Weekend reads: Rage against the (ATM) machine

A Q&A about Canada's big banks, with the economist Andrew Spence

As we stare down imminent tariffs from the Trump administration, the future of the Canadian economy is uncertain. It’s as good a time as any, then, to take a look at our existing vulnerabilities. The Lean Out podcast has explored the issue of excessive market concentration, with Vass Bednar and Denise Hearn, authors of The Big Fix: How Companies Capture Markets and Harm Canadians. Today, we continue that conversation with the economist Andrew Spence, who recently published an insider’s critique of our banking industry.

Here, in this edited and condensed Q&A, the author of Fleeced: Canadians Versus Their Banks discusses how Canada ended up with an expensive and inferior banking system, low productivity, low dynamism — and an enraged citizenry.

TH: One of the themes of the Lean Out Substack is why life in Canada has become so expensive and dysfunctional. I think your book has much to contribute to that conversation. I want to start by talking about your background. You are an economist. You have served as an investment executive to two of Canada’s big pension plans. As well as being Special Advisor to the Governor of the Bank of Canada — I believe you left a role at TD Securities to take that one-year position. You were, at one point, in the running to be Governor yourself. What prompted you to write what is essentially a scathing indictment of your own industry?

AS: Well, I’m going to be provocative and say there is a rage in the land — and there is a rage in the land because our expectations of what the future would be like have not been met. Even when I was within the banking system, and as an investment executive, I was becoming increasingly concerned about the degree of what we call in economics “industrial concentration.” It’s sort of an old-fashioned term, meaning a very few players control, and have a greater proportion of, economic activity.

If you think about the major strategic industries in Canada, those industries that we simply can’t do without in order to have a functioning economy, they are the banks, clearly — probably the most important piece of public infrastructure that we have — the telecommunications companies, the grocery companies, two railroads, maybe if we’re lucky, two airlines. When you start looking at that, what do we know about oligopolies? We know they charge higher prices, and they provide less output for us.

So, in the banking system, that means certain dimensions of the economy are not getting enough credit. And where we are allocating credit, it’s distorting the economy. Banks in Canada are not really in the business of risk. A bank should exist to take deposits and make loans, and they have to manage that risk. But if they can find a way to charge a fee, if they can find a way for the government of Canada, for instance, to underwrite a lot of loan risk — i.e. mortgages — then that’s where they will go. What we have ended up with is ever-higher prices for housing. And the access to that is getting more and more difficult, especially for younger people. So, people are beginning to feel that there were certain routes to a prosperous future that were available to my generation, and the previous generation, that are no longer available. Why is that? What’s going on in the banking system is a key part of that problem.

TH: The banks are a common complaint among the public. The fees are astronomical, the customer service is legendarily poor. In terms of fees, in Fleeced, you looked at the cost to Canadian consumers across a number of different areas: chequing account fees, NSF charges, ATM fees, overdraft fees, credit card interest, mortgage fees, different pricing for different customers (or “price discrimination”), and fees for managing investments like mutual funds. Which of these areas was the most shocking to you, both in terms of actual cost and how we compare to other countries?

AS: I’m going to slightly reframe your question and make a statement. After my book came out, I had a lot of in-bound, as you might expect, and people would pick and choose the abuse that was top of mind for them. One guy says to me, “What about mortgage insurance? That’s a total scam. What about that?” I said, “The problem for me writing a book like this for a general readership to inform people, to inspire them, and to educate them, is: Where do you stop?”

None of it shocks me, really, because I know this system extremely well. But the biggest single item that I think is ripe for reform is the fees that are charged for investments. I’m not the only person to identify these issues. There is a book called Beat the Bank by Larry Bates. Larry does a great job of saying how your bank will take the majority of your lifetime earnings out of your mutual funds, because they charge you a fee every year.

Let’s say that fee is 2%. You’ve got to make 2% just to stand still with your holdings at the end of the year, and then you start to make some money. And if you are cutting your capital at the start of every year, your ability to capture the gains in financial markets, which are there to provide for your future, get ever-more difficult to capture. So that’s one item that is a serious challenge for us. Now, with the arrival of Exchange Traded Funds (ETFs) — which the path was beaten by a vanguard U.S. entity — people have finally woken up to the fact that they are paying a lot of fees to managers that don’t perform relative to expectations …

When you think about consumer protection in Canada, the FCAC in Ottawa, they spend a lot of time educating people about the fees that you will be charged, and the ways in which you can save money. But there doesn’t seem to be any political will in Ottawa at all to say, “Wait a minute, we have an obligation to promote the public interest. And there are certain charges that banks levy that other countries have outlawed because they are seen as predatory.” We get some advice on how to avoid being overcharged, but nobody is observing that the fox is in charge of the hen house. If that’s what happens, then there should be no surprise that there are going to be very high fees that are levied on a myriad different transactions. Also, frictions are introduced to increase the number of fees that you will encounter.

TH: Going back to public complaints, what I hear often is that the customer service is terrible. I encounter that myself. If you go to see a teller, you are going to wait half an hour. The alternative is to get shunted to an overseas call centre. Why has customer service gotten so bad? Is this just a function of lack of competition — going back to your point about oligopolies?

AS: Yes, I think that is entirely the point. There is a bigger, more abstract issue, as well. And that is this notion of corporate purpose. Why do corporations exist? They exist because they are providing a service or a good. And those companies that survive over multiple decades are those that stay focused on their goal, focused on their purpose. Which is, “I’m here to provide this service, to provide this good, to do the best possible job I can. My principal goal, and my first objective, is to create customer satisfaction so they come back for more.”

If you instead decide sometime in the 1970s that all that matters is the return to shareholders, then if shareholders come first, everything else comes second. We have lost our way in terms of the way we think about why corporations exist. Do shareholders own corporations? I’m not sure they do, especially big pieces of infrastructure. When they invest in a bank, or a telecommunications company, or whatever the company is, they set themselves up to have a claim on future revenue, but they are also there to provide a backstop if things go wrong. So, if things go wrong, they are there to absorb the losses. But in Canada, we ensure that there are no losses, pretty much. Because our banks are extremely tightly-regulated — and they should be. Banks are unlike any other piece of infrastructure we have. They cannot go down. So, there is a limit to what we can expect in terms of competition and liberalization, for those very reasons. Our principal regulatory body is the Office of the Superintendent Financial Institutions. They report to the Finance Department. They have a competition mandate in their enabling legislation, but they don’t really do much about it.

And so, if we’re not going to have competition, we need a degree of consumer protection to ensure that certain very expensive charges are not levied. This is the approach that the United Kingdom takes. The FCA, the Financial Conduct Authority, outlawed, in 2019, a number of different charges that were levied against people that were financially marginal or vulnerable.

Take non-sufficient fund (NSF) charges. This is the charge that you get hit with if you bounce a check, either because there has been a financial lapse in management, or because you are just so cashflow-constrained that you cannot stay out of the red. You are charged anywhere from $45 to $50 bucks for that [in Canada]. In the rest of the world, it’s perhaps $5. So, this is an egregious charge to begin with.

UK authorities told the banks, “You can’t do this anymore.” Not so much the NSF charges, but all kinds of other overdraft fees. Moreover, if somebody’s financial management is deteriorating, you know who they are, their age — if you can write an algorithm to hit them with a charge, you can take that algorithm to give you a warning that this person maybe has become financially marginal, and find out why.

Which means: The banks were given a duty of care over their customers. They are not there to pillage them when they are at their most vulnerable.

TH: The book highlights the risk-aversion of Canadian banks, particularly when it comes to lending to small businesses — which I was surprised to read account for quite a large portion of our GDP. What are the consequences, system-wide, when you have that risk-aversion to supporting new businesses?

AS: Substantial, is the short answer to your question. I document in the book how the median amount of financing — that is just the amount of money that is in the middle, between the low side and the high side — in real terms has been declining, inexorably really, over the last 5, 10 years. What does this mean? It means a number of challenges for Canada to start to overcome its now widely understood productivity problem.

Now, it’s not small companies that deliver high productivity, but it is when small companies become large companies that you get the benefits. So, if you are a small, struggling business in Canada, where you have a really good idea … Business school profs will always say, “How does a business start? It is built on a good idea.” Entrepreneurs have a good idea. They want to pursue that idea because they see great profit opportunities. They are quite often on the cutting-edge of innovation, the cutting-edge of invention — and our existing large organizations are clearly not anywhere close to that. So anyway, they need financing. If you start a business, okay, you can get venture capital and private equity financing if you have got a really good idea and the owners of the capital buy in. But others are going to be struggling. They often use their credit cards up front, at 20%-plus interest rates (when the bank is funding a deposit rate of half a percent). So, all the risk stays with the entrepreneur and all the initial profits go to the banks. And if you are cashflow-constrained, you cannot sustain a 20% interest rate for very long.

Okay, so let’s say you are an entrepreneur that is getting a business going, that is viable to get the loan from a bank. You have got to show collateral: “Give me a house as collateral, so that there is a minimal risk of loss.” Or, “Show me a good portion of equity in the business that you have already built” — which is constrained because you can’t get financing.

But let’s assume you get over that hump and you get a bit of financing. In this day and age, what is getting you up the productivity scale is the application of new technology, right? In order for you to get more efficiencies, that needs money. You have got to buy the software, you have got to buy the hardware, but then you need to recruit people that know how to use this stuff, know how to apply it, know how to make it work — and they are not cheap.

I was speaking to a group of CEOs recently, and one of them has an AI business, and he says he is losing people to U.S. companies. They are not moving to the United States, but they are doing it through Zoom, they work in Canada. He says, “I can’t compete with them because they pay them immediately 50% more than I can, because I am constrained.”

But if you don’t get the funding for the right people to do the right thing, how are you going to capture those efficiencies? And then how are you going to become a bigger company that finally is able to contribute to the productivity growth that the economy needs? And banks are a big part of that. So, this is a serious problem. I mean, they’ll talk — they will go to the Canadian Bankers Association: “Oh, we fund and support small businesses.” But at a fraction of the funding that goes to the large corporations.

If you look at the financing, the C.D. Howe Institute did a good study that showed that the difference in the interest rate that small and large businesses get charged. Here in Canada, it is about 2.5 %. Whereas in the United States, it might be half of 1%. The reason being that the U.S. has a lot of small and regional banks that do a lot of entrepreneurial funding, a lot of small business funding. And they do that because they have to, because they are not in a position to charge fees and get lots of what we call “non-interest income.” So, they have to make loans. Which means they have good quality credit people. They stay in touch with their borrowers; they know their borrowers really well. They know the credit risk, and they are able to manage that credit risk, and can apply it properly. And so, that is one reason why the U.S. is much more dynamic than we are. That is history, and there is not much we can do about that. But we should observe this is a problem that is in search of a solution.

TH: Another issue you raise in the book is what you call a “clubby” relationship between the banks and government. What would you propose to do about that?

AS: Good question. What would you propose to do about it? I mean, it’s like a German central banker once said, “Stability isn’t everything. But without stability, everything is nothing.” That is our attitude with respect to the banks. So: “Leave them alone. Let them do what they are good at.”

There is widespread evidence that every time there is an attempt to introduce a degree of competition, or liberalization … Liberalization means you have got lots of stability, oversight, going on, but liberalization means, how do I bring some competition in here to deal with this? The FinTech revolution, what is that all about? Canada is what economists call “uncontestable.” Which means nobody can come in, really, and contest the banks. But FinTech is a way to get a degree of price competition in the system that begins to free up some of the income that we are diverting to onerous fees.

What does that mean? Well, first of all, what is FinTech, or financial technology? It means that an independent organization can provide you with the banking services — like payments, for instance — at a much cheaper rate than the banks can, by using technology. You have to sign up for it. You have to reveal some information to get access to that. But this is a degree of competition that we would all like to see. The one group that doesn’t want to see it is the banks. So, they have thrown sand in the wheels of progress. But one way to animate the depth of this clubby relationship is that the government of Canada has also dragged its feet, in terms of making regulatory and legislative changes that would facilitate this transformation.

There are many FinTech firms out there in Canada, ready to go. They have spent and raised billions of dollars, and that is just sitting there slowly but surely wasting away. The government of Canada has paid very little attention to this. Bill Morneau had a good and great commission on open banking that reported in 2021. It is now 2025, and nothing has happened.

The United Kingdom, in 2016, said to its nine biggest banks, “We’re going to do open banking in two years time. You need to go away and get ready for this. Go and talk to the FinTechs. These are people you’re going to have to interact with.” Open banking in the United Kingdom started in 2018.

Open banking means the following, on a practical basis: You have on your cell phone an app. You say, “I’m going to France for a holiday, so I need to buy some euros.” You open up your open banking app and you see the best possible exchange rate. You have something like 151 potential providers sitting there, and you go, ping, “I’m done.” We can’t do that. We have to go into a bank, or we do it online. And right now, if you want to buy $100 U.S. dollars, you have got to present $147 Canadian dollars. And let’s say you suddenly decided to change your mind, and you say, “Can I sell you back the U.S. dollars?” They say, “Sure, here is $140.” You get seven bucks taken off, right off the top.

So, it gives you a sense of just how much you could keep of your own money. And of course, the banks don’t want to lose this. We hide behind, “We’re worried about fraud. We’re worried about instability.”

TH: This is what I wanted to raise with you. The counter-narrative that I hear — the line from the banks in particular — is that our system is highly stable, and it only makes sense to pay for that stability. The thinking is that this is how Canada made it through the 2008/2009 recession in decent shape. Mark Carney, a former Governor of the Bank of Canada, is making this case to the public as we speak, in his campaign to clinch the Liberal leadership. But you are saying in the book that there is a huge middle ground between “an oligopoly and a casino.” There is a spectrum between “pure competition and super-stable oligopoly.” Help me understand what you’re talking about here — liberalization, increased competition — and how that differs from the deregulation that people are afraid of, and that we should be cautious with.

AS: Just think about what happened in the U.S. and the UK. Deregulation can mean a number of different things. It can mean, “Okay, we have a whole bunch of regulations over here that were meant to deal with a problem 30 years ago that no longer exists. So why are they there? Let’s get rid of that.” That’s a perfectly reasonable thing to do.

But if deregulation means, “I’m going to give you a break on how much capital you have in your system, so you don’t have to have 8% capital ratio” — meaning 8% of your balance sheet is there to absorb losses if there are problems, so that depositors don’t get hit and the state doesn’t have to pony up to make a difference — and if deregulation means, “Yeah, sure, you can finance all your mortgages in the overnight borrowing market,” like what we saw in 2008 … it just disappeared overnight. Certain banks were unable to get funding, and the whole thing seized up. That kind of deregulation, we do not want.

And so, the response to that was — rightly, across the world — higher capital requirements for banks. Because the international agreement at the time was you only needed to have 4% of your balance sheet as capital to underpin potential losses. Well, the problem was that a lot of banks got there very quickly, and the providers of capital, let’s say investors, said, “You are insolvent. You can’t pay your bills, so you’re not getting any more capital out of me.” That was a serious wake-up call for everybody. That capital was too low. Canadian banks are very conservative. They did have 7%, what we call Tier 1 basic capital. Back then, that wasn’t good enough. They needed to have a bit more, so they had 9. They didn’t manage their liquidity very well.

Mark Carney found a way to reliquefy the banks by buying a lot of mortgages from them. And the Bank of Canada itself provided substantial overnight liquidity to the banking system for a prolonged period of time. So, it’s not like the banks just sat there, whistling through the graveyard, right? There was substantial help. What we dodged was a need to recapitalize the banks, and we were able to dodge the very ugly politics of so-called bailouts. So, there is a reason we want to have some stability.

Liberalization is the FinTech example. Open up the door to get these guys to compete for your business. That means then you will get a lower price, and then you will have better customer service. And if that means that the return on equity goes down to 12% instead of 15%? Good. Because that is telling you that they are more competitive.

People need to understand that if you want stability, you’ve got to pay for it, and you’re going to pay for it in a number of ways. We’ve already talked about the high fees. A good way to think about that is as a tax. That’s a tax, on you as a consumer, to know that the bank will be there tomorrow. (So, okay, let’s call it a tax and then see how that goes down.) But it is not my job to give an investor in a bank a 15-cent return on one dollar of investment — when you know that the probability of that thing going under is next to zero. That, to me, is just a straight transfer from me as a consumer to the owner of capital.

This is what we see across the world, because we have not taken industrial concentration seriously. And so, there is evidence of abuse, of dominance, all over industrial countries, because we said to ourselves about 40 years ago, “We don’t need consumer protection anymore, because we are going to introduce competition. And competition is a better way to deliver efficiencies. Efficiencies in pricing, efficiencies in service.” To my mind, that has not eventuated.

So, if we are not prepared to re-regulate everything, like we used to in the 60s and 70s — regulating air fares, regulating telephone charges — then we need to demand competition. In banking, that is a little harder to do. So, let’s call it liberalization, and find some savings where we can.

At the end of the day, there are a lot of very smart people that work in Canadian banks. If you ask them, and you give them the incentive to do better, I’m one hundred percent sure they will. I think we will all benefit — even they will, because they will be free of the ennui of managing a bureaucracy.

TH: I want to end today where we started, with the rage in this country right now. Your book is very calmly argued, but that anger that you are tapping into surfaces at several points. I want to read this passage: “The Big Six should be ashamed of themselves for milking the Canadian market for equity returns, roughly double what they accept in competitive markets, and for delivering fantastic returns to their shareholders and lining the pockets of their executives who take massive incomes for managing what is essentially a low-risk public utility, all while providing Canadians with inferior and indefensibly expensive service.” Why is it so important for us to confront this anger head-on, and to look at its causes and conditions?

AS: If your economy is not delivering for you, and it is not giving you the things you need to be productive, you have to ask yourself why. “I got an education, I work hard, and yet the things that I was told I would have access to, if I played by the rules, are suddenly not available.” Then you think, “Okay, this has to be better.”

You had a very interesting conversation with a political theorist [David Polansky]. He did a much better job than either I could or would be prepared to say. It is about Canada’s Laurentian elite. It’s founding families, the family compact. There is a great book called Fragile by Design, by two academics [Charles W. Calomiris and Stephen Haber], about various countries’ banking experience. They, like I, identify that Canadian banks have been extraordinarily stable over time because they were set up to provide the family compact what it needed to exploit Canada’s resource endowment. And so, they are insulated from the daily experience of others. And in fact, they are delivering this decline in our material well-being. I asked a senior Ottawa person when I met him in the summer before the book was published, how did he think the banks would respond to the book? Because it will certainly get their interest. He said, “Actually Andrew, I think they will be offended, because I think they feel they are actually doing good.”

TH: How have the banks responded?

AS: They have been very quiet. I mean, people have referred to me as a bank-basher. Okay, fine. But that’s about as far as anybody has been willing to go. There is nothing more [in the book] than pointing out something that might just be true and raising the profile of that. I’m not the first person that has come along and pointed this stuff out. There have been many books along the way. But nobody has cared about it. I think people are now beginning to say, “Okay, we have serious problems.”

We are about to be hit with a massive economic shock, at a time when we need a flexible domestic economy to rise to the challenge. And we don’t have it, because we have served the interests of our large corporations.

We are about to be hit with a massive economic shock, at a time when we need a flexible domestic economy to rise to the challenge. It’s going to be really hard. And we don’t have it, because we have served the interests of our large corporations, on the assumption that they are doing good — and if they do good, we do well. Well, I don’t think that’s the case.

If you want to know what the rage in the land is about: Give people a fighting chance. Give people the services they need, at the right prices. And tell them: “This is your reward for playing by the rules.”

For more analysis on the anger in this country, read my essays “What Happened to Canada?” and “On Collapse,” and take a listen to this week’s episode of my media criticism podcast with Harrison Lowman and Peter Menzies, Full Press, at The Hub. That episode is called “Mad As Hell.”