Banks learning to embrace fintech threat
Both sides could benefit if they can reach acceptable financial terms
When the top executives at Canada’s biggest banks start talking about threats to their business from fledgling technology companies getting into traditional financial products and services, it’s time to start paying attention.
Peter Routledge, a managing director and research analyst at National Bank Financial, says he hadn’t realized “how concerned the banks are about the threat” until he attended investor meetings convened by the top brass at Toronto-Dominion Bank and Canadian Imperial Bank of Commerce this past fall.
It wasn’t just what the new fintech firms would cost the banks if they made inroads — it was what they were already costing the banks in the form of building defensive strategies against that mere possibility.
“We think the Big Six Canadian banks have gone on the defensive,” Routledge wrote in a report shortly after the investor meetings. In it, he boldly suggested banks are building, borrowing and buying technology and innovation not to bolster their own growth prospects, but rather to try to protect the very healthy margins of their dominant personal and commercial banking units.
A growing number of partnerships between the big banks and fintech companies are further evidence the big banks fear these “innovators will nip at, and ultimately fleece, their Golden Geese,” Routledge wrote.
“We now see all Canadian personal and commercial banking fintech or digital initiatives as necessary but costly responses to a long-term and dangerous competitive threat,” the veteran analyst concluded.
While bankers are clearly aware of the threat from technologybacked financial innovators, and the likelihood that collaboration is likely to accelerate in the coming year, many involved in fintech partnerships portray them as less of a win-or-lose proposition.
If the sides are able to reach acceptable terms, the trusted reputation of the banks could arguably draw more people to what is these days considered “alternative” financing. At the same time, the banks could benefit from technological innovation.
“We think the pie has huge potential to grow,” says Jon Hountalas, executive vice-president of business and corporate banking at Canadian Imperial Bank of Commerce, which formed a partnership with online business lender Thinking Capital in November.
“If there’s cannibalization on either side in a much bigger pie, if it’s good for clients, long-term we think it’s good for the two of us,” Hountalas said in an interview, adding that CIBC hopes to tap Thinking Capital clients for other banking business over time.
“In a perfect world, they’d get their loan at Thinking Capital, we would meet the customer, we would put our arms around the customer, we would talk to them about their broad business beyond just the loan, personal and commercial business, and then over time, they may continue with their loans at Thinking Capital and do the rest of the business with us.”
At the moment, the partnership with Montreal-based Thinking Capital is primarily a referral arrangement, with the fintech firm continuing to extend the loans on its own platform.
Hountalas declined to say whether CIBC has exclusivity with Thinking Capital or whether the bank would take a stake in the business or has any rights to the technology behind it.
But, as far as partnerships are concerned, CIBC chief executive Victor Dodig set the tone in June when he laid out a vision for the future of banking that included ensuring Canada’s fifth-largest bank embraces technology and innovation — even if it means collaborating and partnering with the upstarts.
“To be nimble and quick in today’s world requires the recognition that you can’t do everything alone,” Dodig said in a widely attended luncheon address in Toronto.
Hountalas said CIBC is willing to partner with more fintech firms if it makes sense from a speed or technology perspective.
“Our organization is talking to many different people about serving clients better,” he said, adding that once it is determined a product or service will be good for customers, executives sit down to determine “do we build, do we buy, do we partner?”
Jeff Mitelman, chief executive of Thinking Capital, says his eightyear-old online business lending company was growing fine, at a clip of 50 per cent to 60 per cent yearover-year, without CIBC. But the bank’s partnership is an “endorsement,” he says, one he expects to bring new business to his technology and data driven enterprise that makes small business loans of up to $300,000.
“Frankly I think the more of those (bank-fintech partnerships) that happen, the better it is for the industry, because then people will stop perceiving us as an alternative and rather see us as part of the overall solution,” he said.
“I’d like nothing more than, thinking ahead, to have the word alternative dropped from the whole notion of an alternative lender.”
Mitelman also expects the bank’s business to be largely complementary to his own.
“We’re intentionally structured within the under-served area. We’re targeting that area that is traditionally most difficult to serve,” he said in an interview.
“The view from our side is we are complementing the existing lending products that the bank would offer, and if at some point it makes sense for a user that they have to come to us or that we have to go to them, that’s entirely fine, and I can’t imagine we would stand in the way of what the customer wants.”
To be sure, such relationships will have to be tested and developed to assess whether they are true innovation or just good public relations.
Fintech development remains incremental at this point on the financial services landscape, rather than transformational.
But Canada isn’t the only place where established players and upstarts are working at odds, but increasingly working together.
This month, JP Morgan Chase teamed up with large online small business lender OnDeck Capital in the United States.
Their collaboration, which aims to capitalize on the bank’s relationships and OnDeck’s technology platform, is set to launch in 2016.
If there’s cannibalization on either side in a much bigger pie, if it’s good for clients, long-term we think it’s good for the two of us.