It’s not easy going up against Canada’s banking oligopoly, but some are trying.
Challengers like EQ Bank and Wealthsimple are rolling out new and cheaper offerings, growing their base and gaining brand recognition. But experts say that rather than creating a disruptive threat to the big banks, mid-sized players are more likely to be bought up by the majors.
“The banking market in Canada is not known to be very competitive. It’s not going to improve,” said Claire Célérier, Canada Research Chair in household finance at the University of Toronto’s Rotman School of Management, who expects more consolidation ahead.
The outlook comes after RBC closed its $13.5-billion takeover of HSBC Canada in March, while National Bank is in the midst of buying Canadian Western Bank in a $5-billion deal.
Fee competition
The loss of the two mid-sized players in what was already a small pool of competitors to the Big Six banks leaves few others with enough scale to even distract the majors.
Wealthsimple is emerging as one, after reporting this past week that it has more than $50 billion in assets, more than double from last year and more than seven times what it had five years ago.
The growth seen with the firm’s business model has led chief executive Michael Katchen to declare that Wealthsimple is the “first and only credible alternative to the big banks in Canada.”
The fintech company’s low fees are a central draw, offering no-commission trading and low investment management rates as part of a growing suite of products as it tries to fill a void of competition.
“When you take out the mid-range players, you make it even more less competitive, and I think the way that shows up is Canadians suffer when it comes to fees,” said Katchen.
The big banks maintain the sector is intensely competitive, especially on areas like mortgage rates.
But consultancy North Economics estimated in March that Canadians pay more than seven billion dollars a year in excess fees. The rough estimate was made by comparing financial results at Canada’s Big Five banks to those in the U.K. and Australia, where charges on accounts, overdrafts, ATM withdrawals and the like are much cheaper or free.
Consumers in countries like the U.K. benefit from aggressive regulators that have put in measures like making account switching easier, by putting the onus on banks to move all payment data and other information over to a new account.
There’s little sign of such switching ease coming to Canada, so competitors like EQ Bank are instead focusing on getting consumers to switch gradually.
“We’re trying to make that seem like a low-risk activity for somebody 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 switched over their payroll, which can provide an anchor, he said.
EQ has also rolled out new products like its notice savings account launched in June, which pays out higher interest rates when consumers agree to give at least 10 or 30 days notice of a withdrawal, and just this last week it launched a bank account targeted specifically at small businesses.
“The nice thing about being a medium-sized bank, it’s much easier to think about bringing that kind of product innovation to the market,” said Moor.
The bank’s efforts have led to its assets roughly doubling in the last five years to some $54 billion.
The wider market
The jumps in size at Wealthsimple and EQ are in contrast to some others smaller players like Laurentian Bank, which has seen its assets grow seven per cent to $47.5 billion in the same time.
Laurentian has been working on a turnaround including numerous executive shuffles, the selling off of business lines and other restructurings, but analysts are still skeptical of how much traction the bank can get even if it solves its operational issues.
“It’s not clear what Laurentian Bank’s structural advantage and competitive advantage will be at the end of all this,” said Vertias Corp. analyst Nigel D’Souza.
It’s not the only one struggling to see much growth. Manulife Bank has grown around 11 per cent to $30 billion since 2019, and ATB Financial is up some 14 per cent to $62 billion.
Canadian Western Bank was seeing higher growth, up 38 per cent to $42.5 billion, but of course it’s being bought up. In the co-operative world, Desjardins has managed to grow around 43 per cent to $444 billion, not too 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.
Challenges for smaller players
While some of the smaller banks are doing better than others, they all face the challenge of it being more expensive to raise money, in part through paying out those higher interest rates to attract deposits, said D’Souza. They also have to keep more capital on hand because they’re seen as less stable.
Perceptions of stability can also make it harder to convince people to park more cash at the bank than the $100,000 that’s federally insured, though Wealthsimple has gotten around this by partnering with several banks to offer upwards of $500,000 in insured deposits.
The overall hesitations on stability, however, along with other barriers like a lack of a branch network, limited economies of scale and less diversification, mean it will always be hard for mid-sized players to gain market share, said D’Souza.
“Our view has always been that there’s going to be more consolidation within the Canadian banking space, because the larger banks have structural competitive advantages.”
The consolidation could in its own way lead to lower fees, he said, as banks benefit from more economies of scale. Canada’s banking sector is already quite competitive on lending rates, he said.
And while a concentrated financial industry is something especially notable in Canada, it is part of a broader long-term trend, said Célérier.
“Banking markets are more and more concentrated, and this is the case more or less everywhere.”