Banking history is characterized by crisis after crisis, the comeback that follows, and the inevitable repetition of this cycle. The 2008-2009 financial crisis and the one we face today clearly prove how vulnerable even the most solid system can be. Yet, there’s one major country whose banking systems seem to stay relatively untouched: Canada.
As part of the G7 and as the 10th-ranked world economy, it’s expected that the country will be affected by problems similar to those of its neighbours, the U.S. The reality couldn’t be more different. 560 U.S. banks have failed since in the U.S 2000, but no Canadian banks have gone under in the 21st century. Even in the middle of the worst financial crisis in history, the Great Depression of the 1930s, no Canadian Bank failed.
It’s fair to say that Canada has one of the most stable banking systems in the world, yet being safe and powerful does not always accompany development. When the digitalization and Fintech penetration levels are analyzed, interesting patterns and factors we’ll address start to appear.
The natural question that follows is how Canada’s banking system is so stable compared to larger economies. The answer lies in what it ‘lacks:’ competition. Only six major institutions dominate the country’s banking system compared to the thousands of regional banks that constitute the US system.
Ing-Haw Cheng, an associate professor of finance at the University of Toronto’s Rotman School of Management, insists that Canada’s more concentrated, less competitive banking system is why the system has held itself together so well in recent decades. Being close to centralization assures low failure rates.
Yet, centralization equals resistance to change, which is the one factor that makes it hard for Fintech to penetrate the digital economy to boom.
Unlike most major economies, where you can open a bank account with a tap on your phone and a few pictures from your phone, the onboarding process in Canada is dreadfully slow. No bank supports opening an account with a mobile app; offline intervention is often required to change a forgotten PIN. The advantage is safety for the system, yet the downfall is that the online competition rates from the banks are starting to suffer in today’s globalized economy; most importantly, everyday customers and businesses feel the effect the most.
No economy in the world today is an island, and there’s no turning back from digitalization. But what does Fintech need to enter a market that is so resistant? A solid financial system and openness are the two factors. While Canada surely has the former, there are multiple reasons for lacking the latter.
The protective nature of Canada’s banking system can be traced back to the similar nature of the country and perhaps the people. Financial privacy is at the top of Canadian business and professionals’ minds; it has always been, and it’s proving challenging to change.
There are reasons to believe that this will change fast:
Data protection is the modern way of spelling privacy. While effective in its mission, PIPEPA, the privacy guide for Canadian businesses, has been the major obstacle to adopting an open banking system.
Open banking would allow FinTech to develop a new suite of valuable financial services, apps, and products for individuals and businesses. However, the privacy implications and the associated bureaucracy further delay the process.
You can draw a line with pretty much anything that has a crossover point between online services and payments. The most commonly talked about examples are online casinos in Canada and what kind of hoops casino operators need to hop over in order to get a proper presence in this market. Canada’s government bodies take gambling as a serious social matter and combine it with the fact that playing casino games in 99% of use cases needs some digital payment to take the players to that next level of entertainment, they’re bound to hit a wall or two while trying to make it all happen.
Legacy core banking systems are often years or decades old and, as the age suggests, not nearly as efficient as today’s digital system. Besides the massive costs of replacing these systems, the paperwork and procedures take months or years to complete.
A core issue to address regarding legacy technology is technical debt. According to a study by McKinsey, 10 to 20 % of the technology budget is diverted to resolving issues related to tech debt. In simple words, for new tech to come in, the old must go out as quickly and efficiently as possible!
Concentrated regulations have been at the core of Canada’s banking safety net. Yet, what provided an advantage in the past is resitting the change that independent market forces bring. Digitalization is based on competition and independent actors, and a fine line between centralization and free must be found for Fintech to enter Canada successfully.
Replicating the US model might be too far of a stretch, but merging what makes the American neighbours more fluid and Canada safe is the best prospect to follow.
At the end of the day, the power of the banking system comes from its customers and their convenience. As evident as it sounds, this general statement is at the core of what might smoothen the Digital Transformation of Canada’s banking system: the customer experience.
The potential future where digital currencies and a unified online-based international financial system dominate could mean that the banking option for citizens and businesses will become global. The relevance of the six major Banking giants in Canada will not likely dwindle, but a more advanced digital system will be needed to stay in those high positions if this future ever comes.
The Canadian economy is more than ready to welcome Fintech, and there’s already a high level of digitization underway; this is a fact. What must change, which is already ongoing in many Western countries, is the structure of top-down decision-making. In the near future, the banking system will not likely switch this model to a bottom-up customer-led one. Yet, the fine line we mentioned between centralized and decentralized is what will spread digitalization and vice versa.
Ultimately, the small things bring change. Once the first Canadian bank offers the ability to open an online account with the fewest clicks possible, that’s the signal.
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