Encouraging Innovation While Maintaining the Stability of our Financial Framework

Published on September 28, 2017

TheFutureEconomy.ca: How is Montreal positioned in the financial services industry and what are its natural advantages compared to its competitors?

Louis Lévesque: At Finance Montréal, which is the cluster representing Quebec’s financial services industry we are not trying to define ourselves by comparison. We look at our own strengths and the potential they represent for the future. When people look at Montreal, they mostly see the cultural side of things and the vibrancy of the city, but if you just look at the data and the facts, Montreal’s financial sector accounts for close to 7% of Quebec’s GDP and 150,000 jobs that pay well over the average income, and that is a big asset. The comparison is always made between Montreal and Toronto and obviously the Toronto market is bigger. The key point is that Montreal has a vibrant sector that is performing well and growing, and it is making progress in the rankings.

If you look at the sector, we are strong in banking with two “anchor tenants” which capture a significant portion of the local market: Desjardins Bank and the National Bank of Canada. From an employment point of view, that provides for a very strong market on both the retail and business sides. We also have all the major Canadian banks present in the ecosystem, a strong insurance sector, a number of pension funds like La Caisse de Dépôt et Placements du Québec and other big players like the Public Sector Pension Investment Board (PSP Investments). All in all, we have a diversified sector that is growing and facing the same fundamental challenges and opportunities that other sectors are facing.

“Montreal’s financial sector accounts for close to 7% of Quebec’s GDP and 150,000 well-paying jobs.”

The sector’s main driver is talent and that is where Montreal is uniquely positioned relative to its size. Voted the best student city in the world, Montreal has McGill, Concordia, Université de Montréal and Université du Québec à Montréal (UQAM). Together, these institutions represent a massive amount of human capital at both the teaching and research level. Obviously, this student pool is a critical asset for the sector. Furthermore, what is less known is that Quebec was home to one of the first actuarial science faculties in Canada. The number of graduates in actuarial sciences, finance and economics in Quebec is larger than anywhere else in Canada, and we have a critical mass of people in math and data science too. This was recently recognized with several Quebec universities winning funding during the CFREF-Apogee competition, which was a major investment by the Canadian federal government to support developments in big data and artificial intelligence.

What are some of the sector’s challenges?

Louis Lévesque: We have a strong regulatory framework which has demonstrated a lot of resiliency at the time of the financial crisis, but it is a two-way street. There exists a little bit more risk aversion and less of a tendency to innovate, so our challenge becomes to encourage innovation while maintaining the stability of our financial framework. This is the kind of subject we are trying to work on with our partners.

Another challenge that is very well known is the gap that exists between research and commercialization. However, this gap presents an opportunity with fintech and the transformation of the financial sector. The federal government recently created the Institute for Data Valorization (IVADO); a research consortium, including the Université de Montréal, Polytechnique de Montréal and HEC, aimed at developing our expertise in artificial intelligence. The challenge is how to ensure the finance sector gets its share of the action and that our members engage in transformation projects with fintech companies and the regulatory authorities to maximize the potential associated with that.

What role does Finance Montréal play in all of this?

Louis Lévesque: As the industry association, our board gathers all the sector’s players. The added value of an association like ours is our ability to collaborate in a non-competitive fashion to improve the outcomes for Montreal’s financial sector ecosystem as a whole. This industry includes private sector entities, regulators and universities, and they all have their own agendas and business models. In this regard, we validate several joint areas of work through our board meetings.

One of these areas is retirement income because Montreal has a lot of insurance companies and pension funds, fuelling an interest in developing our capacity in actuarial science and developing those sectors of activities in the city for the benefit of our members.

In the fintech space, we are working with our members to develop a fintech hub in Montreal. The Government of Quebec has put some money aside in the provincial budget and we are in discussions with our members to ensure Finance Montréal puts forward initiatives that are complementing, rather than duplicating, the initiatives that are already undertaken by members. For example, you have a number of financial institutions in Montreal that have already established or support incubators, and there are all kinds of events being organized. The whole point for us is to create value for our members and to work collectively to identify initiatives.

“The main driver is talent and that is where Montreal is uniquely positioned relative to its size.”

As part of our work on fintech, we also organize the biggest fintech event in Canada in October called the Canada Fintech Forum. This year, we look forward to welcoming about 1,500 people with pitch competitions and ‘tech zone’ demonstrations. It is an incredibly relevant event with a massive networking opportunity that attracts people from all over the world.

There are a variety of other areas we are working on including responsible investment as well as work with the regulators to support the ‘regulatory sandbox’ initiative. We also work to facilitate access to data, a critical issue for the sector, and on derivative products, since the exchange in Montreal has specific responsibilities in Canada for the trading of these products. Finally, Finance Montréal is the mandated sales force for the Quebec government’s tax incentives to attract international financial institutions to Montreal.

What are the tax incentives Quebec offers to attract international financial institutions to Montreal?

Mr. Lévesque: Basically, the Quebec government offers a 24% tax credit for every person brought in to work on international financial transactions up to $16,000 per employee for qualifying activities. This does not include Canadian operations so as not to create issues related to maintaining a level playing field with other Canadian institutions. One of Finance Montréal’s responsibilities is to promote and pitch this incentive. Our job is to identify potential targets and to go after them but ultimately, the responsibility to determine eligibility rests with the provincial government.

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How successful has that been so far?

Mr. Lévesque: Over 1,000 jobs and numerous large international players have been attracted to Montreal since the program’s implementation. In terms of making this success sustainable for the future, we are currently working with our partners to strategize how best to use this measure to Montreal’s advantage through the current transformation taking place in the financial services industry.

How do you assess the efforts of municipal, provincial and federal governments in supporting the growth of Montreal’s financial services sector? Are there areas where governments could do more?

Mr. Lévesque: The financial sector has been established for a long time; it provides quality jobs and a significant contribution to public services. If you look at it from an institutional standpoint, the most important thing governments can provide is a stable environment. From that perspective, I would say Canada scores pretty high. Obviously, any private sector company would rather have a lower tax burden but that is the nature of things.

“Montreal was voted the best student city in the world.”

Mr. Matthieu Cardinal: Another critical aspect is cyber security. Financial services are the second most targeted industry in the world after the military. Collaboration between the public and private sectors is already established with the regulatory bodies and security institutions working together across the country, but I would say that this high level of integration must be maintained going forward.

Montreal is increasingly recognized as a world class tech hub in its own right. Do you see a lot of interaction between the tech cluster and the companies in your sector?

Mr. Lévesque: The members of Finance Montréal are major employers of tech industry specialists and they are making massive investments on a systematic basis, so they are extremely well connected to the whole tech ecosystem and to universities and research centers. This is a key part of their business, so there is definitely a very significant integration between the two sectors. Digital technology is fuelling a lot of change within the industry, which is both an impetus for transformation within organizations and an opportunity to create new organizations outright. Technology will both create new jobs and destroy others, but it is the future.

Mr. Cardinal: I think just last year, the big six Canadian banks spent over $15 billion on technology. If you add to that all the fund managers, pension funds and insurance companies, you are looking at a figure well over $20 billion in terms of investment in IT on a yearly basis. A good amount of that money goes to local Canadian companies – whether it is big tech players like CGI or smaller fintechs – and we see this level of investment continuing in the coming years. Finance is basically composed of two things: talent and tech. We have no supply chain or logistics around the globe; it all goes through fiber optic networks so the tech aspect of it is absolutely critical and will continue to be.

“Large financial institutions have a lot of data and see fintech entrepreneurs and researchers as an opportunity to transform themselves.”

Mr. Lévesque: In Montreal, our challenge is leveraging the local strengths we have in technology. Take for instance the video game industry; they have developed a lot of expertise in user experience, gaming and entertainment. What if we could put those strengths to work in the user experience for financial services? What if we could add a dose of ‘cool’ to the experiences of those services, thereby leveraging some of the strengths we already have in Montreal tech and gaming industries? That is another example of an area we want to work on.

What about collaboration with Montreal’s booming AI sector?

Mr. Lévesque: We certainly see big potential there. Because of our regulatory framework and other intellectual property considerations, one of the challenges we face is how to accelerate the ability for researchers to use financial sector data to create new opportunities. However, it is already beginning to happen; large financial institutions have a lot of data and see fintech entrepreneurs and researchers as an opportunity to transform themselves. If they share their data, people will come back to them with ideas and applications that will be helpful to them, and they can do that in a commercial context with a contractual provision.

“In a world where technology is king, economies of scale will be key if we want to maintain jobs and be on the leading edge, so we will have to serve world markets.”

Although that is already happening with incubators and specific initiatives, we believe Finance Montréal has a unique opportunity to create spaces where more collaboration can be fostered and our members can see that they have a collective interest to develop the ecosystem. Finding ways to make this happen is one of our most immediate challenges because these opportunities are massive right now and governments are investing in things like IVADO and new clusters. Ensuring that the financial sector is well connected and that our members realize this opportunity is obviously a top priority for us.

What is your vision for the future of Montreal’s financial sector 20 to 30 years from now?

Mr. Lévesque: I am sure it will be different. I look at it from the perspective of outcomes, but I am not sure about the best modalities. I still see strong anchor players but at the same time, I see a whole ecosystem of smaller companies that feed the bigger ones and that are more export-oriented than today. In a world where technology is king, economies of scale will be key if we want to maintain jobs and be on the leading edge, so we will have to serve world markets. We will have a lot of high-paying jobs, people with high-level skills and a pipeline of talented people with STEM backgrounds and entrepreneurial spirit coming out of our universities.

Mr. Cardinal: Traditionally, the Canadian financial services industry has been focused on the domestic market. As Louis said, it will be key for the industry to think more internationally if we want to continue to expand. Of course, we will not avoid global trends related to technology, so we will probably see less brick-and-mortar style activity and people will likely visit their bank once a month or even once a year. So the challenge for us is to create jobs that will serve international institutions through technological applications that are created here at a low cost and can generate value by being exported worldwide.

To give you one example, Morgan Stanley came to Montreal about eight years ago and bought a tech company of 250 employees. They have decided to develop more and more software here in Montreal because the costs are low, the technology is here, the talent is here; and now, software Morgan Stanley has developed here is used by the group internationally. This is the type of high paying jobs that we would like to have more of here in Montreal. As a result, the sector could change in nature by becoming more tech focused, perhaps less B2C, and serve the financial industry globally.

Mr. Lévesque: Again, from a Montreal perspective, it is not about trying to be London, Paris, or anywhere else. It is about growing, maximizing our niches, and I believe there are tremendous opportunities for growth.