Growth of Canada’s banks at risk
Face economic headwinds such as technological, regulatory demands
Norm Cappell acknowledges he made a gutsy move when he left a senior job in the capital markets division of Royal Bank of Canada six months ago to join an upstart online lender.
But the 40-year-old predicts the path he took will become more worn in the coming years as traditional banks face increasing technological and regulatory demands and a wave of competition from upstart rivals against a backdrop of economic and market pressures.
“I don’t think the business is as fun as it used to be. And I think a lot of people would tell you that,” Cappell, who is now head of capital markets at Toronto-based online lender Borrowell, said in an interview this week.
“There’s just been extraordinary pressure on — the institutional financial world over the last 10 years by virtue of a number of things — pressure on the technology side, pressure on the cost side, pressure on the regulatory side,” he said.
In Canada, those pressures are combining with challenging economic times and, in particular, woes in the oilpatch — a recipe industry watchers predict will lead to cost cutting, including job reductions.
“Expense offsets are a lever (the banks pull) to protect the bottom line,” said a Toronto-based financial services analyst, who spoke on condition that he would not be named.
With the next fiscal year looking “weak” for the banks, “net head count reductions would not be overly surprising,” the analyst said.
National Bank Financial has already announced cuts that will affect “a few hundred” employees. At the same time, the bank issued shares this month to shore up its capital cushion.
Bank of Nova Scotia, which announced plans last November to cut about 1,500 jobs across the bank’s domestic and international operations, recently indicated the cuts would be deeper.
“Our primary focus when reducing costs will be so we can invest in areas that are going to increase the speed and quality of service for our customers,” a Scotia spokesperson said via email, noting the initial cuts were part of a three- to four-year process aimed at simplifying operations and reducing duplication.
Cost-cutting, which a recent report from global consultancy McKinsey & Co. deemed “the only cylinder still firing in the profit engine” of banks, is clearly also on the agenda of Canadian Imperial Bank of Commerce. At an investor conference Wednesday, CIBC’s chief financial officer Kevin Glass said Canada’s fifth-largest bank would take a restructuring charge of up to $200 million in the fourth quarter.
CIBC, which plans to cut costs by as much as $600 million by 2019, did not disclose whether the cuts would include job losses.
But even as the banks pare down traditional jobs like frontline tellers, they are beefing up in other tech-focused areas to face off against an increasing number of mobile and online rivals.
Toronto-Dominion Bank, for example, announced this month it will create more than 120 jobs over the next year “dedicated to technology innovation.” These jobs will be in the Waterloo, Ont., region, a hotbed for tech.
However, because the banks are outsourcing much of the technology development, or forging partnerships with some of the competing financial technology players, there’s a good chance there will be net job losses in 2016, industry watchers say.
In one of the latest examples of this trend, CIBC executives said Wednesday the bank has partnered with “fintech” — financial technology — companies to offer online loans to small businesses.
The size of the threat to the banks from fintech upstarts in Canada is hard to peg at this point, partly because it is early days compared to developments in the United States and the United Kingdom, and partly because Canadian banks are so dominant in the domestic market.
It is also far from clear, judging from the drubbing some publicly traded fintech companies have taken in the markets this year, which, if any, of the upstarts will come out ahead.
Among the potential threats, according to a recent report from Accenture, are lost market share and revenue, lower margins, and banks being separated from their customers in some lines of business, which would make it more difficult to sell them other financial products and services.
The report noted that global investment in fintech ventures had tripled to US$12.21 billion in 2014 from the previous year.
Meanwhile, the new report on the state of the global banking industry from McKinsey & Co. says “banks’ losses to (fintech) attackers have been little more than a rounding error.” But things are about to change, the report predicts, suggesting 20 per cent to 60 per cent of profits in five banking business lines will be at risk by 2025, with consumer finance the most vulnerable.
Banks that embrace the digital revolution can find success, holding off attackers with one hand and less nimble incumbents with the other
“Attackers will likely capture only a small portion of these businesses; most of banks’ losses will come from margin compression as attackers force prices lower,” the report said, adding that corporate and investment banking will be much less affected than lines of business including mortgages, small business lending, and retail payments.
The McKinsey report suggests ways the traditional banks can fight back, including capitalizing on their biggest advantages, data and access to the customer, while adding the digital skills needed to become nimble low-cost competitors.
“To win, banks will have to beat newcomers at their own game,” while rebuilding customer trust, the report advises. “Banks that embrace the digital revolution can find success, holding off attackers with one hand and less nimble incumbents with the other.”
Dave McKay, chief executive of Royal Bank of Canada, said this week Canada’s largest bank has made it a priority to harness data and access technology to overcome challenges to three traditional banking lines: payments, lending, and money transfers.
“We have to lever machine learning to support those three channels,” McKay said at a conference Thursday in Toronto, where he acknowledged the “fundamental transformation” required to move from traditional banking to options such as giving customers a self-serve channel through their smartphone.
Cappell, who was a Harvardtrained lawyer before he moved into banking, said the culture in the large financial institutions will make their transformation more challenging.
“The nature of large institutions is bureaucracy and bureaucracies, almost by design, don’t change as quickly,” said Cappell.
“They’re designed to have levels of reporting and levels of decision making, and so they don’t lend themselves to innovation,” he said, noting that officials at his new employer, online lender Borrowell, sized him up for several weeks before hiring him to ensure he could make the transition from incumbent financial institution to challenger.