How the FinTech Ecosystem is Challenging Traditional Financial Institutions in Canada

BANKING ON CHANGE 2016

Conclusion

Technology is Evolving Consumer Expectations for the Financial Services Industry

Table of Contents

Executive Summary

Millennials Lead the Transition to FinTech

FinTech Adoption Rates are Driven by Accessibility and Simplicity

Awareness and Education Remain Costly Barriers to Adoption

FinTech Earns Higher Satisfaction Ratings Among Consumers

Non-FinTech Users Show Demand for FinTech Features

Methodology 19

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17

13

11

10

6

3

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In the past, the Canadian financial service landscape was molded by incumbent competitors on an even playing field. Horizontal competi-tion with little differentiation was the only threat large banking insti-tutions had to retain market share, creating a stagnant banking indus-try with little innovation since the introduction of ATMs and electronic payment systems. The emergence of FinTech after the 2008 financial crisis is redefining the competitive landscape and challenging tradi-tional banks. In this new environ-ment, customer expectations have heightened as they become accus-tomed to the real-time interactions they experience when using their mobile phones. This has created an opportunity for startups, and a

gap for banks to fill, as both play-ers move quickly to address this new “FinTech” segment. To better understand the landscape, Extreme Venture Partners surveyed 400 Canadians to gauge the adoption, drivers, and barriers that impact this evolving industry.

Millennials Lead the Charge to FinTech

27% of Canadians report using a FinTech product or service. Millennials were the largest cohort of adopters accounting for half of those who use FinTech. Of the users who have switched, 53% now trust FinTech products over their traditional bank, and 57% agreed they would consider abandoning traditional banking if all finan-cial services were available. 40% of Fintech respondents use “Transfer and Payments”, the most popular Fintech product category to date. An evident statistic when viewing the proliferation of mobile payment startups that have cropped up in the past few years.

FinTech Adoption Driven by Accessibility and Simplicity

Amongst the many reasons FinTech users cited for adopting the tech-nology, several were recurring. The largest reasons users had for adopt-ing FinTech is the level of acces-sibility offered through online and mobile platforms (43%), and its ease-of-use (31%). Other causes include greater control, transparency and higher quality customer service.

Awareness and Education Are Costly Barriers

73% of Canadians do not current-ly use FinTech products or services. This statistic is due to a lack of education and awareness, where 64% of Canadians have no

Executive Summary

“FinTech are banking products and services that are 100% online. When you sign-up as a customer, you complete the entire process online. You do not need to call customer support, walk into a branch, or mail any paperwork. You are then able to manage your entire account on your PC, tablet, or smartphone.”HOW WE DEFINED FINTECH TO SURVEY RESPONDENTS

Survey Highlights

4

understanding of what FinTech is, and another 26% of Canadians had little knowledge. Neither groups felt comfortable using FinTech products. Weak understanding will translate to high customer acquisition costs as startups seek to educate prospec-tive customers. FinTech compa-nies are young and have little brand equity or financing to overcome this challenge. This disposition creates opportunities for both FinTech and established financial institutions to work with one another to broaden available products, and create more cost efficient means of convert-ing Canadians into active users of FinTech.

FinTech Earns Higher Satisfaction Ratings Among Consumers

In the relatively short time since the emergence of FinTech, there has been a positive response in consum-er satisfaction. FinTech users rated their satisfaction with their current FinTech products as 7/10 while rating their satisfaction of tradition-al banks as 6.6/10. It is also evident that while many FinTech users disliked the fees and rates offered through traditional banking, they did not play a significant role in its adoption.

Non-FinTech Users Want FinTech Features Even If They Don’t Know It

When asking non-FinTech users if they would have a better experience

with traditional banking if their traditional bank offered more real-time information, 64% agreed they would. EVP also asked whether their experience with their traditional bank could be better if offers were personalized based on their existing relationship with the bank; 68% of respondents’ state that they would.

Technology is Evolving Consumer Expectations for Financial Services

Currently, there are issues of trust within the Canadian financial service and insurance industry. 42% of Canadians do not trust finan-cial service professionals, 62% of Canadians do not trust insurance professionals, and 63% admit that they do not believe they are getting

the best insurance rates possible. Canadians are looking for smarter, innovative, and more transparent ways to manage their money.

Inside This Report

The implications of this report demonstrate the need for the Big 5 to adopt a digital-first mental-ity when building new products and services. This outlook can be achieved through in-house capa-bilities, joint ventures and partner-ships with the startup community. For the Big 5 banks, joint ventures and partnerships will be critical to covering ground as no single bank can innovate in all product catego-ries at once. For FinTech startups, partnerships with the Big 5 banks is the most efficient way to increase

consumer understanding of their products and gain access to a larger customer pool.

“64% of Canadians have no understanding of what FinTech is, and another 26% of Canadians had little knowledge. Weak understanding will translate to high customer acquisition costs as startups seek to educate prospective customers.”

5

b.1982-2004

vs

FinTech users are more satisfied using FinTech providers than traditional banking.

27%of Canadians have

adopted at least one FinTech product and/or service

49%of Canadian

FinTech users are Millennials

68%of non-FinTech users agree to wanting their

traditional bank to offer FinTech type of services

59%of Canadians believe

the Big 5 banks are too profitable

53%of all FinTech users

trust FinTech providers over their traditional

bank

90%of Non-FinTech users admit to having little

or no understanding of what FinTech is

42%of Canadians do

not trust financial service professionals

Accessibility and ease-of-use are the largest reasons users switched to FinTech.

Key Findings

6

Millennials Lead the Transition to FinTech

While FinTech is a relatively new method of interacting with finan-cial products and services, its explo-sive growth since the 2008 financial crisis has been driven by the need to do things smarter, faster, cheaper, and more securely than previously possible. EVP discovered that 27% of those surveyed had adopted FinTech as an alternative method of banking, half of which were Millennials (ages 18-24 and 25-34). It is important to follow the trends of this genera-tion because, in 2014, Millennials passed both Generation X (Gen X) and the Baby Boomers (Boomers) as the largest cohort in the Canadian workforce.1

73+27“FinTech’s explosive growth since the 2008 financial crisis has been driven by the need to do things smarter, faster, cheaper, and more securely than previously possible.Technology will underscore the new standards of banking.”

Do you currently use a FinTech product and/or service?

Yes27%

73%No

Do you currently use a FinTech product and/or service?

1 Statistics Canada, http://www5.statcan.gc.ca/cansim/a26?lang=eng&id=2820002

24+60+87+48+39+4229%

16%13% 14%

8%

20%

14-17 yo

18-24 yo

25-34 yo

35-44 yo

45-54 yo

>54 yo

7

Those who use FinTech products and services were asked, “Do you trust FinTech more than tradition-al banking?” 53% responded “yes.” While there is little statistical differ-ence in the level of trust between Boomers, Gen X, and Generation Z (Gen Z), the Millennials account-ed for 49% of those who trust FinTech over traditional bank-ing. These statistics are expected as they support the fact that most Millennials have grown up with readily available technology. While Gen Z grew up with a strong tech-nological presence, they have had little experience dealing with finan-cial services, and therefore are not expected to have the same utility for FinTech products as Millennials. As they age and begin to use financial

services more frequently, it is fore-seeable that their adoption rates could quickly overpower those of Millennials. Alternatively, Gen X display cynicism regarding finan-cial services demonstrating they do not yet trust this new method of banking.

Of the sample surveyed, 57% of FinTech users responded that they would consider abandoning tradi-tional banking if all necessary financial services were available. Millennials accounted for half of those willing to break away. Over the next few decades, the wealth accu-mulated by both Gen X and Boomer cohorts will transfer to Millennials and Gen Z. This shift in wealth will facilitate a significant change in banking preferences and consumers’

willingness to switch to accessible online platforms. Traditional banks who do not adopt to this new stan-dard of technology will witness

their customer pools shrink, and their users will migrate to those who have taken advantage of this market opportunity.

All

All

Millennials

Millennials

Do You Trust Your Fintech Providers More Than Your Bank?

Yes

Yes

No

No

Would you ever completely abandon your traditional bank for a FinTech provider if all necessary services where provided?

530+470+=610+390=

570+430+=580+420=

43%

42%

47%

39%

57%

58%

53%

61%

8

47+30+8+8+81 2 3 4 5+

47%

30%

8% 8%8%44+31+14+6+41 2 3 4 5+

44%

31%

14%

6%4%

Technology will underscore the new standards of banking. To understand which areas are most susceptible to disruption, EVP asked FinTech users how many FinTech products they are currently using and for which services. The survey showed that the average FinTech user uses two FinTech products and Millennials account for half of all FinTech prod-ucts used. Millennials are also the only individuals who use five or more FinTech products.

How many FinTech products do you use?

“Millennials are the only individuals who use five or more FinTech products.”

Millennial FinTech User Respondents (18-35 yo) (n=53)All FinTech User Respondents (n=108)

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In EVP’s survey, 40% of Fintech respondents use “Transfer and Payment” services. This statistic is consistent with where the most disruption in the banking industry is occurring. Transfer and Payment is an active space for individuals look-ing for more efficient, streamlined methods of paying bills and trans-ferring money. The second most used FinTech service is “Insurance” which 32% of FinTech respon-dents use in Canada. This is high-er than we expected and may be as a result of Candians being able to register an account and file insur-ance claims online. While this is a basic online feature, it aligns with our definition of FinTech. Beyond

registration and claims, insurance has seen less disruptive activity than banking, FinTech’s manifes-tation through the utilization of the ‘Internet–of –Things,’ ‘Big Data’ and ‘Telematics’ will soon bring forth disruption in the Insurance indus-try.2 Utilizing these technologies will transform how personal data is used to measure risk and disrupt the current Insurance process by creat-ing a more direct, tangible relation-ship between insurers and clients. The high percentage of FinTech users in the Insurance industry demonstrates strong demand for digital access to policies, brokers, and claims as well as an increased demand for personalized plans.

What kind of FinTech product(s) do you use?

“Millennials are focused more on asset growth whereas Boomers are focused more on asset protection.”

The Millennial cohort accounts for 59% of those who use “Transfer and Payment,” and 57% of those who use FinTech for “Saving and Investment” purposes. Additionally, Boomers most used FinTech service is Insurance. The use of these find-ings demonstrates that the adop-tion of FinTech is based on current demographic needs. Millennials are focused more on asset growth whereas Boomers are focused more on asset protection.

2 http://www.nortonrosefulbright.com/knowledge/publications/133043/fintech-and-disruption-in-the-insurance-market

17+19+32+40+2817% 19%

32%40%

28% 19+23+26+45+2819% 23%

45%

26% 28%

Crowd-funding Borrowing and Lending Insurance Money transfer/payment Savings/investments

All FinTech User Respondents (n=108)

Millennial FinTech User Respondents (18-35 yo) (n=53)

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43+29+31+25+16+12FinTech Adoption Rates Are Driven by Accessibility and Simplicity

Although Millennials have initiat-ed a generational shift to FinTech, there is a larger paradigm that shows the evolving expectations of Canadians at all ages. To grasp this trend, EVP asked, “What are FinTech users’ reasons for switching to FinTech?” Participants were able to select more than one response. Among the potential answers, 43% said it is because of the “online and mobile” features which promote convenience and freedom from having to take a trip to the bank to manage their account, apply for a loan, or transfer money. The next most popular reason was that 31% of people believe FinTech was easy to setup. People enjoy being able to set up financial services remotely so they can either get through the

process quickly or take their time to become more comfortable with the product they are signing up for. The third most popular reason was that 29% of individuals enjoy having “lower fees.” There are many reasons why FinTech platforms can offer lower fees, most of which can be attributed to lower over-head achieved through the use of technology.

Online and mobileLower feesEasy to setupMore controlMore transparencyCustomer service

What are your reasons for using a FinTech product?

42+30+34+26+13+1543% 42%

29% 30%31% 34%

25% 26%

16%13%12% 15%

Millennial FinTech User Respondents(18-35 yo) (n=53)

All FinTech User Respondents (n=108)

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Non-FinTech users account for 73% of our Canadian sample popula-tion. EVP’s first question was aimed at ascertaining non-FinTech users’ overall understanding of FinTech. 64% of respondents reported having no understanding of FinTech and did not feel comfortable using it. Another 26% stated that although they have some knowledge of FinTech, they do not feel comfortable using it. This information demonstrates that only 10% of non-FinTech users under-stand what FinTech is and would feel comfortable using it in the future.

EVP asked if individuals were inter-ested in adopting a FinTech product or service over the next 12 months. 42% responded they were either inter-ested or intended to adopt a FinTech product or service. It is evident that

educating consumers will play a meaningful role in the adoption of these services. FinTech compa-nies will have to spend a signifi-cant amount of time and money on awareness and education to over-come these obstacles. The primary advantage that the Big 5 banks’ have over FinTech firms is brand equity and the distribution network to reach millions of Canadians. Banks can use their existing relationships with their customers to facilitate a more cost-effective customer acquisition strategy. Therefore, joint partnerships can help FinTech companies address these challenges while providing banks with new services that can strengthen their portfolio.

Awareness and Education Remain Costly Barriers to Adoption

As a non-FinTech user, what is your level of understanding around FinTech?

As a non-FinTech user, do you intend to use a FinTech product and/or service this year?

I have some knowledge but only for a limited number of products

I understand most FinTech products and can make confident decisions

I do not understand the products well and do not feel comfortable making a decision

n=292

10+26+6426%

10%

64%

n=292

I am interested but I have not made a decision

Yes, I indend to use a FinTech product and/or service

No, I am not planning on using a FinTech product and/or service6+35+5935%

6%

59%

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After recognizing why non-FinTech users do not use FinTech, and seeing their interest in adopting it over the next year, EVP asked non-Fin-Tech users why they chose to stick to traditional banking. Permitted to select more than one response, 37% said that the reason they do not use FinTech is that they were not previously aware of its exis-tence. Reinforcing the importance of increasing awareness and under-standing of FinTech so that indi-viduals are in an informed position and can make better financial deci-sions for themselves. The second most popular reason for not using FinTech is that 23% of non-FinTech users believe they do not have a use for it. Increased understanding of FinTech services available will

help resolve the misapprehension these individuals currently have for FinTech and their use for it. Once FinTech becomes more common-place, reluctant perceptions such as not having a use for it will dissi-pate and consumer adoption rates will increase. The third most popular reason is that 17% of non-FinTech users prefer traditional banking and service providers. Preferring a tradi-tional bank to a FinTech provider is not a reason to not use FinTech, but rather an indicator that there is a barrier to understanding what FinTech is and who can provide it. FinTech can be an online platform offered through a consumer’s tradi-tional bank or service provider.

“Once FinTech becomes more commonplace, reluctant perceptions such as not having a use for it will dissipate and consumer adoption rates will increase.”

Was not previously aware of Fintech Do not have need for it Prefer traditional bank and service providers Do not understand how it works Do not trust it

Why do you not use a FinTech product and/or service?

37+23+17+12+12 44+22+9+14+1137%44%

23% 22%17%

9%12% 14%12% 11%

All Non-FinTech User Respondents (n=292) Millennial Non-FinTech User Respondents(18-35 yo) (n=118)

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38+6238% No

62% Yes

Canadian FinTech users are early adopters of disruptive innovation. The following data confirms that FinTech users have a greater use and understanding of the broad range of products and services available to them and that non-Fin-Tech users may only use traditional banking at the primary level. These findings are presented in a consum-er satisfaction rating scale, ranging from 1-10 (higher numbers meaning higher ratings), and comparing the likes and dislikes of both FinTech and Non-FinTech users.

FinTech Users

To understand the relative perfor-mance of FinTech products and traditional banking; individuals were asked to score their satisfac-tion of both methods. The mean score for FinTech was 7/10 and for traditional banking 6.6/10. These two scores demonstrate the high level of innovation that is taking place in the financial service industry and FinTech’s current disruptive inno-vation performance while account-ing for how long it has existed

FinTech Earns Higher Satisfaction Ratings Among Consumers

compared to traditional banking.EVP then asked seven follow-up

questions to discover which part of traditional banking they most liked or disliked.

From the information below, it is apparent that the most promi-nent reason people dislike tradi-tional banking is due to the “fees and rates” (38%), but only 29% of FinTech users agreed it was a reason for actually switching to FinTech. While the sample individuals are dissatisfied with the fees and rates of traditional banking, they do not

play a significant role in convert-ing consumers to a different plat-form. EVP also asked if customers had a better experience when using FinTech compared to traditional banking, 62% agreed to have better customer experience using FinTech products than traditional banking.

16+18 17+38 39+21 26+14 29+1927+13 29+19

Range of products

Fees & Rates Customer Service

Reliability & Trust

Tech: mobile & online banking

Branches & ATM

Convenience

18% 38% 14% 19%21% 13% 19%

16% 17% 26% 29%39% 27% 29%LikesDislikes

FinTech Users: What do you like and dislike about your traditional bank?

Do you have a better customer experience using FinTech compared to your traditional bank?

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Non-FinTech Users

EVP asked non-FinTech users to rank their satisfaction of their primary bank on a scale of 1-10. The mean satisfaction score was 7.3/10, showing that user satisfaction of traditional banking was greater for non-FinTech users than FinTech users (6.6/10).

Non-FinTech users’ likes and dislikes of traditional banking varied from FinTech users as well. With the exception of 57% of people disliking

the fees and rates offered through traditional banking, non-FinTech users were more satisfied with their banking experiences. To gain more perspective on why non-Fin-Tech users were more satisfied, EVP looked at how they use their primary bank.

Currently, 53% do make invest-ments and over half of those who do not invest rank their banking experiences as 8 out of 10 or greater. Therefore, the satisfaction of the two

groups cannot be compared as both groups rate their traditional bank-ing experience based on different features. These findings also illumi-nate why so few Non-FinTech users have opinions on the products and services their primary bank’s offer.In our sample of both FinTech and

non-FinTech users, EVP found that 46% of Canadians do not invest and 84% of those who do not invest are non-FinTech users.

10+10 20+57 47+14 32+9 40+837+12 36+11Range of products

Fees & Rates Customer Service

Reliability & Trust

Tech: mobile & online banking

Branches & ATM

Convenience

10% 57% 9% 8%14% 12% 11%10%

20%32% 40%47% 37% 36%Non FinTech Users: What do you like

and dislike about your traditional bank?LikesDislikes

6+3+ 3+3+ 3+3+ 3+9+ 12+12+ 12+21+ 18+21+ 42+27+ 27+18+ 33+271 2 3 4 5 6 7 9 108

1% 1% 1%3%

4%

7% 7%6%

9% 9%

2%1% 1% 1%

4% 4%

9%

14%

11%

6%User satisfaction of non-FinTech users who do and do not invest

Non-FinTech users who do not investNon-FinTech users who invest

15

36+6436% No

64% Yes 32+6832%

No

68% Yes

To see how non-FinTech users would support FinTech features under a less intimidating pretext, EVP asked, “Do you believe your experience with your traditional bank can be better if they provid-ed more real-time information (i.e.: notification when your credit card is used)?” 64% of non-FinTech users said yes, they would have a better experience.

EVP also asked, “Do you believe your experience with your tradition-al bank can be better if they person-alize offers to you based on your existing relationship with the bank?” 68% of respondents’ state that they would. These results demonstrate the current barrier of understanding FinTech currently faces.

Non-FinTech Users Show Demand for FinTech Features

Do you believe your experience with your traditional bank can be better if they provided more real-time information?

Do you believe your experience with your traditional bank can be better if they personalize offers to you based on your existing relationship with the bank?

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After establishing Canadian demo-graphics for FinTech users and non-FinTech users, EVP asked the full sample population targeted questions about trust, transparen-cy, and expectations of financial services and the insurance indus-try. Our findings show that 42% of Canadians do not trust financial service professionals. Low trust demonstrates the need for trans-parency in the fees behind prod-ucts and services. This is further exemplified by the fact that 52% of individuals do not trust investment advisors, and 75% either do not trust stock ratings by research analysts or choose not to invest. Despite the issues of trust within the financial services industry, 59% of Canadians still believe that financial services is

an innovative industry.The general mistrust of financial

services coupled with the belief that there is an ability to innovate within the sector offers a unique opportu-nity for banks to acquire and imple-ment their own FinTech products and services. Doing so will help meet the consumers’ needs for transpar-ency and will set standards for other banks to follow.

To understand the opinions towards the financial services industry, we asked how individuals perceive profitability, competitive-ness, and regulation of Canada’s Big 5 banks. 59% of Canadians believe that the Big 5 banks are too profitable and only 39% of Canadians surveyed believe that there needs to be more regulation.

Technology is Evolving Consumer Expectations for the Financial Services Industry

We asked similar questions to Canadians about the insur-ance industry. Currently, 62% of Canadians do not trust their insur-ance professional, and 63% admit that they do not believe they are getting the best insurance rate possible. These statistics demon-strate the evolution of consumer expectations and demand for trans-parency in the insurance industry. Unlike the financial services sector, less than 44% of Canadians believe the insurance industry is innovative.

Moreover, 54% felt that the Canadian insurance industry was too profitable. When EVP asked if Canadians believe there is enough regulation within the insurance industry, 38% of Canadians surveyed say current regulation was “okay”,

and 21% state that less regulation is needed. The juxtaposition of profit-ability and regulation, in this case, demonstrates the necessity of trans-parency within this sector of finan-cial services.

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The information provided within this report demonstrates Canadians’ demand for innovation in regards to financial services. As Canadians look for smarter ways to manage their money, there will be an increased desire for services that make banking more accessible and easier to use. However, awareness and education remain as barriers to adoption. Unless FinTech service providers find cost-effective ways to educate the population, customer acquisition costs are likely to grow and put this advanced method of banking at risk. Partnerships with larger financial institutions can help offset these costs while providing incumbents with a portfolio of innovative solutions that cater to a digital-first generation.

Conclusion

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Ray SharmaManaging Partner: ray@evp.vc

Amir BashirAssociate: amir@evp.vc

John Austin Kennedy Summer Analyst

Extreme Venture Partners (EVP) is one of Canada’s most successful venture capital funds over the past decade. With its focus on mobile, EVP I (launched in 2007) achieved superior investment returns while helping to launch and help grow more than 20 companies; ultimately leading to over 1000 well paying technology jobs in Canada.

With its second fund, EVP is excit-ed to continue upon its track record of discovering exceptional young companies on the verge of break-out. While continuing our focus on Mobile (particularly apps, payment, health and enterprise) we are excit-ed to be expanding our sector inter-est to include Big Data (including open/social data, natural language

processing, machine learning and analytics) and the Internet-of-Things (wearables, robotics, drones and connected devices).

About EVP Authors

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This report gives a comprehensive look at the data and trends covering FinTech in Canada. The data set collect-ed for this report was gathered from a random sampling of 400 Canadians, who answered a series of 33 ques-tions reviewing their experience with FinTech, traditional banking, and the financial services industry. For a confi-dence level of 95% with a 50% chance the sample picks a particular answer (accounting for the worst-case scenar-io), the confidence interval for a sample size of 400, 292 and 108 are ± 4.9%, ±5.7%, ±9.4% respectively. When using the information from this report, individu-als assume the risk of misrepresenta-tion of data. As data is split into smaller groups, the margin for error increases. EVP is not responsible for any misrepre-sentation of data.

Methodology