Breaking Monopolies and Supporting Fintech Innovation

We are at a critical junction when it comes to payments and financial services in Canada.

After decades of stifled competition, we’re starting to see glimpses of new offerings from home-grown tech startups. These fintechs are bringing Canadian consumers and businesses alike new ways to process payments, access lending, build wealth and a whole slew of financial services.

Yet, these companies are still just small entrants in a country dominated by giant incumbents. In this critical moment, we need to decide as a country if we want to embrace a future of innovation or default to mediocrity.

Canada has the brains, talent and potential to be a leader on the world stage, but achieving this will first require innovative companies to be given a level playing field to win at home.

So, as we explore how Canada can lead and win in the future of payments, we have to first explore the biggest issues that are holding back financial innovation in our country.

Monopolies Breed Mediocrity

When I look out of my Calgary office window, I see two nearby office towers featuring prominent logos. One of them is Rogers, and the other was Shaw. But as of this year, they now both feature large red-glowing logos that say Rogers. It is an almost comical daily reminder of the monopolies that stifle the growth of this country.

Our banking industry suffers from the same issue. We have convinced ourselves of a false dichotomy that when it comes to our financial services, we have to choose between stability and competition. This is a false choice, but one that unfortunately became even more solidified in our mindsets after the 2008 financial crisis. We came to believe that it was our banking oligopoly that saved us from a worse-case scenario.

But the reality is that monopolies breed mediocrity in so many aspects of their business, from customer service to pricing and innovation. The big-5 Canadian banks continuously deliver poorly on all these fronts, yet they have been able to maintain a huge market share despite it all.

In order for Canada to win on the world stage, we need to realize that our acceptance of these oligopolies is holding us back. We need more competition in banking, payments, wealth management and all other aspects of financial services in our country.

So, let’s dive into the steps that we can take as a country to make it happen.

Payments Canada Must Become an Inclusive Organization

Payments Canada is the organization that operates the primary payment clearing and settlement systems in Canada and was established by the Canadian Payments Act in 1980. When it comes to payments, this organization, managed by the Minister of Finance, is the holder of most of the “payment keys” that could allow for more competition to participate in our financial systems.

The first step towards bringing innovation to the Canadian systems is for the Minister of Finance to allow more innovative companies to participate directly in the clearing network. Only one fintech company, Wealthsimple, has ever been allowed to participate directly, which itself took years of behind-the-scenes work to make it happen.

Looking at the composition of Payments Canada’s Membership Board, you are four times more likely to be welcomed on the board if you are a large US bank than if you are a Canadian fintech.

Instead, what is happening in the Canadian payments market right now is that new innovative companies needing access to Canadian payment rails can only do so in partnership with incumbent banks, who, unfortunately, have little incentive to bring in new competitors to access the network. For the few that have been able to establish partnerships with banks, these partnerships add an additional layer of fees that would otherwise not be present if fintechs could access these rails directly.

Therefore, step one in bringing a brighter future of payments to Canadians is to make Payments Canada a more inclusive organization.

Interac for All

This theme carries through when it comes to access to our proprietary Canadian debit rail system, Interac. Canada is fortunate to have a fairly modern debit system.

Interac started as a non-profit association in the 1980s with a mission to build a Canadian-grown debit network to avoid dependency on its USA counterparts. Interac has been a huge success for our financial system, growing much beyond its initial scope of in-person debit transactions and ATM cash withdrawals. It is now the de facto peer-to-peer money transfer system with its e-transfer protocol and has been tasked by Payments Canada to build the next generation of Real-Time-Rails for our country.

But the problem is the same. Access to the Interac network is almost entirely limited to the large incumbent banks. That means that fintech, innovative companies and new entrants in the market must go through a patchwork of third parties to access Interac and the e-transfer system. This greatly limits access, adds delays, increases costs and ultimately slows down progress.

The incumbent banks are leveraging Interac as a way to reduce competition by making themselves the sole direct providers of e-transfers and forcing consumers to use the system through their banking portals.

The future of payments in Canada will require access to the Interac rails to be opened for all innovative companies.

Embracing Canadian Providers

In navigating the future of payments and finance in Canada, it is also imperative that we, as Canadians, embrace homegrown providers rather than defaulting to established US counterparts. This shift in mindset is particularly important for local, provincial, and federal governments when selecting new vendors. Instead of defaulting to American alternatives, government entities should prioritize and champion Canadian providers, fostering a supportive environment for domestic innovation and economic growth.

By actively promoting and embracing Canadian-built providers, we can cultivate a robust ecosystem that not only bolsters our national economy but also ensures greater sovereignty and control over critical financial infrastructure. Making deliberate choices on this front also supports the development of local talent and expertise. This will foster homegrown innovation and maintain a distinct Canadian identity within the global financial landscape.

It Will Begin With a Change of Mindset

Ultimately, the future of payments and finance in Canada must first start with a belief that we have the right ingredients to be leaders on a global scale.

We need to change our mindset and stop seeing our local market as a zero-sum game, with incumbents holding back new entrants and hoping for innovation to be slowed. Innovation doesn’t come from well-protected oligopolies but instead thrives when entrepreneurial startups are given a chance to compete.

If Canada doesn’t create a level playing field that allows innovation to thrive from within, then not only will we not prosper internationally, but we will face external challengers that will outcompete us in our own market.

Canada has the brains, talent and potential to be a leader on the world stage, but achieving this will first require innovative companies to be given a level playing field to win at home.