Laurentian Bank is to be broken up and sold in pieces to National Bank of Canada and Fairstone Bank of Canada.Christinne Muschi/The Canadian Press
John Turley-Ewart is a contributing columnist for The Globe and Mail, a regulatory compliance consultant and a Canadian banking historian.
Canada is no country for small banks. And this year is full of reminders, with 179-year-old Laurentian Bank of Canada announcing this month that it will be broken up and sold in pieces to National Bank of Canada and Fairstone Bank of Canada.
Its stay-small strategy didn’t pay. Eric Provost, the Montreal-based bank’s CEO, admitted as much in a recent call with analysts: “The substantial investments needed to sustain a competitive position in the Canadian banking landscape, coupled with the evolving regulatory requirements and rising customer expectations, have made it increasingly difficult to compete.”
President’s Choice Bank, owned by Loblaw Cos. Ltd., has tapped out as well and will merge with EQ Bank. In March, the all-digital Motus Bank was shuttered. The month before, National Bank closed its acquisition of Canadian Western Bank. For Fairstone and EQ Bank the deals are wins. They give both more banking bulk.
Yet these mergers suggest that what Canada needs isn’t more banks, but more big banks.
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For half a century, efforts to increase bank competition have been underwhelming. Changes to the Bank Act in 1980 opened the door to foreign-owned banks, called Schedule II banks. They also encouraged new domestic banks, permitting investors to hold more than a 10-per-cent interest in an institution for as long as a decade. Such concentration is normally prohibited.
Now, after the recent merger announcements, there will be 26 small domestic chartered banks and 15 foreign bank subsidiaries that most Canadians have never heard of. The Big Six banks control almost all the banking assets in the country. What new and foreign banks have failed to do since 1980 is scale – grow big enough to make a material market difference.
There are multiple ways to forge big banks with pace today. Starting as a bank is not one of them.
Consider the credit-spinoff case study that is Capital One Bank. It opened in 1994 and used innovative data analytics to expand a mass market credit business across the U.S. and globally. It developed credit products for underserved markets, nurtured a brand and generated profitability first, then moved into traditional banking about a decade later. It now ranks as the sixth-largest bank in America by assets, according to the Federal Reserve.
Ally was founded in 2009 and bills itself as the “Original Digital Disruptor” bank. An auto lender spinoff, it was built on the foundations of General Motors Acceptance Corp.’s auto financing business. It now ranks among the top 25 financial holding companies in the U.S., with more than US$180-billion in assets, serves 11 million customers and has grown rapidly by building full, digital consumer banking, offering auto dealer financial services and delivering corporate financial services to middle-market companies.
SoFi, or Social Finance, is instructive too. Launched as a fintech venture by four business students at Stanford University in 2011, it was developed for college graduates to reduce refinancing student loans costs. It soon expanded into other lending, savings accounts and credit card offerings through the SoFi digital financial platform and is now one of the fastest-growing companies in the U.S. It has US$45-billion in assets. SoFi waited until 2022 before securing a national U.S. bank charter.
Interesting is the U.K.’s Revolut, a privately owned global fintech company founded a decade ago. It created a global financial business around its foreign-exchange application for mobile phones that helps consumers exchange currencies and transfer money affordably. Now its product range includes savings accounts, stock and cryptocurrency trading and debit cards.
It is reported to have 50 million users in 48 countries and about US$30-billion in assets. It made US$1.5-billion in net profit last year. It only secured a U.K. banking licence, allowing it to offer loans, credit cards and mortgages, in 2024.
What all these examples tell Canadians seeking more bank competition is that making it easier to start a bank isn’t the answer. We have done that. It hasn’t worked since the 1870s.
More mergers between small domestic banks should continue to be encouraged to create bigger players with the capacity to do what Laurentian Bank could not: make the substantial investments needed to compete.
The larger challenge is developing more fintech firms in Canada and scaling them, as Canada’s Wealthsimple seems to be doing and as Capital One, Ally, SoFi and Revolut did: first developing the technology, products, customer base, revenues, marketing and profitability needed to have a shot at becoming a big bank too.