Canadians are a loyal bunch when it comes to their banks. They carp about the fees, but they love the success of the Big Six: the stability, the familiarity, the ever-increasing profits and higher dividends.
Financial stocks make up 37 per cent of the value of shares traded on the S&P TSX Composite index, so pretty well every portfolio has one or two banks in it. The top two Canadian stocks owned by the Canada Pension Plan are RBC and TD Bank, worth about $ 2 billion at current prices.
But while the banks have been the slam-dunk investment choice of the last 25 years, they are surrounded by disruptive technologies that are chipping away at their business. They still have huge advantages and big profit potential, but the going will be tougher.
Secular trends that worked for them may not continue. Favourable regulation which kept out competition is one. Another, is that since the early 1990s, they profited enormously as inflation and interest rates fell. Mortgage lending boomed and profit margins grew. But inflation and rates don’t have much more room to fall.
The maturing of the baby boom brought an expansion into wealth management. The banks began offering advice and then bought stockbrokers to earn a fee from buying and sell the securities. Now, low-cost investment advice is on the rise.
The banks have always bet on the full service umbrella – bringing you into the house and then cross-selling everything from credit cards to American cash for your Florida holiday. The tradeoff for the convenience has been that they don’t offer the best rates for anything.
A recent report by consultant PwC, a firm which provides tax and advisory services to large companies, found Canada now has 80 financial technology firms. These startups may one day be the next Big Six bank.
They’re going after “customer pain points with innovative, easy-to-use and cost-efficient solutions,” the report found. The companies offer banking on the go through mobile payments, or ways to bank that don’t include the big banks.
In addition to companies offering apps – think Apple Pay – there are plenty of players now providing online banking with low, or no fees with better interest rates. They’re cheaper because they don’t have branch networks. Some don’t even have bank machines.
Another is PC Financial, owned by Loblaws, but operated by CIBC. It was launched in 1998 and also has more than 2 million customers. EQ Bank entered the fray in January.
Zag was acquired by Desjardins in 2011. Desjardins is the largest association of credit unions in North America and sees Zag as a way to grow an outside-of-Quebec banking presence.
“You won’t see flashy advertising and fast-changing products that fizzle out,” he says. “Just plain vanilla, uncomplicated banking.”
It’s messages like that, on all fronts, that are giving Canada’s banking giants pause for thought as they look to the future.
More columns by Adam Mayers