Two Vancouver-based fintechs, Koho and Mogo Finance Technology, have launched mobile-enabled prepaid cards targeting Canadian millennial consumers looking to avoid the country’s notoriously high bank charges and expensive credit cards. Robin Arnfield assesses the market’s promise and headwinds
Koho’s prepaid Visa card is linked to a mobile personal financial management (PFM) app, and is issued by Vancouver-based Peoples Trust.
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Mogo’s prepaid Visa card is issued by Home Trust, a subsidiary of Canadian mortgage lender Home Capital, which in April 2017 saw an exodus of savers after the Ontario Securities Commission alleged it had misled investors in its handling of a scandal involving falsified mortgage applications.
On 1 May, Home Capital said Home Trust had drawn down C$1bn ($731m) from its C$2bn credit line provided by a facility led by the Healthcare of Ontario Pension Plan.
Cash-in
The two startups hope to cash in on young Canadians’ dislike of high bank fees and desire for mobile-friendly banking services. CBC cites Statistics Canada as saying Canadians paid “an average of C$216 annually in bank service fees in 2015”.
Whereas in the US, prepaid has been mostly stuck in the sub-prime lending market, in Canada the key driver for prepaid adoption is the concept of spending accounts to avoid excessively high banking fees and high-interest credit cards.
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By GlobalDataVancouver-based Koho has received C$2.6m in backing from Canada’s Power Financial Corp., and other investors including the founders of social media tech company Hootsuite, and e-commerce business Shopify. In April 2017, Koho launched its Smart Spending Account and linked prepaid card. The company says most transactions are free, with the exception of out-of-network ATM withdrawals.
Customers fund their Koho accounts through salary direct deposits and transfers from their bank accounts. Including transactions during its beta trial, Koho had handled C$2m worth of transactions on its prepaid cards up to April 2017.
“The average Koho user is about 30 and predominantly male, but we’re trying to change that,” says Koho CEO Daniel Eberhard.
“Their average income is about C$74,000. Our goal is to get 100,000 customers, and we’re only interested in social media platforms that can scale in terms of promotions. We’ve done 100-120 customer-acquisition experiments through major digital channels.”
“The way we view the Canadian prepaid card market is that prepaid is virtually identical in terms of core feature set to any other primary bank account Canadians use,” says Eberhard.
“What we did was map out the functionality people expect from a primary account – such as bill payments and money transfers – then layer this functionality around a prepaid card and offer a much richer feature set.”
Currently, Koho does not offer mobile payments or cheques. “There is a low ROI in giving people the ability to write cheques from their prepaid account, although we might offer that at some point,” explains Eberhard.
“We plan to offer NFC payments on smartphones in quarter three of 2017.”
On its Roadmap website, Koho lists support for Apple Pay and Android Pay in the near term, plus photo cheque deposits.
Customer experience
“Not being a deposit-taking bank and being a pure technology play, we’re able to build a rich, elegant customer experience tethered to a prepaid card,” says Eberhard. “From a customer usage perspective, prepaid cards make a lot of sense.”
Koho’s customers can set up Interac e-transfers from the account linked to their prepaid card and also perform Koho-to-Koho transfers. Interac e-transfers are P2P payments using Canadian debit scheme Interac’s infrastructure.
“Our Smart Spending Account is a PFM tool that lets customers set control categories for their spending,” says Eberhard.
“We look at a lot of the data sets traditional PFMs don’t examine because they just scrape your bank account.
“For example, we look at merchant categorisation codes and several other variables to give consumers real-time insight into their spending behaviour to provide the context for their financial life.
“We’re accurate 99% of the time in terms of budget categories, and let consumers break down their supermarket spending, for example, into sub-categories like groceries and lifestyle/health. It’s very easy to either permanently or temporarily change these categories.”
Eberhard says it takes three minutes to get a Koho account on a smartphone, and the account can be totally managed via mobile devices.
Koho is regulated by the Financial Transactions and Reports Analysis Centre of Canada (Fintrac), a Canadian government anti-money-laundering/anti-terrorist-financing agency.
“We do full KYC and terrorist watchlist-screening, and part of the intellectual property we’ve built is the decisioning on account applications,” explains Eberhard.
Roadmap
“We’re feature-equal to or better than traditional bank accounts,” says Eberhard. “Over the next 18 months, we’ll accelerate in terms of technology development and continue to do unique things with our account.
“Ultimately, what we want is to create value throughout the entire financial life of the client. At the moment, we own the spending of a lot of our users and a meaningful percentage of them use Koho as their primary account. We’re extending the customer relationship by adding account aggregation so that, with Koho, you’ll see what’s going on with all your accounts at any time.
“We’ll also be adding credit facilities such as an overdraft – but it won’t be unsecured lending at 21% APR.”
Koho plans to offer a loyalty programme and a referrals reward programme. “We think that using our app for P2P transfers will be important,” says Eberhard. “Some of the UK prepaid card issuers like Monzo and Loot that are further ahead of us and have similar models, see 80% of their customer acquisitions come through referrals.
“Koho’s management team takes a different approach, as we aren’t bankers,” Eberhard continues. “We’re technology entrepreneurs, and our team comes from Silicon Valley and from firms such as Alibaba and PayPal. I co-founded a wind farm technology company, so I’m basically an entrepreneur.
“The prepaid card model is doing very well in Europe. There has been a lot of noise in the US prepaid market, but there hasn’t really been a breakout, maybe because of the fragmentation in the US market. But I understand that the Green Dot/Walmart MoneyCard prepaid card is doing very well in the US.”
Koho’s target market is Canadian millennials, or people who want to run their financial life on their smartphone.
Asked why they would get a prepaid card account, Eberhard says: “Everyone in Canada can get bank accounts, and there’s a very small percentage of underbanked people here. People using Koho fall into three categories: A – they want the technology and the simplicity and intuitiveness of the experience. Also, they want to know how much they are spending via our PFM tool. B – they don’t want a primary account that is going to charge them fees. C – they want to have their account run by an institution that they trust and relate to and which isn’t going to sell them things they don’t need, or overly complicate things to make greater profits. There is a mistrust of banks among younger people.
“Our ethos is to build a great product and not profit from confusion or complexity. People know exactly what they are going to get, and that message resonates with them. Our revenue comes from card interchange and interest on deposits,” Eberhard explains.
“We think that our clients might link their Koho account to a savings account with [Canadian digital banks] Tangerine or EQ Bank.
“One of the things that causes a lot of pain for consumers is that they have difficulty in getting a holistic understanding of their financial life. So we’re laying some of the functionality of [Canadian digital account-scraper PFM tool] Mint into our PFM tool.”
Mogo
Mogo’s Platinum Prepaid Visa Card is linked to the digital Mogo Spending Account, which consumers can transfer funds to from most Canadian bank accounts. Each time they add money to their Spending Account, they are prompted to set a spending goal.
The Mogo app provides instant transaction alerts with each purchase along with updated real-time balances. There are no monthly charges for the account, and Mogo prepaid customers have access to Mogo’s other products including free monthly Equifax credit scores, mortgages and a range of different personal loans.
In April 2017, Mogo said it had surpassed 400,000 members, up 52,000 from the 348,000 members reported as at 31 December 2016.
Future promise – substantial headwinds
“I think Koho has future promise, while Mogo faces some substantial headwinds,” says IDC Canada associate Robert Smythe.
“Mogo could be affected by the problems facing Home Capital, parent of Mogo’s issuer Home Trust. With the problems Home Capital is facing, it may be more difficult for Mogo to get clients to place funds in a Visa account managed by Home Trust. The plus factor may be that most people won’t make the connection between the Mogo prepaid Visa card and Home Trust/Home Capital.
“The other positive for Mogo is that its main source of revenue isn’t collecting funds to be placed in prepaid Visa accounts,” Smythe continues. “Its primary business is instalment loans and personal line-of-credit accounts.
“Mogo is also a mortgage broker, and this line of business may be facing greater scrutiny from lenders which are becoming more cautious as a result of Home Capital’s problems. Mogo has been in operation for many years and is still facing operations losses. Its staff complement seems to be high, based on the business being generated,” notes Smythe.
“Koho is a recent startup, whose primary source of revenue is interchange fees and income from funds on deposits in its prepaid card accounts.
“It identifies its target clients as people tired of bank charges. In consumer surveys conducted by IDC Canada, we didn’t see bank fees to be a major concern. Desirable clients usually have balances large enough to eliminate fee charges.
Smythe adds: “Koho is trying to convince clients to have their salaries deposited into their prepaid account.
“It suggests anywhere from a third to 100% of income so deposits can then be used to fund on-going purchases. I doubt Koho will have much success in convincing people to deposit their hard-earned money with anyone but a stable bank. IDC Canada surveys also show that consumers are very satisfied with their banks and the services that they provide.
“Koho has some positives going for it, and has also been discovered by Power Financial as well as several other investors. It seems to have a reasonable staff complement and adequate initial funding. It also has an interesting array of services that enables payments while providing real-time information on how funds are spent.
“The major challenge Koho faces is the assumption that there are many bank clients wanting to switch to a solution that provides lower fees,” Smythe says. “I don’t think there are too many people in this category. It will also be difficult to provide core bank services based on prepaid debit cards.
“This may be why Koho’s projected growth targets are very low. These need to be increased substantially to make the company viable and to make it a potential acquisition target.
“On the positive side, Koho provides innovative payment reporting and management services that are currently only offered by TD as a result of its partnership with Moven.”
Smythe concludes: “Koho needs to target being the Canadian equivalent to Moven, which involves selling its software solutions to banks globally. This will involve abandoning trying to be a bank and focusing on being a fintech software vendor.”
