Canadian banking needs more competition

There is no one-sizefits-all solution to Canadians’ cost-of-living challenges. But whether we’re talking hotdogs, housing or anything in between, the economic impact of competition is clear: as the number of options consumers can choose from goes up, prices come down and service improves.

The battle for market share is a better spur to innovation and increased productivity than any industrial policy could ever be. That’s why it was disconcerting to learn from the Competition Bureau last fall that since 2000 the number of uncompetitive industries has increased in Canada, dominant firms are less likely to be challenged and profits and markups have steadily risen. It’s Canadians who pay for that.

Against this backdrop Finance Canada recently held a welcome public consultation on how to improve choice, affordability and quality of service in the financial sector. By now, Canadians are accustomed to the pain points the consultation probed: high fees for ATM transactions, non-sufficient funds and investment account transfers, which discourage customers from choosing the financial services provider that actually offers them the best value and service.

Competition and product innovation are further hindered by Canada’s outdated financial infrastructure, which lags the real-time payment settlement and consumer-driven banking that have measurably improved outcomes for consumers in all other G7 countries.

Part of the lag is from complacency. Those who seek to block competition argue against change by citing Canada’s relatively stable performance during the 2008 financial crisis. Of course it’s in the public interest to protect Canadians from over-leveraged banks or subprime mortgages, but doing so does not require protecting financial institutions themselves from the pressures of competition.

Another part of the problem is plainly structural. Canada is unique in its federal/provincial split jurisdiction over financial services. The resulting regulatory uncertainty diffuses accountability and tilts the playing field in favour of incumbents, who can outmatch any changemaker in both resources and Rolodex. Nobody in the system truly has the authority or accountability to deliver consumer choice — including the Competition Bureau, which is only empowered to offer recommendations, which have been repeatedly ignored over the last decade.

The loser in all this is the Canadian consumer, who is denied quality service taken for granted elsewhere. All while paying some of the highest banking fees in the world: $694 per household per year, according to Statistics Canada.

In 2023, half of all account transfers moving new clients’ funds from their existing institutions into Wealthsimple were performed manually — by fax, mail and cheque. Thousands took more than four weeks to complete — despite widespread availability of affordable and secure automated technology. Not only are manual transfers more onerous and harder to track, they are also slow and leave clients stressed, vulnerable to market volatility and subject to unreasonably high fees. (We estimate these fees to be upwards of $100 million annually). So why do financial institutions continue to use them? Frankly, the most likely reason is that they deter clients from leaving. Yet provincial securities regulators have not mandated automated transfers or imposed fee or time limits.

Unlike in other G7 countries, payments in Canada do not settle in real time. Money can move fast in the 21st century but perverse incentives against adoption of instant settlement persist. Financial intermediaries clearly enjoy earning interest in the time between payment initiation and settlement. But for consumers and businesses alike, having to send payment three to five business days before it’s due (as utilities and universities advise) is a real hardship, as is dealing with delays in receiving payments such as salaries or sales incomes.

As a relatively recent entrant into the marketplace, Wealthsimple recognizes that our concentrated financial system will not open up overnight. But it does need to open up.

A good start would be to agree on a common definition of the public interest as it relates to financial sector supervision — one that incorporates the need to balance between limiting macro-prudential risk, which is obviously crucial, and providing consumers with meaningful choice, which too often has been undervalued in financial sector policies.

Next we should ensure that the mandates, authorities and accountabilities of all financial regulators align with the public interest as defined. And, finally, we should give the Competition Bureau meaningful authority to enforce its mandate in financial services and to audit regulators’ pursuit of the public interest.

Nothing here makes for a great campaign slogan. But Australia, the U.K., the U.S. and other countries we typically compare ourselves with have shown they can deliver systemic change that will outlast election cycles.

We all share an interest in preserving the stability and security of our financial system. But we also all share an interest in providing consumers — who are all of us — greater value from the institutions that hold our life savings. With the right longterm vision and political will, Canadians can have the better banking system they deserve.