Cryptocurrencies, the blockchain, innovative payment schemes, artificial intelligence, and other emerging technologies are creating new opportunities and threats for Canada’s financial services cooperatives.
For instance, when Goldmoney onboarded its one millionth user in May, credit union stakeholders barely noticed. The Toronto-based gold storage, payments, and wealth-management platform (which recently changed its name from BitGold) is typical of FinTech disruptors: it emerged seemingly from nowhere and at first glance appears to pose no immediate threat to the industry.
But appearances can be misleading. Investments in global financial technology totalled $9.4 billion in the second quarter of 2016. “FinTech is expanding,” KPMG, a consultancy, notes in The Pulse of Fintech, a recent report. “Rapidly evolving innovations are being used to drive new offerings in the banking, financial, and insurance sectors.”
Those offerings — which range from Apple Pay and PayPal to cryptocurrencies, data-mining, analytics, robo-advisers, and blockchain-distributed ledgers — are chipping away financial institutions’ assets, fees, and brand recognition. Many draw assets out of the financial system. Others appear positioned to start taking deposits themselves. Below are some FinTech disruptors to watch, many of which are posing direct threats to existing credit union and financial institution business models.
A million accounts in less than a year
The speed at which innovations take hold can be breathtaking. Goldmoney onboarded the lion’s share of its first million accounts in less than a year.
Furthermore, according to Josh Crumb, Goldmoney’s chief strategist, its business model has significant momentum. “We have account holders in more than 150 countries, many of which are run by governments that pay negative interest rates on their bonds,” says Crumb. “That gives depositors a strong incentive to move funds outside the financial system.”
Goldmoney exemplifies many of the challenges that FinTechs pose to credit unions, in part because those threats are so seemingly small and indirect. By mid-September, the company (which by then had increased its account base to 1.25 million) still had less than $2 billion in assets under management and had yet to reach $15 billion in transaction volumes.
At Goldmoney’s current pace of growth, that could create problems for financial-sector players down the line. However, with so many other challengers in the horizon, credit unions can be forgiven for not having hit the panic button so far.
Goldmoney enables clients to make debit card purchases, international payments, and run businesses using electronic “bits” backed up by real gold stored in its accounts. Furthermore, it says it does many of its $12 trillion transactions (cumulative transaction volume since inception in 2001) through credit unions and financial institutions, which it regards as partners.
AI is the real threat
According to Christine Duhaime, executive director of the Vancouver-based Digital Finance Institute, credit unions and financial services players have the wherewithal to meet the oncoming challenges, but they need to take them seriously.
McKinsey Global Institute estimates that AI will replace 110 million full-time employees globally by 2025
“Canada is surprisingly strong in tech and we don’t get enough credit for this in Ottawa,” says Duhaime. “For example, Samsung Pay, a competitor to Apple Pay, has set up a major research facility in British Columbia, as has Amazon.”
In a recent paper titled The future of artificial intelligence in Fintech, Duhaime cited artificial intelligence (AI) and machine learning as the greatest FinTech threats to existing business models. McKinsey Global Institute, for its part, estimates that AI will replace 110 million full-time employees globally by 2025. “Lower-end and mid-range (jobs) will come under pressure,” Duhaime notes. “Hence in financial services it will be the large number of banking functions such as bank tellers and customer service representatives at call centres that will take the hit. Fully 50 per cent of those posts will be lost to automation.”
While such dislocations would no doubt vastly increase credit union efficiencies, managers will need to be creative to effectively redeploy all that talent, given existing skills gaps. This presents a clear challenge.
“Not enough Canadians will be able to perform high-level AI jobs,” notes Duhaime, who attributes this in part to strong support given by other governments such as Hong Kong, to attract tech startups. “We do not have anywhere near a similar level of support in Canada. Techies, including those in AI, will go where they can get it.”
Bitcoin also appears to be making a comeback. After losing nearly three-quarters of its value from its November 2013 peak, the much maligned cryptocurrency nearly tripled in value during the 12 months to mid-September 2016 when its market cap approached the $14 billion mark.
Bitcoin offers stunning advantages for its users, ranging from low international transfer fees, an effective distributed-ledger recording system, and account opening ease.
“Once people start to understand Bitcoin they never go back,” says Kyle Kemper, executive director of the Bitcoin Alliance of Canada. “The Bitcoin model, in which supply is governed by the speed at which transactions are processed and grouped into blocks by ‘miners,’ is particularly popular with those who do not trust central banks, which can print money at will.”
That said, Bitcoin has clear barriers to overcome if it is to build credibility with the general public.
Just as the cryptocurrency community was bouncing back following the bankruptcy of Tokyo-based Mt. Gox, which at the time was the world’s largest Bitcoin exchange, new issues emerged ranging from debates among developers about the size of transaction blocks in its distributed ledgers to the future of Ethereum, a Bitcoin competitor.
More worrying is the shady nature of these crypto platforms. For example, none of Canada’s largest Bitcoin exchanges would answer the phone when Enterprise called, nor would they provide spokespeople to talk about their models. It is thus hardly surprising that Canada’s major financial sector players, who are required to adhere to strict laws and governance regulations, are reluctant to deal with these exchanges.
Goldmoney onboarded the lion’s share of its first million accounts in less than a year
Blockchain technology: a killer app?
Yet while the futures of Bitcoin, Ethereum, and other digital currencies are unclear, their underlying blockchain technology could well be a killer app, says Howard Yu, professor of strategy and innova- tion at IMD, a Switzerland-based university business school. Blockchains are distributed-ledger systems, which anyone can access, but which protect user identities with encryption codes.
The technology provides three potential categories of benefits to financial institutions, writes Bruce Cahan in a recent report complied for Filene Research, titled Blockchain beyond Bitcoin: Insights for credit unions. A public, open-sourced, encrypted, trusted, and distributed ledger would be more secure, could better spawn innovation, and would be more efficient.
That’s particularly true in the area of international money transfers, which in 2016 continue to be routed through a complex system of third parties, all of whom collect fees. Therein lies the threat.
“International transfers are big moneymakers for financial institutions,” says Lu. “If they don’t streamline the way these are done they will lose lucrative revenue streams. That’s why you are seeing so many banks looking at the technology right now.”
The threat that should have sector players most worried comes from innovative payments processors and online lenders. The challenge, says Paul Gordon, head of the payments strategy committee at the Canadian Credit Union Association (CCUA), is that credit unions lack some of the resources that larger financial players have. This substantially limits their ability to react.
“Many Canadian credit unions are thus adopting the fast-follower approach,” says Gordon. “They are monitoring developments closely and incorporating changes into existing business models as they become practical.” Partnering is emerging as a major strategy. In June, CCUA initiated a pilot project with 15 of its members called Mobile Pay.
The system will enable clients to make payments at selected retailers from their Android phones, with balances withdrawn directly from their credit union accounts.
Partnerships are also emerging at the individual credit union level. Earlier this year Grow, an online lender, announced a partnership with Conexus Credit Union (119,000 members, $7.1 billion in as- sets) and Westoba Credit Union (38,000 members, $1.29 billion in assets) through which they will offer personal loans, mortgages, SME lending, membership account opening, and other digital services.
That said, the partnership mentality, which seems to be pervading both the credit union and financial services sector as a whole, comes with extraordinary risks attached to it. The most important of these stems from an attitude of complacency that comes from the fact that many of the most innovative payment systems are layered on top of existing financial institution services.
“They will always need us to provide backbone services,” appears to a widespread attitude, rooted in large part in the belief that many non-channel competitors would face prohibitive costs, were
they to try obtain banking licences and thus take deposits. Yet while this is indeed true, the resulting loss of branding visibility is spawning the emergence of a generation of young consumers who have no emotional attachment to any financial institution and indeed resent the thought that they may have to visit one at some point.
An international credit union blockchain response?
One Canadian player that is particularly in tune with developments on the technology front is Desjardins Group, the country’s largest nancial cooperative. Led by Chadi Habib, its executive vice-president and CEO, Desjardins has spawned a threefold series of FinTech-inspired responses.
“Once people start to understand Bitcoin they never go back” – Kyle Kemper
These include the Monetico merchant payments solutions platform, funding for a series of FinTech startups through Desjardins’ venture capital arm, and an “innovation lab” the organization has set up.
Habib provides a perfect window into the thinking that germinates internally at the Quebec City–based financial cooperative. For example, he sees huge potential for blockchain technology, which he believes will have implications that go far beyond international fund transfers.
The blockchain’s distributed-ledger technology could also affect the way mortgages are issued, Habib notes. Having a common database of property ownership records (and wills and other legal doc- uments) could potentially make the entire notarial professional obsolete in its current form and vastly reduce the costs and paperwork involved in many financial transactions.
Habib also sees FinTech as the perfect vehicle to bolster national increased collaboration, which he believes could include a national credit union blockchain solution.
Credibility is key
As for Goldmoney’s chief strategist, Crumb’s outlook remains both “out of the box” and far into the future. “Our users are in many ways different than traditional aficionados of digital currencies,” says the Goldman Sachs veteran, who has long been a big backer of gold as a competitor currency to world moneys. “True, many like the fact that our platform enables them to quickly and easily store and move their gold in any one of several countries. However they do so above board, leaving a paper trail of all transactions.”
This enables Goldmoney to have good relations and to work and partner with major Canadian credit unions and other financial institutions. “Our model is exible and works in a wide range of environments and scenarios,” says Crumb. “We make sure that when we win, our partners win too.” ◊