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How the Big Five Banks Control Canada’s Payment Systems

Policy Options | Alex Vronces | June 7, 2022

banks regulatory capture - How the Big Five Banks Control Canada's Payment SystemsIn the early 2000s, the federal government convened a task force to review [why the banks have disproportionate influence over moving money in Canada]. The findings? Canada’s payment systems were still “controlled by Canada’s major banks and other key institutions,” whose “interests are best-served by keeping at bay new entrants to the system‚ the very entrants who would bring the innovations that Canadians need.”

Don’t disrupt the banks – disrupt the distributional coalitions

Decades ago, American economist and political scientist Mancur Olson argued that the longer a country is stable, the more “distributional coalitions” it will have. Distributional coalitions are interest groups. They lobby the government to protect them from competition, muting the forces of creative destruction and slowing down the rate of economic growth.

Canada’s problem is not that it doesn’t have a competitive payment system. The problem is that it has old and powerful distributional coalitions that stand between sclerosis and dynamism. Canada is predicted to be the slowest-growing OECD economy over the next decade. Although regulatory capture isn’t the only reason why, it’s one of them.

Old and powerful distributional coalitions need to be disrupted, beginning with the oldest one at the centre of the Canadian economy: the financial sector, which has a distribution coalition that predates 1867. “Improving the financial services sector’s productivity would not only boost its performance,” according to a recent report from the C.D. Howe Institute, “but also that of Canada’s economy as a whole.”

This should start with the Liberal government amending the Canadian Payments Act, which doesn’t let fintech companies become members of Payments Canada and use the payment systems.

Giving fintechs the ability to move money instantly empowers them to compete with big banks for market share. Moreover, as the fintechs get bigger, so will their distributional coalition, which also empowers them to compete with big banks.


Ipsos Survey: Most Canadians Say (88%) We Need More Competition

Is productivity, wealth creation and competition at the forefront of Canada’s growth agenda?

In addition to letting new distributional coalitions get stronger, Canada should also prevent the old distributional coalitions from maintaining their dominance by anti-competitively merging with or acquiring their competitors. The Competition Act is up for review. The Liberal government should give the Competition Bureau the resources and legal room to do its job better.

Or we could do the opposite. We could wrestle power away from Canada’s biggest interests only to give it right back, as the federal government has done time and time again.

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