LoyaltyOne’s miscalculation a lesson for reward programs

LoyaltyOne’s miscalculation a lesson for reward programs

December 31, 2007

The dominant position of Canada’s big banks has prevented fintech firms from disrupting financial services in this country the way they have elsewhere in the world, says Toronto corporate and commercial lawyer Marlin Horst.

The fintech sector, which includes startup firms focusing on financial technology in areas such as payment processing and alternative lending, has taken off globally in the last few years.

“In some areas of the world, they are causing a huge disruption to the status quo, particularly in Europe, where the banking system is in disarray,” says Horst, a partner in the Toronto office of Shibley Righton LLP.

“Even in the U.S., where the banking system is more fractured than in Canada, it’s much easier to get a foothold. Here, where five banks control 90 per cent or more of the financial system, it’s a much different environment,” Horst tells AdvocateDaily.com.

Still, Canadian banks have turned their attention towards the area. A report released last year by global accountancy firm PricewaterhouseCoopers found that as part of a move to increase efficiency and productivity, Canadian banks were investing heavily in fintech “as they continue to transform their customer experience, automate processes, comply with regulatory demands and enhance digital capabilities.

“Canada’s banks are monitoring the evolution of this emerging ecosystem and actively pursuing opportunities to play an integral part in it,” the report continues. “Banks recognize that they have much to gain from FinTechs’ innovations: soon, many FinTech driven offerings may become pivotal elements in banks’ operating models, enabling banks to reduce costs, reach underserved markets and open up new products and revenue streams.”

Several Canadian fintech pioneers have teamed up with more established players over the last couple of years, including Toronto-based personal loan provider Borrowell. In October, the firm announced a partnership with CIBC to provide the bank’s clients with access to “one-click” online lending.

""By leveraging innovative technology, we are taking a process that is often viewed as slow and cumbersome for clients and making it much faster and more convenient,"" CIBC’s retail and business banking chief David Williamson said in a statement marking the deal.

According to Horst, the willingness of banks to partner with startups in Canada has altered the end goal of most fintech companies based here. Rather than trying to compete with the large banks, they instead try to catch their eye

“It’s a different attitude. If you compare it to smartphones, it’s like instead of trying to develop the new iPhone, they’re trying to invent an app for the iPhone. It’s a shorter-term view of the world,” he says. “Whether you think that’s a good thing or not probably depends on if you’re a shareholder in one of the big banks.”

Horst says the most likely source of a large disrupting force in the financial world will come from outside Canada’s borders.

“It will be difficult for them, because there are many barriers when you move from country to country. You have different regulations in each jurisdiction,” he says.