In an industry first, the Bank of Canada will let Wealthsimple open an account with it, giving the Toronto-based fintech firm the ability to settle payments directly rather than needing a third-party financial institution to act as an intermediary. According to Wealthsimple, the decision is an important precursor to increased competition and innovation in Canada’s financial services industry. Here’s why.

The background: Canadian fintech firms are eagerly awaiting the launch of a system called the Real-Time Rail, which would update the technology the country uses for payments and let financial transactions be settled almost instantly. Payments Canada, the non-profit organization that oversees the development of Real-Time Rail, has repeatedly delayed its launch. In March, people working closely with Payments Canada told The Logic that incumbent financial institutions—which make up most of the organization’s membership and are responsible for funding it—were dragging their feet on the project, which would increase competition.

Meanwhile, Wealthsimple applied to the central bank for a direct settlement account, which will be necessary to make use of many of the Real-Time Rail’s features once it goes live. 

It’s another step on Wealthsimple’s journey from a small online portfolio manager to a company that, in Katchen’s words, aims to “be the primary money relationship in our clients’ lives,” offering products ranging from crypto trading to tax filing. Wealthsimple, which counts major financial services player Power Corp. as a significant shareholder, raised $750 million at a valuation of $5 billion in May 2021. One year later, Power wrote down the value of its investments in the firm by 19 per cent; in June, Wealthsimple laid off 13 per cent of its staff amid a broad downturn in the tech and crypto sectors.

The central bank formally approved Wealthsimple’s direct settlement account application on Thursday, Oct. 13.

Why it’s a big deal: “This decision has the potential to shape the future of financial services in Canada,” Wealthsimple chief executive Michael Katchen said in an email to The Logic. He said it will help Wealthsimple and other challengers compete with the incumbent banks, which previously had a monopoly on access to direct settlement. “Young Canadians are facing a higher cost of living and greater financial burdens than ever before. They deserve access to innovative and affordable financial products,” Katchen said.

What’s direct settlement and why does Wealthsimple want it? Think about your paycheque, which probably goes into your bank account via direct deposit. Behind the scenes, the account your bank holds with the Bank of Canada gets credited in the amount of your paycheque, while the account your employer’s bank holds with the Bank of Canada gets debited. The two banks trade a risk-free asset—central bank money—which allows them to avoid any concerns about receiving the correct amount.

Access to those risk-free transfers, as well as the rich data that will be available once the Real-Time Rail goes live, will help Wealthsimple reduce the risk of fraud. Additionally, without access to a direct settlement account, fintech firms would have to use a bank as an intermediary to process transactions. That would mean higher fees and slower service for the end user. “A direct settlement account puts us on equal ground with the big banks,” Katchen said.

What’s next: Wealthsimple will continue to build and test products such as direct deposit, pre-authorized debit and bill payment, which will be aided by their new access to direct settlement and don’t necessarily need the Real-Time Rail. The fintech firm is also studying more innovative uses of the Real-Time Rail and direct settlement, such as instant wage disbursement, instant bill payment and real-time cross border payments. Katchen said he hopes other financial firms throw their support behind the Real-Time Rail so Canadians can gain access to products like these soon.

Correction: Wealthsimple expects the Real-Time Rail to reduce the risk of fraud, not increase it. The story has been updated.