BANKING ON A NICHE
Chartered banks are bringing a new era of competition to the financial industry,
What do a credit union, a Chinese-Canadian focused startup and a foreign exchange trader have in common?
They have all become chartered Canadian banks, the latest members to join an exclusive club following a rigorous, years-long initiation process.
The Office of the Superintendent of Financial Institutions (OSFI) has approved three new Schedule I banks since Jan. 1 — raising the number of domestic banks in this country to 30.
At the end of last year, there were 27 Schedule I banks, the same number as in 2011.
The more than10-per-cent jump this year suggests a lot of movement in an industry that traditionally has many barriers to entry.
The new wave of banking entrants is empowered by technology, post-financial crash confidence and opportunities for niche players in a new era of competition — and possible instability — in the financial services space.
Under the Canada Bank Act, domestic banks are called Schedule I, while foreign banks are called Schedule II. Schedule I banks are federally regulated and subject to strict regulations and approval criteria related to capital, governance and risk management.
Exchange Bank of Canada announced last Monday its virtual doors were open for business, while New Brunswick’s Caisse Populaire Acadienne (now called Uni) and Wealth One were given the go-ahead in July.
Another credit union, Ontario’s Meridian, said in August that it is in the second phase of its licence and confident its national digital-only offering will join the banking scene by 2018.
OSFI declined to comment on the reasons behind the high number of recent approvals or how many more are waiting in the wings.
It may seem like the current wave of banking entrants is a new trend, but it is actually the continuation of a decades-long wave of new competition, said Terry Campbell, head of the Canadian Bankers’ Association.
The doors opened in 2001 with changes to the Bank Act that ushered in tiered ownership structures that allowed smaller banks with $2 billion or less in equity to have a single owner.
“You began to see a relatively steady flow of new small domestic banks coming into the marketplace,” he said. The changes allowed retailers such as PC Financial and Canadian Tire and communications companies such as Rogers to create their own banks.
“It’s bringing more competition into the marketplace and has since the early part of the last decade,” Campbell said.
After a brief pause in the rush toward new banks during the 2008 to 2009 financial crisis — when many non-bank lenders actually left the marketplace — many entrepreneurs are going after specific niches.
While 2008 was painful, things turned around fairly quickly for Canadian banks. Potential new players saw technology providing opportunities and forgot the financial woes of the recession relatively quickly, said Joe Martin, director of Canadian business history at the Rotman School of Management.
“What I find not only in banking but in most industries is there’s an awful lot of amnesia,” he said.
“Something is happening in technology and technology always breeds extraordinary change.”
Wealth One, which received orders to carry on business in July, is a digital-focused bank that caters to the Chinese-Canadian community. It was founded by a group of Chinese entrepreneurs who discussed the opportunity for such a financial institution given the country’s large Chinese demographic.
Charles Lambert, Wealth One’s chief executive officer, left his job at Scotiabank for the opportunity to start a new financial institution — the first domestic bank in Canada owned by Chinese-Canadian immigrants.
It will be open to all Canadians but operate with “a deep knowledge and respect for Chinese values and culture” and offer services in Cantonese and Mandarin.
Lambert believes that providing culturally aligned services to one of Canada’s largest and fastest-growing immigrant populations, Wealth One will be able to carve out a niche that will lure some customers away from the big banks.
The bank will exist mainly online, but will also have offices in Toronto and Vancouver and a retail location in Markham.
It filed its application in 2012 and has gone through a strict review process since.
“Becoming a bank is a very, very long process,” Lambert said, adding that it decided to go through the process rather than a less-regulated approach because it will allow Wealth One to offer a broader array of products as well as scale up across the country.
Canada is “underbanked” and so ripe with opportunity for new entrants to become a domestic bank, said Randolph Pinna, CEO of the most recent arrival on the banking scene, Exchange Bank of Canada.
“In the United States, there’s 5,000 banking companies, whereas in Canada there’s maybe 30,” he said.
“That’s what’s really driving it — there’s opportunity for banks — the big four or five banks are making billions and billions of dollars and so some of the smaller companies are trying to take advantage of that.”
However, Canada’s banking system, which encourages fewer, larger banks that are federally regulated, has contributed to the stability of the sector, said Martin.
In contrast, U.S. regulations enable many more smaller institutions, he said, with about 100 new banks being incorporated every year. But many also fail.
In Canada, there haven’t been any bank failures since the 1980s, before OSFI was created, Martin said.
The newly minted Canadian banks are highly specialized and reliant on technology, which has opened the doors to more competition but also, potentially, less stability, he added.
According to Pinna, Exchange Bank’s web-based trading software allows its business and bank customers to make all their currency swaps online. Becoming a bank also guarantees the currency it trades is priced at the lower interbank rate. It can also give clients a more competitive price because of the lack of overhead for physical infrastructure.
“We see the advantage of not trying to be the traditional bank of trying to do every- thing for everybody,” said Pinna.
“We are focused on one category, which is foreign exchange, and we’re focused on one market area, which is the corporate or financial institution marketplace.”
Though Exchange Bank opened in its current form earlier this week, the wholesale foreign currency trader has been around since 2010. It is owned by Currency Exchange International of Canada Corp., a subsidiary of a Floridabased company.
It filed its application to become a bank four years ago, eyeing the chance to “open doors that would not normally open for the non-bank foreign exchange provider,” Pinna said.
Some clients wouldn’t or couldn’t do business with the company unless it was a bank.
Though it seems like there are more new bank approvals, it’s not as though OSFI has lowered the bar, said Bill Maurin, CEO of Meridian credit union. The Ontario-based credit union announced in August it is in the second phase of a process to create a federally regulated bank subsidiary.
“The reality is that the process of getting a bank licence today is considerably more robust and time consuming and with a higher threshold than five or 10 years ago,” said Maurin.
“And we can speak to it because we’re living it right now.”
Several federal finance ministers have made overtures to the importance of increasing competition in the financial services sector but, so far, data from Rotman suggests few inroads have been made.
Between 2000, the year before the Bank Act was changed, and 2015 the Big Five Canadian banks have seen just a modest decline in their share of domestic assets — falling from 92.5 per cent market share to 91.4 per cent in 15 years.
“Becoming a bank is a very, very long process.” CHARLES LAMBERT CEO OF WEALTH ONE
Charles Lambert, CEO of Wealth One Canada, visits Markham as work continues on the company’s only retail branch in Canada. Wealth One plans to cater to Chinese Canadians and will provide services in Cantonese and Mandarin.