Understanding the Cartel-like Nature of Canadian Banks

Canadian banks often face criticism for acting like a cartel, a term that suggests collusion and control over the market to limit competition. This perception is not without reason. The structure and behavior of Canada's banking sector have raised questions about how much choice and competition consumers really have. This post explores why Canadian banks are seen as cartel-like, what this means for consumers, and how this impacts the broader economy.

Canadian bank headquarters with multiple logos

What Defines a Cartel and Why It Matters

A cartel is a group of independent companies that agree to control prices, limit supply, or restrict competition to increase profits. Cartels are illegal in many countries because they harm consumers by reducing choices and driving up prices. While Canadian banks are not officially a cartel, many argue their behavior and market structure resemble one.

Canada’s banking system is dominated by a handful of large banks, often called the "Big Five": Royal Bank of Canada, Toronto-Dominion Bank, Bank of Nova Scotia, Bank of Montreal, and Canadian Imperial Bank of Commerce. These banks control about 90% of the market, which creates a highly concentrated industry.

How Canadian Banks Show Cartel-like Behavior

Limited Competition

The dominance of the Big Five means new banks or smaller players find it difficult to enter the market. High regulatory barriers, combined with the established banks’ extensive branch networks and customer loyalty, make competition tough. This limited competition can lead to higher fees and less incentive to improve services.

Similar Pricing and Fees

One of the most common complaints is that Canadian banks charge similar fees for services like account maintenance, overdrafts, and wire transfers. This similarity suggests a lack of price competition. When banks do not compete aggressively on price, customers end up paying more.

Coordinated Lobbying Efforts

Canadian banks often work together to influence government policies and regulations. Their lobbying efforts aim to maintain the status quo, protect their market share, and limit regulatory changes that could increase competition. This coordination can be seen as a form of collective action that benefits the banks at the expense of consumers.

Limited Innovation

Because of their market dominance and lack of strong competition, Canadian banks have been slower to innovate compared to banks in other countries. For example, digital banking services and fee structures in Canada tend to lag behind those in the United States or Europe. This slow pace of change can be linked to the cartel-like environment where banks feel less pressure to improve.

Examples of Cartel-like Practices in Canadian Banking

• Fee Matching: When one bank raises fees, others often follow quickly, keeping fees uniformly high.

• Branch Location Strategies: Banks avoid opening branches too close to each other, reducing direct competition in local markets.

• Credit Card Interest Rates: Interest rates on credit cards remain high and similar across banks, limiting consumer options for lower-cost credit.

  
  

Impact on Consumers and the Economy

Higher Costs for Consumers

With limited competition, consumers face higher fees and interest rates. For example, the average monthly fee for a basic chequing account in Canada is around $10 to $15, higher than in many other countries. Over time, these fees add up, especially for low-income Canadians.

Reduced Choice

Consumers have fewer options for banking products and services. Smaller banks and credit unions exist but hold a small share of the market and often cannot compete on the same scale.

Economic Risks

A concentrated banking sector can pose risks to the economy. If one of the big banks faces trouble, the impact could ripple through the entire financial system. This concentration also limits the diversity of financial services available to businesses and individuals.

Skyline showing major Canadian bank buildings in downtown

What Can Be Done to Increase Competition?

Encouraging New Entrants

Lowering regulatory barriers and providing support to smaller banks and fintech companies could increase competition. New players often bring innovation and better pricing.

Strengthening Consumer Protection

Stronger rules on transparency and fee disclosure can help consumers make better choices and pressure banks to compete on price and service quality.

Promoting Credit Unions and Alternatives

Credit unions and online banks offer alternatives to the Big Five. Supporting these institutions can provide consumers with more options and encourage competition.

Government Oversight

More active government oversight to monitor anti-competitive behavior and prevent coordinated actions among banks could reduce cartel-like practices.

Final Thoughts

The Canadian banking sector’s cartel-like nature limits competition, leading to higher costs and fewer choices for consumers. While these banks provide stability and strong financial services, their dominance creates challenges that affect everyday Canadians. Increasing competition through regulatory changes, supporting smaller banks, and encouraging innovation can help break this cartel-like hold and benefit consumers and the economy.