Assembled on July 7th were the Chief Digital Officers of Canada’s biggest banks (TD, CIBC, BMO, and Scotiabank) to discuss financial technology startups (fintech) at Communitech. Clearer than ever was the truth that though there’s lots of problems in Canadian banking ripe for disruption by startups, the opportunity is very limited. Canadian banks can’t innovate and are on the prowl for the startups that can.

Update: Globe & Mail Finance Reporter Agrees

Long time finance reporter for the Globe & Mail agreed that fintech startups will be significantly cut out from truly disrupting the Canadian banks in the foreseeable future.

@Andrew_Paradi @globeinvestor @uber Not banking, but maybe borrowing for clientele that can't access a home-equity line of credit.

— Rob Carrick (@rcarrick) August 21, 2015

Slow Banks will be Slow

Almost every answer from the CDOs of TD, CIBC, BMO, and Scotiabank was laced with the underlying reality that innovation would not come from within their organizations. Bureaucratic corporate cultures, intense federal regulation, a buyers market in bank competition, and slow advances into Canada from external technologies make innovation a unique challenge for the Canadian banks.

The entire panel of CDOs knew the features that consumers wanted whether it was easier transfers to other people, contactless payments, or more powerful mobile apps. Yet they had few explanations for why these relatively simple fixes for an awful banking experience weren’t already in place. Square has solved easy transfers. Apple Pay and Android Pay standardize the most convenient payment technologies yet. And you only need to give Mint or Acorns a try to understand just how much the bank’s online and mobile experiences could improve.

Banks whether limited by regulation, Apple Pay’s rollout schedule, or “design by committee” internal bureaucracy, are desperate for startups to do the innovation that they can’t.

Banks Want to Become Amazon

Imagine a world where all transaction data on what, where, when, how, (and possibly even why) you buy was leveraged by the banks to target you for their services, new products, or even sold through an API to other companies. Currently this only happens on a limited scale by individual retailers who collect and leverage data in loyalty programs and to manage inventory (think PC Points or the recommendations you get on Amazon).

In this future envisioned by the banks, they would singularly hold all of your purchase information. What we’ve seen from loyalty programs so far would just be the tip of the iceberg for the types of personalization that would be possible with the banks’ information.

And you thought PC Points offering you 200pts to eat a dozen bananas was too personal.

The panel reiterated over and over how important the analysis of transaction information and banking data is to their strategy. The banks don’t just want to become commoditized transaction intermediaries like VISA or MasterCard. They want to become APIs for consumer purchasing information, so entrenched in the space that they can’t be disrupted.

Banks already collect and store these mountains of data, they just need ways to pull out insights while keeping a balance between personalization and privacy. The opportunity for fintech startups to solve this problem is huge.

Tremors of Disruption in Words Unsaid

When asked about their 5 year forecast for Canadian banks one CDO mused that “of course in 5 years we will still have brick & mortar branches.” Implicitly, he points to a potentially inevitable time when there are banks that don’t have branches.

Tangerine (formerly ING Direct) was the first glimmer of a future where opening accounts, transferring funds, and investing could all be done easily online without dealing with any bank staff. A bank that had a user experience as easy and pain-free as Uber would certainly attract my business.

However, unlike the transportation bylaws that Uber lobbies against, Canadian banking regulations would be significantly more difficult for an innovator to overcome. Federal regulation instead of local bylaws would render a divide and conquer city by city attack useless. Where Uber could simply skip Las Vegas and move onto another city when lawsuits made Uber illegal, the dodging whack-a-mole routine doesn’t work when lawsuits and judgements come down at a federal level. Simply ask Aereo.

Tangerine was only possible because established bank, ING, expanded into Canada in 1997 with enough resources to deal with the regulation. With expansive established business around the world, they could pay to get over the regulatory hurdles keeping them from Canadian customers. Most startups will never start with a war chest big enough to get past the regulation to truly disrupt the banking experience in Canada.

Three Options

Disruption in banking is limited, internal bank innovation nearly impossible, so the banks need fintech startups more than ever. Canadian fintech startups now need to live with the fact that the odds for building a sustainable company in Canadian banking are even longer than imagined. The way I see it, there are three options for Canadian fintech: build a nimble firm and accept limited market growth opportunity, make the irrational assumption of founding a startup solely for acquisition, or dare to do the impossible; disrupt the Canadian banks.