How Canadian banks are fighting back as headwinds threaten growth

Traditional banks face increasing technological and regulatory requirements and a wave of competition from upstart competitors amidst economic and market pressures, but they are pushing back.

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Norm Cappell acknowledges that he made a brave move when he left a senior position in the Capital Markets division of the Royal Bank of Canada six months ago to join an entry-level online lender.

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Lately, banks have become familiar with the technology behind Bitcoin, called blockchain – using it to innovate, in fact – having recognized the benefits of the decentralized and lightning-fast transaction verification system as having broad applications for transactions involving anything. , from stock transactions to money. and transfers of ownership.

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But the 40-year-old predicts that the path he has taken will become increasingly worn in the years to come, as increasing technological and regulatory demands, competition from new competitors and economic pressures begin to weigh on him. traditional banks.


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“I don’t think the business is as fun as it used to be. And I think a lot of people would tell you that, ”Cappell, who is now head of capital markets at Toronto-based online lender Borrowell, said in an interview this week.

“There has been extraordinary pressure on… the institutional financial world over the past 10 years due to a number of things – pressure from the technology side, pressure from the cost side, pressure from the regulatory side,” he said. he declared.

In Canada, these pressures combine with tough economic times and, in particular, woes in the oil field – a recipe industry watchers predict will result in lower costs, including job cuts.

“Expense compensation is a lever [the banks pull] to protect the bottom line, ”said a Toronto-based financial services analyst, who spoke on condition that he was not named.


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With the next fiscal year shaping up to be “weak” for banks, “net staff reductions would not be too surprising,” the analyst said.

National Bank Financial has already announced cuts that will affect “a few hundred” employees. At the same time, the bank issued shares this month to strengthen its capital cushion.

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The Bank of Nova Scotia, which announced last November that it plans to cut about 1,500 jobs in its domestic and international operations, recently indicated that the cuts would be larger.

“Our primary focus when reducing costs will be to invest in areas that will increase the speed and quality of service for our customers,” a Scotia spokesperson said via email, noting that the initial cuts were part of a threesome. one-year process to simplify operations and reduce duplication.


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Reducing costs, which a recent report by global consulting firm McKinsey & Co. called “the only cylinder still pulling in the profit engine” of banks, is clearly also on the Bank’s agenda. Canadian Imperial Trade. At an investor conference on Wednesday, CIBC CFO Kevin Glass said Canada’s fifth-largest bank would bear restructuring charges of up to $ 200 million in the fourth quarter.

CIBC, which plans to cut costs by up to $ 600 million by 2019, has not disclosed whether the cuts will include job losses.

But even as banks cut back on traditional jobs like frontline cashiers, they are stepping up in other tech-driven fields to deal with a growing number of mobile and online rivals.


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The Toronto-Dominion Bank, for example, announced this month that it will create more than 120 jobs over the next year “dedicated to technological innovation.” These jobs will be in the region of Waterloo, Ontario, a hotbed of technology.

Peter J. Thompson / National Post
Peter J. Thompson / National Post

However, as banks outsource much of the technology development or forge partnerships with some of the competing fintech players, there is a good chance that there will be net job losses in 2016, observers say. sector.

In one of the latest examples of this trend, CIBC executives said on Wednesday that the bank had partnered with “fintech” – financial technology – firms to offer online lending to small businesses.

The extent of the threat posed to banks by fintech firms in Canada is difficult to assess at this point, in part because this is only the beginning compared to developments in the US and UK. United, and in part because Canadian banks are so dominant in the domestic market. market.


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It’s also far from clear, judging by the beating some publicly traded fintech companies have taken in the markets this year, which, if any, upstarts will come out on top.

Potential threats, according to a recent report from Accenture, include loss of market share and revenue, declining margins and separation of banks from their customers in certain lines of business, which would make selling more difficult. other financial products and services. .

The report noted that global investment in FinTech companies tripled to $ 12.21 billion in 2014 from the previous year.

Meanwhile, McKinsey & Co.’s new State of the Global Banking report says “banks’ losses to (fintech) attackers were just a rounding error.” But things are about to change, the report predicts, suggesting that 20-60% of profits in five banking industries will be at risk by 2025, with consumer credit being the most vulnerable.


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Banks embracing the digital revolution can succeed by fending off attackers with one hand and less agile incumbents with the other

“The attackers will probably only capture a small portion of these companies; most bank losses will come from squeezing margins, with attackers driving prices down, ”the report said, adding that corporate and investment banking will be much less affected than industries, especially mortgages , small business loans and retail payments.

The McKinsey report suggests ways in which traditional banks can fight back, including capitalizing on their greatest advantages, their data and customer access, while adding the digital skills needed to become agile, low-cost competitors.

“To win, banks will have to beat newcomers at their own game,” while restoring customer confidence, the report advises. “Banks embracing the digital revolution can succeed by fending off attackers with one hand and less agile incumbents with the other.


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Dave McKay, Managing Director of the Royal Bank of Canada, said this week that Canada’s largest bank has made it a priority to harness data and access technology to overcome the challenges of three traditional bank lines: payments, loans and money transfers.

“We need to leverage machine learning to support these three channels,” McKay said at a conference Thursday in Toronto, where he recognized the “fundamental transformation” required to move from traditional banking to options. such as giving customers a self-service channel through their smart phone.

Cappell, who was a Harvard-trained attorney before going into banking, said the culture of large financial institutions would make their transformation more difficult.

“The nature of large institutions is bureaucracy, and bureaucracies almost by design don’t change that quickly,” Cappell said.

“They’re designed to have levels of reporting and levels of decision-making, and therefore… they don’t lend themselves to innovation,” he said, noting that officials at his new employer, the lender online Borrowell, had evaluated it for several weeks. before hiring him to ensure that he could make the transition from incumbent financial institution to challenger.

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In-depth reporting on The Logic’s innovation economy, presented in partnership with the Financial Post.


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