Incumbents, consumer complacency barriers to innovation in Canadian banking

Elevate Money

Wednesday at the #ElevateTechFest Money Stage, BetaKit’s Meagan Simpson spoke with three FinTech disruptors about open banking and the barriers faced by innovators looking to shake up Canada’s financial system.

“I think we need to own the fact that we frankly didn’t get our shit together soon enough.”

The panel featured Daniel Eberhard, founder and CEO of Koho, a Toronto-based challenger bank, Alexandra Nuth, managing director of ATB’s new digital offering Brightside, and Saud Aziz, strategy and operations manager of Canada for Revolut, a UK-based challenger that is currently expanding to the Canadian market.

Revolut is one of a number of UK-founded challenger banks, including Starling and Monzo, that have popped up in recent years to offer an alternative to traditional banking. The UK, in fact, is known as having a competitive environment for challenger banks to thrive. The UK has adopted open banking much more quickly than other nations; In 2016, the United Kingdom Competition and Markets Authority required the nine largest UK banks to allow licensed startups direct access to their data.

Eberhard said the regulatory environment across the pond in Canada has made it much more difficult to thrive as a challenger bank, as regulators have prioritized managing system risk over creating a competitive environment.

Open banking is meant to give consumers more control by allowing their banks to distribute their personal data to third parties through the use of open application programming interfaces (APIs). One of the goals of open banking is to foster a more competitive and innovative financial ecosystem and proponents of open banking claim it allows financial companies to improve their offerings and customer engagement, and create new channels for digital revenue.

One of the specific advantages to UK challenger banks over their Canadian counterparts is the ability to receive an electronic money institution licence (EMI), which allows PayTech and FinTech companies to offer specific and common financial operations, including money remittance services, process payment transactions, and direct debit or credit transfers.

No such licence exists in Canada, and this inability to operate means companies like Koho need to rely on partnerships with incumbent institutions to move their customers’ money. Aziz said regulators need to understand that Canada shouldn’t have a binary framework between existing as only either a bank or not a bank.

Outside of Canadian regulations that also make it extremely difficult for startups like Koho and Revolut to get banking licences, challenger FinTech’s like Koho have faced direct roadblocks from incumbent financial institutions. Eberhard referenced a tweet that he shared over the summer, regarding a Koho employee being blocked by CIBC from transferring funds to their Koho account, with the bank flagging that Koho could be associated with “scams.”

While Eberhard said banks should not all be painted with the same brush, incredibly large organizations that are already so entrenched likely have very little incentive to play a part in changing the current competitive landscape.

“It’s a long process, and our regulatory changes take a really long time. In the short term, I’d actually [say] banks need to step up,” Nuth added. “I think there’s more room for the big banks to set a precedent. It does take a lot of work, you have to change your offering model, you have to change your tech stack, you have to change the way that you’re approaching your business.”

Aziz echoed this point, arguing that consumers should always be at the core of the product. He said that, oftentimes, consumers are looking for smaller features without the headache of regulatory burden.

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Nuth noted that in a financial landscape like Canada’s, which is dominated by five or six large incumbents, there is more onus on these banks to disrupt themselves and set a precedent for innovators to follow.

“I think a lot of this would be better for consumers if banks stepped up in this space … disrupted themselves and said ‘what would it look like if we were doing the right thing for consumers?’ Tangerine is a great example of [a bank] doing that,” Nuth added.

“I think a lot of this would be better for consumers if banks stepped up in this space.”

FinTech startups and innovators need to own their part in this, too, Eberhard said. He acknowledged that although Canada has been slow in the FinTech race, regulators have a difficult job, and are still trying to learn and understand about the risks and rewards of open banking.

“I think we need to own the fact that we didn’t, frankly, get our shit together soon enough,” Eberhard said, noting that FinTech startups need to make a cohesive ask of regulators and should improve and clarify their message to the industry.

Aziz, who is carefully watching the Canadian market as Revolut expands, said regulatory change is necessary, but incumbents will not get behind this change until they start to lose a noticeable slice in their market share. Nuth said in order for the government to truly start listening, Canadians need to show that the market demand for open banking is really there.

The panelists also touched on the role consumer demand plays in driving the shift toward open banking, addressing how Canadian consumers complacency with big banks is likely to hinder innovation. In the UK for example, consumer demand shifted away from the incumbent banks, which helped to push the regulators toward new models. Canada, the three panelists agreed, can learn a thing or two from this approach.

“If everybody started voting with their wallets and changed the way that they’re banking with some of these challengers [by] moving their money there, it’ll create more of that need [for regulators] to figure it out,” Nuth said.

Image courtesy Elevate

Isabelle Kirkwood

Isabelle Kirkwood

Isabelle is a Vancouver-based writer with 5+ years of experience in communications and journalism and a lifelong passion for telling stories. For over two years, she has reported on all sides of the Canadian startup ecosystem, from landmark venture deals to public policy, telling the stories of the founders putting Canadian tech on the map.

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