Canada’s financial sector is not robust, but the federal government can fix that

Canada’s financial sector seems robust—until it isn’t. More than a decade ago, when banks failed south of the border and set off a global financial storm, Canada’s financial system weathered it. But its strength was tested again last month, when many people were unable to pay for groceries, gas, and other essentials after the Rogers outage took out Interac’s payment system, and, with it, the only way to pay for things with a debit card, or send and receive email money transfers. The outage made headlines around the world. Canada’s financial sector felt fragile. Canada’s financial sector is so concentrated that it can’t be robust. A robust system can withstand pressure, because it doesn’t put all its eggs in just a few baskets. As it happens, Canada’s financial sector is little more than a few egg-stuffed baskets. Canada’s five big banks control nearly 90 per cent of the country’s banking assets. They control how money moves through Payments Canada, which operates the clearing and settlement systems that power the Canadian economy. They’re major shareholders of Interac, the only option for debit card payments and email money transfers. And bank-issued credit cards from Visa and Mastercard are effectively the only options for credit-based payments. Nearly all the money movement in this country happens between big banks via the networks of Visa, Interac, Mastercard, and Payments Canada. Big banks sit in the middle, processing payments for the majority of other financial institutions. Around the world, governments are modernizing their financial sector laws to ensure big banks are no longer the only games in town. Over the years, “fintech” (financial tech) companies have successfully risen through the cracks of outdated financial sector laws to provide alternatives. Wise is one of them. So are the ones you may unknowingly use, such as Square or Stripe. Canada has its own cast of them, including the likes of Wealthsimple and Flinks, which make headlines on a regular basis. But fintechs aren’t given access to essential financial infrastructure, such as payments systems, because they exist in the gaps between outdated financial sector laws. Instead, they have to rely on banks. This is why the Canadian government is working to modernize our outdated financial sector laws. The federal government recently appointed an international digital banking expert to lead the implementation of open banking, a system that will regulate how Canadians share their financial information with organizations other than their bank to use innovative and more convenient services. The federal government also recently passed the Retail Payment Activities Act, which will regulate how technology companies hold and move money to promote safety and soundness in the payments ecosystem. Concentration abounds: Ian Scott, CEO of the CRTC, appeared before the Industry and Technology Committee on July 25 to answer questions about the massive Rogers service outage on July 8, 2022. The Hill Times photograph by Andrew Meade While these new policy initiatives reduce a number of risks, there’s a big one still neglected: the risk of putting too many eggs in too few baskets. This risk can materialize in myriad ways, such as the Rogers and related Interac outage last month. No matter how the risk eventually materializes, regular consumers end up paying the biggest price. We paid that price when Interac went down, but we should consider ourselves lucky. Next time it might not be a single payments network. What if it’s one of the bigger intermediary banks on which fintechs, credit unions, and small banks rely that goes down? What if the knock-on effects completely prevent a lot of people from making big and important payments, such as mortgage or car payments? That would put the whole economy and everyone’s financial standing at risk. Such events might seem rare, but they happen. That’s the thing about risk. Run the clock long enough, and risk will materialize. The Bank of England takes it seriously, with researchers finding that over-reliance on banks increases risk exposure in the financial sector. We should take it seriously, too. Fortunately, our federal government has been working to manage the risk and make Canada’s financial sector more robust. The government is overseeing the forthcoming launch of a real-time payments system that will serve as an instant alternative to Interac, Visa, and Mastercard rails. The government is also planning to amend the Canadian Payments Act so that fintechs, credit unions, and smaller banks can directly access this new payment system—that is, without needing to rely on big banks to move money for them. We’re glad the government is taking financial risk so seriously, but we’re also looking forward to the other benefit. The government’s initiatives will also increase competition and innovation in Canada’s financial sector. According to a recent market study from the Competition Bureau, Canada can level the playing field of its financial sector by building a payments system that is an alternative to the incumbent networks, and grants access to fintechs, credit unions, and smaller banks. This will benefit everyday Canadians. The ability to choose from more providers will mean lower prices and new financial services we haven’t seen before. It will also mean better risk management, spreading Canada’s financial sector's eggs across a greater number of baskets. Competition and innovation are sometimes said to come at the expense of financial stability and security, but the lack of competition and innovation is, itself, a stability and security risk when the sector is so concentrated. If the government finishes the job it has started—to modernize our outdated financial laws—perhaps Canada can have its eggs and eat them, too. Nick Catino is global head of policy and social Impact at Wise, a global payments technology company building the best way to move money around the world. Alex Vronces is executive director of Paytechs of Canada, an industry association of technology companies that move money. The Hill Times

Canada’s financial sector is not robust, but the federal government can fix that

A robust system can withstand pressure, because it doesn’t put all its eggs in just a few baskets. As it happens, Canada’s financial sector is little more than a few egg-stuffed baskets.

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Canada’s financial sector is not robust, but the federal government can fix that

A robust system can withstand pressure, because it doesn’t put all its eggs in just a few baskets. As it happens, Canada’s financial sector is little more than a few egg-stuffed baskets.

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