Imagine a once-dominant hockey team that’s fallen on hard times. Injuries, poor draft picks, and outdated strategies have sent them to the bottom of the standings. The fans are restless, sponsors are pulling out, and the future looks bleak. Trust me, I’m a Montreal Canadiens fan, so I feel the pain! My son also went through something similar with his travel hockey team losing all top players to several junior programs in the country. Within a two-month period, they had to rebuild the roster. After a slow start of the season, they were able to grow as a team and win the state championship!
Canadian banking may be able to relate.
With a tough fiscal 2023 and some dull skate blades slowing things down, 2024 has shaped into a rebuilding year. How can it get back on track? Let’s take a look at the state of Canadian banking, the strengths and weaknesses of the sectors, tools available, and how the industry can tap into them strategically to build a solid team and playbook for the future.
The Game: What is the current state of Canadian banking?
Assessing the current landscape – how the game is being played today – is critical to rebuilding successfully.
The financial results for fiscal year 2023 demonstrated a difficult year for the Canadian banks. None of the top 6 banks showed greater year-over-year earnings. The same could be said for most other key metrics. That said, they are staying relatively efficient, though ROE varied more widely between the highest and lowest performers. Provisions for Credit Losses were a big driver of the lower net incomes, with an average of 6.7% of revenues across the top 6 (compared to an average of 2.5% in FY22).
But the game is changing – there are signs of an upswing to come. Banks reported that mortgage renewals will peak in 2026, with as much as a third of their renewals for the next 5 years. This will give time for mortgage rates to come down and for some wage inflation to help reduce the impact.
Population growth supported by immigration is another positive sign for the economic outlook. More than one million immigrants moved to Canada last year, breaking previous records by a wide margin. Although this is creating short-term supply pressure on the real estate market, it will have long-term benefits for the economy.
With the PCL already in the books, potential improvements in the macroeconomic conditions, and more people to serve, banks should be well positioned to focus on future strategic investments – and their recent stock performance reflects this.
The Team: How are individual sectors performing?
With a clear picture of the game in hand, it’s time to understand the players you have, their strengths and vulnerabilities, and how to tap into them successfully.
So how are the players faring?
1. Consumer Banking and Payments: Leveraging a strong foundation to innovate for an eager market
As a Canadian, I’ve been amazed how the payment ecosystem adopted innovation faster in Canada than the U.S. I can’t even remember when restaurants in Canada fully adopted the wireless POS terminals to pay at the table. Canada also has been a leader in tap-to-pay adoption, enabled by the centralized financial system, earlier rollout of EMV chip cards, and initiatives like contactless transit payments. The U.S. has been slower to adopt tap-to-pay, weighed down by a fragmented banking system, existing infrastructure, and early reliance on chip-and-PIN.
However, since the pandemic, the U.S. is catching up on the consumer payments (C2B) front. This U.S. trend is a good benchmark – to stay ahead, Team Bank Canada needs to leverage its inherent advantages while continuing to improve on to the great building blocks of the past. The Canadian market is primed and eager for continued innovation.
2. Open Banking: Moving forward with a more deliberate approach and the scale to succeed
As of early 2024, open banking, which promises Canadians the choice of who has access to their financial data, is not yet available in Canada. The Canadian government, having previously promised an early-2023 launch, is still considering how to safely introduce open banking, also known as consumer-driven banking. The government’s plan includes:
- Using a government-led body to oversee the system
- Limiting involvement from larger lenders
- Introducing legislation through Budget 2024
- Fully implementing a consumer-driven banking framework by 2025
There are plenty of markets to learn from: open banking is already available in the UK and the European Union. It also is moving ahead in the U.S., thanks to a recent rule proposed by the Consumer Financial Protection Bureau. The CFPB is now reviewing some 11,000 comments received by the end of 2023, and the reality of fully scaled open banking in the U.S. is still 3-4 years away.
The Canadian banking ecosystem has the right scale to go up in the world ranking of efficiencies and inter-operability by helping in the development of win-win policies and capabilities and showcase the full power of open banking use cases.
3. B2B Payments: Continuing to modernize… slowly
On the B2B payment side, banks and fintech in Canada, like in the U.S., are tackling the challenge of replacing legacy B2B payment methods like checks and wires. Unlike consumer payment, which benefited from the pandemic to accelerate modernization, the B2B space has been slow to adopt new faster, cheaper methods.
One innovation gaining traction is Real-Time Payment (RTP). The concept of instant, 24/7 funds transfer revolutionized by RTP promises great benefits. Despite these advantages, rollout in North America has been slow.
In 2021, Interac was designated as a Prominent Payments System by the Bank of Canada and launched a new B2B product to transfer payment in real time. That same year, Payments Canada announced that Interac was selected to build the infrastructure for a new, national Real-Time Rail. While it has suffered delays, the RTR would facilitate payments and act as a platform for innovation, allowing third parties to develop new products and services giving Canadians new and faster ways to pay and transfer money. As of early 2024, it is uncertain when the RTR system will go live, which is putting Canada way behind the US on real-time payment.
In the U.S., The Clearing House RTP network, launched in 2017, and its competitor FedNow have large number of institutions signed up (as of Dec. 2023, 460 for TCH and 320 for FedNow), but the use cases are still not obvious for many companies (emergency payments like failed payroll run, replacement of ACH in B2B, insurance claims payouts, etc.) and not all institutions have a live program offering.
It is time for Canada to acquire a great defense in the rebuilding years by establishing balanced regulations so that consumers are protected and the eco-system is solid in real time payment. This strong defense will enable staging great offensive plays from the Canadian zone to the International zone.
4. Capital Markets: Remaining resilient and adaptable in the face of rule changes
The Canadian capital market sector is a vital engine of the country’s economy, channeling funds to businesses and facilitating wealth creation. In 2023, just like the other banking units, the sector navigated a complex landscape marked by global economic uncertainties, rising interest rates, and geopolitical tensions.
Despite these challenges, it demonstrated resilience and adaptability with mixed results across the Capital Market divisions of the top six banks. Combined 2023 revenues were up 10.2% vs. 2022. The net income from Capital Market varied greatly (from TD down 16.7 to RBC up 22.9%) for a combined increase of 3.3% vs. 2022.
Changing regulatory requirements continue to impact strategy and returns for the sector. The new SRO (Self-Regulatory Organization), the implementation of SEDAR+ as filing system, upcoming securities laws on Crypto, and the Basel II Endgame to name a few all put pressure on development capacity within the banks. Firms are responding by shifting their focus to client-driven trading revenue and fee income to reduce risk, preserve capital, and are also investing in technology to support growing levels of electronic trading across all markets. Competition is expected to remain intense for transactions with high-quality clients.
Banks are also continue to embed ESG capabilities throughout their capital market units to support clients with their transition to a lower carbon economy.
Just like a good management office in hockey, Canadian banks have been good at trading and roll with the punches of new rulings. It will continue to be an important part of the bank strategy.
5. Wealth Management: Innovative disruptors raising the bar
As in consumer payments, Canadians are increasingly turning to online platforms for direct investing, attracted by lower fees, greater control, and access to a wider range of financial instruments compared to traditional full-service brokerages. Fintech corporations like Questrade and Wealthsimple have gained ground over the last 10 years and attracted cost-conscious investors with competitive commission structures and streamlined trading interfaces.
This has created a push towards innovation and cross-sale focus at the more established players like RBC Direct Investing, TD Direct Investing, and CIBC Investor’s Edge. The large banks want to retain customers within their product set, especially with the uncertainty that open banking will bring.
The Equipment: What are some strategies that all sectors can leverage?
While each player works to hone their own skills, at the end of the day, everyone needs skates and sticks.
Canada can enable a stronger banking sector for all by removing obstacles and better leveraging the tools at its disposal.
Stronger Enforcement and Regulatory Preparation for Modern Banking
Canadian banks have faced recent scrutiny regarding their anti-money laundering (AML) practices, specifically the significant gaps in regulatory implementation and enforcement. Some of the Key Issues:
- Compliance Deficiencies: Recent fines imposed on major banks (RBC, CIBC) by the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC) for failing to report suspicious transactions and failing to meet due diligence requirements highlight systemic weaknesses in internal controls and risk management. TD is also expected to be fined in 2024 by the US regulatory bodies.
- Regulatory Framework Limitations: Critics argue that FINTRAC lacks sufficient resources and investigative powers to effectively monitor and enforce AML regulations. Additionally, loopholes exist regarding cross-border transactions and corporate structures, making it easier for criminals to exploit the system.
- Emerging Threats: Canada’s growing Fintech sector and virtual asset space pose new challenges for AML compliance. Cybercrime and fraud are also evolving, requiring sophisticated detection and prevention methods.
Here, it’s all about the goaltender. Without an agile leader in net with the right technique and calculated risks, it’s hard to make it far in the playoffs.
Strategic and Well-Executed Mergers & Acquisitions
Canadian banks are sitting on a pile of cash and are hungry – a situation in which inorganic growth makes a lot of sense.
Canadian banks are active in pursing the U.S. markets through acquisitions. In December 2021, Bank of Montreal (BMO) agreed to spend $16.3 billion to buy Bank of the West and its 1.8 million U.S. customers from BNP Paribas. It successfully completed the merger in the Fall of 2023. In March 2023, TD was successful at completing acquisition of Cowen Inc., accelerating their U.S. dollar growth strategy by adding and expanding capabilities in U.S. equities and global research, increasing depth in key growth verticals such as Healthcare, and adding scale and high-quality talent.
Within Canada, M&A have been relatively rare in recent memory until RBC announced its acquisition of HSBC Canada, the biggest domestic banking deal on record. The $13.5-billion takeover, expected to close at the end of March 2024, will deliver market share and client base expansion with globally connected clients for RBC, as well as strategic deployment of excess capital with attractive financial returns and great talent acquisition.
Perhaps rebuilding includes merging teams. This needs to be done carefully from end to end – from due diligence to integration. Cultures can clash and playbooks can be confusing. The integration can also slow down other important parts of the rebuilding efforts, so backfilling roles may be necessary for a limited time.
Setting the Stage for a Comeback
All-in-all, the Canadian banks and fintech sector is going through rebuilding years. Just like the struggling hockey team, the sector needs to:
- Reassess its strategy: Analyze what went wrong, identify weaknesses, and develop a new game plan for success. This might involve diversifying its portfolio, focusing on underserved markets, or investing in innovative technologies.
- Build a strong foundation: Draft talented personnel, invest in training and development, and cultivate a culture of high performance. Just like a hockey team needs skilled players and a strong coaching staff, the bank needs competent employees and effective leadership.
- Embrace flexibility: Adapt to changing market conditions and customer needs. A rigid playbook won’t win on the ice or in the financial world. The bank needs to be agile and responsive to stay ahead of the competition.
- Focus on teamwork: No player wins a game alone, and no bank thrives in isolation. Collaboration, communication, and a shared vision are essential for success. Just like a hockey team needs each player to buy into the system, the bank needs all its employees working towards the same goals.
- Play the long game: Rebuilding takes time and dedication. Short-term setbacks are inevitable, but staying focused on the long-term vision will ultimately lead to victory. Just like a hockey team that weathers a losing streak to eventually make the playoffs, the bank needs to be patient and persistent in its rebuilding efforts.
Remember, a strong comeback requires not just talent but also grit, determination, and a willingness to learn from mistakes. With the right approach, the banking sector should come out of it with a great platform and supporting economic factors over the next 5-8 years to develop innovative products and regain a leadership position for great customer and corporation experience at competitive price points.
Banks have never seen more disruption, from unprecedented market and regulatory challenges to intense competition from fintech challengers. Further Advisory works with major financial services firms to establish transformational strategies, build new digital capabilities, and accelerate launches, all while modernizing core business operations.
