Are Canadian Neobanks really challenging the incumbent banks?

Opinions expressed are solely my own and do not express the views or opinions of my employer or any other financial institution.

With the rise of venture funding across Canadian fintech, I felt it was important to share some of the reasons how the fintech space, including Neobanks or Challenger Banks, is still immature in Canada.

There is a lot of hype in the market about how Neobanks are challenging traditional banks in Canada, but the reality is very different. None of the top 5 Canadian banks feel the urgency to beat any of the so-called Neobanks of Canada — Koho, Mogo, Stack, Wingocard, and Neo Financial. Banks are aware of the shifts in the Canadian market but don’t necessarily feel threatened yet.

Some of the key reasons why major Canadian banks do not feel threatened by Neobanks in Canada —

1. Canadian Neobanks are offering financial products that are currently powered by incumbent banks or large financial institutions.
2. Canadian Neobanks are dependent on the financial infrastructure (also referred to as the financial rails) which is built by the incumbents.
3. Canadian Neobanks do not have a strong moat (business model, product, or technology) which could prevent a major bank from offering the same or better version of their product.
4. None of the Canadian Neobanks have any sort of proprietary or patented technology that makes their financial product any better than what’s offered by an incumbent.
5. Most importantly, “Open Banking laws” that already exist in countries like the U.K., Australia, and the U.S., are still a work-in-progress in Canada. You can read the last updated report here — Final Report — Advisory Committee on Open Banking.

This list below supports some of my reasoning above —

• Koho — The KOHO Visa Prepaid card is issued by Peoples Trust Company pursuant to license by Visa Int.
• Mogo — Mogo Visa Platinum Prepaid Card is issued by Peoples Trust Company pursuant to license by Visa Int.
• Wingocard — Mobile banking for teens, prepaid Visa Card is issued by Community Federal Savings Bank (Member FDIC) pursuant to a license from Visa U.S.A Inc. Wingocard (Montreal) is targeting US market for now.
• Stack — Stack card is issued by Peoples Trust Company pursuant to license by Mastercard International Inc.
• Neo Financial — Neo card issued by ATB Financial pursuant to license by Mastercard International Inc. Neo savings account is provided by Concentra — wholesale banking solutions, Mortgages, Capital, Trust, and Wealth management. I wrote at length about Neo Financial in my previous article — Reviewed by its’ target customer — Neo Financial, a neobank from Canada

It is great to see new startups entering the fintech space, and these startups listed above have worked hard to launch their products. But hype alone is not enough to challenge the incumbent banks in Canada. Some of the hype created by the financial blogs or news is often not substantiated by industry experts. Here is an example of a terrible clickbait article posted by the Financial Post — The best online banks in Canada of 2021. This article was then reposted by Andrew Chau, Co-Founder of Neo Financial on LinkedIn with more misleading information that is simply NOT TRUE (see few reasons below this image) -

Post original link — https://www.linkedin.com/posts/neo-financial_the-best-online-banks-in-canada-of-2021-activity-6843216258067001344-a01s

I am sure many of the senior executives from the major Canadian banks will find this post above amusing because —

• Neo Financial has a card issued by ATB Financial pursuant to license by Mastercard International Inc.
• ATB Financial, a Crown Corporation behind Neo Financial’s card product also has a rewards-based card offering of their own in the market called — Brightside.
• Neo Financial built an “App” in 2.5 years and is in the process of acquiring more customers. So the accomplishment in the post is mostly about the app and some key partnerships to offer an expensive, high-interest credit card with rewards.
• Almost any major Canadian bank or a large retailer can build and launch a similar Neo Financial product (card+reward) in less than 12 months (if they really wanted to). I have personal experience working with major banks, and they have all the talent, expertise, and knowledge to build a similar app.
• Reference to 100+ years to build — Neo Financial offers a credit card, so let me use VISA as an example. VISA was established in 1958 as an Americard credit card program in Fresno, California. So that makes it roughly 63 years ago, not 100+ years. VISA then became a nonprofit consortium of banks that operated the Visa network, and only in 2007, VISA completed its’ corporate restructuring and went public.

Neo Financial must be doing something right as they recently raised $64m, CAD, Series B from Valar Ventures, bringing funding to date to $114m CAD (source). As a Canadian, who is following Neobanks closely, it seems like Neo Financial is looking to get acquired by one of the major banks based on some early success with user acquisition. We all know growth hacking is not something that major banks do well. Almost any major consumer retail group like the Canadian retail conglomerate Loblaw, Best Buy, or Home Depot could offer a similar card product with rewards. I would love the opportunity to consult the founding team of Neo Financial as their technology and execution model can be applied to a different business model with a strong moat that will allow them to build a real billion-dollar fintech in Canada.

What are the traditional banks doing?

Traditional banks are also not blind to the trends in the market, and there are a few examples in the Canadian market now — MyDoh (RBC Ventures), Tangerine (acquired by Scotiabank in 2012, was launched as ING DIRECT Canada in 1997), EQ Bank (Equitable Bank), and Simplii Financial (CIBC). Canadian consumers already trust these incumbents with multiple financial products, and due to customer demand, they have started launching new products at a pace similar to fintech startups. E.g., Scotiabank is now offering a buy-now-pay-later (BNPL) product — Scotia SelectPay™

Who is really shifting the fintech landscape?

Based on my research, some of the noticeable Canadian fintech that we should be paying attention to (including Neobank, Payments platform) are —

• Wealthsimple — working on democratizing finance for Canadian customers. You will find that Wealthsimple, like other neobanks listed above, also uses debit cards issued by Peoples Trust Company for their Cash app but they have made a difference in areas like equity trading. Wealthsimple was the first fintech startup in Canada that offered no-fee equity trades. They are also the only trading app that offers fractional trading in Canada (limited stocks for now).
• PayFare — A free digital banking app and payment card for (gig) workers to get their earnings paid instantly. Since March 2021, their stock is up approx. 70%.
• Nuvei — Canada’s largest private and non-bank payment processor. Since January 2021, their stock is up approx. 120%.

What can the Neobanks do in Canada?

If Canadian Neobanks really want to shift the fintech landscape in Canada, then they must think about building a truly competitive and innovative product offering. Few examples —

• Credit cards with less than 4%-5% purchases credit rate/APR as opposed to 19.99% — 24.99%. Such low-interest credit card products are already available in the U.S.
• No fee — online/mobile chequing and investment accounts that are maintained and held by the Neobank itself, and not another incumbent.
• Specific banking products for low-income consumers to help them grow their financial net worth over time.
• Instant, short-term 0% interest loans for emergencies and costly purchases like furniture, appliances, etc.
• Rent-to-buy mortgage products with a $0 down payment.
• AI-driven, real-time credit score mechanisms that are powered by consumer’s financial and behavioral data (as opposed to using archaic, monopolistic technologies like Equifax and Transunion).

I recognize that launching a true challenger bank (like Varo, NuBank)is not an easy task, and it requires a lot of upfront investment. But if you are looking to launch a Neobank in Canada and have the knowledge of the financial regulations, licensing requirements, etc., then some of these technologies could help -

• Galileo — payment card programs and digital banking solutions
• Socure — digital identity verification
• Plaid — connect financial accounts
• Yodlee — connect financial accounts
• Flinks, Canada — connect financial accounts

I like to end this post with a simple caution that until “Open Banking” is a law in Canada, the incumbents are not worried about the Neobanks who are just re-packaging existing, expensive financial products with some low-level customer value. It will be interesting to watch which Neobank can pivot to innovative products once Open Banking is a reality in Canada.