We have our first look at how the banks will respond to what could turn out to be the biggest challenge they've ever faced to their financial dominance.
Financial technology, known as fintech, is enabling startup companies to challenge the banks in areas such as investment advice, borrowing, mortgages and basic chequing accounts. By one estimate, banks could lose up to 60 per cent of their retail profits to fintech companies in the next 10 years. Curious to see how the banks will defend their lucrative franchise?
The new CIBC Smart Account from Canadian Imperial Bank of Commerce offers a hint. It's not a tech-based product, although it does integrate a cheque-killing technology called Interac e-Transfer better than most other banks. What makes Smart Account noteworthy, beyond heavy marketing, is that it's a window into bank strategizing at a time when the fintech threat is intensifying.
Chequing accounts at a bank are typically available in three or four flavours – you have to pick the one that is closest to your needs, and often it's not an ideal fit in terms of features and fees. CIBC Smart Account works on a pay-for-what-you-use basis, which means it's flexible and personalized. The account adjusts to you, not vice versa. That is the sort of nimbleness that makes fintech such a threat.
The base cost of the Smart Account is $4.95, which gives you up to a total of 12 withdrawals, transfers, bill payments, debit purchases and such. You pay $1.25 for each transaction above that amount to a limit of $14.95 a month. At that price point, you've got unlimited transactions.
CIBC also offers the Everyday Chequing account, which costs $3.90 a month and includes up to 12 transactions, with a charge of $1.25 an additional transaction, with no limit. The PremierService Account, a $28.95-a-month niche product, is designed for people who equate big fees with big service.
Most banks are similar in having a minimalist account for basic needs at one end of the spectrum and a Mercedes account for high-net-worth clients. It's the in-between where the chances are highest that you'll end up paying monthly fees for services you don't need on a regular or periodic basis.
If you're travelling and not doing much banking, your fees with Smart Account might fall to the minimum $4.95 for a month. In a month of modest expenses, you might pay a few bucks more. In a heavy spending month, you have the certainty of knowing you're capped at $14.95.
The fintech reply to this approach is that chequing accounts should have no fees at all. Some online banks and credit unions already do this, but big banks tend to waive fees only if you maintain a minimum balance. For the Smart Account, you need to maintain a $3,000 balance and have a recurring direct deposit or two preauthorized payments a month.
Big banks are actually pulling back from no-strings free banking. The seniors fee waiver is pretty much dead, while some student accounts provide only a limited number of transactions for free.
Anyway, with their expensive-to-run branch networks, banks can't compete with fintech by cutting fees to zero.
What the banks can do is provide flexibility in their fees to give clients the feeling that they're being treated like individuals. Add the option for clients to have a personal relationship with someone in a branch and you've got a workable alternative to fintech for baby boomers and maybe Gen X.
The question is whether Smart Account will work with younger people. Unless it's coupled with a slick interface for smartphones, probably not.
But let's not dismiss Smart Account's utility for the young and tech savvy. Unlike most other bank accounts, it treats Interac e-transfers as regular transactions, and not as a fringe thing. Elsewhere, it's not usual to have to pay a fee for an e-transfer in addition to your regularly monthly charge, or to get a few e-transfers thrown in and then pay a fee every time you use the service.
The e-transfer is fintech at its best – you e-mail money to someone instantly instead of writing a cheque and waiting for it to be cashed and then clear your account. If you want to gauge a bank's understanding of fintech, look to see how it handles e-transfers.
Here are some examples of how financial technology is encroaching on the big banks' turf
- Investment Advice: There are now roughly 10 online advisory firms, also called robo-advisers, that will manage your investments for you at a much lower cost than you pay if you own bank mutual funds or use an in-branch financial adviser.
- Banking: Koho will be offering a banking package that is aimed particularly at millennials, with its savings and budgeting apps and the promise of no fees if you use the account subject to certain conditions.
- Borrowing: Online lenders like Borrowell and Mogo offer a middle ground between insanely high credit card interest rates and the low rates available through lines of credit.
- Mortgages: With IntelliMortgage, you can arrange your own mortgage online and have access to the best available rates for the features you want.
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