Canada | Big Banks’ Competitors Try to Carve Out a Space

(Toronto) It’s not easy to fight Canada’s banking oligopoly, but some are trying.

Companies like EQ Bank and Wealthsimple are offering new, cheaper offerings, expanding their customer bases and gaining brand awareness. But experts say that rather than creating a disruptive threat to big banks, mid-sized players are more likely to be acquired by them.

“The banking market in Canada is not known for being very competitive. It’s not going to get better,” said Claire Célérier, Canada Research Chair in Household Finance at the University of Toronto’s Rotman School of Management, who expects to see more consolidation.

She made this observation after the conclusion of the acquisition of HSBC Canada by RBC for 13.5 billion in March. National Bank is in the process of buying Canadian Western Bank for 5 billion.

Fee competition

The loss of these two mid-sized players in what was already a small pool of competitors to the Big Six banks leaves few other players large enough to distract them.

Wealthsimple is becoming a unique company, having announced last week that it has more than $50 billion in assets, more than double what it had last year and more than seven times what it had five years ago.

The growth seen through the company’s business model has led CEO Michael Katchen to declare Wealthsimple the “first and only credible alternative to the big banks in Canada.” The fintech company’s low fees are a major asset, allowing it to offer commission-free trading and low investment management rates across a growing suite of products as it attempts to fill a competitive void.

“When you eliminate the mid-range players, you make [le marché] even less competitive. This manifests itself in making Canadians suffer in terms of costs,” said Mr. Katchen.

Major banks maintain that the industry is intensely competitive, particularly in areas such as mortgage rates.

But consulting firm North Economics estimated in March that Canadians pay more than $7 billion a year in excess fees. That rough estimate was made by comparing the financial results of Canada’s five big banks to those in the U.K. and Australia, where fees on accounts, credit lines, ATM withdrawals and more are much cheaper, or free.

Consumers in countries like the UK benefit from dynamic regulators who have put in place measures such as making it easier to switch accounts, requiring banks to transfer all payment data and other information to a new account.

There aren’t many signs that such ease of switching might come to Canada, so competitors like EQ Bank are instead focusing on how to nudge consumers to switch gradually.

“We’re trying to make it seem like a low-risk activity for someone so you can open a bank account while keeping your other bank account open,” said chief executive Andrew Moor.

The bank pays higher interest rates on accounts where a customer has transferred their payroll, which can serve as an anchor, he added.

EQ has also launched new products like its Notice Savings Account launched in June, which pays higher interest rates when consumers agree to give at least 10 or 30 days’ notice before a withdrawal. Last week, it launched a bank account specifically targeting small businesses.

“The advantage of being a mid-sized bank is that it’s much easier to think about bringing this kind of product innovation to market,” Moor said.

The bank’s efforts have allowed its assets to roughly double over the past five years, reaching some $54 billion.

The broader market

The jumps in size of Wealthsimple and EQ contrast with those of other smaller players like Laurentian Bank, which saw its assets increase by 7% to $47.5 billion over the same period.

Laurentian Bank has been working on a turnaround that has included numerous management shakeups, the sale of lines of business and other restructurings. Analysts remain skeptical about how much traction the bank can get even if it fixes its operational problems.

She’s not alone in struggling to see significant growth. Manulife Bank has grown about 11% to $30 billion since 2019, and ATB Financial has grown about 14% to $62 billion.

Canadian Western Bank saw higher growth, up 38% to $42.5 billion, but it is in the process of being bought out. In the cooperative world, Desjardins managed to grow about 43% to $444 billion, not far behind National Bank, the smallest of the Big Six, at $454 billion.

Meanwhile, RBC, the country’s largest publicly traded company, has about $2.08 trillion in assets.

The challenges of small players

While some of the smaller banks are doing better than others, they all face the challenge of making it more expensive to raise money, partly because they have to pay higher interest rates to attract deposits, D’Souza said. They also have to keep more capital on hand because they are seen as less stable.

The perception of stability can also make it harder to convince people to deposit more money in the bank than the federally insured $100,000, but Wealthsimple has managed to get around this problem by partnering with several banks to offer more than $500,000 in insured deposits.

However, general hesitations about stability, along with other obstacles such as lack of a branch network, limited market scale and less diversification, mean that it will continue to be difficult for mid-sized players to gain market share, D’Souza stressed.

“We have always believed that there will be more consolidation within the Canadian banking space because the larger banks have structural competitive advantages.”

Consolidation could lead to lower fees in its own way, he said, as banks benefit from greater economies of scale. The Canadian banking sector is already quite competitive on lending rates, he added.

While a concentrated financial industry is something that is particularly notable in Canada, it is part of a broader long-term trend, Mr.^me Celery.

“Banking markets are becoming more and more concentrated, and that’s the case more or less everywhere.”