A new report from Boston’s Forrester Research Inc. says that the online banking will help spark an overhaul of the Canadian financial services industry.

“More demanding online consumers and increased competition from new financial institutions will trigger a restructuring within Canada’s financial services industry, says Forrester’s Jordan Kendall in report titled Canada’s Big Banks Unravel, which was published last week.

The report suggests that by 2006 four new financial archetypes will exist in Canada. Microbanks will offer low-end, regional service. Superbanks will offer international reach. Financial assemblers, which operate nationally, will partner extensively to offer a full slate of products. Finance factories will concentrate on efficient back-office services.

All this will play out in three stages according to Forrester. Over the next two years, non-bank firms will attract highly susceptible segments of Canadian consumers by using partnerships to extend their niche offerings.

By 2003 to 2004, insurgents will develop full-service offerings to attack broader segments of consumers and banks will shed underperforming units. Finally from 2005 to 2006, banks will be forced to disaggregate discrete roles, focusing on the services in which they have an advantage and outsourcing the rest in a search for efficiency.

The report suggests that TD Financial Group should form a joint venture with Bank of Montreal, rather than buying it outright. Forrester argues that big bank mergers will distract banks from the competition from new entrants. “Instead of trying to succeed through sheer scale, the banks should ask themselves which of their products are truly competitive — and then partner for everything else. TD and BMO should leverage each other’s complementary online competencies by creating a separate entity that offers TD’s Web banking combined with BMO’s discount brokerage.”

The report sees TD emerging as one of the “superbanks”, along with Royal Bank; with BMO as a mere “assembler”. Bank of Nova Scotia and National Bank are also expected to be “assemblers”.

The report suggests that online brokers will need to provide banking products to complement their investment offering, and should partner up to do so. It recommends that E*TRADE Canada partner with “microbank” contender President’s Choice Financial.

The report sees Citibank Canada buying CIBC’s surplus branches in an effort to become a serious microbank contender, rather than building its own physical branch network. Retailers will also launch forays into the financial services business. The reports tags Canadian Tire, which already offers its own “currency”, as a likely candidate for launching a new bank.

Microbanks will increasingly personalize their wealth-management services says Forrester. “In an effort to serve the financial elite, these financial institutions will pile on services like online private placements. Look for Charles Schwab Canada to buy online investment dealer BayStreetDirect — and automatically notify consumers when relevant investment options arise.”

Forrester also suggests that CIBC needs to set its electronic banking division, Amicus, free to operate as a pure “finance factory”. “The close tie to the bank’s retail operation will hinder the group from selling to CIBC’s most serious competitors — constraining the potential success of this wholesaling group. The solution: CIBC should spin out Amicus as a private company.”

The report says that banks must seek customer permission to use the information in their databases to identify untargeted niches — trading clients’ permission to use their data in return for access to personalized content. In the meantime, it suggests that marketing expenditures will take off as banks try to communicate their deals to consumers.

Forrester suggests that Quebec will see its own financial ecosystem emerge. It predicts that National Bank will scale back retail presence in the rest of Canada and concentrate on serving its Quebec clients as a provincial superbank. As part of strategy, it predicts National will acquire Laurentian Bank’s retail operations in the province.

At the same time, the reports says “the Mouvement de caisses Desjardins will evolve into a provincial network of financial assemblers. [This] will create a distinct provincial industry structure — further fuelling the province’s drive for independence.”