The Power of Disruptive Innovation

It’s no secret that technology has been turning industries upside down, crippling major incumbents and their business models almost overnight… look at what Uber has done to taxis, what Air B & B has done to hotels, what Napster, iTunes, Netflix and Spotify have done to the music and movie industries, and what Tesla is in the midst of doing to the car industry. In all cases, the outcome was (or stands to be) devastating for companies caught sitting on their hands.

In his book “The Innovator’s Dilemma”, Clayton Christensen explains how disruptive technologies force corporations to radically rethink their very existence. In his follow-up book, “The Innovator’s Solution”, Christensen establishes that it is more than just technology causing disruption, but rather it’s what companies are doing with it. Beyond technology, there are new business models, new players, and new experiences. When your company is making good revenue with the business models that got you there it’s hard to justify rethinking everything.

Banks Under Pressure from New Entrants

Innovative and nimble fintech startups – as well as giants from other segments – are changing how Canadians think about accessing their financial services. This is happening around the world, and the 2015 McKinsey annual review on global banking crystalized the need for traditional financial institutions to take notice. The report estimates that due to competition from new technology companies, “in five major retail banking businesses (consumer finance, mortgages, SME lending, retail payments and wealth management) from 10 to 40 percent of revenues (depending on the business) will be at risk by 2025, and between 20 and 60 percent of profits.”

“In Canada and around the world, banks will soon find themselves facing an unprecedented level of disruption. New market entrants, from retailers to telecoms to technology firms, are poised to move into the traditional banking space and seize profitable opportunities. Payments will likely be the first major battleground”
PWC’s 2015 report on Canadian Banking

The Banking System in Canada is Strong

Canadian banks are undoubtedly among the most successful in the world consistently demonstrating healthy returns on equity.

“For the fiscal year (2015) as a whole, the six big Canadian banks reported total earnings of almost $35 billion”

The World Economic Forum has ranked Canada #1 for having the world’s soundest banking system for eight consecutive years. This reputation for managing prudently is supported by the percentage of residential mortgages that are found to be in arrears: according the Canadian Bankers association only 0.28% of the 4,694,273 mortgages in the country were shown in arrears in Jan 2016, and in the 2008-2009 timeframe of the financial mortgage credit crisis that number never went over 0.45%. CMHC compares this to 2.39% for the USA in 2010.

But how the Canadian banks do in the area of innovation?

There are two schools of thought on how the Canadian banks do in the area of innovation… speak to most bankers and they will profess that banks are known to be traditionally slow moving. This being said, we lead the U.S. in EMV payment (chip card) processing by a long shot and are said to have the most connection to digital channels, ATM, telephone and online banking. But with so many lines of business to defend and so many emerging players they are recognizing publically and from the top the need to make changes.

It’s not just about tech… Trust is a big factor

Certainly the Banks have long been viewed as a trusted and integral part of people’s financial lives. Technology has largely rendered regular visits to bricks & mortar bank branches unnecessary, removing a built-in relationship advantage for the incumbents. Many, especially younger generations, are no more likely to have a personal relationship with and trust in their Bank of choice than they are with an emergent company providing the same products and services in a novel and/or more cost effective way. This presents a big opportunity for new entrants to gain market share.

The challenge is understood at the very top – build, buy, or ally?

RBC CEO David McKay told media at their AGM in April that the Bank has an interest in partnering with fintechs to develop applications for mobile banking. Further, RBC in April announced a $3-million commitment to the University of Toronto to develop ONRamp – a collaborative space for entrepreneurial students, graduates and startup companies.

ScotiaBank CEO Brian Porter told shareholders in April that the Bank had doubled its investment in technology to more than $2.4-billion in response to nimble fintechs and the decreasing demand for traditional branch transactions as consumers increasingly do their banking on computers or smartphones.

And BMO, in collaboration with our friends at the Ryerson DMZ, announced a sponsorship of up to six startups for a four-month placement at the DMZ, including an exclusive opportunity to pilot their product with BMO and introductions to potential funders.

Given the new opportunities opened up by the digital world, along with the consumer’s growing propensity to trust newer players in the fintech space, startups and banks have some decisions to make around competing or partnering. Banks have the reach into a vast base of merchants and consumers. Startups are bringing new products and fresh thinking to the table. Organizations like MaRS, Ryerson DMZ, and Communitech are serving as matchmakers and facilitators. My perspective as a CEO and Co-Founder of a startup is that for partnerships with banks to work, they will need to be driven at the executive level to ensure the functional and cultural buy-in that can only be championed from the top.