Canada’s top banking regulator Peter Routledge in Ottawa in 2023. Mr. Routledge has said he plans to address barriers to entering the federally regulated banking system over the next year.Dave Chan/The Globe and Mail
At a recent meeting of the Senate’s banking, commerce and economy committee, Canada’s top banking regulator, Peter Routledge, said his office is smoothing the path to starting a bank – an arduous and lengthy process that is often criticized for being too restrictive for new entrants to join the federally regulated financial system.
The Office of the Superintendent of Financial Institutions requires bank licence applicants to prove that their probability of failure over the following five years is near zero, one of several factors that make it difficult to enter the banking system, Mr. Routledge, OSFI’s head, told the Senate committee in October.
That could soon change as OSFI signals it is considering ways to bring fintechs and credit unions into the federally regulated financial system to boost competition in Canada’s highly concentrated banking sector.
“We have to revamp, not our process, but our basic risk appetite. That will add more competition to the system through credit union entry and innovators entering our system,” Mr. Routledge said.
“I’ll be blunt. We have to do better on this as a regulator.”
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Canada’s banking industry is dominated by six lenders – Royal Bank of Canada RY-T, Toronto-Dominion Bank TD-T, Bank of Nova Scotia BNS-T, Bank of Montreal BMO-T, Canadian Imperial Bank of Commerce CM-T and National Bank of Canada NA-T – that hold more than 90-per-cent market share.
Ottawa is taking aim at banking competition as it seeks to boost productivity and diversify the country’s economy away from the United States. The federal budget in November proposed measures to make it easier to switch banks, lower fees and reduce hurdles for smaller lenders.
Fintechs are edging their way into banking. Questrade Financial Group Inc., which started out in Canada as an online brokerage before offering a range of banking services, recently became the first fintech to secure a banking licence. Koho Financial Inc., which also offers banking services, is aiming to receive approval on its application next year. But the process has taken several years for both companies.
Mr. Routledge told the Senate he plans to address barriers over the next year.
“We won’t take five years to fix this problem,” he said.
Proponents of the current regime credit the financial system’s reputation for stability and security to its concentrated market with high barriers to entry. About 100 banks operate in Canada, compared with more than 4,000 in the United States, which experiences more frequent bank failures, as seen when Silicon Valley Bank and other regional banks collapsed in 2023.
Six big banks – RBC, TD Bank, Scotiabank, BMO, CIBC and National Bank – hold more than 90-per-cent market share.Andrew Lahodynskyj/The Canadian Press
Critics say the singular focus on avoiding risks prevents innovation and competition, restricting consumers and businesses to few and expensive options.
“People are starting to become alive to the fact that we had this fairly misguided view in banking in Canada for a long time, which was that competition and systemic risk were opposing forces, and in fact the exact opposite is true,” Koho chief executive officer Daniel Eberhard said in an interview.
“The recent U.S.-Canada dynamic has made us aware that we need to be a globally competitive financial ecosystem.”
Koho applied for a bank licence in 2021, launching a three-phase regulatory process as part of the Bank Act. OSFI reviews the applications and makes a recommendation to the Finance Minister, who has final approval.
In early 2024, the company entered the second phase in the process of securing a Schedule 1 bank licence – a wholly domestic institution that accepts customer deposits.
The licence would give Koho access to a cheaper funding source by holding deposits. It will have to maintain higher standards under stricter regulations, but a licence will also help them raise their profile as a bank among Canadians, enabling it to expand its customer base.
OSFI has already started inching toward a more flexible and collaborative licensing process. Mr. Eberhard said OSFI provided key details earlier than anticipated that allowed Koho to meet certain milestones on its path to starting a bank.
In 2024, Koho raised $190-million in equity and debt to expand its loan book. To raise these funds, it needed information from OSFI on the types of requirements the regulator would apply to the company if it were to secure a licence.
“They’ve been very constructive in telegraphing some of that stuff in ways that let us go to market, because you have a circular condition where if they don’t give you clarity then you can’t raise money for the bank – and if you don’t have the money, you can’t capitalize the bank,” Mr. Eberhard said.
These types of tweaks to OSFI’s cultural approach and risk appetite will be key to introducing more banks to the market, according to Alana Scotchmer, Gowling WLG partner and member of the firm’s Financial Services Regulation Group.
“OFSI is viewing itself and its own role in a changing way, and it’s part of a broader conversation about our national position within the international economic system, as well as issues like sovereignty,” Ms. Scotchmer said.
In October, Mr. Routledge said in a speech that the regulator is exploring ways to manage risks while avoiding the “stability of the graveyard,” a phrase borrowed from Bank of England deputy governor for financial stability, Sarah Breeden.
In Britain, the Finance Minister has asked regulators across industries to consider both stability and innovation. OSFI’s mandate is solely focused on stability – maintaining the soundness of the financial system and mitigating risks that could cause shocks, such as the 2008 financial crisis.
Under Prime Minister Mark Carney, the government has said it will be more aggressive about encouraging competition. Last month, Industry Minister Mélanie Joly said enhancing competition between companies would help push prices lower.
Her comments followed a move by Canada’s Competition Bureau to launch a review of barriers for small and medium-sized businesses seeking financing in a market dominated by the Big Six banks.
Greater government involvement will be required to boost competition as OSFI ultimately reports to the Finance Minister, according to Senator Colin Deacon, who is a member of the committee on banking.
“We’re starting to see indications of action,” Mr. Deacon said in an interview.
“It starts with political leadership. Regulators can’t just look at risks and say we manage risks, because if they don’t consider how they manage the creation of opportunity as well, then they’re creating another risk.”
Questrade, the most recent company to secure a bank licence after a six-year process, expects to introduce banking products next year. It launched 26 years ago and has since grown into a financial services company with $85-billion in total assets under administration, up from $9-billion when it first applied for the licence in 2019.
Questrade president Rob Galaski said the current banking licence hurdles are appropriately high and rigorous to stamp out the risks that come with the responsibility of holding Canadians’ money.
Questrade president Rob Galaski in Toronto in November. Questrade expects to introduce banking products next year.Sammy Kogan/The Globe and Mail
But like Koho’s Mr. Eberhard, he believes the process could be made more efficient by providing applicants with greater clarity on the requirements they must meet to pass key milestones or meet certain standards. OSFI could also provide experts dedicated to helping individual applicants navigate the process.
“The people at OSFI, regardless of how long the process takes, they are very thorough and they really care about making sure that the standards are met – they’ve turned over every rock, and that the recommendation they’re making is one they can stand behind,” Mr. Galaski said.
“If that’s the standard, then more institutions like that are only better for Canadians.”
Wealthsimple Technologies Inc. has taken a different strategy. It has partnered with Schedule 1 banks that hold its customers’ deposits. These partnerships also allow the fintech to provide up to $1-million in insurance per account – protection from a bank insolvency from the Canada Deposit Insurance Corp. – which is more coverage than the $100,000 per account that banks typically provide.
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Wealthsimple was the first fintech to secure a membership with Payments Canada, providing it with direct access to payment infrastructure. It was also the first securities dealer to join Interac’s service, giving it more efficient access to e-transfer capabilities.
These types of features are key to building core banking and payments capabilities, which typically require obtaining a licence, according to Hanna Zaidi, Wealthsimple’s vice-president of payments strategy and chief compliance officer.
While the fintech does not have access to a less expensive source of funding through deposits, Ms. Zaidi said that Wealthsimple is working on changing the economics of providing banking services.
“If you pursue a bank charter today, you inherit a lot of the overhead and product constraints of a bank licence, without meaningfully giving the clients a better experience,” Ms. Zaidi said. “We would rather keep doing the hard regulatory work that lets us act as like a modern balance sheet company without the drag of a traditional bank.”