New banks seek slice of hot market
New banks look to use technology to compete with Canada’s formidable behemoths
TORO N TO Banking is a fantastic business to be in, if the latest round of earnings by Canada’s Big Six banks is any indication.
Each of them beat fiscal firstquarter market expectations, had double-digit profit increases over a year earlier and collectively earned some $10.5 billion in adjusted net income.
It’s no wonder there is a new crop of entrants looking to carve out a piece of the Canadian financial services market for themselves.
Five new domestic banks have been approved by the Ministry of Finance and the Office of the Superintendent of Financial Institutions (OSFI) since the beginning of 2016. There are now 32 Schedule I banks — which are allowed to take deposits that may be eligible for coverage by the Canada Deposit Insurance Corp. — up 40 per cent from 23 banks five years ago. OSFI won’t comment on the applications in progress, but Meridian Credit Union is also undergoing the multi-year, multimillion-dollar process.
Costly brick-and-mortar branches are no longer a mandatory requirement when more Canadians are happy to do their banking on laptops or smartphones, but Canada’s financial behemoths are formidable competition.
The newest entrants — Street Capital Bank of Canada, Uni Financial Cooperation, Wealth One Bank of Canada Inc., Exchange Bank of Canada and Concentra Bank — are all banking that by focusing on a particular niche or service, or by using technology to connect with customers online or on their mobile phones, they will be able to stay in the game.
“The fact that we don’t have legacy systems, we are able to start from a clean slate and leverage new and emerging technology probably easier than the large traditional banks,” said Ed Gettings, chief executive of Street Capital Group Inc., the parent company of the similarly named bank.
But the storied institutions that make up the upstarts’ competition are becoming increasingly adept in the digital realm as well, and they also top the rankings of the most valuable and recognizable brands in Canada.
“Brand is incredibly important in banking,” said Laurence Booth, a professor of finance at the University of Toronto’s Rotman School of Business. “We might complain about our banks, but they are brands we all know and are familiar with.”
They also have the big budgets to heavily invest in their digital transformation to stay ahead of the curve. For example, the Bank of Nova Scotia in January launched a 70,000-square-foot “digital factory,” a separate campus to house bright minds from the worlds of science and technology in the hopes of developing the banking innovations of the future (ahead of both competitors and fintech startups).
Royal Bank of Canada is in the process of establishing an artificial intelligence lab in Alberta, while TD Bank Group is looking to hire another 1,000 people for its technology team on top of the 2,000 it has already hired.
And while there may be more competition, Canada’s biggest banks continue to hold the lion’s share of the market.
There was an initial flurry of applications for new chartered banks after 2001, when the federal government changed ownership rules in the Bank Act. After the change, banks with equity of less than $2 billion could be closely held (have a single owner). That allowed the likes of retailer Canadian Tire Corp. and telecommunications giant Rogers Communication Inc. to open banks.
However, the Big Six still account for 85 per cent of all Canadian deposits, 62 per cent of the total assets held by all financials, and 81 per cent of residential mortgages, according to a recent report by Robert Sedran, an analyst at CIBC World Markets.
That pattern hasn’t changed much in the past 20 years, as most Canadian retail banking customers rarely switch banks, Booth said.
Canadian consumers may be open to trying new things when it comes to restaurants or other services, but they often look to a perceived safe place or brand when it comes to their money, he added.
That’s where Uni Financial, formerly called Caisse populaire acadienne ltée, may have an advantage. The network of credit unions in New Brunswick (whose roots reach back to 1936) merged into one caisse and rebranded itself Uni Financial last year. Uni Financial in July became the first Canadian credit union to obtain a federal charter (it follows the Bank Act, but remains a credit union).
Chief executive Robert Moreau said Uni’s relatively smaller size allows it to be “more agile and react quicker” to the changing banking landscape than the Big Six. It also aims to focus on smaller markets that are less attractive to its bigger cousins, he said.
However, he acknowledges that the credit union’s size also means it “won’t be able to do everything and provide every solution.”
One strategy to compensate for this lack of size is to pool Uni’s re- sources and ideas with other credit unions, Moreau said.
“Anything that’s going to be looking into the digital space is going to be something that is, in the years to come, more and more discussed,” he said. “How can we pool our funds and our ideas together to better adapt to our customers, and to our reality also?”
Meridian Credit Union, which wants to have a new national online and mobile bank by mid-2018, is already rolling out digital capabilities for its existing business to get ready ahead of its anticipated approval by OSFI. This new digital bank, if approved, will be a subsidiary of Meridian.
The credit union plans to offer online secured mortgages by midyear and a digital wealth adviser service before the end of 2017, said chief executive Bill Maurin. It is also open to partnering with fintech companies going forward, he added.
The credit union can take deposits, sign up new members online and has mobile apps. Meridian has been spending roughly $1 to $2 million per year to ramp up its digital capabilities, he added.
“It is intimidating to hear of the magnitude, of the volume of people (Canada’s Big Six are) bringing in,” Maurin said. “But I look at what we’re pulling off with our digital team, both on the development side and the business side of digi- tal, and we’ve come a long way in a short time.”
Still, amid growing reports of cyberattacks, a brand name carries much weight with consumers online, Rotman’s Booth said.
“Just because you can lower the cost by digitization doesn’t mean it gives any advantage to a new entrant to the banking market,” he said. “In fact, it’s exactly the opposite, because you don’t have that brand name recognition and the security.”
Nevertheless, EQ Bank has managed to convince some 30,000 Canadians to sign up for a digital bank that they had probably never heard of previously.
Equitable Bank, an established player in the alternative mortgage space, launched the online banking venture in January 2016.
It now has some $1.1 billion in deposits after a flurry of interest helped by an initial offer of a threeper-cent interest account (it was brought down to two per cent in August.)
EQ Bank isn’t looking to compete directly with Canada’s big financial institutions, said Equitable’s chief executive Andrew Moor.
“We’re not looking to take 10 per cent of their market, or something,” he said. “If we got one per cent of the market, it would be huge for us.”
We’re not looking to take 10 per cent of their market, or something. If we got one per cent of the market, it would be huge for us.