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Todd Roberts, Senior VP, Payments Strategy and Innovations, Payment Retail Markets for CIBC, demonstrates the use of CIBC's mobile payment app to pay for transactions at a Tim Horton's coffee shop on Feb. 14 2014. Using near field communications (nfc), the device accesses the same 'tap' pads that is placed at many points of purchases in various stores. (Fred Lum/The Globe and Mail)Fred Lum/The Globe and Mail

Silicon Valley prides itself on being an oasis free of suits, but that hasn't stopped Dave McKay from showing up.

To bridge the gap between Bay Street and the close-knit U.S. tech community, Mr. McKay, Royal Bank of Canada's president and incoming chief executive officer, makes it a priority to trek out to the innovation hub, stopping at places such as Facebook Inc.'s campus in Menlo Park, Calif.

The excursions are more than just meet-and-greets. The way Canadians conduct their retail banking is rapidly evolving, and the change is largely driven by the disruptive forces emanating from Silicon Valley. To keep pace with the technological revolution, Mr. McKay wants to know what the innovators are working on, and looks to forge new relationships.

He isn't alone. Rival Canadian banks are all trying to get ahead of the curve. Today, they offer mobile apps that let clients deposit cheques by snapping pictures with their smartphones as well as tools that let customers transfer money through Facebook's private messaging system.

"The pace of change in retail banking is far higher now than I think it's ever been in my entire career," said Todd Roberts, senior vice-president of payments and innovation at Canadian Imperial Bank of Commerce.

There are deep-rooted reasons for this. Privately, the banks admit to two big fears.

The first is being usurped by the tech giants. The likes of Google, Apple, and Amazon are all developing ways to let customers pay for goods and services, and the banks are fearful of losing out again. During the last tech boom, financial institutions ignored eBay's rise, allowing PayPal to elbow its way into the market.

"What we need to get better at is designing interfaces that are easy for our clients to use," Mr. Roberts said, adding that he appreciates this because he's seen firsthand how such simplicity can win over consumers – his 16-year-old daughter loves Apple devices.

The second concern: a disruption to revenues. So far, the banks have mastered making their clients pay hefty fees for everything from ATM withdrawals to monthly chequing accounts. But the telcos' experiences have made them worry. Long distance fees were once a staple for phone companies; now you can Skype or Google Chat for free. Texting fees once boosted mobile profits but WhatsApp and BBM have sucked them dry.

Although the banks know they are in for a major fight, they don't fear a sudden sea change. "I am not worried about it happening overnight," Mr. McKay said. "There are no shocks here. These are regulated industries, they require very sophisticated networks to transfer money."

Mr. Roberts agrees. "I've heard the 'Apple is going to eat-your-lunch story' for the past four or five years," he said, wearily.

The banks also have a leg up on the competition. "The extent to which we are able to outcompete the likes of Apple and Google really depends on our ability to hold on to what we are best-in-class for," Mr. Roberts said. These qualities include offering top-notch security, unshakeable reliability and a suite of products that comply with the wide gamut of regulatory guidelines.

Still, fending off newcomers is going to require boatloads of money. In 2013, the banks spent an estimated $13-billion on everything from product development to computing services to communications, according to International Data Corp. Canada.

The cost is so high because the banks also have to spend extensively on infrastructure, such as computer systems that help them cross-sell products in their retail branches. These seemingly mundane, back-office plumbing initiatives can suck up a lot of resources.

To help share the cost burden for innovation, the banks have opted to work with new partners – including former rivals such as the telcos, as well as credit card companies, handset providers, marketing agencies and social media giants.

"At the end of the day, we're a small country," Mr. McKay said. "If you start splitting up the market, it can get very expensive."

As strange as these new bedfellows may be, relying on the banks' dominant market share to fend off rivals is a far less attractive option. "If we are apathetic about it, and we don't stay relevant to our customers … it will happen over time," he said.

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Royal Bank of Canada
+0.3%132.3

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