Whatever city you visit in Canada, big or small, some of the oldest buildings downtown and along main street are banks. These prominent financial institutions have existed for decades, between 60 and 200 years, from a time when banking was dominated by paper bills, teller transactions and heavy-duty vaults.
Things are changing, but it’s hard to tell from the cityscape. The banking scene is rapidly evolving, and numerous upstart challenger banks and FinTech (financial technology) companies are making big waves in the financial scene. The big difference lies in how they do business.
The rise of born-digital banking
The bulk of the challengers operate nearly exclusively online or through apps, so they don’t exist like conventional banks do in physical space. Built on digital technology, these new financial service organizations offer new kinds of online banking convenience alongside innovative new products. People that grew up with smart devices love doing things by phone and having data at their fingertips. Now there are apps for that in the financial industry.
The upstart banks let retail and business customers do all kinds of banking transactions directly from their smartphones – move money, make payments, get loans, invest and earn rewards. It’s no wonder challenger banks are gaining popularity so fast.
Fresh takes: the advantages of challenger banking
Topping the list of challenger bank advantages is added convenience. Online-only banks let customers do their banking wherever and whenever they want to. Gone are the days when visiting the bank meant spending a weekday lunch hour waiting in a lineup, or being frustrated by the lack of service on weekends or holidays. In fact, pressure from challenger banks have pushed conventional banks to innovate and keep pace by offering expanded opening hours and more online banking and digital options.
Another huge new bank advantage is the lack of fees. Having few employees and no brick-and-mortar locations keeps overhead low for challenger banks. As a result, they’re able to differentiate themselves through low- or no-fee accounts, no-fee credit cards, and no minimum balance requirements. Some challenger banks offer prepaid credit cards without credit checks, which is a big plus for younger users and immigrants without credit history in Canada. Others offer cashback incentives on credit cards, with higher rewards for purchases made or online banking transactions done through eligible partners. Some challengers are making cashback rewards immediately available. One challenger, Mogo, is attracting new customers by offering cashback in Bitcoin.
A big plus of many challenger banks is their focus on smart spending. These financial technology companies design cutting-edge dashboards and provide advanced in-app tools that help customers track and visualize their finances. For instance, customers can monitor their credit scores, make automated payments, control spending limits, create dedicated accounts for saving goals, or save money through transaction round-ups.
Another benefit is customization. Many offer tailored products for special demographics, such as kids, teens, and international students. Some challenger banks offer specialized platforms for small and medium sized businesses with benefits such as low fees, transaction monitoring, and credit card services.
While challengers are getting stronger for a reason, some drawbacks remain. Most challengers don’t maintain physical locations, meaning they don’t have ATMs, either. Getting cash or making deposits through branded ATMs can be expensive. Other physical services provided by conventional banks will be missing, too, like safety deposit boxes.
Personal and business financial decisions can be significant. Customers often want face-to-face interactions when they’re dealing with big-money questions, like loans, mortgages and investments. Many digital-only challengers are self-service, so what’s gained in convenience for some might be seen as lacking in personal service or financial expertise for other kinds of customers.
Challenger banks may have streamlined application procedures, but they still need to abide by banking regulations to keep their licensees. That means they’ll still run the same credit checks and require the same information from customers to open accounts and issue credit cards.
The challenger territory in Canada
In Canada, challenger banks loosely fall into four main categories. The National Crowdfunding and FinTech Association in Canada uses the following breakdown:
- Beta: These banks are subsidiaries of conventional banks and use their parent company’s financial license to operate. Examples include Simplli Financial (subsidiary of CIBC), Tangerine (subsidiary of Scotiabank) and Brightside (subsidiary of ATB, Alberta Treasury Branch)
- New: These are entirely new banks that have secured an independent operating license. Despite being new, many are affiliated with existing Canadian companies, for instance, PC Financial, the Canadian Tire Bank and Rogers Bank.
- Neo: These banks don’t have their own financial license, but are partnered with an organization that does. Examples include Neo Financial, STACK, Koho and Mogo.
- Non: These companies and services don’t have a conventional financial license, but offer financial products in non-traditional ways. An example includes Brim Financial, which provides Mastercards with innovative payment options.
Prepaid means access to the playing field
People are serious about money and the licensing and security measures around financial transactions have been established for good reason. But that usually means there’s a high barrier to entry. At the same time, digital technology and eCommerce are making it easier to process and secure transactions in new ways and opening up new entry points to the sector.
For instance, many newcomers are entering the banking space through the launch of prepaid cards. When a customer signs up and prepays, the new bank establishes a relationship with that customer, but bypasses the licensing requirements necessary for other services, like accepting deposits or trading securities. The benefit for the challenger bank is in getting to know the customer, and having access to their spending data, which helps them cement that relationship and innovate more products for them down the road.
Up for the challenge?
One thing’s certain – with more and more challenger banks becoming viable options for customers in Canada and around the world, Canadians will be banking differently in the months and years to come.
Though the new entrants to the banking scene are gaining traction, we shouldn’t expect to see those main street banking organizations simply vanish. One major benefit of all the online banking activity is that conventional banks are adjusting their services. In fact, more and more are partnering with upstart FinTechs to meet customer expectations and give business and retail customers top-notch financial products that are tailored to their needs.