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How Canada's Big Five Banks Are Investing in FinTech

Nov. 3, 2015
5 mins
A professional woman sends a message on her phone while working in front of her laptop in a mixed outdoor workspace

Technology has a way of permanently disrupting and changing the way other industries operate. For example, Uber has transformed the transportation sector. Airbnb has left a mark on the travel and accommodation industries.

These companies were able to massively shift consumer behavior and preferences in a short amount of time. They did so because they’ve been able to operate nimbly, use technological innovation, and target Millennials – the fastest growing customer base.

Now, the tech sector has its sights firmly focused on the financial industry; in the next 10 years, banking as we know it is set to change forever. Already there are companies launching innovative new solutions that threaten to take significant market share away from traditional banks and financial institutions.

One example of these innovations is Apple Pay, a service which allows you to make payments using your Apple devices. Of all the tech players in the financial sector, Apple Pay is probably the one that has caused the most fear in financial circles because of the company’s reach. In fact, it’s motivated many traditional companies to make their own investments in technology or technology companies. It’s not surprising that Visa has recently invested in Stripe, a company that accepts mobile and online payments, and which is an Apple Pay partner.

Bank Revenues Could Be Affected

These changes could potentially take a big bite out of Canada’s banking industry. Consultants McKinsey & Co recently published their annual banking review and estimated that banks could lose as much as 60% of the profits and 40% of revenue from their retail arms to financial technology or fintech startups within the next decade. According to the report, these losses won’t just be because these new firms will take market share away from the big banks, but also because to compete with nimble start ups, banks will have to accept smaller margins in areas like retail payments, small business lending, and mortgages.

It’s predictions like these that urge banks to scramble to catch up in the technological arms race and to forge partnerships with technology firms. One of the biggest challenges that banks face is that they have the costly infrastructure of branches, large numbers of employees, and offices. Without these encumbrances, start-up companies are able to offer similar solutions for less. As more consumers move towards digital and mobile banking, banks are already preparing for these changes by closing or consolidating branches, trimming their payroll, and streamlining their processes to stay competitive.

What Canada’s Banks Are Doing About It

Each of the big five Canadian banks is developing a strategy to combat the threat of fintech. While some banks are developing in-house solutions, others are forging partnerships with fintech companies.

Here’s a breakdown of some of the things each bank is doing.

Royal Bank of Canada

RBC is looking to compete with fintech by investing heavily in wearable technology, mobile payments, and security. RBC is working with the Canadian startup Bionym to test wristbands that have mobile wallet or credit applications and which can authenticate identity through cardiac rhythms.

RBC has also invested in the RBC Secure Cloud technology in the hopes of gaining early market share in the mobile wallet category. The technology, which works with Apple Pay and Android alternatives, provides a secure way to pay with your phone. The lender has also partnered with the firm R3 to look into how banks can use the technology behind cryptocurrencies like bitcoin.

Bank of Montreal

BMO’s investments have focused on commercial investing. BMO recently announced that they will be the first Canadian bank to launch a robo-advisor service. Robo-advisors are particularly popular with Millennials who are looking for online and inexpensive options for investment advice. They provide customized investment advice online for a much cheaper price.

BMO is also innovating to save money internally. Last year, they won the 2014 American Financial Technology Award for the Best Cloud Initiative with their BMO Skyway program, a technology platform that saves the bank money by eliminated duplicate data usage of market information within their departments.

BMO is also an investor in the OMERS Venture Fund, which focuses on funding the next crop of Canadian Fintech startups.

Scotiabank

In October, Scotia announced that they were creating the Digital Factory, an internal financial tech incubator. Scotiabank will use this incubator to forge partnerships with fintech startups in order to improve their online and mobile banking experiences.

The lender is no stranger to innovation or collaboration with fintech. The bank also recently designed an app for Samsung’s smartwatch that customers can use to check their balances.

CIBC

CIBC has focused on creating partnerships with existing fintech companies. For example, in 2013 they created a partnership with Payfirma to allow their business clients to accept payments via mobile devices.

They also recently announced that they’re working to launch free cross-border money transfers that can be done via phone, computer, or bank branch, and online lending for small businesses. These exciting new offerings will also be the product of partnerships with existing fintech companies.

TD Bank

TD has opened an innovation lab in Waterloo which has been hiring some of the region’s tech talent to help the company innovate their product offerings.

TD is also forging partnerships with fintech companies including one recently with a budgeting and money management app called Moven. The app provides real time data to consumers about where they’re spending their money.

TD Bank is also partnered with R3 and RBC in their exploration of the technology behind cryptocurrencies.

The Future

Whatever the future has in store for the financial sector, it won’t be business as usual. In a recent earnings call with investors, TD Bank’s CEO Bharat Masrani said, “New technologies are raising consumer expectations of what banks do – and how they do it.”

If a bank wants to keep their market share and grow, they’ll have to learn how to change and meet those expectations by finding ways to deploy technologies to provide their customers with the tech-friendly solutions that they will come to expect.  

Amanda Reaume

Amanda is a freelance writer and the creator of the blog Millennial Personal Finance. After graduating from university with no debt, and $40,000 in savings, Amanda wrote the book The Complete Guide to a Debt-Free Education. She is also the author of a personal finance book aimed at Millennials called Money Is Everything.

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