Canada has an opportunity for international fintech leadership if it ensures its financial regulations do not stifle innovation and competition in the sector. A flourishing fintech industry will act as a driver of economic growth and job creation. Robin Arnfield reports
Canada has seen low consumer adoption of alternatives to incumbent financial institutions.
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According to a 2016 Ernst & Young fintech adoption survey, 8% of digitally-active Canadian consumers had used at least two fintech products – transfers, payments, savings or investments – in the previous six months compared to 15.5% globally.
“Canadian consumers are too satisfied with their banks and trust them too much to switch to an upstart because of lower fees and even superior features,” says Robert Smythe, an associate with IDC Canada.
Investments
Canadian fintechs have attracted substantial investments. The March 2017 edition of US consultancy First Annapolis’s Navigator newsletter says that over C$1bn ($727m) in venture capital was invested in Canadian fintechs between 2010 and August 2015.
“In parallel, major financial institutions in Canada aren’t standing by idly,” wrote First Annapolis consultant Peter Lischick. “While some still compete directly with fintech startups, others are embracing innovation either by partnering with startups or by developing their own proprietary solutions.”
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By GlobalDataCanadian alternative financial services providers include mobile-enabled prepaid card issuers Koho and Mogo; blockchain tech firm BTL; robo-advisory firms Nest Wealth, which has partnered with National Bank of Canada, Responsive.AI, and Wealthsimple; and alternative lender Borrowell, which has partnered with CIBC.
Workshop
Canadian financial regulators and industry stakeholders collectively agreed at a February 2017 Competition Bureau workshop that they must collaborate on the right policies and regulations for innovation to flourish in Canada’s fintech sector.
The Competition Bureau, an independent agency which enforces Canada’s Competition Act, held the workshop to provide input into its current fintech market study.
Scheduled to be published in late 2017, the study will examine the competitive impact that fintech has on the Canadian financial sector, the possible barriers to entry faced by startups, and whether regulatory reform is needed to promote greater competition while maintaining consumer confidence in the sector. It will focus on three areas:
- Lending: peer-to-peer and small/medium business lending, including crowdfunding,
- Payments/payment systems: using technology such as e-wallets/mobile wallets to pay for goods and services, and the systems enabling payments between institutions (clearing and settlement), and
- Financial advice: robo advisors and online investment dealing, for example.
Department of Finance
Separately to the Competition Bureau’s initiative, Canada’s Department of Finance is conducting a two-stage consultation for its federal financial sector regulation review, asking stakeholders questions about fintech, innovation, and competition. The review is intended to ensure a financial sector legislative and regulatory framework that supports financial stability, efficiency and utility.
“The department is in the process of absorbing submissions from a wide range of stakeholders from the first consultation and plans to post submissions in the future,” a spokesperson says. “Stakeholders will have the opportunity to comment on specific proposals for reform in a second consultation paper planned for 2017.”
The Department of Finance’s 2017 Budget includes a commitment to supporting fintech and to working with provincial regulators to better coordinate and share information on financial innovation.
“To promote a well-functioning payments system that fosters innovation and better protects consumers, the Government will also release a consultation paper on a new retail payments oversight framework in 2017,” it said. “Based on the results of its consultations, the Government will propose legislation to implement the oversight framework.”
Barriers
Reasons cited by workshop participants why Canada’s fintech sector isn’t realising its potential, include:
- Lack of trust in new alternatives to Canada’s big banks
- Consumer complacency
- Challenges for Canadian fintech companies in growing their business to a global scale
Restrictions on access to data and banking infrastructure, and - A regulatory framework that is often complex, fragmented, prescriptive and doesn’t sufficiently account for changing technologies. There are varying mandates and differences in regulation across and within jurisdictions, and between provinces and countries.
“Our decision to look at fintech was made independently of any broader policy direction the Government is undertaking on fintech,” says Julien Brazeau, the Competition Bureau’s associate deputy commissioner.
“Our role isn’t to act as a regulator but to advocate to regulators on how to take pro-competitive approaches to regulation. We’re examining the regulations from the various regulators in the Canadian financial services landscape to see if there is anything impeding new entrants and competition.
“Our report will provide recommendations to regulators and to federal and provincial governments as to how they can enable competition to thrive and potentially make their regulations more nimble, while protecting consumers and maintaining the stability of the financial system.
“Our view is that any time you increase competition in the market, you create greater innovation which enhances productivity and increases GDP,” Brazeau adds.
Brazeau says a key issue identified by workshop participants is the need for fintechs to enjoy open access to Canada’s banking and payment systems so they can access customer data and compete with incumbents. This involves open banking, the use of open APIs to enable consumers to share their banking information with third-party providers.
The UK’s Competition and Markets Authority will require UK banks to implement open banking by 2018, while the EU’s new Payment Services Directive contains a requirement for open banking.
“We’re seeing more movement, especially in the EU, in terms of open data,” says Brazeau. “Canada is still taking a look at open data, but I don’t think we are completely there yet with regard to open banking.”
Complex regulations
“We heard from stakeholders that, while they recognise the legitimacy of individual regulations, it’s the volume and complexity of Canadian regulations that creates barriers,” says Brazeau.
“Startups told us the value of regulations is that they make potential customers feel comfortable as the fintech is under the auspices of regulation. But, from a consumer viewpoint, there is complacency about moving to new services provided by fintechs, as people are satisfied with their banks’ services. There is also consumer uncertainty about what the protections are if they do transfer to a fintech.”
Canada lacks a national securities industry regulator, so firms wanting to sell securities or mortgages nationwide must register with each province’s securities and mortgages regulators.
The Department of Finance is responsible federally for banking regulations, with the Office of the Superintendent of Financial Institutions supervising federally registered banks, insurers and trust and loan companies.
Financial Transactions and Reports Analysis Centre of Canada (Fintrac) oversees AML/ATF regulations, and Payments Canada oversees the country’s core payments infrastructure.
‘We heard from some startup fintechs that they chose to enter only specific markets in Canada and not others,” says Brazeau.
“This is because the regulatory burden is higher in certain provinces and they don’t have the funds or regulatory know-how to operate in a complex regulatory landscape.”
Over-prescriptive
“We were told that Canadian regulation is very prescriptive, and that Canada might consider taking a more functional approach to regulation and allowing regulators to be more nimble in their approach and allow fintechs who want to collaborate with big banks not necessarily to be caught in the same regulatory schemes as the big banks,” says Brazeau.
“There is a real climate of co-operation between the big banks and fintechs in Canada, and we will draw on this in our recommendations. The banks realise that by collaborating with fintechs, there is a possibility to offer more tailored services to consumers who are keen to look at alternatives.”
Workshop participants said prescriptive regulations can be difficult to implement in a digital environment. If too rigid, they reduce businesses’ ability to respond to market demand and regulators’ flexibility to adapt to changing conditions.
However, the requirement to open accounts with wet signatures is one barrier to fintech adoption in Canada which has been eased.
The Canadian government amended the Proceeds of Crime (Money Laundering) and Terrorist Financing Act in June 2016 to allow greater flexibility in the methods for verifying identity in non-face-to-face contexts, and enable consumers to open accounts with electronic signatures instead of paper signatures. The new regulations come into effect from June 2017.
Canadian digital ID platform provider SecureKey has received funding from Canada’s top banks to build a federated digital ID network for Canadian consumers and businesses that will allow them to open bank and other types of accounts with mobile devices.
SecureKey already has 7m users of its SecureKey Concierge service which facilitates access to Canadian e-government services.
Leadership
“One thing we noted in the workshop and in our consultations is the idea of leadership in fintech,” says Brazeau.
“We noticed that a common factory in countries like the UK and Singapore, where fintech has been adopted successfully, is that fintech success depended on the federal government taking a very principled stance in favour of fintechs and getting all the regulators round the table to tackle the issue.
“Canada must ask itself the question, ‘do we want to become a market leader in fintech, and, if so, what do we need to do at the various levels of government involved, to show leadership and ensure Canada becomes a global leader in fintech?’,” Brazeau explains.
“We have the advantage of a very stable financial sector and a highly educated workforce. The Waterloo-to-Toronto corridor [in Ontario] is known for its high-tech leadership and a lot of work is being done in Canada on AI. So there is an opportunity for Canada to develop a niche in fintech.”
In March 2017, the Canadian government announced C$125m in AI funding to support AI institutes in Toronto, Edmonton and Montreal, establish ‘deep learning’ research chairs at universities across Canada, set up a national training program and encourage collaboration with industry.
SecureKey
“Our view is that the Canadian banks are quite open to working with fintechs and are active with many engagements,” says Greg Wolfond, SecureKey’s CEO.
“SecureKey may be a special case as we are active with all the major FIs, but our colleagues at other fintechs tell us they are active too across many FIs.
“The federal and provincial governments recognise that technology is a vitally important area of growth for Canada. fintech, cybersecurity and health access are vitally important. We encourage the development of programs that assist fintechs to scale-up in Canada and abroad.”
BTL
“Many fintechs are looking to disrupt existing industries, when they should be looking to help innovate, not disrupt,” says Guy Halford-Thompson, CEO of Canadian blockchain technology firm BTL.
“This creates misalignment between fintechs and banks and creates friction and a high barrier to entry.
“Regulation is always going to represent a challenge. Fintechs should be looking initially at applications they can deliver which have minimal impact on regulation. It’s a lot easier to expand an existing platform into regulated areas, than to deliver a new platform into a regulated area from scratch,” Halford-Thompson continues.
If fintechs are looking to disrupt, then they will face competition from the Big Five, but for those looking to innovate, they should be working with the large financial institutions.
“The Canadian government needs to promote and support innovation by incentivising corporations to work with fintechs. Innovation is hard, especially for large companies, and it’s critical that there is government support.”
Responsive.AI
“For wealth management-focused fintechs, the absence of a National Securities Commission, and the existence of multiple jurisdictions can make registration and on-going compliance more complicated and expensive,” says Davyde Wachell, CEO of Responsive.AI.
“The regulators we have worked with have been very helpful, and focused on creating a good environment for clients. At the same time, it sometimes feels like the landscape is designed to favour larger institutions.
“We’ve had all kinds of conversations with the Big Five and other institutions. We think there is plenty of room for collaboration, and are starting to see some green shoots in that respect.
“The established players have all kinds of folk wisdom and scale to provide value for customers, while the fintechs have new ideas and energy. I think Canadians will win with strong collaborations between the old and new guard,” Wachell adds.
“I think a single point of regulation for fintechs, and a regulatory sandbox like the Hong Kong Monetary Authority’s Fintech Facilitation Office would be very valuable.”
Regulatory sandboxes enable fintechs and regulators to experiment with different regulations to see what their effect is on fintechs. A Canadian example of a sandbox is the Ontario Securities Commission’s OSC LaunchPad which allows fintechs in Ontario to engage in regulated activities for a test period without having to comply with certain security requirements.
“At the risk of being controversial, I think Canadian regulators could go even further in the direction of CRM2 [Client Relationship Model Phase 2] to make financial services more transparent around the issue of cost. Clients still pay billions of dollars in fees they may or may not be aware of.”
CRM2 is a regulatory initiative to provide Canadians with clarity on the fees paid for investments.
