The federal government’s ongoing exploration of “open banking” is a negative for Canada’s Big Six banks, which currently dominate the retail banking business, says a new report from Moody’s Investors Service Inc.
Ottawa published a consultation paper on Jan. 11 as part of its effort to examine the idea of “open banking” as a way to stoke competition in the highly concentrated Canadian banking business. Open banking allows banking customers to share their financial information with fintech firms and other upstarts to enable them to more easily develop competing products and services.
“The government initiative is credit negative for the largest Canadian banks’ retail operations because it has the potential to incrementally weaken the industry’s favourable industry structure of a few concentrated players, and therefore the banks’ retail franchise strength and associated high profitability,” says the Moody’s report.
The government promised to explore the idea of open banking in last year’s federal budget, and launched an advisory committee to lead a public consultation this past autumn. Comments to the consultation are due by Feb. 11. Following the consultation, the committee will provide its recommendations to the government.
The credit-rating agency says that the big Canadian banks have both the financial resources and the fintech expertise to adapt to innovations in consumer banking.
“Nonetheless, technological disruption is likely to erode the incumbents’ 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 states.