In 1967, The Velvet Underground released the album Nico and became one of the first bands to be referred to by some critics as ‘new wave.’ That same year, the first cash machine appeared in Enfield Town, North London, ushering in the era of the ATM and, with it, perhaps the most significant new wave in consumer banking since credit cards appeared in the 1950s.
Innovations such as online banking and email money transfers fuelled bank growth. But the fintech revolution is different. Driven from outside the banks, these innovations now threaten their market share. Last year, OMERS Ventures reported that 100 fintech startups in Canada had raised more than $1 billion in funding since 2010.
And we’re about to move into the third wave of fintech development, according to Jeff Gido, global head of Goldman’s financial technology group in investment banking, who spoke at Goldman Sachs’ annual technology conference earlier this year.
The first wave arose after the financial crisis of 2008, as regulatory changes “made some businesses less profitable for banks,” he said. This created an opportunity for startups to fill the void by taking advantage of new technologies and consumer preferences that were shifting toward real-time mobile financial services.
Gido believes we are now in a second wave where “incumbents are using their brands and infrastructure to remain competitive with the startups.” During this second wave, Canadian banks have developed mobile apps to provide access to their existing banking services.
Bank of Montreal, for example, is the first of the Big Five to offer a ‘robo-advisor,’ called SmartFolio, which it designed in-house. Bank of Nova Scotia has also chosen to develop solutions internally by creating a ‘digital factory’ to focus on technology and mobile banking.
In the coming third wave, Gido believes big banks will partner with startups, just as Scotiabank has done with Atlanta-based online lender Kabbage to provide small business loans, and CIBC and the Bank of Nova Scotia have done with Montreal-based Thinking Capital in the online lending space.
Experts say it’s imperative for banks to bring innovation to market quickly. In its 2015 annual review of global banking, consultancy firm McKinsey & Co. warns that banks could lose up to 60 per cent of their retail profits to fintech firms within the next decade. That’s huge.
By teaming with fintech startups, the banks get technical expertise and a culture of innovation. As Jeff Marshall, head of Scotiabank’s digital factory, told the Toronto Star: “What we’ve found is that going to somebody who has already thought through the customer experience is a great way to get to market a lot faster.”
The banks, in turn, can provide startups with capital and the infrastructure to handle regulatory compliance as they expand — not to mention a large customer base. After all, 57 per cent of digitally active Canadians don’t use fintech because they don’t know it exists, according to an Ernst and Young study.
The partnerships formed in this third wave may be the salvation of both players as they face common competitors, such as Google and Apple. Facebook, for example, is now offering peer-to-peer lending.
As RBC CEO Dave McKay says, the banks are on a “collision course with the Googles and the Apples of the world,” both of which have launched digital wallets. Without innovation, banks could not only lose revenue, but their customer base.