Key Takeaways:
- The Canadian banking industry is undergoing significant changes, driven by government efforts to increase competition and the emergence of new tech-based players.
- Open banking, also known as consumer-driven banking, is being implemented to give consumers control over their financial data and make it easier to switch accounts and manage multiple products.
- The government has made promises to ban charges for switching investment and registered accounts, make switching accounts easier, and improve fee transparency.
- New players, such as Wealthsimple and Questrade, are expanding their banking offerings and securing banking licenses, increasing competition in the sector.
- Consolidation in the industry may not necessarily reduce competition, as informed and empowered consumers can drive competition even with fewer institutions.
Introduction to Canadian Banking Changes
The Canadian banking industry is experiencing a significant shift, with the government making efforts to increase competition and new tech-based players emerging. This change is being driven by the implementation of open banking, which will give consumers control over their financial data and make it easier to switch accounts and manage multiple products. The government has also made promises to ban charges for switching investment and registered accounts, make switching accounts easier, and improve fee transparency. As a result, new players, such as Wealthsimple and Questrade, are expanding their banking offerings and securing banking licenses, increasing competition in the sector.
The Emergence of Open Banking
Open banking, also known as consumer-driven banking, is a system that allows consumers to control their financial data and make it easier to manage multiple accounts and products. This system has been hailed by many as the best way to shake up the sector and increase competition. The government has already moved forward with legislation to make open banking a reality and has explicitly stated that fostering competition is part of the mandate. According to Steve Boms, executive director of the Financial Data and Technology Association, "This really isn’t open banking; it’s open finance." The government is looking to make up for lost time by including a wide range of financial products, such as investments and mortgages, in the mandate.
Government Efforts to Increase Competition
The government’s efforts to increase competition in the banking sector are being led by Prime Minister Mark Carney, who is well aware of the benefits of open banking. The government has made significant promises, including banning charges for switching investment and registered accounts, making switching accounts easier, and improving fee transparency. The Financial Consumer Agency of Canada has been tasked with looking into the structure, level, and transparency of fees charged by Canadian banks. The government has also promised to explore improving the transparency of cross-border transfer fees. According to Andrew Spence, who worked in the industry and now works as a consultant, "The budget signalled for the first time some significant political commitment to introducing competition into the sector."
Consolidation and Competition
Consolidation in the industry has seen several smaller players being bought up by larger banks. However, this does not necessarily mean less competition. According to Claire Celerier, Canada Research Chair in household finance at the University of Toronto’s Rotman School of Management, "There is no evidence of an ideal number of institutions to have competition… you could have a very competitive market with only four banks." The biggest factors are how informed consumers are and how empowered they are. If fees are totally transparent, and people can switch banks very easily, it can be extremely powerful. The government’s promises to make switching accounts easier and improve fee transparency may help to drive competition in the sector.
New Players and Emerging Trends
New players, such as Wealthsimple and Questrade, are expanding their banking offerings and securing banking licenses, increasing competition in the sector. Wealthsimple has launched its first credit card, while Questrade has secured a banking license. EQ Bank, the only remaining publicly traded bank outside of the Big Six, has announced a tie-up with Loblaw that will see it take over the grocer’s PC Financial portfolio and add it as a major investor. There is also the potential for more competition on the credit union side, as the budget promised to make consolidations and the jump to national credit union status easier. According to Michael Hatch, vice-president of government relations at the Canadian Credit Union Association, "To the extent that we can have policies… that encourage more institutions to compete from coast to coast to coast for Canadians’ business, then obviously we’ll have a more competitive sector, and better services and lower prices for consumers."
Conclusion
The Canadian banking industry is undergoing significant changes, driven by government efforts to increase competition and the emergence of new tech-based players. Open banking, consumer-driven banking, is being implemented to give consumers control over their financial data and make it easier to switch accounts and manage multiple products. The government’s promises to ban charges for switching investment and registered accounts, make switching accounts easier, and improve fee transparency may help to drive competition in the sector. New players, such as Wealthsimple and Questrade, are expanding their banking offerings and securing banking licenses, increasing competition in the sector. As the industry continues to evolve, it will be important to monitor the impact of these changes on consumers and the overall competitiveness of the sector.