Will fintech and open banking make a dent in the big banks’ market share?

March 9th, 2020 | Sanjay Sharma

Headlines such as “SkipTheDishes founders target big banks with new Fintech Neo Financial” signal the entry of one more player in Canada’s increasingly crowded banking fintech space. Others, such as motusbank and Wealthsimple Cash promise much of the same, but what are the actual differentiators? In short, a smoother digital experience, better chequing rates, no fee accounts, and a “no-big corporate” feel. 

The question remains: Will they be able to make a real threat against the dominant positions held by the major banks and credit unions in Canada? To answer this question, let’s first look at the role open banking plays.

Will open banking enable fintechs?

In simple terms, open banking (aka consumer-directed finance) allows consumers to opt-in for offers from third-party financial services providers on a single platform. A recent committee report has given a cautious go-ahead for open banking in Canada and recommended calling it “consumer-directed finance” to emphasize that the consumer will be in charge of enabling the process for his or her banking.  

At the same time, banks are considered the “experts” in financial services, not technology companies. Consequently, there is little interest in opening bank accounts even with well-known names such as Google and Amazon, as 80% prefer to bank with an institution that has a local branch, according to Mintel research on banking innovations in Canada. 

So, will open banking make a significant difference in the foreseeable future? Not according to this Mintel analyst.

Does open banking pose a threat to the big five?

Although awareness of the concept of open banking is low (just 13% of Canadians are aware of open banking), nearly a third are interested in the ability to compare different financial offers on their banking interface (essentially – again – what open banking is), according to Mintel research on the Canadian fintech market. This is helpful for fintech companies, whose lower-cost structure will help them undercut the major banks on some banking products.

However, the importance that Canadians place on a branch network and the trust invested by the public in the major banks are both factors that will make it very difficult for fintechs to make any significant gains over the big five in the foreseeable future. As mentioned, most Canadians prefer having a main FI that has a local branch; many, in fact, prefer Canadian brands, according to Mintel research on perceptions of financial brands. Digital, no-fee banks in Canada have made inroads, but it is important to keep in mind that both of the leading digital banks in Canada are subsidiaries of a ‘big five’ bank (Tangerine is owned by Scotiabank and Simplii by CIBC). So any Fintech company that makes an impact will be a potential acquisition target for major banks.

Furthermore, banks have their own innovation labs, so the technological advantage of new fintech products will likely be short-lived. In the spirit of competition, Canadian banks have also been active collaborators with fintech companies. Examples are numerous and include BMO’s expanded partnership with digital lending platform, Blend, and National Bank’s partnership with Thinking Capital’s AI-based platform to expand financing options.

What it means

In terms of the competitive environment and potential advent of open banking, the importance that Canadians place on a branch network when selecting their main bank and the amount of trust they place in the major Canadian banks are both factors that will ensure their strong market position in the foreseeable future.

Sanjay Sharma

Sanjay Sharma

Sanjay Sharma is a Senior Financial Services Analyst at Comperemedia based in Toronto.