Article – When Canada’s biggest discount brokerage finally got the nod to become a bank, it wasn’t just another financial announcement – it marked a potentially significant shift in the country’s notoriously stable banking landscape.
After a lengthy application process, Questrade Financial Group has secured federal approval to establish a Schedule I bank, positioning the Toronto-based financial services company to challenge Canada’s traditional banking giants on their home turf.
“This approval represents a watershed moment for Canadian consumers,” Edward Kholodenko, Questrade’s president and CEO, told me during a phone interview. “We’ve spent 25 years building trust as a low-cost alternative in investing, and banking is the natural evolution of our mission to help Canadians become more financially successful.”
The approval from the Office of the Superintendent of Financial Institutions (OSFI) transforms Questrade from merely a discount brokerage into a full-service financial institution. The company can now accept deposits and offer traditional banking products alongside its established investment services that manage over $30 billion in assets.
What makes this development particularly notable is Canada’s banking environment, dominated by the “Big Six” banks that collectively control roughly 90% of the country’s banking assets. This concentration has long raised questions about the level of competition in Canadian banking.
“The Canadian banking sector has historically been characterized by high barriers to entry and limited competition,” explains Walid Hejazi, associate professor of economic analysis and policy at the University of Toronto’s Rotman School of Management. “New entrants like Questrade Bank could potentially drive innovation and more competitive pricing.”
For consumers, Questrade’s entry into banking could mean more competitive rates and lower fees. The company built its reputation on significantly undercutting traditional brokerages with commission fees that were often 90% lower than established players.
Bank of Canada data shows that Canadians pay among the highest banking fees in developed economies, with the average checking account costing over $220 annually. According to StatsCan, these fees have increased by approximately 3.2% per year over the past decade, outpacing inflation during many of those years.
“We’re applying the same philosophy to banking that made us successful in brokerage – transparent pricing, elimination of unnecessary fees, and leveraging technology to create efficiencies,” Kholodenko added.
However, competing with established banks presents unique challenges. Canada’s big banks benefit from extensive branch networks, established trust, and deep pockets for marketing. They’ve also been investing heavily in their own digital transformations.
Christine Day, a fintech analyst at Desjardins Securities, offers a more tempered view: “While Questrade has built impressive brand recognition among investors, converting those customers to banking relationships requires overcoming significant switching costs and consumer inertia.”
The approval comes at a time when digital banking adoption has accelerated dramatically. The Canadian Bankers Association reports that 78% of Canadians now primarily bank digitally, up from 68% pre-pandemic. This shift potentially benefits digital-first players like Questrade that don’t carry the overhead of extensive physical locations.
For its part, Questrade appears to be targeting a specific segment initially. “We’re focusing first on the millions of Canadians who already have investment relationships with us,” noted Kholodenko. “Our customers have been asking for integrated banking services for years.”
The company hasn’t released specific details about its banking products, but industry observers expect high-interest savings accounts, mortgages, and potentially credit cards to be among the initial offerings. Questrade’s regulatory filings suggest a phased approach, with deposit products launching first.
The approval also comes against the backdrop of rising interest rates, which typically benefit banking margins. The Bank of Canada’s overnight rate, which influences everything from mortgage rates to savings accounts, has risen from a pandemic low of 0.25% to 5% as of early 2024, creating a potentially favorable environment for new banking entrants.
Not everyone is convinced Questrade can make significant inroads against established players. “The history of challenger banks in Canada hasn’t been particularly encouraging,” notes Paul Jenkins, former Senior Deputy Governor of the Bank of Canada. “From ING Direct to Tangerine and EQ Bank, we’ve seen digital banks capture niche segments but fail to fundamentally alter the competitive landscape.”
The regulatory hurdle Questrade has cleared is significant. Since 2010, OSFI has approved only a handful of new Schedule I banks, reflecting the rigorous capital, governance, and operational requirements applicants must meet.
For existing banks, Questrade’s entry signals increased competition, particularly for digitally-savvy customers who prioritize low fees. TD Bank and RBC, which have the largest retail banking market shares in Canada, may feel pressure to enhance their digital offerings and reconsider fee structures.
Questrade hasn’t specified a launch date for its banking operations, but industry sources suggest products could begin rolling out as early as Q3 2024. The company has been quietly building its banking infrastructure and making strategic hires from traditional financial institutions over the past 18 months.
For Canadian consumers long accustomed to limited banking choices, Questrade’s entry represents a potentially meaningful addition to the landscape. Whether it can deliver on its promise of bringing the same disruptive energy to banking that it brought to investing remains to be seen.
As one Questrade customer, Toronto-based software developer Maya Krishnan, put it: “I’ve saved thousands in investment fees with Questrade over the years. If they can do the same for my banking, I’d switch in a heartbeat.”
