Financial Post | Barbara Schecter | January 28, 2016

EY's report says more than half of the “digitally active” Canadians who didn't use two or more fintech products in the last six months simply weren't aware the products existed. (Photo: Fred Thornhill/Toronto Sun)

TORONTO • Canadian adoption rates of financial services products developed by non-bank online firms, which operate under the umbrella of fintech, could triple in a year, according to a report Thursday from EY.

The consulting firm framed the results as a heads-up to banks, whose business is the primary target of disruptive fintech firms, but the expected increase is due, at least in part, to low awareness that has kept adoption rates low to this point.

“Only 8.2 per cent of digitally active consumers in Canada have used at least two FinTech products within the last six months,” said Gregory Smith, a partner in EY’s financial services advisory practice. “This puts Canada’s behind five other countries surveyed, including the U.S. and the U.K.”

Report: Report: Current State of the Financial Technology Ecosystem in the Toronto Region

He noted that the arrival in fintech is relatively recent in Canada, and said bankers in this country should not assume they will avoid the challenge from their newer rivals.

“As the trend continues to catch on, traditional financial services companies will have to be much more aggressive and creative to keep their customers,” Smith said. “A big piece of the customer pie will be at stake here.”

Last year, a report on the global banking industry from McKinsey and Co. said losses to fintech attackers have been “little more than a rounding error.” But the report went on to predict that 20 to 60 per cent of bank profits in five business lines will be at risk by 2025, with consumer finance — including mortgages and retail payments — the most vulnerable.

Related: Let’s cheer – not fear – the rise of ‘fintech’ alternative lenders

Even if just a small portion of these businesses is captured by the fintechs, the McKinsey report said banks stand to lose large amounts of money due to margin pressure from the prices offered by their sleek new competitors.

Market observers have warned that banks are also vulnerable to being separated from their customers and the valuable data they provide, making it more difficult to sell them a range of financial services.

So far, Canadian banks are responding to the fintech threat by developing their own technology hubs and taking tentative steps to team up with the same fintech firms challenging their traditional businesses.

Canadian Imperial Bank of Commerce, for example, entered a referral partnership with small business lender Thinking Capital late last year.

Sean O’Connor, vice-president of partnerships at Grow, an online fintech lender formerly known as Grouplend, thinks other banks will follow suit this year, along with credit unions courting a younger demographic.

“In some cases, this may mean cannibalizing areas of their core businesses in order to keep up in the technology arms race,” he said.

O’Connor acknowledged that Canadian fintech is more “evolutionary than revolutionary” at this stage, with no new player even approaching the level of disruption a company like Uber is causing in the transportation-for-hire business.

Related: Uber Banking: Fintech Aims to Revolutionize Financial Services in Canada

He said fintech players that want to succeed longer term, particularly in the Canadian market dominated by a handful of major banks, will have to offer more than just a slightly cheaper, faster, and more convenient financial product or service.

“In 2016, innovation on the margin will no longer cut it for these newcomers,’ O’Connor said. “To be competitive in the market with large and well-heeled banks, or attractive from a partnership perspective, truly game changing products will be need to delivered.”

Getting discovered will also be key.

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