The Greater Toronto Area should be a major player in global financial technology, but is lagging centres such as New York and London because of slow-moving banks and regulators, according to a report from the University of Toronto's Munk School of Global Affairs.
The report, prepared with support from the Toronto Financial Services Alliance, argues that Canadian banks have failed to strike meaningful partnerships with financial technology startups, or fintechs.
As well, banks are often represented by low-level executives who lack the power to make strategic decisions, encouraging promising entrepreneurs to look elsewhere for opportunities.
"In New York and London, large numbers of fintech startups are working in close proximity to each other and are building effective relationships with financial institutions, but not in Toronto," the report said.
As a result, the Toronto area risks losing out on a tremendous opportunity for growth, while the financial sector could be diminished by outside threats.
The rebuke lands amid considerable uncertainty about the future of banks, as new players emerge offering cheaper and simpler financial products. A recent report from McKinsey & Co. said banks worldwide could lose up to 60 per cent of their retail profits to fintech firms within the next decade if they fail to react.
Canadian banks have been addressing the challenges, investing in their own innovation capabilities and partnering with innovation hubs such as Communitech and the MaRS Discovery District.
They are also keen to work with others. Canadian Imperial Bank of Commerce has partnered with fintech firms that offer overseas remissions and small-business loans, while Royal Bank of Canada, Bank of Nova Scotia and Bank of Montreal are piloting a digital receipts management tool developed by Sensibill Inc.
But Dan Breznitz, the co-director of the innovation policy lab at the Munk School of Global Affairs and one of the authors of the report, believes these responses are inadequate given Toronto's potential.
"We can easily be on par with London and New York," he said in an interview, pointing to Toronto's educated work force, strong infrastructure and concentration of financial services.
Instead, Toronto missed out on the rise of peer-to-peer lending, for example, which has become established in many other markets, particularly in the United States, where LendingClub Corp. is a public company valued at more than $5-billion (U.S.).
"We're 11 years late to the party," Mr. Breznitz said.
But he's optimistic, believing Toronto can start closing the gap with New York and London within two years if the right changes are made.
Industry regulators must stop imposing obstacles to financial innovation and instead test and approve worthy developments at a faster pace.
Canadian banks can do more, too. The report argues that they should collaborate more openly with fintech startups, rather than discouraging these newcomers to the point where they focus their efforts on U.S. financial firms. Mr. Breznitz also said that banks largely innovate within their own "silos." Instead, he believes they should be building a fintech ecosystem that links together various components into a more cohesive whole.
He uses mobile payments as an example, where each bank has taken its own approach to allowing consumers to make secure purchases with their smartphones.
"If the banks worked together to create a secure platform for mobile payment, and did it with the fintech industry, they will have a solution that is much better than what they can develop on their own," Mr. Breznitz said.
"And they will be the first to have nifty security applications that their international competitors will not have, and Toronto will be the place where every startup will come to experiment with their latest technology."