The Bureau’s Analysis
In conducting its review of the Proposed Transaction, the Bureau identified relevant markets based on overlapping products/services offered by the parties and considered concentration levels, barriers to entry, and the effectiveness of remaining competitors in the relevant markets, among other factors set out under the Competition Act.
The Bureau ultimately concluded that the Proposed Transaction is not likely to result in a substantial lessening or prevention of competition, given HSBC Canada’s limited competitive impact in the relevant markets and the effectiveness of remaining competitors.
The Bureau observed that the relevant financial services markets remain highly concentrated, and pointed to data suggesting that the four-firm concentration ratio for many financial products may exceed 65% across various Canadian markets, and that 90% of personal banking accounts in the country are held by the six largest banks. The Bureau further noted that there are high barriers to entry and expansion across many financial services markets due to the costs incurred by customers when switching banks; the stringent regulatory requirements; the brand presence established by the major banks; and the high costs associated with establishing a competitive branch network. The Bureau also found that significant transparency in the relevant markets, as well as a high degree of multi-market exposure resulting from the extensive branch networks maintained by the major banks, may facilitate coordinated behavior among competitors.
The Relevant Markets
Relevant product market: The Bureau found that HSBC Canada was a vigorous competitor and a material rival to RBC in the offering of personal and business financial services. Specifically, the Bureau identified the following key overlapping products and services between the parties: capital market services; credit card services; personal financial services; and business financial services.
Relevant geographic market: The Bureau’s assessment of competition in personal and business financial services focused on approximately 60 local areas in which RBC and HSBC Canada operated a retail branch. The Bureau noted that RBC and HSBC Canada maintain extensive retail branches. With respect to personal and business financial services, the Bureau found that the parties frequently made local, regional, or customer-specific offers through their respective branch networks. Documentary evidence revealed that these offers were most affected by local, nearby competition, and less so by firms that have no branch presence. As a result, the Bureau concluded that the relevant geographic markets are local for many of the personal and business financial services offered by both parties.
RBC and HSBC Canada argued that firms who serve customers solely through digital distribution channels effectively compete with the parties in the impugned product markets. While the Bureau acknowledged that FinTech enterprises, branchless competitors, and other players “operating outside the traditional banking system” have changed the way Canadians access and use financial products, local branch networks continue to play an important role in the financial services markets. The Bureau concluded that retail branches remain the primary (or a significant) mode of banking for many Canadians.
HSBC Canada’s Competitive Impact
The Bureau determined that HSBC Canada—while an effective competitor with respect to certain products—had a limited competitive impact relative to other financial institutions. On the one hand, the Bureau found that HSBC Canada had material influence on a number of RBC’s product offerings, including mortgages, high interest savings accounts, and business loans. The Bureau relied on RBC’s internal reports, which regularly monitored HSBC Canada’s rates for certain personal financial services, as evidence of competitive rivalry. For example, the Bureau cited a few instances where HSBC Canada’s mortgage rates were used as a reference point in negotiations with RBC clients. Despite the foregoing, the Bureau concluded that HSBC Canada had achieved only “modest market penetration in most products” largely due to vigorous competition from the Big Five Banks. On the whole, the Bureau found that RBC’s competitive strategies were primarily concerned with the other Big Five Banks. The Bureau also pointed to several instances where RBC and other major competitors declined to match the rates offered by HSBC Canada. Ultimately, the Bureau concluded that HSBC Canada had limited competitive impact on the relevant financial services markets.
Remaining Competitors in the Relevant Markets
The Bureau found that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition in each of the markets at issue.
- Capital Markets Services: Based on the information collected, the Bureau found that capital markets customers do not typically require that their service provider have a local office within the jurisdiction in which they operate. As a result, RBC and HSBC Canada not only compete with local suppliers of capital markets services, but they also face competition from large, sophisticated, internationally-based institutions. In light of the global competitive landscape, the Bureau found that RBC’s and HSBC Canada’s shares were low for each of the relevant capital markets products. As such, the Bureau concluded that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition in capital markets services.
- Credit Card Services: Based on RBC’s and HSBC Canada’s limited presence in the relevant credit card markets and the continued competitive restraints imposed by the other Big Five Banks, the Bureau concluded that the Proposed Transaction was not likely to result in a substantial lessening or prevention of competition in the credit card services market.
- Personal and Business Financial Services: The Bureau assessed market concentration for personal and business financial services in over 60 local markets where RBC and HSBC both operated branches. The Bureau found that RBC’s and HSBC Canada’s market shares in the overlapping product and geographic markets were well below 35 percent and that RBC’s post- acquisition market share would likely remain below 35 percent, the Bureau’s safe harbor threshold. The Proposed Transaction therefore would not raise concerns related to the unilateral exercise of market power.
The Bureau attributed the parties’ low market shares to competition from the other Big Five Banks, which all offer comparable personal and business financial services in the aforementioned local markets. The Bureau concluded that the Proposed Transaction would not likely result in a substantial lessening or prevention of competition in the relevant markets because RBC would continue to face vigorous competition from the other Big Five Banks.
High Barriers to Entry and Expansion
The Bureau’s review identified four key barriers that inhibit entrance and expansion in the relevant financial services markets:
- Impediments to Customer Switching: The Bureau found that Canadians typically rely on their primary banking relationship for all their banking needs, such that switching providers has become a costly and risky endeavor for many Canadians. As a result, entrants would face considerable challenges when attempting to attract new customers.
- Stringent Regulatory Requirements: The Bureau noted that the regulatory barriers, in the form of compliance, reporting, and minimum capital requirements, limit the scope of market participants that may enter and compete in the relevant markets.
- Reputational Barriers: Evidence before the Bureau indicated that an established reputation for financial stability is crucial for attracting clients in the relevant business and personal financial services markets. As such, significant investments in marketing and mitigation of reputational risk would likely be required for any prospective entrants seeking to compete with the major incumbents.
- Costly Investments in Branch Networks: The Bureau emphasized that retail branches have continued importance in the financial services markets, despite the growing role of digital banking solutions. In order to achieve market penetration, potential competitors would likely be required to incur significant costs to establish a sufficient branch network.
Coordinated Behaviour Among Competitors
The Bureau determined that conditions in the relevant markets generally facilitate coordinated behaviour. The Bureau found that banks extensively monitored each other’s pricing and frequently contemplated the response from competitors when implementing a price change. However, the Bureau did not find any instances where HSBC Canada’s competitive behavior constrained or undermined the potential for coordinated behaviour. Given its limited competitive impact in several product categories, HSBC Canada was generally not considered by other institutions in setting their own rates or making competitive decisions. Accordingly, the Bureau concluded that the Proposed Transaction would not affect the likelihood or effectiveness of coordination in the relevant markets.
Key Takeaways
- Mergers and acquisitions among any of the Big Five Banks would likely raise concerns for the Bureau: The Bureau’s conclusion was largely driven by HSBC Canada’s limited competitive impact in most financial services markets. Given that each of the Big Five Banks holds a considerable market share across the financial services sector, any proposed mergers or acquisitions among these firms are likely to raise concerns for Canadian competition authorities.
- Retail branches have a continued importance in the Canadian financial services sector: Notwithstanding the digitization of banking, the Bureau’s report emphasizes that many Canadians continue to rely on local branches to access financial products and services. Consequently, firms that operate extensive branch networks largely compete with nearby branches or local competitors and, to lesser extent, with firms that serve customers solely through digital distribution channels.
- There are high barriers to entry and expansion in the Canadian financial services sector: The Bureau’s review revealed that high fixed costs, reputational awareness, and regulatory requirements impede entry and expansion in the financial services markets.
- Conditions in the Canadian financial services sector facilitate coordinated behavior among competitors: The Bureau observed that the conditions in the relevant markets allow for coordinated behavior among firms. A transaction that would eliminate an aggressive competitor in the financial services sector could impact the likelihood or effectiveness of potential coordination and raise concerns for the Bureau.
