Donner Prize-winning book a must-read for big banks

This year’s winner of the award for Canada’s best public policy book could be a must-read for executives at the country’s big banks.

Some of those senior executives “barely know how to get their email off their phone,” according to Patricia Meredith, co-author with James Darroch of Stumbling Giants: Transforming Canada’s Banks for the Information Age. 

The authors of the book, which claimed the 20th annual Donner Prize on Tuesday, see Canadian banks and the rules that govern them as being ripe for an innovation-friendly shake-up.

“In this timely and original book, Meredith and Darroch argue that Canadian banks are ignoring the dramatic and disruptive effects of info-tech changes that are threatening their very existence,” the jury for the $50,000 prize said, according to a release. “The book is a policy manifesto, developing a compelling case for the need for fundamental change from the branch-focused business model of current Canadian banking, to a model that conforms to the habits of the mobile-app era.”

The Canadian financial system has opted for more stability and not enough innovation, Darroch said in an interview. This is something, he acknowledged, that could be controversial, as during the financial crisis, choosing stability appeared to be the right call.

“But the issue is, stability comes at a price,” said Darroch, a professor at York University’s Schulich School of Business in Toronto. “And I think that’s innovation.”

It could be a tough act to try to get the message of the book — published by Rotman-UTP Publishing, an imprint of University of Toronto Press — to resonate with Canada’s big banks, which remain some of the most profitable companies in the country. “If you’re a CEO of any of the Canadian banks, there’s nothing telling you that you’re doing a bad job,” Darroch noted.

But those short-term incentives could be affecting longer-term thinking. Meredith pointed to the infamous quote of former Citigroup Inc. CEO Chuck Prince: “As long as the music is playing, you’ve got to get up and dance.”

“So as long as we can produce these short-term earnings, as long we’re keeping the stock market happy, our investors are happy, things are great,” Meredith said in an interview. “When new technology is able to perform the same functions that the old institutions perform cheaper, better, faster, then the music stops and all hell breaks loose.”

And while the big banks in Canada have been pouring billions into technology to innovate and manage their businesses, 75 to 80 per cent of the money being spent on technology is going to maintain the older systems, according to Meredith, who is also a consultant and fellow at the University of Toronto’s Rotman School of Management.

“They’ve got this old business model, which simply makes it almost impossible for them to deliver modern financial services as fast, as cheap and as well as these new technology players,” she said. “The amount that they’re spending on… what I would consider to be the future of financial services is pretty small.”

In the meantime, the banks’ traditional businesses are already being challenged on a number of fronts, including by high consumer debt in Canada that has left customers with less room to borrow from traditional lenders. Darroch foresees a slow-but-sure chipping away at parts of the banking business by the forces of disruption.

“Until you basically find your model being compromised by a thousand cuts rather than a direct competitor,” he said.

The banks are also a big part of the broader Canadian economy, and the country as a whole was recently called out as lagging when it comes to innovation. The Conference Board of Canada said this week that the country had slid in the think-tank’s annual innovation report card, ranking 12th among 16 peer countries, some of which had stepped up their game.

The book argues that longer-term investors could press banks to create new “information-based” products and services, that the federal government should promote competition in payments, and that rules could be clarified for market-based sources of financing for businesses.

It’s younger bankers that see the future, Meredith said.

“And really what we’re trying to do is encourage them to speak out, because they’re the ones who can really change this,” she said.

Financial Post

Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne