TORONTO — It’s not every day, or even every decade, that a big foreign bank decides to have a go at Canada’s retail banking market.
But Spain's Banco Santander — which has already shown an ability to attract customers, with more than 168 million of them worldwide — is poised to be among the few that have tried as it nears the all-clear to expand in Canada.
A fresh international challenger has the potential to add competition to the country’s banking oligopoly, though experts warn it won’t be easy to shake up the status quo.
“You’d think the Canadian banking market should be ripe for disruption, and yet that never seems to happen,” said Andrew Spence, author of the recently published book, "Fleeced: Canadians versus their banks."
The Canadian market, where the Big Six banks made about $54 billion in profits in 2024, should be tempting because it consistently shows margins well ahead of other regions, said Spence.
On the crucial banking indicator of earnings relative to equity, Canadian banks have come in about 40 per cent higher on the ratio than U.S. banks over the past couple of decades, and around double what European banks manage.
Canadian banks also make much more per client. RBC made $4.2 billion last quarter off its 17 million customers. Santander, meanwhile, made about $4.9 billion off 10 times more.
The sector's profits come in part through the numerous and hefty fees Canadians pay, which Spence said should take away some of the halo effect the banks have of avoiding past bailouts.
“We didn't have to use the state to stabilize the banking system because in a sense, as taxpayers, we're bailing them out every day.”
But while the market seems ready for a new entrant, it won't be easy to gain traction, said Michael Liquornik, president and principal of consultancy Fin-Serv Advisors Inc.
“That's great that you're opening your doors. But what's the strategy to actually get people to deposit money? Because it's not like we lack banking options in this country," he said.
Santander hasn't said much about its plans yet, and didn't provide comment for this story.
It has kept a low profile as it works to secure a banking licence that will allow it to take those deposits and expand its services. In April, the finance minister approved its application, but it still needs the go-ahead from the banking regulator, which has a year from the minister's approval to make a decision.
So far, it looks like Santander plans to follow the path it's taking in the U.S., said Liquornik.
The bank launched its no-fee, high-interest online Openbank offering in both the U.S. and Mexico in recent months, in part to gather deposits to help fund its auto lending business.
Santander also has an auto lending operation in Canada after it agreed to buy Edmonton-based Carfinco in 2014 for about $300 million. The bank renamed it Santander Consumer in 2021, saying at the time that it was “excited for the future under this globally recognized brand.”
It makes sense to fund its auto loans through deposits, since they're cheaper than wholesale funding. But it's not clear how many Canadians would want to switch over their banking for just a higher interest rate on their deposits, said Liquornik.
“There's only so much the market can absorb of people who don't have existing relationships, or want to change their relationship."
Some international banks have had success in the past though.
When ING Bank came to Canada in 1997, it brought no-fee online banking to the market. It was an option novel enough to lead it to attract 1.8 million customers, and several imitators, by the time it sold to Scotiabank in 2012.
And HSBC, which entered the Canadian market in 1981, built up a franchise of almost 800,000 clients and more than $100 billion in assets, in part though aggressive mortgage rates, before it sold the division to RBC earlier this year.
But the relatively modest size of the Canadian market, dominated by a few players that control more than 90 per cent of assets, makes it a tough choice for foreign players like Santander to try to enter, said Johann Scholtz, an analyst at Morningstar who covers the bank.
“The Canadian market out of all markets ... is a surprising move to us.”
While some banks have success in establishing a foothold in a country by offering wealth management or commercial banking, it's harder to get traction on the retail side, he said.
“They really lack a clear competitive advantage," said Scholtz. “Traditional bread-and-butter retail banking is not something that really scales well across borders.”
Santander has billed its Openbank, already the largest digital bank by deposit volume in Europe, as a cheap and efficient way to expand banking services. But Scholtz notes that there’s still different regulatory regimes, product preferences and hiring compliance teams, which all make it not so simple to adapt.
Even if the bank does gain some traction, it’s not necessarily going to shake up the system, said Vass Bednar, head of McMaster University's public policy masters program and co-author of "The Big Fix: How Companies Capture Markets and Harm Canadians."
“More isn't always better, but it could be great for them to join us here.”
She said the way out of the dominance of the big banks is more likely to come from challengers in the tech sector, if Canadians can learn to trust alternatives.
“Maybe it doesn't matter how cool the offering is from a fintech, if we're conditioned to believe that something has to come from the main bank.”
Liquornik and Spence also see more potential for competition coming from the tech sector, especially if Canada actually moves ahead with open banking and other policies to open up the market.
But the slow-walking of the measures that could shake up the banking sector are emblematic of a wider sleepiness in the country, which has led to diminished productivity and lower economic dynamism, said Spence.
“It’s time to deal with it, because the downside is now painfully obvious."
If Canada doesn't make the changes needed to prepare for the future, it's doomed to get stuck in the past, said Spence.
“If we want tomorrow to be like yesterday, it will be. And meanwhile everybody is living their new tomorrows, and we're not.”
This report by The Canadian Press was first published Dec 18, 2024.
Ian Bickis, The Canadian Press
