Canada’s Twist On The Digital Banking Model

Oh, Canada?  A good market to be in for FIs seeking to create digital only banks, if you get the rates right, the timing right and do the fine tuning on the fly.  EQ Bank’s CDO, Dan Dickinson tells Karen Webster that low operating costs mean high rates for savings, with clarity as a competitive advantage.  But before coming to market via bits and bytes, he cautioned, banks have some big (even existential) questions to ponder.  

Banking has been around for centuries. Bits and bytes? They have been around for a few decades. Marry the two, successfully, and the results can be significant for financial institution (FIs). Exhibit A: EQ Bank, at the beginning of 2016, took its place as Canada’s first digital-born bank, and has now reached $2 billion in deposits.

The concept is a bit different than might be seen with other digital banking models. In this case, EQ is starting with deposits that are used in transactions. Through its Savings Plus account, the company offers high savings on interest rates that are used across a variety of purposes, including bill payments, where a checking account (which, of course, earns no interest) would have once been earmarked for that purpose.

The move from a standing start to $2 billion in deposited funds is a fast ramp, to be sure, one that has eclipsed similar journeys to critical (deposit) mass seen across other branchless banking options, such as banking by telephone and banking at the grocery kiosk.

In an interview with PYMNTS’ Karen Webster, Dan Dickinson, chief digital officer at EQ Bank, stated that deposits grew by 52 percent year over year in 2017, and the digital bank stands poised to see another year of strong results in 2018. Such a meteoric pace indicates a key question for banks considering the digital route. As Dickinson put it, the banking model itself has remained pretty much unchanged across the decades, saying that “we bring deposits in and we lend money out.”

Technology, however, with its cost savings and its ability to help banks customize product offerings, can put new wrinkles in an old tapestry within Canada’s financial services market, which has been dominated by six banks.

EQ Bank, Dickinson told Webster, has seen its Savings Plus account embraced by users so as to streamline their money management efforts. Rather than juggle accounts to get the best rates, or create “buckets” of accounts for different purposes (where, say, one “bucket” is for a vacation savings, another for educational expenses and so on), consumers “earn interest on every dollar at rest,” he said, even as clients conduct everyday transactions, such as P2P transfers.

Call it active money management done simply through a single platform.

Making Key Decisions

The move toward digital banking came as EQ sought to broaden its base beyond its traditional B2B focus, said Dickinson, where $25 billion in deposits had already been taken in by the time the company started to tackle the consumer market. EQ is hardly alone as big banks shift toward branchless considerations, innovations, rebranding or new account offerings that seek to change everyday banking habits. (Webster noted that JPMorgan has a similar effort in place.) On a grand scale, Dickinson said, some fundamental considerations come into play.

“It’s tough to know how to go,” he stated. “Do you try to take what you have  all the systems that you already have  and retrofit them for a digital crowd … or do you build something off to the side, with a different team and a different culture, and different projects with separate funding?”

The EQ approach has embraced the latter strategy, he said.

When queried by Webster over how the firm is able to pay hundreds of basis points over traditional interest rates paid on savings from competitors, Dickinson noted that streamlined operations play a role, where EQ has not had to rely on overdraft fees or complicated back-end technology.

“We do not have a branch infrastructure to support,” he said. “My entire company is in one building, for all intents and purposes, and my tech spend is a rounding error for a big bank. We can pass on that lack of complexity in terms of rate premiums, and no fees, to our customers. That’s a source of not just why we grew, but why we grew so quickly.”

In The Digital Age, Building Trust

To gain exposure and trust in the digital age (and, of course, lure customers), it may pay to be a bit, well, old school.

Dickinson noted that, upon the launch of EQ Bank, the questions had skewed toward a most basic level: “Who are you?” Would-be individual consumers wanted to know about whether the digital upstart had (and has) deposit insurance — given the status as a Schedule 1 Bank, the answer is yes. And in an effort to gain exposure, the company has relied upon TV advertising and ads in subway stations.

“This may seem odd for a digital bank, but we found there are certain mediums that really provide legitimacy when you are a new bank starting out. There’s a sense of ‘well, if you can get an ad out on TV, then you must be legit,’” said Dickinson.

Another bit of throwback comes amid efforts to staff positions within EQ that handle inbound phone calls. Lest one think that digital means “millennial,” Dickinson stated that EQ’s offerings for its client base cuts across demographics, where older users 55 and above (the ones with the money) find it easier to have an ear-to-ear conversation.

Growth At A Price?

Scaling rapidly has its costs, however. As Dickinson stated, the firm was “blown away by the consumer demand.” The aforementioned double-digit growth rates came amid a startup culture — design a new product, launch a new product. However, as Dickinson stated, one path not initially taken was to have a waiting list — an offering that was eventually put into place.

EQ, said Dickinson, had come to market modeling its launch (and perceived demand) based on other bank launches seen in Canada that were, admittedly, a few years old. With the unanticipated uptake, the digital bank’s staff had to spend the first couple of months sleeping under their desks amid a revamp and the creation of a waiting list, which swelled to more than 10,000 people, and some balked.

“It was a good problem to have,” he said of the initial demand, “but we didn’t feel at all good about how that went.”

Dickinson noted that the firm is also looking to close a geographic gap of sorts by eyeing an entrance into the Quebec market  which is itself a challenge with the need to operate in French  and, thus, serving a market through dint of a second language.

In addition, consumer-facing offerings, especially digital ones, should be elegant, intuitive and secure, Dickinson said, aided by machine learning and artificial intelligence (AI).

“We don’t ever say those things to the customer, but they should always feel them,” said Dickinson — the feedback for the bank itself is instantaneous, and is also gleaned from focus groups and social media interactions.

The share shift from competitors has been significant for the company, as EQ Bank has seen “funds come in from just about every other institution in Canada, so our message is getting out there … The fact that we have one rate for everybody, no matter how much you bank,” Dickinson summed up, “that clarity is something that we are trying to compete on as well.”