Mobile banking provider Koho Financial Inc. is one step closer to obtaining a banking licence in Canada, a process that has taken more than two years of discussions with regulators.
Koho confirmed Friday it has moved into phase two of securing a Schedule 1 banking licence, a lengthy and rigorous process that requires final approval from the Office of the Superintendent of Financial Institutions (OSFI) and the federal Minister of Finance.
“If we want to build the best products in the country, we need the best infrastructure in the country. This is a significant milestone in that journey,” Koho chief executive Daniel Eberhard said in an interview with The Globe and Mail.
There are three phases under Canada’s Bank Act to obtaining approval for a licence. As part of the regulatory process, OSFI assesses applications for incorporation and makes recommendations to the Minister of Finance, who has the ultimate responsibility for approving the incorporation of a federally regulated financial institution.
Mr. Eberhard told The Globe that if the next phase is approved in a timely manner, the company could be operating its banking division – which would be named KOHO Bank or Banque KOHO in French – within 18 months to two years. KOHO Bank will provide Canadian residents with more competitive deposit and lending products, he said, such as savings accounts, prepaid payment cards and retail loans.
“If you think about where our innovation is constrained today, we’ve innovated on a lot of the customer experience and we’ve innovated on different customer products but where we have done zero innovation is on infrastructure,” Mr. Eberhard said. “Hypothetically, if we had a bank licence today, we can pay a much higher rate on deposits than we are able to today – or we could lend money at a cheaper cost than we do.”
A banking licence would also open access to direct payments infrastructure, he added.
Koho is not the first fintech provider chasing a Schedule 1 banking licence.
In late 2019, Questrade Financial Group Inc. – best known for its online trading platform – filed an application with OSFI to operate a division under the name Quest Bank (Banque Quest in French).
Questrade chief executive Edward Kholodenko told The Globe that while the application was delayed during the height of the pandemic, the company is still in the approval process with OSFI and “could see an approval in about 12 months.”
Mr. Kholodenko did not comment on which phase of the approval process the company was in.
Vancouver-based Koho first launched a mobile app in 2016 that allows users to accumulate savings similar to a traditional high-interest savings account. Clients’ deposits are currently held by Peoples Trust Company. The account doesn’t charge any fees for transactions and users can spend funds with a prepaid Mastercard. In turn, the company makes its revenue from the transaction fees that credit-card companies earn from retailers.
In 2022, Koho shifted into lending products that allow users – free of charge – to receive an advance on a portion of their next paycheque several days before their payday.
Last year, the company raised two financing rounds totalling close to $300-million from prominent investors, including Portage Ventures, a wing of Power Corp. of Canada’s alternative-investing arm Sagard Holdings ULC.
Now, as the company focuses on the final stages of obtaining a banking licence, Mr. Eberhard has appointed Peter Aceto to his leadership team to assist in the application. He is the former CEO of Tangerine Bank and former head of CannTrust Holdings Inc.
Canada has 35 domestic Schedule 1 banks, according to data listed on OSFI’s website. The regulator does not publicly post the number of outstanding applications that are currently awaiting approval for a Canadian banking licence. However, an OSFI spokesperson said in an e-mail to The Globe that since Jan. 1, 2014, OSFI has received 12 applications for Schedule 1 banks, of which 10 were approved for licences.
Koho is among a growing group of financial-technology providers that are looking to disrupt the small number of players in the Canadian banking industry, which is largely dominated by the country’s six largest banks.
In 2018, online financial services provider Wealthsimple Inc., launched a savings account in partnership with Equitable Bank, which held client deposits. Since then, Wealthsimple has partnered with multiple Schedule 1 banks to hold client deposits in trust, and therefore is not required to have a banking licence.
With deposits held at existing banks, fintech providers such as Wealthsimple and Koho are still able to offer deposit insurance through the Canada Deposit Insurance Corporation. CDIC insurance provides coverage up to $100,000 in combined principal and interest per eligible account.
Wealthsimple spokesperson Juanita Leon said the company has no plans to apply for its own banking licence at this time. Unlike some of its competitors, she said the company’s existing partnerships with multiple banks have allowed it to increase the CDIC insurance protection up to $300,000 per account, as client deposits can be split between three institutions.
“Being a securities dealer and a Payments Canada member has allowed us to build the product without a banking licence,” Ms. Leon said.
Senator Colin Deacon, a member of the Senate’s banking committee, said the potential for more disruptive players to enter the banking space would be a huge benefit to groups that are not being serviced by traditional models – such as Canadians who have lower credit scores.
As well, he added, digital online banks can play an important part in the financial ecosystem to help assist the growing number of communities that are losing their brick-and-mortar banks and credit unions, such as those in small rural areas.
“Contestable markets are finally being prioritized in this country, which is extremely important if we want to see companies that drive more innovation become strong competitors – companies that can be more globally competitive in this digital era,” Mr. Deacon said in an interview.