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The flat yield curve everyone in finance is talking about these days is a gift to Canada’s newest online bank.

Motusbank, brought to you by Ontario-based Meridian Credit Union, is a virtual bank that charges nothing for chequing accounts, pays a good rate on savings and has a unique offer on mortgages: All terms from one to five years have the same interest rate.

All of these features have a connection to the flat yield curve, a term that refers to an unusual phenomenon where short-term interest rates are pretty much the same as long-term rates. Usually, there’s a reward in the form of higher rates for buying a longer-term bond or term deposit.

This oddball rate environment can be a signal of recession ahead, particularly when the yield curve inverts as it did late last month (inverted means short-term interest rates are higher than long-term rates). For publicly traded banks, it poses a challenge to maintaining upward momentum on profits.

Here’s the problem: Banks are used to paying a modest rate to depositors and then lending that money out at a higher rate. A flat or inverted yield curve makes it harder to do this because savings-account rates are guided by short-term interest rates and lending is done at longer-term rates.

Just the other day, Royal Bank of Canada issued a notice to clients that the monthly fee on its RBC Signature No Limit Banking account will rise June 1 by $1 to $15.95. A couple of other banks are already at this price point – for now. If their profit margins are squeezed, then banks will be looking for ways to bump up fees and prices on everything, including the mainline chequing accounts that now cost almost $16 a month in some cases.

“Within maybe 18 to 24 months, we might see those going to $20,” said Bill Maurin, president and chief executive of both Motusbank and Meridian.

Motusbank’s fee for chequing accounts is zero, and that includes unlimited debits, including e-transfers, and an interest rate of 0.5 per cent (competitive for a chequing account). On savings, the bank will pay a rate of 2.25 per cent on regular accounts and 2.5 per cent on tax-free savings accounts.

As a division of a member-owned credit union, Motusbank does not face the same pressure as shareholder-owned banks to keep revenue, profits and dividends on the rise. This is a big competitive advantage for luring cost-conscious customers.

“From our research, price was the No. 1 consideration when we asked people what was important to them,” Mr. Maurin said. “The harsh reality in financial services is that price matters.”

Motusbank sees itself as a branchless online bank offering everything except credit cards and investments (at least for now) via website, mobile app and call centre. Its competitors are the big banks plus online outfits Tangerine (owned by Bank of Nova Scotia) and Simplii Financial (owned by Canadian Imperial Bank of Commerce). Other competitors include Alterna Bank, another online bank owned by a credit union, and EQ Bank, which specializes in savings accounts and guaranteed investment certificates.

These players have for years offered no-fee chequing and comparatively high rates on savings, but they haven’t yet made a noticeable dent in the market share of the big banks. Mr. Maurin said Motusbank has an advantage in launching at a time when Canadians are more comfortable than they ever have been with digital banking by phone or computer (Motusbank is a part of Canada Deposit Insurance Corp.).

A flat or inverted yield curve is also a help to Motusbank, and not just in putting upward pressure on fees at competitors. It also supports a unique introductory mortgage offering where a single 3.09-per-cent rate applies to all mortgages of one through five years, variable and fixed. Normally, there’s a rate premium for locking in your mortgage for longer terms.

“The rate itself is a launch special,” Mr. Maurin said. “It’s designed to make a little bit of noise, without being silly on pricing. The fact that all of the rates are the same is something we will probably hold to for a while.”

Coast Capital Savings, a big B.C. credit union, has announced a national expansion that would add yet another competitor to the big banks. We could see still more low-cost online banks, but only if customers respond.

Attracting clients is where Mr. Maurin’s mind is right now. “With something like this, you always face the ‘if you build it, will they come?’ risk.”

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Tickers mentioned in this story

Study and track financial data on any traded entity: click to open the full quote page. Data updated as of 13/06/24 4:00pm EDT.

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Royal Bank of Canada
Bank of Nova Scotia
Canadian Imperial Bank of Commerce

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