Canada’s move to foster competition in the financial sector is a negative for the large banks’ retail operations over the long run, says Moody’s Investors Service in a report published Monday.
Last week, the Department of Finance Canada announced the launch of an advisory committee on open banking, which is tasked with providing federal policymakers with input on how to enable bank customers to share their financial data with fintechs, so that they can develop innovative products and services.
The initiative was announced in the latest federal budget. The government is planning to publish a consultation paper later this year to guide the advisory committee.
The effort to stoke competition in the banking sector, to empower consumers, and to enable easier switching between financial institutions is, “credit negative for the retail operations of largest Canadian banks because it has the potential to incrementally weaken the industry’s oligopoly, and therefore the banks’ retail franchise strength and associated high profitability,” Moody’s says in the report.
The large banks have the financial resources and the tech expertise to adapt to innovation in consumer banking, but that the trend is still going to dent their earnings.
“Technological disruption is likely to erode their profitability in certain retail lending products, such as credit cards, and/or payments over the long term as smaller, more agile banks achieve competitive advantages,” the report says.