From supermarkets and department stores to insurance companies, utility providers, auto leasing companies and automobile associations, large companies are tapping into their installed base in order to offer more services to their clients.
In Canada and around the world, the financial services industry is witnessing the emergence of a number of non-traditional players. According to a Datamonitor article (2006) the landscape in each country is different, but the overall trend is one of the sector opening up with more competitive activity. Existing financial service providers will need to "make room for the new kids on the block."

What is motivating these companies to enter this market? According to spokespersons from many of Canada's de novo banks, the primary reason for entering this market is that financial services are profitable. But there are more benefits: companies currently using 3rd parties to process transactions (like credit cards) can reduce processing costs; companies with a large installed base find it is easier to mine their existing client base with profitable services than it is to acquire new clients. Finally, the existing service providers, especially the Big Banks, are seen as vulnerable to competing offers that provide better customer service or can operate more efficiently.

David Moulton, a spokesperson for TELUS adds another motivation-ongoing consumer frustration. "Lets face it, the big banks are not exactly known for delivering great services or for their efficiency," Moulton says. "We are all aware of the huge profits the big banks are making. Yet, we see increasing service charges. For example, there is the ongoing issue of ATM charges frustrating consumers. This does not appear to be going away and the inability of the big banks to justify these types of service charges leaves them open to customers migrating to 'fairer' offers provided by the new entrants (See Presidents Choice Interview Page 7)."

Moulton believes that there are many different ways a company can break into the financial service space. "In looking at some of the new entrants it is clear that most already have an existing footprint in financial services," he points out. "Many have large numbers of credit card users, but others, like Bank West are in insurance or offer car loans. Extension into other facets of the industry makes sense because it allows them to offer services their customers are demanding with only incremental cost increases."

Key common success factors for these 'de novo' companies:
1. The new entrants have existing inexpensive distribution channels
2. The new players have a trustworthy brand that can be leveraged with their existing customers
3. The development of banking technology allows the new ventures to enter the market relatively inexpensively and, at the same time, use the technology to provide innovative products to the market
4. Each of the new organizations have strong experience with retail customers

Moulton cites insurance companies as a good example of leveraging extensive networks by offering 3rd party GICs. Other companies like President's Choice have gotten into the game by white labeling 3rd party infrastructure (President's Choice uses CIBC). President's Choice even use CIBC's extensive teller network to allow their clients to make deposits. Some new arrivals have even started wholly owned subsidiary banks. Moulton points to the fact that there are three pilots going on right now in Alberta to test business models.

While there is unprecedented de novo activity in Canada since regulatory changes in 2001, the creation of de novo banks lags far behind the US. According to research from US-based SNL Financial, 542 de novo banks were established there between 2000 and 2004. Moulton attributes Canada's hesitation to past regulatory structures. "In the past this may relate to the fact that the Canadian market was highly controlled by a small number of large banks and regulations worked against the smaller players," he says. "There has also been amazing technological changes. Today's technology means that small players can deliver financial services more efficiently than old legacy systems used by the big banks; and software is like a service, you can share, rent or own it depending on your organizations size and requirements."

Moulton isn't saying that there has been no activity from competitors wishing to offer financial services, "It is more that in the past they have not chosen to open up banks," he points out. "In fact, just looking at the national retailers, it is clear that most of the bigger ones have developed their own credit card operations. Usually these divisions have been the most profitable operations within the company."
Two good examples are Eaton's and Sears. In fact, Sears just recently sold their card subsidiary to J.P. Morgan Bank (in 2006). In another retail arena, the automobile companies set up credit operations in Canada similar to what was developed in the USA and Canadian gas retailers established credit card programs that matched the ones created south of the border.

"The potential in the Canadian market is significant," Moulton says. "The fact that companies like Bank West are already seeing pre-tax profits after only a short time in operation demonstrates that there is room for competitive activity. It is a fact that the margins earned by established financial institutions have been excellent over the past several years, particularly if you look at their retail operations alone."

Some of the recent de novo banks include:

Schedule A banks which means they are domestically owned institutions