Wealthsimple first FinTech startup approved by Bank of Canada for direct settlement

Wealthsimple has become the first non-bank or credit union to be approved by the Bank of Canada for a direct settlement account.

This means the FinTech startup will not need to rely on a third-party financial institution to process transactions when Real-Time Rail (RTR) launches in Canada, as it will have direct access.

“Approval is monumental for our business, but beyond that it will change the financial services landscape in Canada,” Wealthsimple CEO Michael Katchen wrote in a LinkedIn post published Tuesday morning. “This decision helps level the playing field with incumbents.”

Wealthsimple’s new approval for direct settlement could prove to be a big boon for its super app, as the company looks to offer all the services of a bank without being a bank.

“It means we’ll be able to continue to innovate and deliver on projects we’ve long envisioned will improve the everyday lives of the 2.5 million-plus Canadians we serve today. Things like instant payroll and instant billing.”

FinTech startups have long awaited the arrival of the RTR, calling it a necessary development for financial innovation and competition in the country. Last week, however, it was revealed that Payments Canada has delayed the launch of the upcoming RTR payment system, saying it needs more time to validate and test the system’s components and end-to-end integration.

Industry insiders BetaKit spoke to called the delay “disappointing” but also “not a surprise.”

In anticipation of the new system, Wealthsimple had applied for a settlement account with the Bank of Canada.

Katchen announced approval from the Bank of Canada, adding that Wealthsimple is “ready to do our part to bring the Real-Time-Rail payment system to Canadians as soon as possible.”

Wealthsimple’s approval follows a trend of the FinTech startup working with standards bodies as it builds its financial services suite to compete with the big banks: Wealthsimple was one of the first companies to receive an exemption for its crypto offering. Indicative of this effort to work with standards bodies, Wealthsimple’s Chief Compliance Officer was appointed to the Membership Advisory Council of Payments Canada, which is responsible for implementing the new RTRs as well as maintaining standards for Canada’s overall payments system.

“We have a strong track record of cooperation with regulators across our registered entities, robust compliance and risk management practices,” Katchen said in an email to BetaKit.

While the approval of direct settlement is a notable step forward for Wealthsimple, the question remains where other Canadian FinTech startups stand. Speaking about the RTR delay, Koho CEO Daniel Eberhard said “what’s happening in Canada is not normal.”

“The banks are acting in a way that is completely consistent with their incentives, which is to do nothing,” he added regarding the RTR delay. “Unless we are willing to hold our banks accountable via real dates with fines and penalties, nothing is going to change.”

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Katchen also spoke about the need for innovation and movement at RTR last month, writing in another LinkedIn post: “Looking at our peers in the UK, the central bank took the decision to allow non-bank payment companies direct access to the payment system, resulting in an explosion of fintech services. They saw a new generation of challenger banks rise offering better and cheaper products, such as transformative international money transfer services. It forced dominant players to make their service offerings more competitive, giving consumers access to more choices and lower fees.”

Wealthsimple’s new approval for direct settlement could prove to be a big boon for its super app, as the company looks to offer all the services of a bank without being a bank.

However, Wealthsimple’s payments compliance officer, Hanna Zaidi, who sits on Payment Canada’s Member Advisory Council, noted that the benefits Wealthsimple hopes to see from its direct settlement approval can only be realized once the RTR is live.

We appreciate @bankofcanada take meaningful steps to support competition and innovation. The challenge remains that the upcoming Real-Time Rails payment system has been delayed by another year, and these benefits can only be realized when they are live. 7/8

— Hanna Zaidi | zaidi.eth (@HannaFZaidi) 18 October 2022

Despite its progress, Wealthsimple has not been immune to the struggles many FinTech startups face across Canada and North America more generally. In June, Wealthsimple joined a growing league of companies that made layoffs amid the market downturn.

Speaking to Wealthsimple’s recent approval, Katchen told BetaKit that Wealthsimple is “committed to continuing to work closely with regulators to continue to push the industry forward.” He called the Bank of Canada approval, “a big step in the right direction,” but noted that “Canada still has a long way to go to create a truly competitive and innovative financial services industry.”

Asked whether Wealthsimple has or wants to pursue a banking license, which would mean it wouldn’t have to rely on any third-party financial institutions for its products, Katchen said: “Our goal is not to become a bank, it’s to become the primary , the trusted money relationship in our clients’ lives. Doing so will likely mean a new model for financial services that has never existed before.”