Canadian financial institutions are duking it out in an increasingly competitive market for deposits, whether the new business comes through deposit brokers or directly from consumers. New entrants into the industry are hunting aggressively for customers by launching high-interest savings products and services, while existing players are expanding their product lineups.

This past September saw the splashy launch of a new, online-only deposit-taker, Ally, into the retail high-interest savings-account and term-deposit space. Ally is a product line of Toronto-based ResMor Trust Co. , which in turn is a subsidiary of U.S.-based GMAC Inc. ResMor has applied to the Office of the Superintendent of Financial Institutionsto become a Schedule II bank, a Canadian subsidiary of a foreign financial institution, under the Bank Act.

In October, Toronto-based Canadian Tire Bank, a subsidiary of retailer of Canadian Tire Corp. Ltd., announced that it would be offering its direct-to-consumer deposit products and services nationally, following the completion of a two-year pilot project that offered them in selected cities only. However, Canadian Tire Bank also announced it will be retreating from the mortgage loan business, selling its existing book of $167 million in mortgages to National Bank of Canada.

Both Ally and Canadian Tire Bank deposit products are available across the country, except in Quebec, although both firms say they have plans to enter that market.

These two firms, along with dozens of other banks and financial services firms, are vying for a piece of the mountain of inves-tor dollars that have been sitting on the sidelines since the market crash.

In fact, according to a report released in September by Toronto-based Scotia Capital Inc., Canadians have an estimated $1 trillion in cash or near-cash vehicles such as term deposits. Much of that money is earning no interest — or next to none — in deposit accounts with the big banks. Indeed, even the high-interest vehicles of the banks usually pay out at significantly lower rates than those posted by some of the online players, such as Ally. This fact presents a chance for new and nimble players to establish themselves.

“It’s a large market in Canada, there’s a lot of opportunity for new entrants to gather share, and everyone else keeps going along happily,” says Ally’s managing director, Mike Spero. “The Big Six are still happy, and the new entrants are happy.”

But perhaps a bigger factor driving the hunt for deposits appears to be the continued absence of activity in the securitization market.

“We used to do securitizations for our credit card business, but that dried up over the past 12 to 18 months,” says Marco Marrone, president of Canadian Tire Financial Services, the Canadian Tire unit under which the banking arm operates. The firm last completed a securitization transaction based on its credit card portfolio in February 2008, he says. As of June 30, Canadian Tire Bank had raised $1.6 billion in broker deposits and $541 million in retail deposits.

In fact, the lack of an active securitization market has forced many financial institutions to adjust their business models significantly. Earlier this year, Xceed Mortgage Corp., an originator of residential mortgages, and HOMEQ Corp., which provides reverse mortgages through its Canadian Home Income Plan Corp. subsidiary, each applied for permission to convert into a Schedule I bank, a domestic bank under the Bank Act. CHIP has recently been approved and, as a result, is changing its name to HomEquity Bank. Both Toronto-based firms are interested in raising deposits through the broker network to help fund their mortgage businesses.

And there are few indications the securitization market is returning quickly. “While I see no reason it won’t come back [eventually],” says Raj Kothari, a partner and leader of the asset-management practice with Toronto-based consulting firm PricewaterhouseCoopers LLP, “I don’t think there’s enough confidence yet in the integrity of the system that will allow it to flourish as it did in the past 10 years.”

One thing that doesn’t seem to be preventing new players from entering the market is the threat of margin compression, which was one of the key challenges facing most financial institutions at the beginning of the financial crisis.

“Presumably,” says Maurice Levi, a professor of finance at the Sauder School of Business at the University of British Columbia in Vancouver, “the new players believe the margins between borrowing and lending rates are wide enough to be of interest.”

@page_break@In its case, Ally has set itself up as an online deposit-taker that offers retail investors interest rates that are close to the highest in the country, with no fees or minimums, and around-the-clock service online or by phone. The deposits generated by Ally’s direct-to-consumer products will fund the automotive loan and mortgage businesses currently operated by ResMor Trust. It’s a business model that Spero believes will allow Ally to thrive: “[Because we have] a very good pool of auto assets, we’re able to fund at the rates that you see in the marketplace quite profitably.”

High rates and good service will allow Ally to stand out from competitors, says Spero, who previously served as president at both President’s Choice Financial and Dundee Bank of Canada and who led the launch of Altamira Investment Services Inc. ’s High-Interest Cash Performer account.

“We’re trying to get onto the consumers’ radar and be noticed,” says Spero, who also believes that Ally’s promise not to offer “teaser” rates — rates that start off higher than those of the competition, but drop substantially lower after a period of time — will appeal to many consumers. He also thinks financial advisors will notice, particularly those who operate a fee-based-on-assets business rather than one based on commissions.

“In my experience,” Spero says, “advisors hate teaser rates even more than customers do.”

Although Spero won’t disclose how much deposit business Ally has raised thus far, he says that the results in the first month of operation exceeded the business plan. In the U.S., Ally Bank, which shares the same logo and branding as its Canadian cousin, holds some US$25 billion in deposits. It has also drawn the ire of competitors in the U.S., which say that GMAC — which had received U.S. government bailout money — is being overly aggressive in offering hard-to-match rates through Ally.

For its part, Canadian Tire Bank has taken a careful, deliberate approach in building its deposit-gathering business on top of its existing and successful credit card business line. The firm did extensive testing over the past two years in its pilot project cities of Calgary, and London and Kitchener-Waterloo in Ontario, and says the time is right to take its product lineup of high-interest savings accounts, guaranteed investment certificates and tax-free savings accounts national. “We found ways to drive deposits cost-effectively,” Marrone says, “and now we want to expand that to other markets.”

One thing Canadian Tire Bank won’t do is open banking kiosks in its stores. “We tested them, but we didn’t find there was a decent return on that investment,” Marrone says. “The store is great for communication; but, given the nature of why the consumer is in the store [in the first place], it’s not the best to conduct a [banking] transaction.”

RRSPs, as well as other products, may be offered down the line, but Canadian Tire Bank will keep its suite of products simple for the immediate future, says Marrone: “We’ll take our time and do what makes sense.”

Marrone acknowledges that the deposit-taking market will get tougher as more firms look to get a slice of the pie: “We believe the market for deposits will get more competitive over time, and the costs [of operating] may rise. But that’s part of being in this business.”

Most observers believe that the new entrants in the sector can be successful if they offer good service and keep rates high. “These are specialized firms that don’t carry the full gamut of banking products as the big banks do,” Levi says. “They can keep costs low and their rates high.”

If new players can identify a niche in the market, they will find room to compete, says one deposit industry veteran. “As long at they can get traction on the ground,” says David Newman, the principal director of Oakville, Ont.-based Fiscal Agents Inc. , “there’s absolutely room [for more deposit-takers].”

Spero believes that new entrants can increase their market share by taking advantage of the complacency he believes has crept into the market as a whole.

“[What were] new entrants five years ago are now starting to behave like incumbents,” Spero says. “I think there’s a good opportunity for Ally to be able to grab that price-leadership position.” IE