also benefit from lower funding costs, both because of the implicit guarantee that they would be bailed out if needed, and simply because of their large deposit bases. RBC, for example, boasts to analysts of its “low-cost Canadian deposit base,” meaning Canadians keep a lot of money at the bank for which they’re paid relatively little in return.
But while big banks often pay out lower interest in accounts, current systems can make it cumbersome for customers to switch banks through everything from paperwork to possibly having to go into branches to the $150 it can cost to transfer a single registered account.
One of the biggest possibilities to shake up the system is the rising trend globally towards open banking, which is in essence allows customers to give banks permission to share their personal data with other financial companies.
By making the data more mobile, customers can easily shop around for services and switch providers, sort of like porting a cellphone number, rather than the clunky systems currently relied on. The system could mean a quick switch of accounts, including automated deposits, all done online.
“Having access to that data in an easy way would really open up competition,” said Moor.
Modernizing the payments system would also help, he said, creating more options for instant money transfers with more fraud protection, as well as innovations like sending money phone to phone using near field communication or QR codes, as is already common at farmers markets everywhere from the U.K. to India.
Both open banking and modernized payments are in the works, but are coming years after places like the U.K. and Australia have already moved forward.
A long-awaited report from a government-convened advisory committee out in 2021 recommended an initial open banking system to be in place by the start of 2023, but there’s still no clear launch date.
The delays mean all sorts of innovations are slower to arrive, said Vass Bednar, executive director of the Master of Public Policy in Digital Society at McMaster University.
“Why can’t you Venmo in Canada?” asked Bednar, referring to the popular money transfer service in the U.S. “They can’t because of how we regulate our payment system.”
While these are complex changes, some of the slow pace can be blamed on reluctance from the biggest banks, said Bednar.
“We see them being hostile to progress that allows others to compete on a more even footing with them,” she said.
The industry is simply concerned with making sure the government balances safety and security with competition and access, said Hannah at the bankers association.
“At the end of the day, everyone is trying to establish what that appropriate balance is.”
The tension between competition and security is seeing more focus these days following several high-profile bank failures including Silicon Valley Bank and Credit Suisse.
Moor however said it was ridiculous to think adding competition would mean less stability, and that the failures aren’t representative of the Canadian market.
And to some degree there is increasing competition in Canada even as the system remains stable. EQ for example, has grown to over 300,000 clients and more than $50-billion in assets since a 2016 launch, while Laurtentian Bank is rolling out fully digital account sign-ups as it looks to expand nationally and fintechs and credit unions also push alternatives.
But while there is the potential for more competition ahead, more concentration is also on the horizon.
RBC’s proposed $13.5-billion takeover of HSBC’s Canadian division, announced last November, will see it swallow up the $128-billion assets the global giant has carved out in Canada after four decades of aggressively trying to win locals away from the Big Six.
“They were offering really low rates and building up a sizable mortgage portfolio as a result, but that’s what they had to do,” said Clark at Queen’s.
“They had to come with these super low introductory rates to get them in. And then now we see that potentially they’re going to be bought up by an existing lender.”
The deal, still working through the regulatory process, would finally move the needle on that 93 per cent share asset the Big Six have. It would move it up though, to almost 95 per cent.