Banking rules are frequently credited for helping the country weather the last recession, but they also take unnecessary blame for hampering their response to fintech disruption. The barrier may in fact be technology, when all is said and done.
As fintech disruption in Canada heightens speculation of what the future holds for traditional financial institutions, most of the attention is being focused on what's keeping banks from transforming how they serve customers. UX is everything after all, especially with millennials dropping banks left and right.
Fintech disruption in Canada fumbles
More recently, legacy technology has been identified as the culprit, as it impedes the ability of banks to adapt. Outdated IT systems are also being blamed for major systems outages, such as the one experienced by the Royal Bank of Scotland several years ago. It's a hurdle banks themselves have recognized. Among the excited chatter about how blockchain and mobile wallets are fuelling fintech disruption in Canada, the chief executive of the Royal of Bank of Canada (RBC) went on record to say that banks need to focus more on fixing their own legacy systems rather than trying to pull fintech startups under the microscope of regulators. Outdated technology, rather than regulation, is hampering innovation, contended the RBC CEO.
But others argue the divide isn't that wide. For example, banks have taken advantage of APIs to integrate legacy systems to easily and cost-effectively connect with newer technologies and work with third parties. In some cases, they've launched their own disruptive offering to compete with emerging fintech companies.
Banks have been slowly but surely reducing brick and mortar operations for more than a decade and replacing them with digital alternatives as customers become more comfortable with e-commerce and—more recently—mobile commerce. The insurance industry is going mobile too as its customer base shifts toward more digital options for researching and buying products and services.
Are Canadians ready for fintech?
There's also evidence that banks do have the breathing room to transform how they do business and their underlying technologies, according to this year's Digital Money Trends Report. Although Canadians are comfortable researching financial products online, they're still not ready for fintech. Authored by Ratehub.ca, the report looked at how technology was being used to manage personal finances among major generational demographics. It found Canadians aren't prepared to fully trust fintech companies. The Digital Money Trends Report also found there are fewer fintech players in Canada—and less awareness.
The Competition Bureau of Canada also believes more work needs to be done if the fintech sector is to reach its full potential. That means industry leaders and regulators need to work together. The bureau held a workshop earlier this year where Canadian fintech leaders cited several barriers they were facing. Aside from the dread consumers feel toward big bank alternatives, one of the other key reasons was they faced the same challenge considered to be a barrier for traditional financial institutions: a complex, fragmented, and prescriptive regulatory framework that doesn't sufficiently account for changing technologies.
The irony of highlighting legacy IT as a barrier to responding to Canada's fintech disruption is that fintech companies view restrictions on access to data and banking infrastructure as another main impediment to growth, which suggests a balance can be struck. While it would appear banking may have already had its Uber moment, collaboration between the old and new—not direct competition—may be the answer.
Can't we all just get along?
Canadian banks are leading the charge for digital transformation through collaboration with their fintech counterparts, according to a report released earlier this year by consulting firm PricewaterhouseCoopers. The report found that rather than viewing fintech startups as a threat, banks see them as potential partners and collaborators who can provide fresh ideas and new technologies to improve efficiency and the customer experience.
This marks a shift in thinking for a sector that traditionally has preferred to keep development of new products and services in-house. The report does hone in on the role of legacy systems as a reason why Canada's banks have been slow to make changes behind the scenes, but they're also looking at artificial intelligence, robotic process automation, and machine learning as enablers of digital transformation.
When we're talking money and tech innovation, who knows what could be just around the corner when big banks and bright fintech stars start combining their powers.