The 2024 Canadian federal budget introduced mandates that aim to enhance consumer protection and promote inclusivity. These directives will reshape the business strategies of both traditional and digital-only banks, affecting revenue models, technology infrastructure and customer engagement practices. Amidst these regulatory changes, a critical question arises: How will digital-only banks redefine their value proposition to maintain their competitive edge?


With the goal of enhancing consumer protection and promoting financial inclusivity, the Canadian government has recently introduced a set of directives within its 2024 budget.¹ These mandates aim to revolutionize banking practices, increasing fair treatment for consumers while encouraging innovation in the financial sector. Some of the most significant changes are highlighted below:

1. Non-sufficient Funds (NSF) penalties cap: NSF penalties will be capped at $10 per occurrence, providing relief to consumers facing excessive fees for insufficient funds. Additionally, consumers will now receive alerts before incurring any fees, providing them with a grace period to top up their accounts and avoid penalties. This move empowers consumers by promoting financial transparency and preventing them from being caught off guard by unexpected charges.
   
2. Enhanced banking agreements: Ongoing negotiations with banks aim to secure enhanced agreements offering low-fee bank accounts with fees ranging from $0 to $4 per month. The eligibility for $0 accounts will also be expanded to make everyday banking more accessible to more customers. 
   
3. Automatic notifications and service renewal: In a re-issuance of guidance from 2022, banks must automatically notify Canadians when their bank account or credit card balance falls below a set amount, enhancing financial awareness and helping individuals manage their finances more effectively. Consumers will be able to personalize the amount at which this alert will be generated. Additionally, with the introduction of the Financial Consumer Protection Framework, banks are now mandated to provide advance notice before renewing any products or services to ensure that the consumer only pays for the services they need. 

HOW WILL THESE MEASURES IMPACT THE BANKING INDUSTRY?

1. Revenue impact: Caps on NSF penalties and restrictions on charging multiple fees for the same transaction will reduce the revenue generated from overdraft fees for banks. Additionally, prohibiting NSF fees for small overdrawn amounts will further impact fee revenue.
   
2. Technology and third-party integrations: Banks will need to update their systems to comply with the new mandates, including implementing features such as grace periods for NSF fees, limits on maximum charges, and automatic notifications for low balances. They may need to integrate their systems with government databases or third-party notification services to comply with automatic notification mandates. This will require investment in technology infrastructure and software development to ensure seamless integration and functionality. 
   
3. Data and analytics: Banks will benefit from data and analytics capabilities to monitor customer account balances, track NSF occurrences, allow for and monitor grace periods, and analyze customer behaviour in response to the new mandates. This may involve implementing advanced analytics tools and algorithms to identify patterns and trends that could inform decision-making and improve customer service.
   
4. Operating model: It will be important for banks to reassess their operating models to ensure alignment with the new regulatory requirements. This could involve creation of new chequing account products and product teams, restructuring internal departments, revising policies and procedures, and/or reallocating resources to prioritize compliance efforts.
   
5. Monitoring and risk management framework: Banks will need to enhance their monitoring systems to track compliance with the new mandates and mitigate the risk of non-compliance. This may involve implementing new risk management frameworks and internal controls to ensure adherence to regulations and to minimize the potential for penalties.

WHAT IS THE FUTURE OF THE DIGITAL-ONLY BANK?

In the realm of consumer banking, these mandates necessitate a paradigm shift in operations and technology infrastructure for traditional and digital-only banks. More significantly, with traditional banks now mandated to offer more no-fee/low-fee checking accounts and the revenue impact of new restrictions on fees, the viability of digital-only banks may come into question. These mandates level the playing field by providing consumers with similar options across both traditional and digital-only banking platforms. 

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