BANK­ING ON A NICHE

Char­tered banks are bring­ing a new era of com­pe­ti­tion to the fi­nan­cial in­dus­try,

Toronto Star - - GTA - SUNNY FREE­MAN BUSI­NESS REPORTER

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

CHRIS SO PHOTOS/TORONTO STAR

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.

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