Analysis of the Banking Industry in Canada

 ANALYSIS OF THE BANKING INDUSTRY IN CANADA

The banking sector is an industry and a section of the economy that is tasked with the role of holding and controlling financial resources for other people and organizations. It also investigates the particular financial resources to build more wealth out of the finances. The banking industry similarly includes the moderation and regulation of banking activities by state agencies, mortgages, credit cards, insurance, and investor services (Antwi, 2020). However, taking charge of financial resources is the fundamental duty of all banking industries; the industry has undergone development and expansion to the extent that it has gone beyond holding gold coins in ancient times to holding promissory notes. A bank always holds assets which are often referred to as deposits for its clients under an agreement that the person can make withdrawals of the particular money at any moment they wish.

The banking sector has always made an effort to diversify its risks through making wide and several investments; this is geared towards ensuring that there is prevention and containment of probable and unexpected loan defaults, which lead to the sinking of the entire banking industry. This can equally lead to other gross problems. In our discussion and analysis, we shall rely on the banking industry in Canada, and the study indicates that banks contribute to approximately 3.5% of Canada’s Gross Domestic Product. It is reported that the number of salaries and benefits that banks and their subsidiaries in Canada paid in the year 2019 was 30 million US Dollars. It was further indicated that in the same year, the banking industries created employment opportunities for more than 280,000 people.  Finally, the number of individuals who Canadian banks employed in the same year was past 110,000.

Banking is one of Canada’s most reliable and valuable industries, with numerous banks being among the biggest and most paying companies. The banking industry is dominated by a minimal number of large banks, together with the six largest forming 90% of the whole market share. It is indicated that the Royal Bank of Canada, together with The Toronto Dominion Bank, comprise the 25 largest banks in the whole world. The Canadian banking system is regarded as one of the most reliable and safest systems globally since it managed to deal with significant challenges that were occasioned by the financial crisis between 2007 and 2008. The banks in Canada have quality service standards and reliance on technology (Johnson, 2019). A report that the Minister of Finance doctorate procured asserted that Canada has the most significant number of ATMs per capita globally. All this is credited to advanced electronic channels like internet banking, telephone banking, and debit cards.

More recent reports generated from the World Bank indicated that in 2017 Canada had 227.82 Automated teller Machines per 100,000 grown up, and the country was ranked at position three worldwide by basing on this. However, the most significant critics of the banking industry in Canada are that it is an oligopoly type of system characterized by minimal competition levels and enormous charges for Canadian consumers. In Canada, there are only two small regional banks that have collapsed since 1923, where the Home Bank of Canada failed; from this, we can tell and conclude that the Canadian banking system is the most significant and most stable banking industry on the whole globe. The banking system is well protected and catered for under the provisions of the Canadian Constitution.

Internal Rivalry within the Industry

The Canadian banking industry is currently being faced with high levels of competition from the financial technology organizations and reduced demand for mortgages together with vast consumer debts even as their interest rates continue to go high. However, despite these challenges, pre-tax gains in the Canadian banking industry have been predicted to go upwards. It has been foreseen that they are likely to go beyond 95 billion US Dollars this financial year. These reports are following the Conference Board for the latest Canada’s outlook in the banking arena. The implications of financial technology organizations on the banking industries have grown much, and it is reaching enormously greater and dangerous heights. However, productivity has been viewed to continue rising remarkably, and it has been deemed an essential driver behind the successful performance of the Canadian banking sector (Chen & Lee, 2018). Technology has vastly changed the way the banking industry in Canada is being run and managed.

Financial technology is often referred to as Fintech firms, both aid, and conflict with the ancient financial institutions. However, the banking industry has made an effort to respond to this challenge by establishing and expanding its own digital and online platforms by making partnerships with fintech and acquiring various fintech companies.  Similarly, the banking sector has also ramped up its leasing of in-house Information Technology workers to help in making upgrades on their technological devices. This has resulted in extreme demand for Information Technology experts in the recent past, while some of the other skills have disappeared in importance. However, the outcoming productivity benefits have been enough to counter the negative implications of the move to higher renumerated experts (Chen & Lee, 2018). With the foreseen rise in the Canadian interest rates in 2020 and the near future, together with excessive regulations on mortgages, the demand for mortgages is expected to drop drastically over the next few years. This will have negative implications on the banking sector, reducing the profits it desires to make considerably.

Besides, the mortgage factor study shows a likelihood for a rise in consumer loans and a decrease in the lines of credit. While the actual domestic consumption rose by 3.5 percent in 2019, which was its highest increase since 2010, sources indicate that record levels of consumers’ debts and poor employment gains will lead to stringent household budgets and more simple growth. Canada’s insurance industry which is highly linked with the banking sector, is equally facing the same problems (Pringle, 2018). In the life insurance array, the insurers are making efforts to bring close new enrollers to help lift the cost caused by Canada’s aging population; however, a study indicates that this will be extremely difficult. On the property and casualty arena, it has been indicated that booming interest rates and stringent mortgage policies will lead to a reduction in house markets, which will minimize the demand for local insurance. Similarly, the effort to recover oil costs and realize high levels of household debts will slow the speed of automotive sales, which will implicate negatively on auto insurers.

On a positive side, however, is that the insurers shall not stand a chance to rip profits from rising interest rates; instead, they will realize higher revenues on their investments. The aspect of technology is equally fostering change in the industry of insurance (Pringle, 2018). Changes are highly facing consumers’ expectations because besides expecting reasonable prices, they are equally expecting a rise in simplicity, openness, pace, and customization. Some innovative insurance companies respond to this and focus on addressing it by providing services like instant binding and paying out of claims, using sensors to modify the underwritten risks, minimizing the magnitude of claims, and finally, through increased modifications in policy choices.  Even though automation has led to a reduction in the need for particular types of jobs, technology is also geared towards enhancing an increased need for higher pay Information and Technology expert; this has resulted in vertical pressure on the industry’s wages.

Further study indicates that the mid-1960s were the productive and best days for the Canadian banking system before the sector paved the way for foreign competition. Currently, the sector has turned itself into a whole new competitive array. Experts argue that the possibility of the banking institutions in Canada to deal with and work along with the increasing foreign competition highly depends on their economic stability related to the stability of the potential competitors (Lasserre, 2017). The forces that have led to the realization of globalization of financial services have negatively impacted some aspects of the banking system. First, they have made obsolete the past regulations to govern the economies of scale and the ideal size of financial organizations. The regulations have also severed away from the past guidelines that were dealing with intense home market concentration. It is, therefore, clear that for the financial industry to realize intense growth in the days to come, there will be a need for them to be highly competitive both at the regional and international levels. However, as per the measure of assets and capital bases, it has been indicated that financial institutions have been going down the list of essential global financial facilities.

Research indicates that if mergers were allowed for the financial facilities, their non-interest costs would not be between 10 to 20 percent higher like they are currently. The forces of globalization will lead to a consistent tendency of foreign possession of the Canadian banking industry, as is the case currently. It is indicated that Bill C-8, which has come into force recently to procure reforms in the financial sector, is discriminatory in some sense. The bill entails specific discriminatory regulations that are highly believed will limit the global competitiveness of the banking sector in Canada. The discriminatory regulations include; a politicized and strict bank merger policy, which is geared towards limiting the banks from realizing the economies of scale which their most significant competitors are achieving; secondly, there is the recurrent ban against the sharing out of life insurance through branches of various banks, this highly limits competition in the Canadian market. Another restriction is the prevalent seclusion of the banks from the business of leasing cars, and this business is highly dominated by foreign competitors (Lasserre, 2017). Therefore, the merger process is highly flawed and outrageous, and it is a tool to prolonged delays and highly politicized. The fundamental question in this case that needs to be responded to is not whether the Canadian citizens will find access to the global financial services they need. Since global competition will meet that, but whether the particular services will be offered by the Canadian banks or foreign financial bodies.

Potential Entrants into the Industry

The threat of new Entrants comprises one of the 5 Porter Forces framework forces for analyzing industries. It simply refers to the incoming threats that a new competitor can occasion to the current operating industry. Potential entrants are one of the significant forces that give shape to the competitive figure of the industry as well as helps gauge the attractiveness of the sector. This framework was postulated by Michael Porter, who was at the University of Harvard. Besides potential entrants, the other outlined forces include; potential Rivalry, the threat of substitutes, the bargaining power of buyers, and finally, the bargaining power of the supplier (Amin & Ibn Boamah, 2020). The threat of new entrants often inputs a significant implication on the ability of the operating company to realize profits. It is provided that when a new competitor comes into the field, and he or she offers a similar product or service, the competitive position of an existing institution will be at an extreme threat. Therefore, the threat of potential new entrants refers to the likelihood and ability of new institutions to enter into an industry.

The threat of new entrants highly relies on the barriers of entry. These barriers refer to the deterrence factors that can prevent a potential competitor from entering the industry and occasioning competitions. Examples of such barriers include high costs or any other obstacles that can prevent competition. Brand loyalty is one factor that can act as a barrier for a new entry. It is often clear that consumers or customers in the industry often hold strong love and preference for products and services of already existing companies (Chen & Lee, 2018). They would therefore opt for such services and products any day and any time if given a choice. Cost advantages are equally another essential factor. The existing company will often produce services and goods and offer them to their consumers at a lower price than new companies that enter the industry for the first time. Other factors that affect new entry into the industry include; regulations from the government, capital requirements, retaliation from existing companies, and finally, access to distribution channels and buyers, among other factors.

Despite the provision of the regulatory and capital requirements of beginning to run a new bank, from 1977 to 2002 study indicates that an average of 215 banks opened annually. With the ideology of new banks finding their way into the banking industry, it was clear that the threat of new entrants was grossly excess. However, due to merging banks and the failure of other new entrants, the number of new banks entering the financial sector has decreased by 253 after every two years. It is argued that the most significant cause of this failure is the most extensive blockade of entry into the banking industry, which is trust (Lasserre, 2017). This is because the banking sector is entitled to dealing in money and essential assets belonging to persons and private financial information; it is therefore always hard for new banks to lay the foundation and make faster progress. Due to the type of transactions in the banking industry, individuals are often convinced to trust well-known, big-name, and significant banks they deem highly trustworthy and sound when they transact with them.

The banking industry has undergone various changes over the years to the point that the central banks are geared toward providing services to almost all the customers under their roof, limiting the growth and progress of other small banks. This can be seen in the five central banks in Canada, and this consolidation builds the aspect of trust that each customer always looks for before making transactions with any bank. In turn, this acts as a barrier to the small banks who make an effort to get to the top of the chain and compete favorably with the other central banks; this is because the customers are always more than willing to chain entrust all their assets and finances in one bank and allow them to procure services to all their financial requirements (Pringle, 2018).  However, the barriers to entry are always relatively minimal when it comes to the banking system compared to other industries. While it is a bit hard and complicated for new banks to find their way into the industry and start procuring banking services to the people and offer them trust and quality services as is the case with big banks, it is somehow easy to begin a small bank and run it on the regional level.

In Canadian banks and any other banks globally, we can tell that capital is the primary asset on any bank, and without capital, the bank can not run. There are four major providers of capital in the banking industry: deposits from customers, mortgages and loans, mortgage-backed securities, and finally, loans from other financial organizations. We shall discuss the threat of new entry by basing on the specific banks in Canada. First, we shall begin with The Royal Bank of Spain; it is clear that new entrants in Monetary Center Banks often come forth with innovation. With their new ways of carrying out activities, they often put a lot of pressure on the Royal Bank of Canada. The pressure is put on the bank through various strategies, including lower pricing techniques, reduced costs, and offering current propositions to the consumers (Zhu et al., 2019). The Royal Bank of Canada is entitled to manage and contain all these problems and competitive approaches and foster effective guards to safeguard its competitive array.

The Royal Bank of Canada deals with the threats of new entrants through several ways; the first approach is usually by making innovations of new products together with new services. It is clear that new products and services draw customers to the fold of an institution and offer the existing customers a chance and reason to continue sourcing the services of the Royal Bank of Canada. Secondly, the competition is countered by building economies of scale, which can help it realize reductions in the fixed cost per unit. Similarly, the bank counters threats of entrants by creating capacities and utilizing money on research and progress (Pringle, 2018). It suffices to assert that new entrants have minimal chances of finding access to the changing industry where the advanced central banks like the Royal Bank of Canada keep working on their standards frequently. This, to a great extent, minimizes the door of vast profits for new entrants and, in turn, discourages them from taking over the industry. This is the same case with other central banks in Canada like the Canadian Imperial Bank of Commerce, The Bank of Montreal. The threats are similar for all banks, and the mechanisms deployed to help work on the challenges and minimize competitions are similar for all of them.

Suppliers’ Market Power

Supplier power is among Porter’s five forces, and it refers to the magnitude of control that a provider of particular goods and services can put on the consumers. The power of the supplier is linked to his or her ability to make increments in the prices of the goods or services, reduce the quality of the product or service, limit the number of goods that the company will sell, and the services they will provide. Usually, the number of individuals or groups entitled to supply a particular commodity determines the power of supply (MacKenzie, 2018). For example, if a particular company requires to make use of steel to generate a particular product, it turns out that one seller in the market only holds the steel. The steel company has a strong power of suppliers, which can be termed under one word as monopolization. However, if the companies entitled to selling steel metal are many, then the steel metal supplier has less power of supply compared to if he or she was a single person.

There are three critical suppliers for any bank or financial institution that furnish it with capital; these are deposits from the customers, money from other institutions entitled with the role of lending money, and the experts or workers that manage the company. The customers always have the bargaining power, whereas the financial organizations, on the other hand, are always aware and conversant with the essence of their finances for commercial banks and financial bodies. Both two factors contribute highly to the power of bargaining of any supplier. Indeed, the experts of the various financial institutions are always in plenty; however, this does not aid in mitigating the impact of the two factors of suppliers; and this is enough justification as to why the suppliers’ bargaining power is always high (Yip & Bocken, 2018). By using the four key suppliers, the bank can be sure enough that they have the required materials to aid them in procuring appropriate services to their consumers borrowing demands while ensuring that they are left with good capital that can aid them in meeting the withdrawal expectations. The power of suppliers highly relies on the market, and it is clear that the particular power often fluctuates, ranging between high and medium.

Looking into the bargaining power of suppliers as about the Royal Bank of Canada, there are many aspects that we can draw from this. It is important to note that roughly all companies in the Money Center Banks industry purchase their raw materials from several suppliers. Suppliers in an essential rank can reduce the gaps that the Royal Bank of Canada can draw from the market. Powerful and advanced suppliers within the financial realm use their power of negotiation to source higher returns from the organizations in Money Center Bank Fields. The most significant overall implication of higher supplier bargaining power is that it highly reduces the general returns of the Money Center Banks. The bank of Canada uses diverse approaches to deal with the bargaining power of suppliers and ensure that they work along in a precise, concise, and mutual way. The bank needs to ensure that the supplier does not establish extreme dominance over it and neither does it have to establish extreme dominance over the supplier.

The first approach that the Royal Bank of Canada uses to tackle the bargaining power of suppliers is by purchasing a proper supply chain with diverse and multiple suppliers. Secondly, by carrying out experiments with product creations using various materials so that if the price of one raw material shoots up, the company can opt to make use of another different product. Finally, the supplier’s bargaining power can well be dealt with by fostering and developing committed suppliers whose business success relies on the firm’s success (Ozdemir & Giesinger, 2020). A great lesson that the Royal Bank of Canada can draw from Wal-Mart and Nike is how the two firms build third-party manufacturers whose business success relies on their well-being, thus creating an environment in which the third party has limited bargaining power over the two firms. The challenges associated with the bargaining power of suppliers are similar for all the central banks in Canada, with the Canadian Imperial Bank included, and the mechanisms of tackling the challenges are equally similar on a broad scale.

Buyers’ Market Power

The bargaining power of the buyers is also one of the forces that Porte provided for under the framework of industry analysis. This force refers to the pressure that the consumer, often referred to as the customer, can exert on the company to make them process high quality and reliable products, procure moderate and standard customer services and finally minimize the prices (MacKenzie, 2018). Important to note that the buyer’s bargaining power is always carried out from the point of view of the seller, in this case, the company or the producer. We can state that the buyer’s bargain power refers to the consumers who use a service or commodity produced by the company. In a nutshell, we can say that the buyer’s bargaining power is to press the supplier to lower the price of the product and, in that order, increase the quality of the same product.

The bargaining power of the buyer is determined by relying on four major factors; these are the number of buyers about the suppliers. If the number of buyers is minimal, as about the suppliers, it is openly clear that the power of the buyer will be high, and he or she will find an opportunity to press on the producer highly. Secondly, it relies on the dependence of the consumer’s purchase on a particular supplier, if the buyer is less dependent on the supplier to the extent that they can buy a similar product to a different supplier without any further ado (Ducas & Wilner, 2017). then it is clear that the buyer’s power surpasses that of the product creator. Thirdly, it depends on switching costs; if there are limited or zero alternative suppliers present, then the cost of switching will turn out to be up. From this, the power of the buyer will be reduced, and the final factor is backward integration. This means that it can bring together or merge the suppliers, then he or she has a more remarkable power of bargain.

Looking at this in line with the banking system in Canada, it is clear that the buyers are, on many occasions, extremely demanding. Almost all of them prefer to get the best services by paying the minimal prices possible. This, in turn, results in pressure on the banks in Canada, especially the central banks; a good example is the Canadian Imperial Bank of Commerce. It is indicated that the minor and consequential consumer base is of the bank. The higher the bargaining power of the same consumer, the greater they can request increased discounts. These challenges of the bargaining power of the buyer can be dealt with by creating a massive base for customers and making new products that will limit the bargaining power of customers.

Substitutes and Complements

Complements are goods that are utilized together, whereas substitutes are goods that can be utilized or consumed in place of another. When a new commodity comes on the market and satisfies the demands of a customer similarly to a prior product, the industry undergoes devastating loss (Dhanessar & Mitchell, 2021). The threat procured by a substitute product renders the existing one useless since most of the substitutes are often high fit and might be high of better quality than the existing one. The banks in Canada are often faced with this challenge, an example being the Canadian Imperial Bank of Commerce, and they often deal with such a challenge in several ways. First, by making sure that the banks are service entitled and not just product entitled, by having a comprehension of the basic needs of the customers, and finally by raising the switching charges for the customers.

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