Question

In comparison to several nations around the world, the Canadian financial services industry is one that is typically strong, secure and stable. Imagine that an acquaintance of yours has asked you to explain why this fact about the Canadian financial services industry holds true. Your task is to explain the key business entities in the Canadian financial system, the role of the Bank of Canada in this system and the major changes that have occurred in banking over the past 20 years.

Answer 1

The financial services industry is fully entrenched in the digital age as consumer expectations for convenient and frictionless digital access continue to grow. However, technology is not the only factor disrupting the industry, the need for customer experiences is driving every transaction and touchpoint.

Prudent lending, borrowing and risk management practices, as well as regulatory compliance, have helped the Canadian banking industry wade through prolonged recessionary tides fairly unscathed. As such, Canada’s banks are consistently lauded and rated as sound and safe, and unlike financial institutions in other portions of the developed world they are seen as strongly positioned to grow. Canada’s Big Six1 banks operate under a government charter, with a national presence and in various business lines. They are well capitalized, well managed and deeply entrenched in the nation’s economy, contributing significantly to its growth.

Going forward, the Canadian banking industry will face challenges on a multiplicity of fronts, including regulatory requirements, economic conditions, changing demographics and new technologies. Canada’s banks can rely on the experience they gained through successful navigation of the global financial meltdown, as well as extending operational strategies that have kept them solvent in times of turmoil. This will help them maintain consumer confidence in an industry whose reputation worldwide has been tarnished by questionable tactics and decisions.

Major driving forces in industry

1, Economy

2, Industry/ Business Drivers Regulations

3, Technology

Forces Shaping the Industry

Canadian banks are enjoying relatively strong growth and stability compared with financial institutions in many developed markets. The industry continues to be influenced by economic challenges, new growth strategies, changing consumer behaviour and the need for technology upgrades.

· Maintaining the fine balance of meeting growth targets while complying with more stringent regulatory requirements.

· Diversifying into markets and related businesses with strong growth potential, while applying the experience gained in their home markets.

· Effectively dealing with the economic, political, cultural and regulatory hurdles in markets where they operate.

· Achieving operational efficiencies with smart use of technology and third-party services to keep focused on acquiring, retaining and delighting customers.

Over the past few years, there has been tremendous growth in the Canadian financial services industry. The future of the industry will continue to revolve around digitalization and technological developments that will revolutionize processes in the financial services sector. Although the Canadian financial services industry has witnessed healthy levels of capital adequacy and liquidity, the coming few years for this sector will be dominated by tremendous changes due to evolving trends and business models in the industry. Therefore, companies need to constantly keep track of emerging trends to gain a wider understanding of the dynamic market.

Canadian consumers and businesses rely on retail payments to purchase goods and services, make financial investments, pay wages and send money to one another in the form of cheques, electronic point‑of‑sale debit transactions, electronic funds transfers or credit card transactions. While a strong regulatory framework is needed to ensure that payments are made and received in a safe, secure and expedient way, regulatory constructs can sometimes have unintended consequences that slow innovation and reduce competition.

Influenced by the mobile and online experiences available in other sectors, today’s financial services consumers are seeking seamless, instant and around‑the‑clock payment options. A number of new payment service providers have entered the market, using technology and innovative business models to meet that demand. Mobile wallets, for example, allow consumers to make retail payments with their phones, reducing or eliminating the physical limitations on the number of cards they can carry and use at any given time. Low‑cost POS terminals and mobile credit card processing solutions have made it possible for merchants to accept a wider range of payment forms, greatly improving convenience for consumers. Other entrants have launched entirely new closed‑loop systems for initiating payments and transferring funds that are making the financial institutions involved invisible to end users.

Canadian Financial Services Industry Major Trends

Open banking model

Open banking is an emerging trend in the Canadian financial services industry that opens the door to third-party-providers to offer a wide variety of new services. Also, as nearly 60% of financial services providers have already incorporated open banking model in their strategic business plan, it becomes vital for other financial services providers in Canada to embrace this recent innovation. The open banking model is even beneficial for customers as it allows easier management of their finances and even provides them with the power to switch between financial providers.

Conversational engagement

In an age where technology rules the world, conversational banking has become the next big trend in the financial services industry. With Canadian customers demanding personalized offerings and a wide range of banking features at their fingertips, it has become imperative for financial services companies to embrace well-designed conversational AI platform in their business model. Apart from delivering answers to basic customer queries, this business model tackles a huge range of financial services industry challenges efficiently.

Cloud technology

Adoption of cloud services is becoming mainstream for financial services companies in Canada. This delivers innovation, customization, and security to generate a unique competitive advantage. By embracing cloud technologies, financial services companies will have unlimited access to data storage. Also, this enhances data security in companies.

The introduction of new policies and laws

The current regulatory environment encourages financial institutions to prioritise checkbox compliance, often at the expense of putting a practical strategy in place to balance data protection with the fight against financial crime.

Anti-money laundering compliance commonly takes preference over data privacy, for example; yet when asked to support criminal investigations, data privacy laws discourage Canadian firms from supplying critical information to law enforcement agencies.

The next 12 months should see proposed new laws that encourage digital innovation, protect consumers, and ensure that all laws are adhered to equally.

In financial services in Canada, however, firms also grapple with a complex domestic regulatory environment, where each province harbours its own laws, as do municipalities and the federal government.

Canada has one of the strongest financial services sectors in the world, comprised of

Banks

Trust and Loan companies

Insurance Companies

Credit Unions

Securities

Finance and Leasing companies

Pension Fund Managers

Mutual-Fund Companies

Independent Insurance Agents and Brokers.

Canadian banking sector

The Canadian banking sector includes 32 domestic banks, 25 foreign-bank subsidiaries, 28 full-service foreign-bank branches, four foreign-bank lending branches and 18 foreign-bank representative offices.

Banks operate as:

• Schedule I: Domestic banks authorised to accept deposits
• Schedule II: Foreign bank subsidiaries authorised to accept deposits
• Schedule III: Foreign bank branches of foreign institutions authorised to do banking business in Canada. These branches have certain restrictions

Asset and Wealth Management

Canadian capabilities encompass all aspects of asset and wealth management—financial planning, portfolio management, retail banking, estate planning, financial-statement analysis, asset and stock selection, plan implementation and monitoring of investments.

Pension Funds

Pension funds in Canada have become major investors across sectors including domestic and foreign investments in infrastructure, commercial properties and assets. Key players include The Canada Pension Plan Investment Board (CPPIB), Borealis Infrastructure (Ontario Municipal Employees Retirement System –OMERS), Ontario Teachers Pension Plan (OTPP). Each of these has offices in the UK to manage their UK/European investments.

One of Largest Capital Markets in the World

Sound Regulatory Environment

Education, Skill and Research

The Bank of Canada is the country’s central bank, a financial institution that provides banking services on behalf of the federal government. Its operations include four principal functions: to manage the country’s money supply; to act as the federal government’s agent in issuing its bonds and managing its holdings of foreign currencies; to manage various monetary policies that can influence the performance of the economy, such as interest rates; and to manage the overall financial industry in Canada and economic relations with other countries and international organizations.

The Canadian banking industry weathered the global financial storm. In fact, no Canadian financial institution required a government bailout. Given their strong fundamentals, track record and operational strategies, Canadian banks are well positioned to tap into new growth opportunities. But this can only happen if they can quickly and cost-effectively upgrade their legacy systems and apply historically solid risk mitigation strategies to expand into new geographies and offer ancillary products that will enable them to incrementally improve their top and bottom lines.

Canadian banking system can best be understood and interpreted in terms of Adam Shortt's three main evolutionary influences.

(1) The actual experience of operating under Canadian conditions

(2) The experience of the neighbouring states

(3) The views of the British Treasury as expressed through the colonial office in various ways - minutes, memoranda, circulars, letters, and the disallowance of bills. With these factors in view, the development of the Canadian banking system becomes a more easily understood social process, and the various innovations and retreats merely reflect the temporary dominance of some influence. Because of its close relationships with the United States and Great Britain, Canada has shown a great deal of ingenuity in selecting from the legislation of both countries, and this process of combining cannot be seen better than in the field of banking.

In conclusion, it ought to be said that the Canadian system is an efficient commercial banking organization. It has a long record of achievement and efficient functioning which should not be underestimated or unappreciated, although like most human institutions - it has had some members who were without honour or honesty. The system of training the personnel develops good "practical bankers", but does not train men in the broader aspects of their business. This, in the past, was not a serious matter, but now it is of more importance, and doubtless the system will adapt itself to the new needs. The creation of a central bank rounds out the Canadian banking structure and gives the head and direction which is needed in a present-day banking system. With its efficient commercial banks and the mechanism for a unified control of its monetary system, Canada has a monetary and banking system which is capable of serving the commonwealth well.