How digital finance startups are rewriting the rules of saving and borrowing

Financial technology firms are using big data, machine learning and ubiquitous networking to revolutionize how money flows through the financial system


Hundred-dollar bill rolled up and looking like an @ symbol

(Illustration by Yarek Waszul)

A little over two years ago, Andrew Graham was working in a popular bank’s insurance department when he was struck by the shocking profitability of credit card companies.

Something about it rankled. While most people think of credit cards as useful for making quick, convenient purchases, plenty also rely on them as a way to borrow longer term, he realized. With credit card interest rates hovering around 20%, they’re a good way for people to get into debt—and stay there.

As digital, and particularly mobile, technologies proliferated, Graham saw an opportunity. He quit his job to start Borrowell, a new type of lender that provides loans via simple online applications. Borrowell’s interest charges are also lower than what credit cards are offering and, rather than charging uniform fees, rates are matched to the risk level of each individual borrower.

“There’s a lot of money being made here, and there has got to be a way to get consumers a better deal,” Graham says. “People are looking for alternatives. We believe there’s lots of opportunity.”

Toronto’s Borrowell, along with names such as Voleo, CoPower and Encircle, is riding a global wave of financial technology—or fintech—startups looking to make borrowing, investing and insuring easier and more affordable. Fintech is the hottest startup sector going, according to the MaRS Discovery District, a Canadian incubator focused on four main industry sectors, including green tech, health care, work and learning and, of course, fintech.

“There’s a shift happening,” says Adam Nanjee, MaRS Discovery District’s head of financial technology and innovation. “All of these core functions of traditional financial institutions are being disrupted.”

Indeed, a recent report from McKinsey & Company suggested that globally, banks and large financial institutions stand to lose as much as 60% in retail profits to fintech outfits over the next decade.

Borrowell’s success can be seen as a barometer for the field. Roughly 100,000 Canadians have tapped into the company’s services so far, Graham says, adding that he’s up to 18 employees. Borrowell has also attracted investment from heavy hitters that include the Desmarais family’s Power Corp., Equitable Bank, The Wealthy Barber author and former Dragons’ Den personality David Chilton and Toronto Raptors founder John Bitove.

Like most startups, Borrowell’s advantage over the incumbents is lower overhead and legacy costs. The company is a long way from focusing on generating the sort of hefty profits bank shareholders expect, which allows it to offer the lower fees that lure customers away from the big players.

“When you’re used to making that kind of money, it can be hard to change,” Graham says of the big banks.

Similar thinking is fuelling Voleo, a Vancouver-based startup that will enable investors to set up and manage investments from their smartphones.

Launching in the United States as a beta test in October and in Canada next year, Voleo’s app also encourages users to create “investment clubs” with their friends, family members and colleagues. Members put in as much money as they want and suggest exchange-traded funds or securities to invest in. The group then votes on each proposal and the app initiates the next steps. It even provides tax forms at the end of the year.

“We track every proposal made by every person so they can learn and so they can prove to their friends how things would have gone if they had listened to them,” says Thomas Beattie, Voleo’s chief executive. “Nobody else has combined investing brokerages and social media.”

Since 2013, Voleo has managed to attract $2.5 million in private investment and has grown to nine employees. Like Borrowell, the company sees lower fees as its edge over traditional investing options.

“If [a transaction] would have cost you $10 and there’s 12 of you on your team, instead of wasting $120 on trading charges, [with Voleo] you’re going to be paying a dollar apiece,” Beattie says.

CoPower’s founders saw a rise in demand for socially responsible investing that corresponded with the rapid growth in online investment platforms, so in 2013, they put the two together.

The Toronto-based company, which now has nine employees and $7 million in assets under management, aims to make users more money by allowing them to pool their funds and invest in areas they wouldn’t normally be able to as individuals.

“We wanted to go out and build an online platform that makes it easy for not just the Warren Buffetts of the world to invest in clean energy but also the general public,” says Raphael Bouskila, co-founder and president of CoPower.

Meanwhile, Encircle, based in Kitchener, Ont., is also looking to overhaul the home insurance industry. The company’s app lets users catalog their belongings by taking and uploading smartphone photos. In the event of a robbery or accident, homeowners can then easily generate a PDF or spreadsheet report for the insurance company, which speeds up the reimbursement process.

“They get a better payout on their insurance claim,” says Paul Donald, Encircle’s chief executive. “If you’re going to pay for insurance, let’s make sure you’re ready to leverage it when you need it.”

It’s not all tailwinds for startups, though, as big financial institutions are starting to wake up and smell the disruption.

Just this year, Ally Financial in the U.S. purchased web brokerage TradeKing Group for $275 million, while Goldman Sachs acquired online retirement planner Honest Dollar for an undisclosed amount.

Canadian banks are also responding by investing in or partnering with upstarts. Equitable Bank, for example, has teamed with Borrowell, while RBC holds shares in CoPower and TD has invested in Kitchener’s Communitech accelerator hub.

When it comes to offering value, fintech companies may find themselves walking a fine line now that the giants have awoken.

“[Big banks] are not ultra nimble, but after a few years they do figure out how to shift things around,” says Duncan Stewart, Deloitte Canada’s director of technology, media and telecommunications research. “Many of the incumbents are aware that they will need to save customers money. They understand that’s the way the world works.”

In the meantime however, fintech startups like Graham’s Borrowell remain the darlings of the venture capital world.