The New Look Of Banking

Commentary, Public Finance & Fiscal Federalism, Peter Holle

Banks, as money-making corporations, are easy targets for demagoguery. Those who vilify them most point to record-breaking profits, as if the healthy bottom lines confirm long-held devil theories.

But the times are changing. Plunging technology costs now relentlessly push deregulation upon the industry. It means more competition and more benefits for consumers. The cosy days when a new bank had to be chartered by an Act of Parliament are gone forever. Banks will have to lower their prices or lose business.

Formidable barriers erected in the past to new entrants made things easier for existing banks. While the world recognizes Canada’s banking industry for its stability and high service standards, the regulated framework encouraged the banks to take on a much more conservative tone than other places, with less lending to new enterprises, hence less economic growth.

Nothing symbolizes the energy of the emerging new framework more than the Hongkong Bank of Canada. It wedged its way into the restricted market in 1986 by buying an existing charter, the Bank of British Columbia. The foreign interloper managed to outperform the industry. In 1996, it tallied up a 19.5% rate of return, three points higher than the industry average. The Hongkong Bank managed this feat partly by concentrating on small business lending, an area underserved by the major banks. It was cited last year by the House of Commons industry committee as a "shining beacon" for its performance in underwriting new companies.

The big six will have lots of competition like this, and soon. By the end of this year, the American giant, Wells Fargo, plans to invade the small business loan market in Canada without setting up a single branch office. How? The U.S. regulator has given it the go-ahead to conduct business here by direct mail. And that’s just the start. A new bank, the Citizen’s Bank, operates strictly via the Internet. It’s advertising boasts that its lower operating costs allow it to offer its customers higher returns on their deposits.

Boot up a computer and you’ll be astounded by the new forms of commerce already taking place. Information costs are falling so fast that the traditional slow motion bank line-up is on its way out. Why spend money putting up expensive buildings and hiring tellers when most people can transact their business at the flip of an electronic switch, anytime, anywhere? As people become more comfortable with the technology, bank branches will close.

A month ago, the U.S. Treasury Secretary proposed a radical overhaul of American banking laws that allow head-to-head competition between banks, insurance companies and dealers in securities. A bill containing the changes will reach the American Congress in July. Since the Free Trade Agreement requires that Canada offer equal treatment to domestic and foreign investors, market liberalization south of the border will ultimately force it here.

A task force commissioned by the federal government is already looking at the issue, but it will not report until September, 1998. Its recommendations, which are certain to call for more competition, won’t become law until 2002. At least under the current schedule. It may have to be accelerated.

The political elements in this mix are sweet news to those who believe in maximizing choices for consumers. The ironies abound. Just two years ago, concerned insurance company executives persuaded the federal government to dump a proposal that would have allowed banks to sell insurance policies. Now they see the same common-sense logic approaching from across the line. They see barriers that protect their markets evaporating, courtesy of the information revolution. Change can be delayed but it can’t be stopped. They will adapt or be crushed.

And consider the ironic position of the bank-bashing crowd. They’re the same bunch that fought hard against the North American Free Trade Agreement. Now they see it about to be used to shake up the "villains" of Bay Street.

It must be tough.