Canadian fintech KOHO has raised C$130 million in new funding, boosting the company’s valuation to C$1.33 billion and earning the firm unicorn status. The Series E investment provides KOHO with the initial capital base it requires to secure a federal banking license, and boosts KOHO’s total capital raised to $507 million.
The round featured participation from both new and existing investors. Among the former were Mubadala, the Abu Dhabi-based sovereign investor, and Savano Capital, an investment firm based in Baltimore, Maryland. Also contributing to the round were new investors Tobi Lütke, founder and CEO of Shopify, and Michael Linford, COO of Affirm. Existing investors involved in the funding were Portage Ventures, Drive Capital, BDC Capital, HOOPP, and Eldridge.
“We’ve spent years earning the trust of Canadians who deserve better from their financial institutions, and this investor group reflects a shared belief that we’re just getting started,” KOHO CEO Daniel Eberhard said. “We’ve focused on building the infrastructure, the regulatory relationships, and the trust with Canadians to do this right. The investor group we’ve assembled reflects a shared knowledge that the next great Canadian bank needs to be built differently, and that KOHO is the team to build it.”
This last point is what makes the KOHO news especially interesting. Unlike the US, Canada’s banking system is highly concentrated, arguably one of the most concentrated in the world. The so-called “Big Five” banks—Royal Bank of Canada, TD Bank, Bank of Nova Scotia, Bank of Montreal, and CIBC—hold more than 80% of Canadian banking assets and 84% of deposits, serving the overwhelming majority of Canadian households and businesses. When the country’s National Bank of Canada is added to the Big Five, creating the “Big Six,” the dominance of the country’s traditional banking firms is only more stark.
Founded in 2014 in Vancouver, British Columbia, and operating out of Toronto, Ontario, KOHO could be a very interesting player in the Canadian banking market should the firm obtain a federal banking license. The company currently serves more than one million Canadians with banking services including no-fee accounts, a prepaid Mastercard, credit-building tools, and services like overdraft protection and roundups. Having processed $20 billion in transactions since inception, and now an official Payments Service Provider member of Payments Canada, KOHO also benefits from having a digital-first advantage over its rivals in the Big Five (or Six). In recent weeks, the company has added features such as phone support and its first in-app contest, Double Your Pay, to boost its Direct Deposit offering. KOHO added cryptocurrency trading to its app in May, courtesy of a partnership with Canadian crypto trading platform Ndax.
Would Canadian banking customers be willing to switch to KOHO? A study released by JD Power last fall indicated that there was a widening “satisfaction gap” in which customer satisfaction with the country’s Big Five banks declined 7 points (on a 1,000-point scale) to 604. Compare this to the customer satisfaction score for the country’s mid-sized banks, which increased by 5 points to 649. The report noted that the difference in satisfaction reflects a growing preference for “high-impact banking experiences related to ease of use and personalization.” Younger customers, unsurprisingly, as well as higher-income households, digital-first consumers, and even recent immigrants have been among those most commonly indicating an interest in fintech alternatives that are associated with these preferences.
This is an area where KOHO could have an advantage. At the same time, issues such as trust and customer inertia are likely to stem any large-scale shift away from Canada’s big banks. Also, KOHO is unlikely to challenge these larger financial institutions in many of their key services such as mortgages, business banking, and wealth management and investment services—at least in the near term. As such, it might be more appropriate to see KOHO’s pursuit of a banking license as part of the company’s strategy to grow via new capacities, such as holding deposits directly, as well as offer a broader range of products, enhance unit economics, and innovate on the customer experience, rather than a direct threat to the country’s incumbents.
“One of my favorite things about KOHO is that the only way we win is if millions of Canadians choose us,” Eberhard wrote on the company’s LinkedIn page. “We cannot out-spend or out-market. We have to out-build. The progress we have made reflects the progress our users have made. So while we feel very proud of what’s behind us, we’re much more humbled by what’s in front of us.”
Photo by Praveen Kumar Nandagiri on Unsplash