Adapting Not Imitating: How Fintechs Can Drive Banking Innovation in Canada 🇨🇦, part 2 of 2
Disclaimer: Opinions expressed are solely my own and do not express the views or opinions of my employer or any other institution. Any information shared on a publicly listed company or digital assets is for informational purposes only and is not a recommendation of an investment strategy or to buy or sell any security or digital asset.
As promised, this article is part 2 of my previous post — Tune Out the Noise on Neobanks in Canada, Part 1 of 2 — where I covered the size of the banking sector, listed many of its participants, and discussed why we need to learn from other countries to localize products for Canada.
Repeating my recommendation—
Keep an open mind to extract value from this article as I genuinely care that our Canadian 🇨🇦 fintech founders and their teams are successful in their ventures —
- This article is presented from the perspective of a Canadian consumer without bias towards any specific neobank, incumbent bank, or credit card company.
- For those associated with a neobank (as a founder, part of the management, or an employee), internally stress-test these opinions through constructive workshops instead of adopting a defensive stance.
- Investors in neobanks or related fintech ventures should challenge founder(s) on original hypotheses, considering the current economic state and the fintech’s performance against fundamental startup/scale-up metrics.
- If involved in the neobank landscape for 5–8 years without profitability or higher cash deposits on the horizon in the next 2–5 years, consider options such as “Sell,” “Pivot,” or “Reinvent.” Prioritize research-driven product development over replicating neobanks from the U.S. or Europe.
What comes to mind when you think about Consumer Banking?
Fundamentally, for over 20 years, consumer banking products have remained unchanged in North America.
Since arriving in Canada in 2006 from the UK, I have observed minimal changes in consumer-facing banking products or new service offerings that have positively impacted my wealth over the past decade. Like many other Canadians, most of my wealth accumulation has resulted from the rise in real estate values or independent financial decisions, such as investments in stocks and ETFs. The way I managed my finances using consumer banking products (chequing or savings accounts, mortgages) a decade ago remains largely the same today. The main changes are my increased use of mobile banking apps, e-signing documents with banks, visiting branches less often, and using domestic money transfer services like Interac e-Transfer instead of cheques.
It leads me to wonder:
Is the innovation in the Canadian banking system shaped by Government and Competition Commission policies, or are these policies influenced by how the Canadian banking system is innovating?
To answer the earlier question, we would need to consult leaders at the Bank of Canada, the government, and, of course, the incumbent banks.
As Canadian consumers, we see the leaders at fintechs arguing that the Canadian banking system lacks innovation, supporting the narrative often presented by venture-backed startups. However, they have essentially built and offered the same consumer banking products available to us for the past 10 to 20 years. Fintechs might offer new types of rewards (e.g., points for discounts, cashback on debit card use, etc.) that encourage consumers to spend more or differentiate with a more compelling mobile app experience. Yet, with or without a banking license, their products are similar to those incumbents offer. They might be able to save some operational costs by having a banking license, but the regulatory oversight could bring different challenges to those fintechs.
In my view, given their current product offerings, unless fintechs fundamentally reinvent consumer banking products now, they will ultimately end up just like existing neobanks run by incumbents, such as Tangerine (Scotiabank), Simplii Financial (CIBC), or EQ Bank.
For fintechs, there is nothing inherently wrong with ending up similar to an incumbent-run neobank; at least they will become profitable 😉. However, they must acknowledge this publicly and focus on differentiating in other areas. Fintechs could innovate around adjacent products (such as brokerage and wealth management), financial well-being education, and customer service using AI. They could also provide compelling personalized consumer incentives and create unique offers to carve out a niche and gradually grow their market share.
Rethinking New Entrants’ Narratives on Growth
I sincerely care about our Canadian founders and their teams who are working incredibly hard to build fintech companies in a highly competitive environment. This environment has a high cost of user acquisition and is mostly saturated (as covered in my previous article). However, it benefits Canadian consumers when fintechs can clearly articulate their value proposition and how they are addressing our unmet needs to grow organically.
Some VC-funded new entrants are crowding the market with their white-label credit card products for consumer brands or encouraging Canadian consumers to spend more on debit cards (Visa or MasterCard) to sustain their business model through interchange fees. This approach allows them to show investors that they are growing their market share across consumer banking. At times, they claim to support low-income Canadian consumers with some of their product offerings, which are typically short-term by nature, yet there is no verified published data to support these claims. I have personally interviewed a few of their customers who benefited from their credit-building product for a short period, but that offering is also easily replicable.
References to Assets Under management (AUM) as an indicator of growth —
Many new entrants often highlight their Assets Under Management (AUM) as a primary indicator of growth. While this can demonstrate trust from investors and success in attracting funds, it does not provide a complete picture of their impact on everyday banking for consumers. AUM can be a misleading metric, especially when compared to traditional investment funds and incumbent banks, which often have significantly larger assets under management.
It would be more insightful for consumers if new entrants provided anonymized data on the growth in the number of customers, their income brackets, and age groups who are using their services. This information would truly gauge interest from new customers and demonstrate how well these new entrants are serving the needs of Canadian consumers.
Furthermore, without aggregated data about these consumers, references to growth in AUM do not necessarily indicate whether consumers are using the new entrant for everyday banking needs and depositing money into their chequing accounts. This information is not particularly valuable for a Canadian consumer deciding whether to select a new entrant for their everyday banking needs. Many financial institutions in Canada have similar or larger AUM portfolios. For example, some investment groups hold over $30B in AUM. Should all such investment groups start competing in the consumer banking space?
When comparing new entrants to incumbents, nearly each of the top five or six incumbents holds close to or over a trillion dollars in Assets Under Management (AUM), according to Investopedia’s 2023 data. Therefore, given the size of our economy, new entrants might never come close to the incumbents in terms of AUM for many decades. As a Canadian consumer, if we were to use the size of AUM as a reference for selecting our bank, it is best to pick from the top six instead of a new entrant.
Adapting Not Imitating: Shaping Fintech to Meet the Real Needs of Canadians 🇨🇦
Let us now explore how Canadian fintechs can research, learn, and gain insights from the common financial issues faced by citizens of Canada and other countries while crafting products tailored to our unique economic landscape.
This approach not only encourages the development of valuable fintech products that directly address the specific needs and challenges encountered by Canadians, but it also helps prevent fintech founders from having to construct narratives for their investors and the market that are not applicable or feasible in Canada, as is often witnessed today.
Insights for fintech products from financial behaviors —
During my recent research, Corey Rosen from the National Center for Employee Ownership (U.S.) articulated a growing concern in an interview about private equity firms: “It’s no surprise that people see the economy as distinctly unfair and getting unfairer because wealth and income are increasingly concentrated in the hands of a small number of people. When three families — Warren Buffett, Bill Gates, and Jeff Bezos — own 40 percent of the privately held productive wealth in the country, it’s a little bit hard to say, “Oh, the system works; it’s fair.”
As we delve deeper into Corey Rosen’s observations on wealth concentration and the unfair economy, they directly relate to a recent analysis by The Economist on how poorer citizens in America spend a staggering amount on lottery tickets, highlighting financial behaviors that underscore economic disparities.
Quick highlights of The Economist article: The economics of American lotteries -
- April 1st draw offered consumers a shot at a $1bn jackpot, the fifth-biggest in the game’s 32-year history.
- The odds of winning the jackpot are unimaginably low — just one in 292m for Powerball. Yet sales are at a record high.
- In 2023 Americans shelled out more than $100bn (chart below: Rags to riches) on state-run lotteries. Were they a single company, America’s lotteries would be the ninth-most profitable in the country.
- On average, State lotteries keep around 30% of ticket sales.
- Through public records requests, The Economist finds that poorer households spend significantly more, in absolute terms, on lotteries than richer ones (chart below: The golden ticket).
- Zip-code-level sales data from 24 states reveals a share of income imbalance: a 10% drop in median household income correlates with a 4% increase in lottery expenditures.
- Age and ethnicity impact lottery sales, with older and non-white Americans more likely to play, though income remains the key factor.
- In the poorest 1% of zip codes that have lottery retailers, the average American adult spends around $600 a year, or nearly 5% of their income, on tickets. That compares with just $150, or 0.15%, for those in the richest 1% of zip codes. The poorest households spend roughly 30 times more on lotteries than richer ones, as a share of income.
Although lottery revenues support worthy social programs, the disproportionate share of earnings that low-income households spend on lotteries promotes irresponsible financial behavior, especially given the slim odds of 1 in 292 million, driven by the intense desire to overcome economic inequities.
Building on the insights from the financial behavior discussed, we might find similar lottery spending patterns in Canada. The highlights I shared above do not suggest a direct link to the rise in gambling behavior, which organizations in the US and Canada (like the Ontario Lottery and Gaming Corporation, OLG) monitor closely. However, based on the compelling market size of lottery players, my research leads me to identify an unmet consumer need.
This presents an opportunity to develop a responsible financial product for the U.S. and Canada that satisfies the urge to win in a game with low odds, promotes responsible consumer behaviour, and contributes to financial well-being or security.
Uncovering new product ideas by encouraging positive behaviors
UK’s Longstanding Lottery-Based Savings for Citizens
If research is conducted thoroughly, we can discover inspiring fintech product ideas worldwide that satisfy unmet consumer needs, to then experiment, iterate, and adopt them for Canada and the U.S. To address some of the needs discussed in the previous section, many countries have established product offerings under the concept of a government savings bank. In the UK, this is exemplified by NS&I. Established in 1861, NS&I (originally known as the Post Office Savings Bank) was created to offer a safe way for people to save money and to provide a source of funding for the government to run the country.
One such responsible savings product from NS&I is Premium Bonds. These bonds offer a unique way for individuals to save money while having the chance to win tax-free prizes through monthly draws. With Premium Bonds, instead of earning traditional interest, bondholders have the opportunity to win various prizes, making saving as engaging and exciting as playing a lottery.
Backed by HM Treasury, for over 160 years NS&I with over 24 million customers must be doing something right for its citizens. Here are some interesting facts about NS&I Premium Bonds from the 2023 report —
Since the first draw on 1st June 1957, £25 billion has been paid out in prizes.
In 2023 alone, 24 Premium Bonds jackpot millionaires were made.
2023 also saw the 500th person win the £1 million Premium Bonds jackpot since it began in 1994.
Key Features of NS&I’s Premium Bonds-
- Tax-Free Prizes — Instead of earning interest, bondholders participate in monthly prize draws, with prizes ranging from £25 to £1 million.
- Odds and Prize Fund — Each £1 bond has a 21,000 to 1 chance of winning. Every £1 Bond entered into the prize draw has the same odds of winning, but purchasing more Bonds increases your chances of winning.
- Accessibility — Bonds can be purchased with a minimum of £25, up to a maximum of £50,000 per person, and are available to children as well.
Prize-linked savings products have been around for some time, and many countries have adopted them in different forms. They are valuable tools for enhancing financial well-being. While the UK’s Premium Bonds provide an excellent model, simply replicating this product in Canada without adaptation might not fully address the unique needs and regulatory environment of Canadian consumers. With appropriate government support, a tailored version can be created for Canada and expanded into the U.S. Fintechs could experiment with such financial products by incorporating specific features and offering interest on certain tiers, ensuring they do not directly compete with provincial lottery programs. These products address unmet needs, promote responsible financial behavior, generate new millionaires, and help close the wealth gap.
Conclusion
The Canadian banking landscape presents both challenges and opportunities for fintechs. While there is a pressing need for innovation, it is crucial that new entrants differentiate themselves by addressing the real and unique needs of Canadian consumers. By adapting successful international financial products and focusing on financial education, personalized experiences, and community impact, fintechs can carve out a niche for themselves and contribute to a more inclusive and dynamic banking environment.
One such fintech that I am particularly excited about is Woveo, Calgary. The founding team applied their research on group and community-based savings or financing approaches from other countries to Canada. Woveo has launched a “community wallet type of group savings” financial product, providing financial security to non-prime Canadians. They are making low-cost and short-term credit options accessible for low and moderate-income consumers.
As these fintechs evolve, their ability to provide value beyond traditional banking will be key to their success and the betterment of financial well-being for all Canadians.
