Canada’s challenger banks: Fueling incumbent innovation

As financial systems around the world begin to adopt Open Banking, Challenger Banks have begun to consider expanding across the pond.
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With Open Banking coming to Canada, there has been an increasing shift towards openness; where consumers and not traditional institutions, are in control of their data. Challenger Banks, which are designed to compete for consumers with traditional financial institutions, have benefited significantly from consumers having greater choice when it comes to their financial products and services. A Challenger Bank is any company that offers banking services in a digital only mode, do not have any physical branches, and users interact with them through the web or an app. Although the barriers to the success of Challenger Banks can be difficult to overcome, the opportunity for growth and success is considerable. Internationally, there have been a number of successful cases of Challenger Banks. Revolut, a challenger bank based in the UK, offers customers banking products such as prepaid debit cards, currency exchange, cryptocurrency exchange, and peer-to-peer payments. As financial systems around the world begin to adopt Open Banking, Challenger Banks have begun to consider expanding across the pond. In recent years, a number of successful Challenger Banks have considered expanding into Canada specifically. So why Canada? 

The 3 Reasons Why Challenger Banks are Choosing Canada

Opposites Attract 

As Canadian consumer’s needs and expectations continue to evolve, the ability to deliver products and services that enhance the customer’s experience, whether it be through convenience or speed, has created an opportunity for stakeholders. Within the Canadian landscape, the FinTech ecosystem consists of 1,200+ FinTech start-ups. The growing strength of the FinTech market within Canada presents a unique opportunity for any company interested in innovation. Through FinTech’s ability to provide agile technology and disruptive business models, partnering with FinTechs has enabled the transformation that incumbents need to survive. As tech giants such as Amazon, Alibaba, and Google have begun to offer financial products, these companies can leverage their existing customer bases for faster adoption of their new offerings. Amazon, for instance, has made serious investments in payment and lending products, which will stand as a serious challenger to conventional banks.

With the emerging threat of new entrants, Canadian incumbents are increasingly partnering with FinTechs to remain competitive. Payment Source recently announced a partnership with FinTech STACK to enable Canadians to access their Load Hub product via any Canada Post location. In comparison to their local bank branch, the partnership will allow customers to have greater access to traditional financial products and services. STACK members can now instantly load cash into their prepaid Mastercard at the 6,000 Canada Post locations across the country. As Canadian incumbents and FinTechs continue to partner with other FinTechs, Challenger Banks and alternatives will increasingly become an attractive opportunity. Offering agile solutions, disruptive business models, and a deep understanding of the global consumer, Incumbents will benefit from Challenger Banks growing success. For Challenger Banks looking to expand, Canada and its incumbents represent an obvious opportunity into a new market that is familiar with FinTech and one that is always open to partner. FGS reached out to a unicorn (startup with a valuation of over $1 billion), and a successful Challenger Bank, Revolut for a comment. Revolut mentioned that “the ideal partner is one that shares a like-minded attitude, looking to make advancements in the customer experience by solving real problems in creative ways.”

The Canadian Opportunity 

For Challenger Banks, the Canadian market is a unique opportunity. Most notably, Challenger Banks such as Revolut, have recognized a market opportunity for their products and services within the Canadian market. “Canada has always been a very attractive market for Revolut. As a country constantly at the forefront of innovation, the clunky and unresponsive products from the big banks showed a clear opportunity in an otherwise technology-forward market. Simply, it’s not so much what the Canadian landscape offers Revolut, but what our product can offer a marketplace yearning for innovation in the personal finance space” stated Revolut. Presently, the Canadian consumer is diverse; made up of a large number of baby boomers, as well as a significant amount of Millenials that are increasingly becoming empowered about their financial health. Within the next few years, Canada will see one of the most significant shifts within its workforce as baby boomers begin to retire and millennials and Generation Z will become the majority of the Canadian workforce: a new workforce that has been empowered by technology. 

Traditional Canadian financial institutions will fail to meet the needs of Millenials as the modernization of their legacy systems will fall short of the digital experience expected by this generation. Consequently, this has created an opportunity for Challenger Banks such as Revolut. By recognizing this gap within the Canadian market, Challenger Banks are set to succeed significantly if they were to expand and partner with an incumbent. Although Canada is a smaller market, Challenger Banks are also attracted to the idea of being one of the few to operate within Canada. When compared to the US, the American market is highly saturated with competitors. This can potentially lead to high costs associated with brand awareness, as well as increased barriers to success when partnering with incumbents. For international Challenger Banks, therefore, the Canadian poses the best opportunity to enter the North American market. 

Home away from Home 

Although a foreign market may have a need for a Challenger Bank’s solutions, the norms and culture of a country can be a significant deciding factor as to whether or not they should expand. Canada is a unique opportunity for any Challenger Bank who is considering an expansion into a new market. Adopting a policy of multiculturalism, Canada recognizes the culture, race, and religion of all its constituents as being equal. For Challenger Banks based around the world, the ability to expand into a new market where they are judged for their product and not for their background, is a significant pull factor. The cost of living and immigration policies, for instance, are two significant factors that would need to be considered as a Challenger Bank expands. Countries that are too expensive or have a negative stigma towards immigrants, for instance, would create too many barriers for an expanding Challenger Bank. Alternatively, Canada should be a natural option!

Wrapping Up 

Increasingly, incumbents are seeing the value of partnering with FinTechs – whether they are domestic or international. As societies shift towards a more open financial system, Challenger Banks will continue to expand their reach into new markets around the world. Canada stands as a country that will benefit the most from this shift; as the culture and norms of the country emphasize collaboration and acceptance. Moving forward, it will be interesting to see how Challenger Bank’s products and services will impact the lives of Canadians specifically. 

To learn more about how we help innovators succeed, check out our podcast The Disrupticons where we share stories with innovators and why it matters. 

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