Canada's big 5 banks are an oligopoly

Disclaimer: The views and opinions expressed here are those of the author and do not necessarily reflect the views of KOHO or its employees.

Have you ever noticed that Canada’s Big 5 banks tend to make similar moves around the same time? Service fees at TD and RBC go up together, while BMO, CIBC, and Scotiabank send notices of policy changes, one after another. This is because the Big 5 operate as an oligopoly.

What is an oligopoly?

To put it simply, an oligopoly is a system where a small group of big companies dominates their respective industry on an almost even playing field. They do so by maintaining similar prices, and then raising those prices simultaneously to increase their collective profits. This results in little to no space for new or smaller competitors to thrive.

In Canada, one of the most prominent examples of an oligopoly are the Big 5 banks. They collaborate to control prices, thereby protecting themselves from new competition—even when other financial services have customer-focused policies that can benefit all Canadians (such as cash back on purchases, no hidden fees or minimum balance—sound familiar?).

How are Canada’s banks an oligopoly?

Canada’s banking system functions as an oligopoly, as the Big 5 offer pretty much the same, mediocre products and services to all of their clientele. They use their stature to get away with hurting their customers, particularly those from low-income communities, with sudden raises to account and service fees. Typically, they avoid pushback by assigning one institution as a “price leader” who raises its prices first so that the others can do so right after and cite it as a reaction to competition.

We saw this happen just a few weeks ago when TD, CIBC, BMO and Scotiabank all increased fees for their account and service fees—much to their customers’ dismay. What makes this situation worse is that these institutions implemented their price surges despite profiting in billions during the COVID-19 pandemic; meanwhile many of their customers are financially struggling due to job insecurity, small business closures, skyrocketing housing prices, and more.

Duff Conacher, co-founder of Democracy Watch, has said that even the federal government is unable to see or do anything about the banks’ unfair treatment of customers due to a lack of transparency. Banks are able to keep their profit levels hidden, along with the complaints they receive and their criteria for accepting or rejecting loan requests.

“The big banks can afford to do much more to help during this crisis and must be required by law to disclose much more information about how they treat customers and borrowers … to ensure they are effectively required to serve everyone fairly and well with fair interest rates and fees,” he said, in an article for Ottawa Life Magazine.

That’s not to say we should just sit around waiting for some greater power to step in and alleviate Canada’s banking system. In order to help Canadians push through sudden increases in account and overdraft charges, as a fintech company that exists outside of the oligopoly and operates with its own independent policies, KOHO allows Canadians to oppose the Big 5’s harmful practices.

"To put it simply, an oligopoly is a system where a small group of big companies dominates their respective industry on an almost even playing field."

What does this mean for Canada’s financial services landscape?

As Canada’s financial services system functions as an oligopoly, the Big 5 banks are able to get away with a lot more than they should be. They can harm Canada’s financial services landscape by:

1. Blocking new competition from entering the market

Despite the emergence of customer-driven competitors like KOHO, the Big 5 still dominate the market. They’re able to control prices and set up barriers to entry to stop competitors from entering or thriving in the market. Without substantial competition, these major banks continue offering skewed and unfair services, as customers have nowhere else to go.

2. Slowing down innovation in the sector

Again, without significant competition, there is very little incentive for the major banks to come up with new, innovative ideas. As a result, the financial services sector remains outdated and boring while other industries constantly update products and practices to keep up with the public’s need for change.

3. Preventing competitive pricing

Competitive pricing strategies have many advantages. In an oligopoly, however, there is no opportunity for competitive pricing as the Big 5 maintain their price increases with each other. As such, there is no space left in the market to offer competitive rates in order to prevent the loss of customers.

Without competitive pricing, Canada’s financial services landscape is missing out on a variety of benefits, such as maintaining a stable customer base, growing market share and increasing profits. Additionally, Canadians are left without the opportunity to pick a bank that meets their needs without, well, “breaking the bank”. When competitive pricing strategies are in play, companies might find ways to lower their prices to match their more affordable competitors. This allows for a better customer experience, as users have a wider variety of affordable services to choose from.

4. Offering the same, old products

Similar to competitive pricing, offering competitive products can help companies draw new customers in and make a company stand out. By functioning as an oligopoly, the Canadian financial services system does not develop new products independently from their competitors, which leaves consumers with the same, mediocre products and services.

5. Prioritizing market share over the customer

As previously mentioned, the Big 5 may not have customers' best interests at the forefront of their actions. While customers continue to seek media attention and sign petitions in order to protest unfair fee structures, banks are more concerned with maintaining their share of the market. As a result, we are left with a cycle of customers struggling to meet minimum balance requirements to waive fees, then paying those fees for basic financial services which takes away from their bottom line and ability to meet minimum balances in the future.

How can we break the cycle?

It is important to find ways to make decisions that can help avoid unnecessary fees and other harmful practices. However, this can be really hard when most resources are created and provided by institutions that don’t have your best interest at heart! Fortunately, Canada has seen the emergence of many great personal finance alternatives that don’t prioritize profit over the customer’s wellbeing.

It’s also important to hold banks accountable. You can report your concerns to local, provincial, and national news organizations and raise awareness on social media to encourage major banks to choose more ethical practices.