For Daniel Eberhard, the ambition to break up Canada’s cozy banking sector is about more than the success of his upstart fintech.

The founder and CEO of Toronto-based Koho wants his company to challenge the stuffiness that has prevailed in Canada’s economy for decades, and counter the lack of innovation that has fed the country’s worsening productivity woes. 

“We love our monopolies in Canada, and we wonder why we have productivity issues,” Eberhard told The Logic. “There’s like two airlines, there’s like three grocery stores, there’s three cell phone companies, [and] there’s six banks with 93 per cent market share.” 

Koho is trying to become the first fintech startup in Canada to obtain a licence to run a Schedule I bank. On Friday evening, the company announced it had reached the halfway point of a more than five-year process to secure such a permit through the Office of the Superintendent of Financial Institutions. 

Koho also announced the addition of Peter Aceto, the former CEO of Tangerine, Scotiabank’s digital subsidiary bank, to its leadership team. Aceto will lead Koho’s bank once it is fully established, the company said.  

For Koho, it is another step on a long road. Founded in 2014, the company—which boasts a valuation of $800 million, and has raised US$290 million to date from investors including Portage, Power Financial, Round13 and BDC—currently offers an array of products including credit-building services and a five per cent interest savings account.

There are currently 35 banks that fall under Schedule I of the Federal Bank Act,meaning they’re domestically owned, strictly regulated and take deposits from customers. According to a notice Friday in the Canada Gazette, a government publication, the proposed Koho Bank would “provide deposit and lending products and services (e.g. savings accounts, prepaid cards, and retail loans) to Canadian residents.”

Eberhard said building Koho into a licensed financial provider might go at least some way toward addressing Canada’s flagging productivity, which has been deepened by the private sector’s laggard adoption of innovative technology. Finance Minister Chrystia Freeland has described the problem as the “Achilles heel” of the economy. 

In the financial sector specifically, governments and other bodies have been slow to introduce new technologies and policies. A 2019 government consultation document said open banking, a more reciprocal and secure method of sharing financial information, could “promote a vibrant and more diverse ecosystem of financial-services providers in the financial sector, and offer useful and innovative services to consumers and small business.” However, efforts to modernize the nation’s payments system with a new platform known as the Real-Time Rail have run aground, while government pledges to introduce open banking have drifted beyond their promised timelines. 

The issue can be understood to some degree as a hangover from recent economic crises, Eberhard said, from which Canada’s Big Six banks emerged relatively unscathed compared to their U.S. counterparts thanks to regulations that limited their lending power. Those regulations helped avert major crises, but reinforced a culture of risk aversion and technological complacency that persists today.

“We have been way too focused on systemic stability and not focused enough on the downstream implications of [being] the least competitive banking market in the G20,” he said. 

As for Koho, Eberhard said completing the “intense” regulatory process would give the company an edge to aid its longer-term growth. Koho is partnered with prepaid credit card company Peoples Trust and like other online financial companies in Canada, relies on third-party companies to administer its transactions. Becoming a licensed banker would let Koho shed many of the limitations embedded in those third-party partnerships. 

“We will have a durable, structural advantage that will let us either pay the highest savings rates in the country or continue to innovate,” he said.  

For example, Eberhard said, more than 100,000 people have used the company’s credit-building product. But so far its lending capacity is miniscule: about 90 per cent of users have never owed Koho more than $5, he said. A banking licence, according to Eberhard, would accelerate Koho’s ability to scale up products, lend money at cheaper rates and underwrite clients it previously couldn’t, among other things. 

“Short term, it’s going to be painful. But long term I think it’s going to be useful.”

The effort is loosely comparable to what Wealthsimple achieved in 2022, when it locked down a Bank of Canada approval to open an account with the central bank and settle payments directly rather than through a third-party institution. The deal was a first for the Canadian fintech industry. (Power Financial, one of Koho’s biggest backers, is also invested in Wealthsimple and Toronto credit rating company Borrowell. Wealthsimple CEO Michael Katchen previously sat on Koho’s board.) 

“What Wealthsimple has done in investing, we are doing in banking,” Eberhard said. 

OSFI told The Logic it has awarded a Schedule I banking licence to just 10 companies since 2014. Among those are Saskatoon-based Concentra Bank—since bought by Equitable—and the Chinese-Canadian-focused Wealth One Bank of Canada. 

Questrade, an investing and wealth management fintech, applied for a Schedule 1 licence in late 2019. Questrade CEO Edward Kholodenko told The Globe and Mail last week that the company is still going through the OSFI approval process, but that he hopes Questrade could be granted its licence “in about 12 months.”

Koho’s journey hasn’t been without its struggles. In early 2023, Koho laid off 42 staff, or 14 per cent of its workforce, as part of a restructuring. It currently employs around 300 people. With capital investment drying up across the tech sector in recent years, Koho secured an $86-million extension in December on the $210-million Series D it had raised 18 months earlier. 

Asked about the extension, Eberhard mostly brushed it off: “We were one of the very few companies that were able to protect our valuation from 2021,” he said. 

The company’s regulatory application to OSFI, too, has come with its expected bumps. 

“I think OSFI is trying to figure us out and we’re trying to figure OSFI out,” he said. “Koho is a different type of company than they’re used to.” 

The regulator is in general “receptive and open-minded,” he said, and internally it has a “real and earnest recognition that this existing Canadian ecosystem, as a function of a lack of competition, does not serve large portions of this country.”

Securing a licence would give Koho a “real seat at the table,” Eberhard said, and help counter the “warped perspective” that bodies including the Canadian Bankers Association—which represents the Big Six banks and others—have projected onto the country’s financial landscape. 

If successful, he contends Koho could offer banking services at more competitive prices, which he sees as a vital service at a time when high inflation has pinched the pocketbooks of lower-income Canadians. 

“We are trying to build a generational business, and it takes decades to build a real challenger in this country. If we are always doing that on someone else’s infrastructure, we will always be at a disadvantage.” 

Correction: Michael Katchen is no longer on Koho’s board. The company has raised a total of US$290 million from investors to date. The story has been updated.