Banks’ low cost of capital, plethora of customers and ability to develop products means they can keep pace with newcomers
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Sep 10, 2020 • • 3 minute read
When Shopify Inc. dethroned the Royal Bank of Canada to become the country’s most valuable company earlier this year, it didn’t bother Dave McKay.
Speaking at a virtual conference earlier this week, the chief executive of RBC said a rise like Shopify’s doesn’t harm the bank’s shareholders, and that Canada could actually use more such companies, as well as the economic benefits that come with their success.
McKay’s magnanimity may have had another source as well.
“It comes from the confidence in our own business model and our own position, and how we’re going to defend against disruptive platforms that are coming at us, who do want to participate in the payments business in particular,” the CEO said.
Shopify provides loans and processes payments, qualifying the Ottawa-based e-commerce giant as one of the growing number of tech firms that have in recent years been encroaching on the financial-services turf the banks have traditionally owned.
McKay’s comments, however, suggest that at least some of Canada’s biggest banks are feeling pretty sure they can stare down technology-driven challengers, even as the coronavirus pandemic has prompted more consumers and businesses to go digital.
McKay particularly took aim at “monoline” financial-technology companies that he said may use price discounts to try to attract and acquire customers, hoping somewhere in the future those customers can be sold on another product or service.
“Those competitors are diminishing in their threat level,” McKay said during the Scotiabank Financials Summit this week. “And you’re seeing a number get into trouble in Europe, where investors aren’t willing to continue to fund losses against that business model.”
You’re seeing a number (of competitors) get into trouble in Europe, where investors aren’t willing to continue to fund losses
RBC CEO Dave McKay
Bank of Montreal CEO Darryl White had a similar take on monoline fintechs, which may have a good product but can’t fund themselves as cheaply as a big bank can.
That kind of company “is really a diminished challenge for us today relative to what it was a while ago,” White said during the Scotiabank conference.
“Because we’ve got a low cost of capital, we’ve got lots of customers and we’re able to develop some of those products ourselves, or we’re able to develop it with some of our fintech partners,” the BMO CEO added.
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The coronavirus pandemic and the related lockdowns and restrictions imposed by governments have been a boon for things digital and distant, including financial technology.
Polling firm Environics Research said recently that COVID-19 had accelerated the adoption of fintech in Canada by at least three to five years in just the past six months, as the pandemic has forced “even the most reluctant consumers” to change their behaviour.
“While some may try to revert to their old ways when the pandemic subsides, the longer the pandemic continues, the less likely this will be the case, as retailers and other consumers make these advances and innovations permanent,” Environics’ Bernice Cheung wrote.
Canada’s big banks had already made spending on upgrading and innovating their technology a priority over the past few years. While that spending could be reduced to try to bring down expenses and improve profits, digital demand and the need to provide work-from-home capabilities makes those investments look prudent.
RBC reported its digital adoption rate was 53.8 per cent for the quarter ended July 31, up from 51.7 per cent a year earlier. The bank’s RBC Ventures subsidiary has also made a host of financial apps and investments over the past two years, which helps defend the business from “potential disruptive play,” McKay said.
Some lenders have partnered with other companies to up their digital games, such as National Bank of Canada announcing in July it was investing further in robo-adviser Nest Wealth.
“The investments we made in technology and our strategic positioning, I think the crisis so far has confirmed that we made the right choices,” National Bank CEO Louis Vachon said Wednesday.
And, ultimately, some people may still want to bank in person.
BMO’s White said there were customers who opted during the earlier pandemic days not to go to branches and instead figured out how to bank digitally. Those clients are now coming back to branches.
“You might have thought that they would all stay home forever, but that’s not the case,” White said.
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