By and large, Canadians aren’t thrilled with the Big Five banks that dominate the country’s personal banking sector. In a J.D. Power survey released last month, Bank of Montreal scored 612 out of 1,000 points — and it led every other similarly sized bank.
Every year, more than five million Canadians — roughly the population of Toronto — lodges at least one complaint against their bank. Not all are aimed at the Big Five, but given the dominance of TD, CIBC, RBC, Scotiabank and the National Bank of Canada in the Canadian marketplace, it’s a safe bet many of them are.
For years, major Canadian banks have faced accusations ranging from a lack of transparency around customer fees to predatory sales practices to uncompetitive rates. Into all of this angst around banking, fintech companies like Neo Financial are promising a slicker banking experience to challenge the Big Five’s market hold.
They wouldn’t be the first. Tangerine, launched in 1997 as ING Direct, made similar promises. It’s now owned by Scotiabank. For decades, alternatives to major banks — credit unions, community banks, fintechs — promised to be an alternative to the Big Five. And while all three exist, they’ve never overthrown the ancien régime.
Neo Financial co-founder and CEO Andrew Chau spoke to the Star earlier this month:
Fintech companies like Neo Financial talk a lot about “banking innovation” and “consumer choice.” What does that actually mean?
We started Neo about four years ago, and our mission was to create more choice for Canadians. The last meaningful consumer bank that was started in Canada was ING Direct, in 1997. Canada’s sector is really dominated by five or six big banks, and they haven’t really changed over the last 100 years or so. They have the same products, the same features, the same functionality — a lot of the time, the same pricing as well.
Canadians get the short end of the stick when it comes to choice. What we, and other fintechs, are trying to do is introduce more competition. In the modern world, when you can hail a cab or order food delivery on your phone, why can’t you do your banking on your phone as well?
So what does that competition look like? Do you compete with them on speed? On rates?
It’s really a combination of a lot of different things that make Neo a much better experience, from a higher interest rate on an everyday bank account to having no monthly fees. A comparable bank account at one of the Big Five is at least $15 to $20 a month, versus getting one for free at Neo. We’ve even got unique offerings like our cashback network, where we’ve partnered with over 11,000 small businesses across the country to offer cash back on not only your credit card, but our Neo Money card, which is like a debit card. The experience should look and feel more like an Airbnb experience, rather than a banking experience.
Why do you think big banks haven’t done that? They probably have much bigger research and development budgets than Neo.
They do. They have a ton more money. They spend billions of dollars just to maintain their legacy systems and technology. That’s really what’s holding a lot of these banks back is that they started more than a hundred years ago, and they’ve put together a myriad of systems that have been outdated and outpaced by modern advances in technology.
A lot of the systems of banks today are built on a programming language called COBOL, from back in the mid-1900s. In order for them to make changes to the system today, the big banks need to pull computer engineers out of retirement, because it is such an old language. I always thought it was a myth, but whenever I’ve talked to a big bank executive, they say it is mostly true. These systems have just been duct-taped together over time.
Think about the bank account you have today. How many new features and functionality have they added in the last 10 years for you? The banks know that these things are happening. As Canadians, we’ve usually been left behind on innovation. We’re the last ones to get Uber, or to get a popular Netflix series, or Amazon Prime. When we started Neo, we didn’t want to be the last ones to get a modern banking experience. That’s really why we started Neo in the first place.
Neo has a secured credit card for people unable to get access to traditional credit cards. Are you seeing an uptick in interest because consumers have busted their credit elsewhere?
It’s actually one of our most popular products. Secured credit cards can apply to folks who can’t traditionally get credit, but we’re seeing a lot of uptake from consumers new to credit. Folks who are new to Canada can start building their credit history with us and, at the same time, get the cashback network that we offer.
We charge no annual fees for credit cards. This is one of the only cards in Canada that offers no annual fee to build your credit.
Are the interest rates higher?
No, they are not.
How do you manage that? Usually, traditional banks charge higher rates on unsecured cards because they’re worried about risk.
With a secured credit card, there actually is very little risk. You’re putting down a security deposit because we don’t know your credit score. I think, as well, we’ve built a lot of our technology ourselves. We have in-house systems, which reduces the cost of operating these programs, and that’s why we’re able to offer them at no cost to the consumer.
You’ve just launched a partnership with Junior Achievement Canada to promote financial literacy for young people. But the issue a lot of young people have isn’t a lack of understanding of finances, it’s that they can’t afford to pay for things. Why did you decide to pursue this initiative?
When we think about the gaps in the Canadian economy, a lot of it really has to do with financial literacy.
Is financial literacy the reason houses are so expensive?
No, it’s not. Interest rates have gone up. But when we think about financial literacy, there’s an affordability question — and then there’s a planning and a savings question. Half of Canadians are living paycheque to paycheque: Yes, there is an affordability component to it, but that statistic has stayed pretty consistent if you look at those surveys over the past couple of years, despite housing prices.
A lot of it has to do with starting early when it comes to savings, when it comes to budgeting, when it comes to responsible credit. That’s the genesis of why we want to work with an organization like Junior Achievement, who have very similarly aligned values to us. We offer a youth high-interest savings account, from day one, that youth can sign for themselves and be more independent, and learn along the way as opposed to waiting until they actually have savings.
How do you strike the balance between promoting financial literacy, and not just using this program as a way to get kids into Neo?
In terms of where youth can go for a bank account, a lot of them already have one. You can probably relate to it: typically, they just adopt whatever bank accounts their parents have. Neo would really be their first choice in terms of where they’d like to bank.
It’s similar to how they’re choosing their own phones or choosing their own clothes to wear. A bank account, and where they should bank, should be no different. When we think about empowering youth with financial literacy, you’re exactly right. It’s really up to them. We just want to make sure they have a choice and a different option when it comes to managing their money.
People have been trying to upset the big-bank model for a long time. Why do you think Neo is going to be the differentiator?
When you think about the evolution of technology over the last 100 years — the iPhone was only invented around 20 years ago. When you think about today’s evolving technology, this is a pivotal moment. Generative AI is a driving force. It’s really a matter of who’s going to be able to adapt and be nimble enough to adapt to changing consumer needs.
That’s why we think now is that great opportunity for Neo, and other fintechs, to come in and challenge the inertia that’s existed for more than a hundred years. It’s exciting. Obviously, it’s not going to be easy. I think it starts with building trust and credibility with consumers. And then, of course, leveraging tech to make those experiences delightful.
This interview has been edited for length and clarity.
Brennan Doherty is a former staff reporter for Star Calgary and the Star’s 24-hour radio room in Toronto. He is now a freelance contributor.
Source: Toronto Star
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