OTTAWA’S TWO BIG RISKS TO BANKING.

Big changes are on the horizon for Canada’s chartered banks. We’re not talking here of the public preoccupations of bank CEOS and their alleged institutional focus on ESG investing, diversity, equality, carbon policy and other high-fashion initiatives promoted by the banks and their departments of “thought leadership.”

The real change comes from two technology trends that are closing in on the banks, both under the regulatory oversight of federal institutions. The first is open banking; the second is the growing support for central banks such as the Bank of Canada to get into the digital currency transaction business in direct competition with the big banks.

The open banking movement got a bit of a boost Wednesday from Finance Minister Chrystia Freeland. After months of delays that irritated the rent-seeking fintech industry, the final report from Ottawa’s Advisory Committee on Open Banking landed with a plan to get something up and running by maybe 2023.

The report’s recommendations are thick with proposed rules and regulatory processes and structures that may not satisfy the burgeoning claque of companies — including Power Corp.’s Wealthsimple — clamouring to elbow their way into the banking industry. The main objective of the movement is to force the big banks, which currently own and control client financial information, to release all their customers’ data so that upstart fintech companies can sell services to the same customers. Laws would have to change, and consumers would have to approve of the release of their personal financial situations to third parties.

In the words of the manifesto of the Canadian branch of the Open Banking Initiative, the objective is to take data ownership away from the banks who use their control “to set the pace of innovation to suit their own purposes rather than meeting the changing financial needs of all Canadians.”

Depending on its regulatory structure, open banking could shake up the banks — although it could also give the banks an opportunity to compete with one another and the fintech operators. We shall see.

Meanwhile, a second and more troubling front in the attack on the big commercial banks is being built within the Bank of Canada and throughout the global central bank community, where there is constant talk of creating central bank digital currencies (CBDC).

CBDCS would be similar to the Bitcoin cryptocurrencies of the world, except they would be run by national central banks. If central banks got into the crypto business, they would likely drive the crypto business out of business — as suggested recently by U.S. Federal Reserve Chairman Jerome Powell. With CBDCS, said Powell, “in particular, you wouldn’t need stablecoins, you wouldn’t need cryptocurrencies if you had a digital U.S. currency — I think that’s one of the stronger arguments in its favour.”

What Powell did not say is what a lot of others have warned about. If central banks get into the digital currency business directly they would be competing with the existing banking industry. The headline on a recent report in The Economist put the case bluntly: “When central banks issue digital money, will banks survive the transition to a new monetary system?”

In banking economics, it’s known as disintermediation, which happens when the middlemen (in this case the banks) are cut out of a transaction system. If the disintermediation is a function of market competition, economic benefits flow. But if the market is disrupted by government agencies using extraordinary powers, the effect is quite different.

The CBDC concept is a radical move that could pull deposits out of the banking system and onto the balance sheets of central banks. The Economist report said that “if CBDCS proved popular, they could suck all deposits out of the banking system.”

Nobody would have to worry about such a colossal financial shift were it not for the fact that the idea is being seriously reviewed by the International Monetary Fund and other global agencies, along with politicians. Congressional hearings into CBDCS began in July.

The Bank of Canada last month published a paper (The Positive Case for a CBDC) that portrayed a central-bank issued digital currency as a mighty tool to curb the abuses in the current financial system. A Canadian CBDC “would improve the consumers’ choice by giving them the option of a digital nonbank store of value that is risk-free. Retail deposits in Canada have several advantages over cash: they can earn interest, have a high degree of safety from theft and can be used for online payments. A CBDC, however, could offer the same level of safety as cash (because central banks cannot default on their nominal obligations) while allowing use in payment systems for online transactions and peer-to-peer transfers.”

The bank paper goes on to highlight other CBDC benefits, including the ability to curb the market power of credit card companies and their “high fees for retailers” that are passed on to consumers. “Without a public digital payment option, current problems related to competition are likely to worsen, and promising future markets might not fully realize or equitably distribute the benefits of innovation. In other words, a CBDC could be necessary in the future to ensure a competitive digital economy.” As for disintermediation risk to the banks, the paper dismisses the threat as “limited” because the banks have the ability to raise money from large institutions.

Maybe the banks should be producing some thought leadership on CBDCS.

FIRST THERE’S OPEN BANKING, THEN THE BANK OF CANADA’S DIGITAL CASH.