In Canada, we bank where we buy

Open this photo in gallery:

Vass Bednar is a contributing columnist for The Globe and Mail and host of the new podcast, Lately. She is the executive director of McMaster University’s master of public policy in digital society program.

Imagine Scotiabank encouraging you to buy a car, or RBC trying to sell you a house so that it can lock you into a mortgage. It would seem odd, and scam-like. And yet we tolerate the reverse when retailers expand into banking.

Despite the Big Six’s dominance in Canada, we have more banks than we think. But a few of those other options to manage your money are retailers, too – encouraging you to borrow money and spend it in their stores. A private retailer’s primary motive of profit maximization is at odds with the fiscal prudence that a bank is supposed to encourage you to practise. This duality is duplicitous.

While Canadian Tire may have once felt bank-like with its Monopoly-money-esque loyalty coupons, it turns out that Canadian Tire Bank has been licensed under Canada’s notoriously stringent Bank Act since 2003 (for real money). Its associated Triangle Rewards program allows you to redeem Canadian Tire money at other stores that Canadian Tire owns.

Telecommunications giant Rogers also has Rogers Bank, which was established in 2013 and offers credit card products. Grocery titan Loblaw also owns President’s Choice Bank (established in 1996), which operates the PC Money Account and offers PC Optimum points on everyday banking transactions and purchases. Sears Canada similarly had a “bank” until 2005, and you can get a special credit card at Home Depot and other stores.

These rewards programs can also be viewed as a form of preferential discounting, and their existence makes some sense because retailers already have foot traffic. But let’s be real: These banks are spun up by retail giants that already have market power and are trying to further entrench it through the presumed “flywheel” of banking services supercharged by loyalty programs at the expense of consumers’ best interests (namely, preserving their capital and deploying it judiciously). The associated promise of points incentivizes consumers to spend more money, more often; it’s the opposite of saving.

These arrangements also allow retailers to skim the credit-card fees for themselves. When banks issue credit cards, they make a little bit of money every time the card is used, claiming the majority of the interchange fee. Some firms have even tried to wage a war with the Visa-Mastercard duopoly because of how high their fees are.

But instead of actually challenging that behaviour, they’re just replicating (and perpetuating) it; sometimes through white-labelled cards that rely on one of those companies. The pairing of a retailer with a loyalty program, or a loyalty program with a banking system can make good sense; but the combination of all three is extractive and ultimately, exploitative. Decoupling retailers from banking would be better for consumer privacy, data security and fair lending processes.

The United States actively separates retailers from also being banks through a principle in the Bank Holding Company Act that prevents commercial companies from obtaining banking charters. Canada has no such rule. This separation was tested back in 2005 when Walmart tried to obtain a special banking charter, prompting pushback from consumer groups, competitors and threats from legislators. In 2007, Walmart sheepishly abandoned this prospect. Two years later, it received a Canadian banking licence without media fanfare or political attention, which it then used to issue its own credit cards. We simply don’t seem to hold the same value of keeping commerce and banking separate.

Marketplaces are morphing and companies have concurrent functions that can make us underestimate their complexity. For instance, Starbucks collects cash from its members through its Rewards program and operates like a treasury but isn’t formally legislated as such – despite holding more money than many banks. Every time you preload your app for your next Frappuccino, you offer Starbucks an interest-free loan. Sometimes customers are literally treated as if they are a bank.

Canadians often boast about their stable, reliable banking system. As politicians support the evolution of this system toward a consumer-led-banking context that unlocks open banking and facilitates payment modernization, we should do more to eliminate the fundamental conflict of interest inherent between a savings institution (a bank) and a spending one (a retailer), even if it means losing a little bit of competition in the process. Participating in slick marketing programs that allow you to engage in lite banking activity seems contradictory and foolish. It’s a little bit silly, just like Canadian Tire money was.

Not everything needs to be an everything store. Since Walmart shied away from its bid in 2005, many traditional, familiar retailers have begun to emulate digital platforms. Now would be a smart time for Canada to mandate a structural separation between banks or partnerships with financial institutions and retailers in the name of smart competition.