Pity the entrepreneur seeking a bank loan. A Harvard Business School report noted that it takes 25 person-hours to fill out the necessary paperwork, and it can take four to six weeks for the bank to make a decision. At the end of that painful process, the answer is quite likely to be no.
Since the financial crisis, North American banks no longer consider loans under $250,000 to be profitable, according to Steven Uster. As the founder and CEO of Toronto-based FundThrough, Uster aims to help these beleaguered business owners find the financing they need. FundThrough is a marketplace lender, a strictly digital platform that connects prospective borrowers and investors, promising lower rates.
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It’s one of many Canadian startups in the financial technology (fintech) space deploying low-cost, Internet-only business models to disrupt the way bricks-and-mortar banks operate. Incumbent players have so far had little incentive to change. The biggest sources of customer complaints, such as transaction fees, are also where banks make their biggest profits, after all. But while Canada’s banks are focused on prying customers away from one another, they risk losing important parts of their business to upstart firms. “A bank is always going to be there to hold your money,” Uster says. Fintech firms might do everything else. “You may not go to the bank for much more than deposits.”
Fintech ventures attracted $12.21 billion in investments in 2014, according to Accenture, a management consultancy. Canadian startups have been particularly active, staking claims to every function of traditional banking, from personal lending (Borrowell) to payments (Payfirma) to investment portfolio management (Wealthsimple).
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Vancouver’s Koho, set to launch in August, is targeting retail banking. “We issue you a card, a web app and a mobile app, and effectively this account does everything you could do with your regular bank account,” explains co-founder and CEO Daniel Eberhard. “On top of that, we strip away all the fees.” Instead of charging the customer, Koho plans to make money with a cut of the interchange fees merchants disburse when processing payment cards. Deposits will be held by a federal financial institution, meaning that Koho isn’t a bank but a new service layer atop existing infrastructure.
Koho is aimed primarily at Generation Y, a demographic with little patience for the delays and high fees of traditional financial institutions. A Google consumer survey last year found that Canadian millennials were more likely to switch banks (22%, compared with 14% for the general population), and 47% would switch for a better mobile experience. “With a lot of the ways banks have traditionally embraced the relationship-management side of business, they just can’t reach these younger kids,” says David Unsworth, co-founder at Information Venture Partners, a Toronto fund specializing in fintech. “They have a high distrust for big banks, and they don’t like the user experience.”
But big banks are in no danger of being replaced by fintech startups altogether. Unlike other sectors disrupted by technology, like print media or music, the financial industry is subject to heavy regulation. Many fintech firms avoid legal issues by never handling consumers’ money. FundThrough, for example, simply facilitates the contact between lenders and borrowers.
The big banks aren’t ignoring the challenge posed by fintech firms, though. Power Financial, which owns mutual fund manager IGM Financial, is investing up to $30 million in Wealth-simple, while mortgage lender Equitable Bank is backing Borrowell. A new fintech cluster at MaRS, a Toronto incubator, is also working with existing financial players and fintech specialists like Information Venture Partners. The Canadian Imperial Bank of Commerce announced the opening of a new innovation hub on the MaRS campus in April. While the bank’s own employees and co-op students will be conducting R&D at the facility, CIBC vice-president for digital channels Aayaz Pira says there will also be opportunities to observe and work with startups. “A lot of these organizations are doing really interesting things directly related to our core business proposition,” Pira says. “We need to coexist. We’ll look at partnerships with emerging players to help us fill the gaps in how we currently service our clients.”
The role of big banks is likely to change. New business owners seeking loans might be referred by a bank to a fintech partner, with the hope they’ll return to the bigger financial institution when they’re more established. Retail banking might occur via an app that doesn’t bear a big bank’s logo, but feeds into its infrastructure. The fintech explosion could prove beneficial to traditional financial institutions, if they can just figure out how to harness it.
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