Experts predict more buyouts in the near future
Alternative banks in Canada are chipping away at the Big Six’s market share with new, affordable loans, but experts predict these smaller players could soon be absorbed through consolidation.
While these challengers are growing their customer base, analysts suggest that they are not likely to disrupt the dominance of the Big Six banks. Instead, they may be prime targets for acquisition.
“The banking market in Canada is not known to be very competitive. It’s not going to improve,” Claire Célérier, Canada Research Chair in household finance at the University of Toronto’s Rotman School of Management, told The Canadian Press.
Célérier predicted more consolidation in the industry, especially after RBC’s $13.5 billion acquisition of HSBC Canada in March and National Bank’s ongoing $5 billion deal to acquire Canadian Western Bank.
With the loss of two mid-sized players, the pool of competitors to challenge Canada’s banking giants has shrunk even further. Wealthsimple, however, is positioning itself as a key alternative.
The company recently reported over $50 billion in assets, more than doubling from last year. Wealthsimple CEO Michael Katchen believes they’re filling a gap, declaring his company to be "the first and only credible alternative to the big banks in Canada."
Wealthsimple’s appeal lies in its low fees, offering no-commission trading and low-cost investment management. Katchen warned that with fewer mid-sized competitors, Canadians are suffering from higher fees.
“When you take out the mid-range players, you make it even more less competitive, and I think the way that shows up is Canadians suffer when it comes to fees,” he said.
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However, Canada’s major banks argued that the sector remains competitive, especially on lending products like mortgages.
Still, a report from consultancy North Economics estimated that Canadians pay over $7 billion annually in excess fees compared to countries like the UK and Australia, where banking services like overdrafts and ATM withdrawals are often free or cheaper.
EQ Bank is also trying to differentiate itself by offering higher interest rates on accounts and launching innovative products.
CEO Andrew Moor explained that the bank focuses on making it easy for customers to switch by allowing them to open an account while keeping their current one active. EQ’s new products, like its notice savings account and small business accounts, have helped boost its assets to $54 billion, doubling in the last five years.
“The nice thing about being a medium-sized bank, it’s much easier to think about bringing that kind of product innovation to the market,” said Moor.
Despite success stories like EQ Bank and Wealthsimple, smaller financial players face significant challenges. Mid-sized banks like Laurentian Bank and Manulife Bank have seen modest growth, but analysts remain sceptical about their ability to gain ground on the big banks. Laurentian has been going through a turnaround but is still struggling to find a competitive edge.
“It’s not clear what Laurentian Bank’s structural advantage and competitive advantage will be at the end of all this,” said Nigel D’Souza, an analyst at Veritas Corp.
Mid-sized banks are also facing higher costs to attract deposits by offering better interest rates, and they need to hold more capital to counter perceptions of being less stable than the larger banks.
Additionally, smaller banks struggle with the challenge of convincing customers to deposit more than the $100,000 that’s federally insured, making it harder for them to grow.
D’Souza also believes that more consolidation is inevitable in Canada’s banking sector. Larger banks benefit from economies of scale, which allow them to offer lower fees and more competitive products, making it harder for mid-sized players to gain market share.
“Our view has always been that there’s going to be more consolidation within the Canadian banking space, because the larger banks have structural competitive advantages,” D’Souza said.
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