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Byline: DAVID BERMAN

When Tom Camps sold his Ottawa-based WiFi software and services company in 2014 after a
successful 12-year run, he decided to take six months off to recharge. His downtime didn't last
six days.
His teenage son returned to his awaiting car after making a small purchase at a fast-food outlet
and declared: "Dad, I hate change."
And just like that, Mr. Camps's next venture, ChangeJar, began.
Instead of taking your change in the form of cumbersome coins, you can use the company's app
to have it uploaded to your smartphone, where you can tip, donate to a cause or save it for
another purchase.
"I'm being somewhat contrarian because I'm trying to reinvigorate cash payments," Mr. Camps
says.
With $500,000 in seed money, three full-time developers and a May launch that will be limited
initially to a neighbourhood in Ottawa, ChangeJar may look more like a curiosity than a threat to
the banks.
But it is part of a massive wave of new companies - lumped together as financial-technology
firms, or fintech - that are making banking simpler, faster and cheaper. As these upstarts gain
momentum and grow by the thousands, often staffed by experienced ex-bankers and financed by
deep-pocketed venture-capital firms, financial behemoths are growing nervous.
These innovative forces threaten to nibble away at the banks' core franchises or carve out new
markets that are particularly appealing to millennials - even if it is a handful of coins at a time.
Global consultancy McKinsey & Co. estimates that banks could lose up to 60 per cent of their
retail profits within the next decade as new competitors either take market share or force
incumbents to lower their fees.
Still, major hurdles remain for the small players. The fight for consumer attention in an
increasingly crowded space won't be easy. And wooing customers away from massive
institutions - and the marketing budgets they possess - comes at a significant cost.
But on top of the challenges posed by small startups is a deeper, longer-term threat: Some of the
largest companies in the world - firms with histories of disrupting industries - have designs on
breaking into financial services.
"We are on a collision course with the Googles and the Apples of the world," Royal Bank of
Canada chief executive officer Dave McKay said last year.

In response, banks are desperately trying to reinvent themselves to hold back the onslaught and
maintain their relevance with a younger generation. The shift comes as Canada's largest lenders
grapple with slowing growth. The domestic economy is weak and consumers have little room for
additional debt, leaving analysts expecting profit growth of just 1 per cent to 2 per cent for the
big banks in 2016 - a significant drop from a reported average annual profit growth of 9.5 per
cent between 2004 and 2014.
Faced with these headwinds, the banks are slashing staff in traditional areas of banking that are
being overtaken by online services. Last year, Toronto-Dominion Bank cut its payroll count by
1,600 people and Bank of Nova Scotia is now embarking upon a widespread cull as it responds
to what it calls "changing customer preferences."
At the same time, though, banks are devoting tremendous resources to expanding their
technology-driven operations, hiring experienced executives and tech-savvy workers, and
turning a ponderous, bureaucratic corporate culture into something that can react quickly to new
ideas. The environment has fostered an arms race for both tech and talent that spans the globe.
Canada's banks are keeping close tabs on a slew of startups emanating from technology centres
from Silicon Valley to London, Berlin, Singapore and Hong Kong. In Canada, Toronto, Waterloo,
Ont., Ottawa and Vancouver have built major centres of financial innovation.
The banks are buying in. Scotiabank's tech investment has doubled to $2.4-billion in recent
years, implying that the Big Five collectively could have technology budgets exceeding $10billion.
The fintech threat
"Silicon Valley is coming," Jamie Dimon, CEO of JPMorgan Chase & Co., said in a particularly
ominous letter to shareholders last year.
Tech giants such as Apple Inc. and Google Inc. are wading into financial services with apps that
allow consumers to make payments from their smartphones, bypassing the need to produce a
credit card at a merchant terminal. They scoop up fees and insert themselves between the banks
and their customers, threatening to turn the banks into so-called dumb pipes that simply transfer
money and suffer diminished brand value.
Apple Pay began in the United States and has since expanded into Britain, Australia and China.
In Canada, its presence is initially limited to American Express cardholders after Apple failed to
strike a deal with the big banks last year.
But smartphone payments won't remain a novelty among consumers for long: Juniper Research
expects global users will rise to 148 million at the end of this year. Companies such as Square
and PayPal are also revolutionizing the way we pay.

But in his warning, Mr. Dimon - arguably one of the shrewdest bankers on Wall Street - was also
alerting the financial industry to the smaller, harder-to-see threats that are starting to emerge in
force with equally innovative approaches.
Michael Katchen was living in California in his mid-20s and contemplating his next project after
selling a startup. His friends, also young, handed it to him: They had some savings that they
didn't want to entrust to pricey professional money managers, so Mr. Katchen, who had been
investing since he was 12, helped them out.
He constructed simple portfolios based on exchange-traded funds (ETFs), which resemble index
mutual funds but trade like stocks and cost significantly less.
Now 28 and based in his hometown of Toronto, he is doing the same thing but on a larger scale.
He sits atop one of Canada's most successful fintech companies, Wealthsimple Inc., and those
friends have expanded to a roster of 15,000 Canadian clients with combined assets of $500million - not bad for a company that is just 19 months old. Perhaps more impressive, assets are
growing by 20 per cent each month.
The appeal is simplicity and cost. Wealthsimple is an automated investing service, or "roboadviser," where customers can sign up online in about 10 minutes. An algorithm then assesses
their risk tolerance and objectives, and slots their savings into a mix of ETFs. The fee is typically
less than half a percentage point - or $228 a year for an account of $50,000 - which is a fraction
of what investors would pay for a human adviser to pick stocks and mutual funds, and there is no
account minimum.
The business model, Mr. Katchen believes, is especially attractive to younger professionals. "If
you don't have a lot of money, you really can't get much out of the banks," he says.
As he sees it, the banks will have a tough time emulating him because they are in a bind: They
can't afford to alienate older clients - or their own advisers and mutual-fund salespeople, for that
matter - who are used to paying hefty fees for investment advice.
"That internal conflict makes it really hard for them to build new models that put the client first,"
Mr. Katchen says. Power Financial Corp. was so impressed, it backed Wealthsimple to the tune
of $30-million.
The success of the company illustrates how quickly new approaches to finance can take root,
especially among younger consumers who often gravitate toward alternative brands that build
trust with engaging websites and transparent business models.
Fintech has found traction in other areas of finance besides wealth management.
Shrad Rao, CEO of Wagepoint, a payroll-services company, says businesses can sign up for his
online software, giving them access to direct deposit functions and payroll calculations, in fewer
than 20 minutes. That is considerably faster than the older companies he seeks to replace.

"They're too big to be fast," Mr. Rao says.

Small-business lenders such as Lendified, Grow Financial and FundThrough are finding a
market by offering hassle-free online applications and quick access to funds, using sophisticated
algorithms to ferret out fraud.
All three firms were founded by ex-bankers, giving them added heft. And although they're
targeting areas of the market underserved by the banks - generally small, short-term loans - it is
not hard to see a clash ahead as they expand with quick, low-cost services, unburdened by the
banks' legacy issues of costly branches and large payrolls.
"They're not built to do this," says Kevin Clark, Lendified's president, who spent three decades at
Scotiabank.
For Canada's big banks, which made a collective $35-billion in profit in 2015 and have
outstanding loans totalling more than $2.2-trillion, fintech upstarts may look like trivial
annoyances right now - except that there are thousands of them and they are continually seeking
ways to drive down costs, improve online experiences and take market share one thin slice at a
time.
"We think that if the banks start creating what we've already built, we would be 10 steps ahead
by the time they completed it," says Sean O'Connor, a vice-president at Vancouver-based Grow
Financial. "We're a moving target."
Remarkably, though, fintech is only just getting started. Citigroup analysts estimate that new
competitors have grabbed just 1 per cent of revenue from North American banks so far.
But observers expect fintech will gain prominence - and fast.
The same Citigroup analysts estimate that competitors will own a 10-per-cent slice of bank
revenue by 2020, rising to 17 per cent by 2023 - raising the question of whether banking will
eventually fall into the same category as disrupted businesses such as CD sales and DVD rentals.
Consumer lending and investing could be particularly vulnerable as smartphones change the way
we interact with financial institutions - at a time when the banks have already seen consumerloan growth slip to the lowsingle digits from double digits a decade ago.
The upheaval can already be seen in bank payrolls: Layoffs are frequent as CEOs shift financial
resources from traditional branch banking to automated services as consumers move online.
While branch numbers are relatively stable in Canada so far, they're being slashed in Europe.
Making matters worse, the new competitors are increasingly well funded thanks to interest from
venture-capital firms. According to CB Insights, global investments flowing into fintech firms
approached $14-billion (U.S.) in 2015, more than double the influx in the previous year.

When OMERS Ventures - an arm of the $77-billion (Canadian) Ontario Municipal Employees
Retirement System - announced a new fund last year, it singled out its interest in fintech with a
Canadian map showing startups in various cities.
"That was our way of saying, 'If you're out there and you're not on our list, you should give us a
call because we'd love to hear what you're up to,' " says Jim Orlando, managing director of
OMERS Ventures.
Some fintech players have an advantage for a simple reason: lower lending costs.
Lending Club, a so-called peerto-peer online lender that connects investors with borrowers,
originated nearly $8.4-billion (U.S.) in loans in 2015, up more than 90 per cent from the previous
year. One of its advantages is the cost of doing business.
According to Goldman Sachs, a typical bank incurs costs of 5.3 per cent of average loans, while
Lending Club's costs are just 1.7 per cent.
Mint, a financial "aggregator" that allows customers to track accounts across various financial
institutions and set budgets - in the process, pushing bank brands to the sidelines - has more than
20 million registered users in the United States and Canada. Intuit Inc. bought the company in
2009 for $170-million.
Mint's 20 million users represent a key victory in the largest uphill battle facing most upstarts.
Growing a customer base is no easy feat - and it's expensive.
With vast marketing budgets and brand recognition built over decades, the banks have a
considerable advantage in this area.
"The success of fintech firms will be dependent on minimizing their customer acquisition costs,"
says Adam Felesky, former CEO of Horizons ETF Management (Canada) Inc. Mr. Felesky has a
frontrow view of this challenge as an investor in Koho - a mobile application that allows
customers to conduct day-to-day financial transactions such as direct deposits, purchases, ATM
withdrawals, bill payments and electronic money transfers.
"Koho has a simple and attractive financial product, which we believe will be sought out. The
company is at the front lines of building the future financial ecosystem as this customer base can
then be offered other solutions - whether in-house or through other fintech partnerships," he says.
The banks strike back
On an afternoon earlier this year at the MaRS Discovery District in Toronto - a base and
mentorship centre to small companies - about a dozen young designers and developers have
assembled in a large room that is plastered with whiteboards and multicoloured sticky notes.
There is a nearby foosball table and Xbox gaming console. The dress code: Whatever goes.

The team is taking a break to show a visitor the progress they have made on a project designed to
allow online consumers to apply for mortgages, file paperwork and sign documents, without
setting foot in a bank branch.
They have been working fast, with a deadline measured in months.
If this sounds like a startup that is propelled by a desire to disrupt traditional banking, check the
sign outside: This is Canadian Imperial Bank of Commerce. It expects to launch the mortgage
app later this year, followed by enhancements as they gain customer feedback - a development
approach lifted from technology companies.
"We started off with a concept or idea of how we can re-envision the mortgage process, because
it can be very clunky for a home buyer," says Greg Elcich, director of digital strategy and
innovation at CIBC. "No one has really nailed it digitally."
It's too soon to know whether CIBC has nailed it. But the urgency behind by the development of
the app certainly suggests banks are serious about finding new ways to serve their customers
before competitors do it for them.
To do that, they are remaking their work forces. Their ranks are being beefed up with
experienced technology executives who occupy key management positions near the top of the
hierarchy.
RBC's group head of technology and operations is Bruce Ross, who was previously a general
manager at International Business Machines. Similarly, Scotiabank's co-head of information
technology is Michael Zerbs, formerly the president of Algorithmics, a risk-management
software company that was bought by IBM.
Lower down the hierarchy, banks are scrambling to hire computer scientists, engineers, data
scientists, designers and anyone else who can offer a fresh approach to a 150-year-old institution.
The demand is provoking a talent war as banks jostle not only with each other, but also envoys
from Silicon Valley and the entrepreneurial pull of startups.
To attract new hires, banks are donating hefty sums to universities, ripping up conservative dress
codes and, in some cases, finding new buildings to keep the innovators away from the suits.
They are also luring bright young students for months-long work terms with the promise that
they can develop ideas that will be embraced by millions of clients.
TD Bank hired Naima Khan, a third-year computer engineering student at the University of
Waterloo, for two co-op terms at its TD Labs, an innovation team located within KitchenerWaterloo's Communitech hub. She has a third term with TD lined up this summer.

"We keep it as much like a startup environment as possible," Ms. Khan, 20, explains. "We pitch
ideas every two months to the innovation council. If the bank likes it, that's when the money is
put toward bringing the idea to market."
At TD, Ms. Khan helped develop an app called Family Allowance, which teaches children how
to save. The app is now available in a test phase.
The banks can point to significantly larger examples of innovations that suggest they understand
the need to evolve.
User-friendly mobile banking apps allow consumers to make transactions whenever they want.
RBC, CIBC and TD have created their own payment apps for Android phones. Scotiabank is
touting Tangerine, its branchless "digital" bank, as its own disruptor.
Earlier this year, Bank of Montreal launched its own robo-adviser called SmartFolio, which
draws on the bank's own suite of low-cost ETFs.
"We recognized that wealth management was undergoing significant change and people are more
comfortable than ever using digital tools," says Joanna Rotenberg, BMO's head of personalwealth management.
In April, TD launched MySpend, a mobile app developed with Movencorp Inc. that tracks your
spending and helps with budgeting. The bank is considering allowing consumers to pull in
information from non-TD accounts and credit cards, in what looks like a shot at financial
aggregators.
"It started with assessing the competitive landscape, but very quickly the objective became to
play a significant role in financial literacy," says Rizwan Khalfan, TD's chief digital officer.
Further out, the big banks are exploring the use of blockchain, the technology behind
cryptocurrency bitcoin, which promises to make transactions faster, cheaper and safer. The Big
Five have joined R3, a global consortium of 42 financial companies devoted to the research and
development of the technology.
But despite their pursuit of innovation, the banks also believe that their foundation - their history
and their millions of clients and reams of data - offers them a key competitive advantage.
"I call it the gold of RBC," says Mr. Ross, the bank's top technology executive. "The gold is how
we manage that information and those relationships."
When the dust settles
For all the concern about rising competition, the big banks are doing a lot to encourage it.

In March, Scotiabank gave $3-million (Canadian) to the University of Western Ontario to fund a
digital banking lab. In April, RBC committed $3-million to an innovation hub at the University
of Toronto, called ONRamp, which will support entrepreneurs. CIBC has a commitment to
MaRS, TD has a big presence at Communitech and BMO just announced a partnership with
Ryerson University's DMZ to provide support for startups.
"It gives us direct access to young technology companies with a focus on financial services and it
gives them access to us," says Cam Fowler, BMO's group head of Canadian personal and
commercial banking. "Maybe we're helping the competitors that may disrupt us, but my strong
view is that we're better together."
Despite their bluster about disruption, many fintech companies agree. Thinking Capital, an
online small-business lender based in Montreal, has struck a partnership with CIBC. Grow
Financial is offering its online services through Saskatchewan's Conexus Credit Union.
Even Mr. Katchen of Wealthsimple agrees that talking is better than fighting.
"I think the banks have the attitude, 'if any of these startups become a threat, we'll either copy
them or buy them,' " he says.
"But I think they'll realize that procurement and partnerships can be a path to innovation."
In the meantime, expect a lot of awkward moments as collaborations are celebrated and
competition is fought.
Some bank CEOs are complaining out loud that the playing field is not level, arguing that many
fintech firms enjoy the advantages of operating beyond the gaze of regulators.
Sometimes, the banks' actions go beyond complaining. Last month, Scotiabank clients who used
Mint suddenly discovered that the financial service had been disconnected.
The bank explained to its clients: "We regret to inform you that Scotiabank does not provide
support for the operation of third-party software."