Artwork by Sophia Huang

The Existing Retail Banking Landscape

For the majority of young Canadians, banking is a set-and-forget issue. They use the same accounts their parents created for them more than a decade ago without considering the financial impact of complacency on their futures. After a lifetime of building stable credit and paying a significant mortgage, older generations typically have been happy to take the path of least resistance and continue to utilize the existing services offered by traditional banks. Whether it is due to comfort, loyalty, or credibility, there are serious implications to overlooking new platforms with different services. 

Ratehub Canada estimates that Canadians over 40 years old have held the same account for 18 years on average. They also found that one third of men and nearly half of women use a financial institution simply because family or friends recommended it. For many of these individuals, these timelines serve as a marker for the first and last time they evaluated their banking needs, instead opting to pay for “peace of mind” and support a banking system that is not mutually supporting them. 

Canada’s five major banks — RBC, TD, BMO, Scotiabank, and CIBC — have made billions of dollars through surreptitious increases in banking fees, net interest margins, and fixed mortgage rates. Banks install every failsafe for a customer looking to switch providers, and thoroughly depend on entrenchment by offering attractive incentives and perks to opening additional brokerage accounts, TFSA’s, car insurance, and mortgages. Canadians are bleeding cash through their chequing accounts without realizing it, or even worse, accepting that this is the way banking is done. 

Changing Preferences of Younger Generations

The retail banking industry has historically thrived on a potent concoction of three drivers: lack of transparency, accessibility, and failure to provide personal customization for individual financial needs. Unlike their parents, some young Canadians are now growing skeptical of traditional offerings in favor of the modern investing and saving services becoming ubiquitous among their friends. The rise of movements like F.I.R.E. (Financially Independent Retire Early), has encouraged aggressive saving and investing decisions at approximately 50% to 75% of one’s income in order to retire years ahead of traditional retirement plans. Consequently, banking services like Neo Financial and Wealthsimple that enable young Canadians to begin maximizing their investing, saving, and spending activities for the future are becoming increasingly popular. 

Canadian fintech giant Wealthsimple, for example, was created to allow access to seamless registration, no fee trading, and original investing educational content aimed at everyday first-time investors. While Wealthsimple offers commission and fee-free investment accounts, digital banking service Neo (which is also founded and based in Canada) offers transparent zero-fee savings accounts. Savings options are generally judged by the rates under which the account earns monthly or annual interest, building on the principal initially deposited into the account. By having a low-cost structure with no physical branches or locations, Neo is able to offer high-interest savings accounts at a rate of 1.55%, 31 times higher than traditional bank rates. Further, being fully digital enables Neo to capitalize on recent changes in consumer behaviour; REBEX found that  more than a quarter of customers expect to increase their usage of online and mobile channels while visiting brick-and-mortar branches less frequently. 

While skeptics often question the credibility of smaller digital banking platforms, Neo is a Canadian Deposit Insurance Corporation (CDIC) member institution (eligible for up to $100,000 in deposit protection) like each of Canada’s five major banks and virtually every financial service in Canada. If a company, such as Neo, went bankrupt, consumers’ savings would be completely insured and reimbursed automatically. Ultimately, both Neo and Wealthsimple are putting a spotlight on consumer needs in order to democratize access to investment services, investment education, and the benefits that they reap.

As a result, modern digital banking platforms such as these that are free, convenient, and driven by customer experience will soon increasingly siphon fed-up customers and set the new standards for modern banking practices. The rate of adoption of emerging fintech services has undoubtedly been accelerated by the COVID-19 pandemic. Canadians have embraced digital services during this period and many are never going back, as confirmed by Boston Consulting Group’s (BCG) Retail Banking Excellence Benchmark (REBEX) which surveyed 17,600 banking customers in 30 countries including Canada. The Pulse Survey found that digital adoption grew by 10% during the lockdown period, bringing the overall base of online banking users to more than 80%. Consumers are becoming increasingly comfortable with the “bank” as an app rather than a building. It is exciting to see that numerous Canadian born startups like Neo and Wealthsimple have helped solidify these trends by dismantling the narrative that personal finance is intimidating or inaccessible.

Financial Innovation in Emerging Economies

While Canadians have begun to embrace newer digital banking services, we have not seen the pace of technology disruption or adoption that emerging markets in other countries have. BitPesa and Movii are industry leaders capturing large customer bases in underbanked countries like Kenya and Columbia respectively. They illustrate what the future of financial services could look like if novel technology was further embraced on the supply and demand side.

BitPesa is a blockchain payments startup and digital foreign exchange that aims to increase the speed of business payments. Blockchain is a distributed ledger technology that creates a record of transactions, independently verified by a consensus of multiple users instead of a central domineering authority. Thus, it removes traditional banks (and the costs associated with them) as middle-persons for payments processing, allowing transactions to occur instantaneously. By decentralizing payments, BitPesa has accelerated the pace of financial inclusion across multiple countries in Africa — where transactions are typically performed exclusively in cash — by empowering customers who do not have access to or cannot afford traditional services with the ability to make quick transactions.

Further, over the past seven years, it has built trust with customers by offering security and convenience at a low cost, especially for those in regions that are remotely populated, experiencing political strife, or are economically unstable. Understandably, banks have not embraced blockchain technology because it renders much of their fee structure and management irrelevant. However, restructuring their revenue models may be exactly what is necessary to create greater value for consumers and to compete in the future.

Similarly, Columbian startup Movii launched in 2019 to provide no fee checking accounts and debit cards solely through digital channels to millions of underbanked citizens (people who previously never had access to bank accounts). Movii is one of many companies that have recently realized that identifying niche segments that are often ignored and then creating value for them can unlock huge upside. It is much easier to enter, monopolize, and subsequently grow an untapped small market versus a more saturated large market. 

This has important implications for Canadian banks, which have traditionally geared financial products towards older individuals and men because they are typically viewed as the head of households. However, we have already seen that younger Canadians are becoming more interested in their personal finances. Further, Canadian women currently control $2.2 trillion of assets and that could double to nearly $4 trillion (or more if real estate is included) by 2028. There is an opportunity to better serve these specific segments that cannot be overlooked.

Challenges and Opportunities for Canadian Banks

The rapid scaling and adoption of innovative digital banking platforms in emerging markets will not necessarily be experienced in Canada for several reasons. First, fintech scaleups face many regulations in Canada but more importantly, Canada’s five major banks remain monstrous incumbents in terms of market share and control. Trust is an important factor when it comes to consumer adoption of new digital banking services, and the banks have entrenched their position in offering peace of mind; REBEX found that 75% of consumers have not changed their trust in their bank since the pandemic and 19% had more trust since the start of the crisis. 

Additionally, some would argue that innovation is stifled because the big banks have little incentive to change their revenue models when the vast majority of Canadians still rely heavily on their services. However, many banking executives are acutely aware that a digital transformation is on the horizon. Either a bank will disrupt themselves and reimagine their operations, or other banks, startups, and established tech giants will disrupt and snag some market share. Truly, the opportunity to better serve consumers is so obvious that tech giants like Amazon, Facebook, and Google are rumoured to have their eyes set on acting like banks. Walmart, for example, announced in early 2021 that it is building a business line of unique and affordable financial products. Any disruptor will likely compete by commoditizing financial services to offer lower costs to consumers, shaving banks’ margins. Thus, digital transformation will be inevitably necessary to compete in the future, it is simply a matter of who takes advantage of the immense opportunity first. 

The new playbook for success for Canadian banks consists of the following three strategies: make digital services accessible and personalized, use Artificial Intelligence (AI) for digital advisory services, and deliver integrated services throughout the entire customer journey. Most banks have begun to work on executing these strategies — RBC, for example, has already launched an AI-based electronic trading platform — which imply reconceptualizing how a bank works. A bank could use multiple apps to tailor financial tips and offers based on a customer’s interests and needs (and permission to access data). 

For example, all three strategies could be deployed simultaneously via an AI-powered housing platform where a customer undergoing remodelling of their home can view financing options for the project and information on sustainability incentives for installing solar panels. The app might help find an optimal time to sell the renovated home based on the market value and interest rates. It could then become the customer’s mortgage provider, offering advice on purchasing a new home based on the price ranges and neighbourhoods that fit the customer’s income, needs, and lifestyle. Tapping into existing customer insights can help banks reposition themselves as financial allies while they still have insights that disruptors like Google or smaller firms don’t possess.

The Bright Future for Canadian Banking

Unsurprisingly, we will have to wait five to seven years to see versions of these strategies come to life and witness the forthcoming seismic shift in retail banking. Nonetheless, the Covid era pushed more consumers to adopt digital banking services, especially those of smaller players. As a result, this enabled consumer-centric Canadian fintech startups with more affordable services to make headway, producing a credible threat of chiseling banks’ monopolistic market share. This forced banks to push the fast forward button into the future. It is unclear who might come out as the winner in this arena given the sheer size, resources, and potential momentum of incumbents and looming threat of rapid market entry of global tech firms like Google. 

What is certain, however, is that digitally savvy, uncomplacent consumers led to the renewed urgency for digital transformation in banking in the first place. Consumers should continue to educate themselves about the different services available, fee structures, and personal finance. This empowers them to choose services that serve them faster, cheaper, and more intimately, consequently further catalyzing innovation that liberates them in achieving their financial goals.