Koho Financial Inc. has received access to Interac Corp.’s payments services as the online challenger moves toward joining Canada’s federally regulated banking system.
The Toronto-based financial technology company said Tuesday it has been approved to use Interac’s e-Transfer service, which gives Koho more control over the cost and speed of transfers and payments. Ottawa has focused on increasing competition in Canadian banking and Interac has been broadening access to its payments network to include fintechs, which is used by nearly every bank in Canada.
Koho chief executive officer Daniel Eberhard said he expects these types of developments to increase competition in banking and result in better products and services for consumers and businesses.
“It is real progress,” Mr. Eberhard said in an interview. “It’s not just about Koho winning, it’s about creating the conditions in a market where users benefit from market forces. And for a long time, fintechs have been fighting with one hand behind their back, insofar as the ability to directly access the payment infrastructure and directly access user data.”
Previously, Koho depended on intermediaries – including banks – to facilitate payments transactions. Interac access allows Koho to lower its costs and control its payments infrastructure, enhancing fraud detection and services for customers, Mr. Eberhard said.
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Before Interac started broadening access to its network in 2023, payments infrastructure was restricted largely to traditional banks. In previous years when Koho did not have direct access to payments rails, about 25 per cent of clients’ transfers would fail in the first attempt, according to Mr. Eberhard.
When relying on intermediaries, “you don’t get close enough to the data to really understand what’s happening in these products,” he said.
“We had to rely on third-party technical architecture, which didn’t let us do all the things we wanted to do to make sure that our users had reliable, affordable and transparent payment systems.”
Interac connects more than 300 financial institutions in Canada and its e-Transfer service processed 1.6 billion transactions last year.
Koho is one of the first non-banks to join the system. Wealthsimple Financial Corp. was the first to join in 2023. Last month, Neo Financial Technologies Inc. became the second fintech.
The move by Koho is the latest in its journey to becoming a federally regulated bank.
In 2021, Koho applied for a bank licence, initiating a three-phase regulatory process which typically takes several years. The fintech moved into the second phase in early 2024.
The company expects to receive approval on its application this year.
Canada’s banking regulator, the Office of the Superintendent of Financial Institutions, recently unveiled a pilot project aimed at taking years off the application process to become a bank, in an effort to bring more competitors into the market.
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Before OSFI unveiled its plans, Mr. Eberhard told The Globe in December last year the regulator was already showing signs of more flexibility and collaboration in the licensing process.
Through a pilot in June, OSFI is looking to reshape its approach to bank failures to allow for more innovation in the banking system.
Mr. Eberhard said OSFI has been largely incentivized to focus solely on stamping out systemic risks to financial stability, but now the finance department and regulator are recognizing the importance of competition for Canadian consumers and businesses.
“Part of what made it so hard in Canada for so long, not just in terms of operating but in terms of capital, was a borderline hostile regulatory environment towards competition,” Mr. Eberhard said.
“This is symbolically helpful, and then good founders and good companies will go raise capital predicated on the opportunities.”