Seeds Of Disruption Lurk

Even as disruption and dislocation hit other banking markets in this time of economic and customer uncertainty, the market in Canada appears to be a model of stability. If anything, the Big 5 have added to their market domination, while regional player Desjardins remains in control in Quebec. For those sifting for some evidence of change or disruption, pickings are currently a little slim. But like a swan serenely gliding over the water while furiously paddling below, change looms for Canadian banking, even as the fundamental stability so prized by regulators continues. Now that interest rates have risen and the lasting effects of COVID have taken hold, we look at five dynamics that are likely to contribute to the next wave of industry disruption. 

Market share divergence. Ranking by market share remains intact, with TD and RBC dominant, followed by CIBC, BMO and Scotia, then Desjardins and the regionals. But within this hierarchy, things are changing, according to the most recent Curinos Canadian Shopper Survey. RBC is growing faster, and collecting more primary customers, than any other bank. TD, on the other hand, has seen its growth of primary customers slow. This divergence, coupled with HSBC’s addition to its portfolio, will increase RBC’s relative dominance. 

Divergence by consumer segment. Market share standing masks some significant differences among banks in how they appeal to different types of consumers, according to the Shopper Survey. In examining financial comfort and sentiment toward non-traditional banking, for example, the survey identified six distinct consumer segments. (See Figure 1.) Both Confident and Insecure Innovators favor Tangerine while Independent Innovators are more likely to choose RBC and CIBC. Scotiabank, TD and RBC are the banks of choice for Confident Traditionalists, but only TD stands out among Insecure Traditionalists. Desjardins appears to appeal to customers with confidence, whether Traditionalists or Innovators. These differences point to the need for banks to go beyond demographics and into their customers’ attitudinal profiles and preferences if they are to predict their behavior more effectively and respond accordingly.    

Funding costs. Interest rates are rising faster than at any time in more than 40 years, and funding costs for Canadian banks are rising faster and more steeply than in any recent rising–rate cycle. As a result, the promotional-pricing arms race continues unabated, and while banks with deeper, lower-cost funding always perform better through such cycles, no bank is immune from growing customer churn. Deposit betas have risen significantly, driven by promotional pricing that has caused the back book to stir. Because deposit rate increases typically persist even after market rate hikes abate, look for funding in 2023 to be a highly competitive and even more expensive.  

Network-density values. Network-density values continue to erode. Even with sales volume returning to pre-COVID levels, overall service volumes within networks are down between 20 to 30 percent and will likely never return to where they were before the pandemic. As digital acquisition grows, high-fixed-cost infrastructure becomes less and less efficient, but unlike other markets, Canada has been very slow to shed distribution costs. With as much as 30 percent less volume to work with, however, banks are bound to face a reckoning sooner or later. Those already with smaller networks will experience less disruption than those that derive greater contribution from their branches.   

Business banking performance. One bright spot is business banking, a growing segment in which deposits are typically 20 basis points cheaper than either retail or commercial. As with other segments, differences among the banks continue to widen, with BMO excelling and Scotia and others losing share. Banks that can cultivate their business banking book effectively should be able dampen their high costs of deposit gathering.   

Market share tells only part of the story. It can cloud what’s happening beneath the surface and what may happen in the future. Staying current with the banking market means looking deeper and beyond just the averages. For now, stability may reign supreme, but change is irresistible, and it will continue to alter the fundamental positions of each bank, and along with them, the industry.