SME Financing in Canada, 2003 — Part III: Financial Services Sector — Providers of Business Financing

1. Canada's Financial Service Providers: An Evolving Landscape

The financial services sector has undergone rapid change over the past decade in response to technological innovation and globalization. This has led to the breakdown of what were formerly known as the four "pillars" of the financial services sector: banks, trust companies, insurers and securities dealers. These "pillars" have given way to less specialized "financial groups", or conglomerates that offer the full spectrum of financial products and services. As a result, the financial service sector has become increasingly dominated by large financial groups that provide a variety of services, operating alongside narrow-focus "monoline" and "niche" companies that concentrate on credit cards or internet or telephone-based retail banking. This section examines the various providers in the financial services sector, and their importance in the marketplace.

There are many factors that have influenced the changes in the financial services sector (technology improvements, globalization); however, two in particular include the following:

• Changes to federal laws and regulations: These changes have permitted other competitors to enter the market. In particular, foreign banks and financing firms have increased their presence in Canada by 23 percent over the past six years (see Table 17). These large financial institutions provide large authorizations, while smaller providers focus on smaller authorization categories
  
  
• Consolidation of key financial institutions: Significant consolidation through mergers and acquisitions has resulted in a decline in the number of firms, which in turn has created increased concentration. For example, the credit unions and caisses populaires which have traditionally served Western Canada and Quebec, have reduced their points of service by nearly a quarter (23 percent) over the 1997–2002 period (see Table 17)

Table 17 — Distribution of Financial Institutions from 1997 to 2001

Type of Financial Institution	Number of companies, 19971	Number of companies, 20012	Percentage Change
Domestic Banks Small Large	6 5	9 6	50 20
Foreign Banks (includes branches)	44	54	23
Trust (excl. bank subsidiaries)	34	25	-26
Insurance Companies3	367	350	-5
Credit Unions & Caisses Populaires	2 289	1 772	-23
Mutual Fund Companies	78	80	3

Notes:
1) Data is derived from the MacKay Task Force Report, 1997.
2) Data is derived from Competition in the Canadian Financial Services Sector, Canadian Bankers Association, January, 2003 and the Department of Finance Canada.
3) Includes life, health and P&C insurance companies.

1.1 Access to Financing by SMEs — Delivery Channels

Ensuring that SMEs have reliable access to capital is an issue of great importance for the government. SMEs have traditionally accessed financing through well-established branch networks. In 2001, 76 percent of SMEs reported that they requested debt through a personal discussion in a branch (see Table 18).

Table 18 — Application Method Used by SMEs Who Requested Debt in 2001

Method	Percentage of Applicants Applying by Method*
Personal Discussion	58.8
Request at the Branch	17.1
Applied by Phone	13.1
Approached by Credit Supplier	3.9
Other	2.9
Mail or Courier	1.8
Applied by Fax	1.6
Applied by Internet	0.9

*More than one method was used by some businesses, therefore these numbers do not add to 100 percent.

Source: Statistics Canada, Survey on Financing of Small and Medium-sized Enterprises, 2001.

However, the rapid development of new technologies such as the Internet and telephone networks opened new horizons to financial providers, and they invested heavily in these new technologies. Between 1996 and 2002, the six largest banks in Canada invested more than $21 billion⁶³ ($4.0 billion in 2002) in upgrades and developments to allow for internet and telephone banking. Although the initial goal of these investments was to provide their customers (consumers and businesses) with alternative ways to access financial services, SMEs tend not to make use of these methods. In 2001, only 13 percent of SMEs made a request for debt over the phone (down from 17 percent in 2000), and even fewer (less than one percent) made a request over the Internet.

Despite the importance of branch banking to SMEs, the financial services sector is expected to continue branch downsizing over the next five years, a tendency that was confirmed in the 2002 accountability statement of the six largest banks. For example, the Canadian Imperial Bank of Commerce had a net reduction of 30 branches, and faces a potential 150 additional closures over the next three years. During the same period, the Royal Bank of Canada had a net decrease of seven branches; TD Canada Trust had a net closure of 150 branches in 2002. These reductions have not been limited to the chartered banks — caisses populaires and credit unions also experience considerable consolidation over the last ten years. As access to financing is a fundamental issue for the government, the SME Financing Data Initiative (SME FDI) will continue to monitor the state of branch closures across Canada.

1.2 Serving the Smaller Authorization Market

Changes in the structure of the financial services sector have led financial institutions to concentrate on the smaller authorization market. Figure 32 shows that domestic banks served the smaller authorization categories for commercial debt, authorizing $71 billion as of December 31, 2001, the highest of any other financial service provider. However, as will be seen in Section 3.1, domestic banks' authorizations of smaller commercial debt amounts represented a small percentage of domestic banks' overall commercial debt portfolio. By comparison, institutions such as credit unions, caisses populaires and finance companies tended to focus on smaller authorization categories, which represent a larger portion of their overall commercial debt portfolio.

The distribution of commercial debt by certain financial service providers has implications for businesses seeking smaller authorization amounts. As will be demonstrated, many of these financial service providers are regionally based (see Figure 45). For example, credit unions typically serve the western provinces and caisses populaires serve enterprises in Quebec; domestic banks are distributed across Canada, but are proportionally more active in Ontario and the Atlantic provinces. Further consolidation among financial service providers may have implications for SMEs' access to financing.

Figure 32
Amount of Commercial Debt Authorized by Financial Suppliers as of December 31, 2001

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63. Canadian Bankers Association, Banking and Innovation: A Canadian Success Story, September 2002.