John Armstrong is national industry leader, financial services, KPMG in Canada.
Every day, another article in the North American business press cites the threat that banks and other financial institutions (FIs) face from fintech firms, which will disintermediate them from their customers, provide better products and services for a fraction of the cost and steal away market share and significant revenues from those hapless "old economy" firms.
While the David-versus-Goliath narrative makes for a good story, it is not supported by the emerging trends in the Canadian fintech sector and the rest of the world. The strength of banks and insurers in Canada, and their history of innovation, are what make Canada, and especially Ontario, an ideal environment to foster the growth of the industry and make this country a beacon to the financial-services industry.
Firstly, investors are increasingly looking beyond the hype to understand if firms have a differentiated business model and the ability to deliver. In 2016, some missteps in the industry were a wake-up call for investors. Powa, a British-based payments firm, filed for protection after it burned through $250-million of investors' money and its putative valuation fell from $2.5-billion to zero.
The funding trend is now moving toward "enablers" versus "disruptors." Disruptors are firms with a business model based on disintermediating financial institutions or competing with them, a group that includes Lending Club, robo-advisers Betterment in the United States and Wealthsimple in Canada. The enablers are fintechs focused on partnering with current financial institutions to deliver an improved client experience or provide banks with more efficient technology, streamlined processes and better security. More than 42 per cent of new money is going to enablers.
Banks and other FIs have large incumbency advantages, and fintech firms recognize that convincing the large base of satisfied bank customers to switch is difficult for a monoline fintech. Banks have an unparalleled ability to cross-sell existing customers using sophisticated analytics that target key buyer values.
Finally, Canadian banks are not standing still in mobile and digital. In Canada, major banks undertake large investments to make their organizations agile and faster to market. Internally, most banks have changed how they build technology, using new approaches and new platforms. Canadian banks are also aggressively partnering with fintech firms and Ontario incubators.
While we have made great progress and have strong fintech players in Canada, there is the potential to make fintech even more important in the financial-services cluster. To do this, there are several actions to take:
- Increase domestic venture funding. Current venture funding falls short of the United States and Britain on a per-capita basis. There has been discussion about starting an equity bank, similar to the successful Business Growth Fund in Britain, which would support venture and other small-to-medium-sized firms. Other approaches to increase funding include a more favourable tax treatment for these investments.
- Foster more collaboration between universities, FIs and fintech firms. There have been successful collaborations so far, such as BNS’s $1.75-million investment in the Scotiabank Disruptive Technologies Venture at the Rotman School of Management and financial services courses in risk and finance at several universities, including York University, the University of Toronto and the University of Waterloo. However, more can be done to further collaboration in a systematic and co-operative way.
- Promote a safe but enabling regulatory environment to foster innovation in the financial sector. Britain has led the way with the development of a regulatory sandbox for startups to test concepts, undermanaged conditions and no regulatory risks. The Ontario Securities Commission has announced that it is following suit, teaming with Australia to develop ideas and support each other’s fintech cluster. This marks the first step to ensuring a fostering environment in Canada.
- Governments have a key role at the federal and provincial levels. Increasing the “ease of doing business” in a jurisdiction can have a profound impact on where firms decide to locate. In addition, current tax policy puts firms at a disadvantage as they grow out of the small-business tax category. Finally, simply promoting the strengths of the financial services cluster can have a huge impact. We need to tell our story more aggressively around the world.
As the Canadian economy changes from resource-based to more services-oriented, the financial services cluster is critical. We must continue to foster innovation in the industry, and a robust fintech ecosystem is a key component. Canada is well positioned to play a global leadership role in the fintech sector – if we act decisively.