Andrew Boyajian
Head of Banking, North America - TransferWise

Equal Footing for Emerging FinTechs and Incumbent Financial Institutions

Takeaways

  1. Canadian financial regulators must allow for open banking by granting non-banking institutions direct access to payment outlets in order to unleash FinTech innovation and an improved service offering.
  2. Canadian FinTechs are just as good at scaling up from a product perspective as US ones, and have an advantage in terms of scaling internationally due to their bilingualism and localization experience. But the larger American market provides American FinTechs the opportunity to scale more easily.
  3. FinTechs and incumbent financial institutions will benefit most by developing constructive partnerships, not predatory relationships.

Action

Canada needs to open up direct access to payment origination outlets for nonbanking financial institutions to equalize the footing between new payment service providers and incumbent financial institutions.


What trends are driving the emergence of FinTech today?

The idea of accessibility is extremely popular in the global financial services industry today. This not only includes access to financial services for populations that have previously been unbanked or underbanked, but also the accessibility of services in general. Companies are moving away from providing financial services only from 9 to 5. Instead, they are designing products around consumers’ ability to engage directly with them at their own convenience. TransferWise is a great example of that since it recognizes some insufficiencies in the market and tries to fill that gap. Technology has certainly improved over the course of the last several decades. For example, non-face-to-face verification means that I can now take a quick photo of my driving license or passport, and software can evaluate its authenticity. It can pull my name and perhaps my driving ID number and run that through the Department of Motor Vehicles registry to verify its validity.

“The idea of accessibility is extremely popular in the global financial services industry today.”

One area where technological interventions have yet to make an impact is the clearing of payments and money transfers. But consumers are now used to instant communication. They are saying, “If I can send an email to someone in Singapore instantly, why should a money transfer take three or four days to reach Singapore?”


How do you gauge the accessibility and openness to innovation of Canada’s financial services market as a foreign FinTech?

The Canadian market is somewhat conservative and that certainly did benefit the industry during the last recession, which left Canadian banks relatively unscathed. I would not say that Canada is conservative across the board because Payments Canada, Finance Canada and the Bank of Canada are thinking about modernization in terms of open banking and direct access to accounts and services.

“Canada needs to open up direct access to payment origination outlets for nonbanking financial institutions.”

FinTechs entering the Canadian market are generally unable to originate payments on their own behalf and try to use a partner bank in order to originate, clear and settle payments. That means that FinTechs need to convince one of the major banks in Canada that they are trustworthy enough to hold a relationship with. There are some banks that will automatically deny a product line or a service to a money services business because it is too risky or does not fit well into their ecosystem. So, Canada needs to open up direct access to payment origination outlets for nonbanking financial institutions to equalize the footing between new payment service providers and incumbent financial institutions. Fortunately, that is on the radar of Payments Canada, Finance Canada and the Bank of Canada.


How would you define the relationship between incumbent financial institutions and FinTechs in Canada?

FinTechs and incumbent financial institutions can learn a lot from each other. For example, a nascent FinTech might need to learn a couple of lessons in scale or distribution from the big five banks. On the other hand, the incumbent financial institutions should learn how to be more nimble and innovative from FinTechs. They need to redefine their relationships with customers or small businesses and improve their services. So, there are learnings for both the incumbents and FinTechs, and ultimately a partnership is much more advantageous for both entities than a predatory relationship.


How competitive are Canadian FinTechs in terms of service offering and product creation?

First of all, from a product perspective, Canadian companies are just as good at scaling up as their US counterparts. One of the things a lot of US companies do not get is that they need to build a product that is robust enough to handle different languages and localization. In contrast, Canada is a bilingual society. So, in order for a product to work in Canada, it does need to be in both English and French. So, from the very beginning, entrepreneurs give credence to any type of localization required for their products in Quebec, as opposed to the rest of Canada. That said, the size difference between the US and Canada provides American FinTechs the opportunity to scale more easily.

“From a product perspective, Canadian companies are just as good at scaling up as their US counterparts.”

We partner with one key Canadian fintech called Flinks, which is based in Montreal. When someone wants to use TransferWise through their bank account, they are required to link the two. By doing so, we are able to validate our customer’s name and bank details. In Canada, we previously used a US-based company to link bank accounts to our platform, but we noticed that their connection to the Canadian banks was weak. Then we found Flinks, which had a broader reach in the market and could deliver better simply by being close to the major banks. We have now been integrated with them for about a year and it has been a terrific partnership so far. We are quite excited to see them continue to grow and look at new value-added services beyond bank account validation.


How do Canadians perform in terms of FinTech adoption rates and how do you see this evolving?

A 2017 FinTech report ranked Canada lower in the Global FinTech Adoption Index. One reason for that is that most Canadians are very familiar with the top five banks and have an account with at least two, if not four of those institutions. Canadians do not necessarily feel the need to look further, but they might not realize what they are missing out on. Hidden fees during a foreign exchange transfer through a bank, for example, might go unnoticed. Eventually, Canadians will awaken to these shortcomings and demand more than the big five banks.