How to Build A Leading Fintech Sector in Canada

The Canadian fintech sector is on steady ground. There are ample opportunities for clever fintechs to fulfill business and retail customer needs, often in a more nimble and efficient manner than larger banking institutions can manage. With significant movement over the last 10 years, and already over 2000 fintechs operating in Canada, the foundation is strong and the outlook is positive. 

At the same time, more can be done to maintain that momentum and push it beyond Canadian borders. Growth demands government support and consumer participation. Swifter regulatory action in support of open banking will help catalyze fintech innovation and implementation. A clearer demonstration of fintech’s value for end customers will help the sector connect the dots and deliver on its promise of lower cost and added efficiencies.

In short, the pieces are already in place. A few more strategic plays can help establish Canadian fintech as a winner at home and scale its impact in the years ahead.

Making a Strong Foundation Stronger

Canada’s research capabilities are a major strength in the sector. Fintech startups also benefit from strong support from government and private enterprises. Technology leaders have made sizeable investments in Artificial Intelligence (AI) and the Canadian government has introduced the national AI strategy.

Toronto is among some of the largest tech hubs in North America, and tech markets in other Canadian centres – Vancouver, Calgary, the Waterloo Region, and Edmonton – show higher job growth rates than the United States. Our leading universities attract a growing field of motivated and engaged international students. The country is preparing an experienced talent pool with the right technical skills to sustain and grow the fintech ecosystem. 

Significant activity in the payments space is spurring more activity, particularly in Quebec, where payment providers represent almost 25% of the sector. Payments Canada continues to facilitate and modernize the nation’s payment infrastructure, and its Real-Time Rail program is advancing, despite delays. 

The adoption of standards, such as ISO 20022 for payment clearance and settlement, is facilitating fintech growth worldwide. Canadian fintechs are poised to harness these advantages with expanded treasury optimization services. 

Possible Challenges to Growing Canada’s Fintech Sector

An outward look paints a slightly different picture. The United Kingdom is years ahead with open banking, which came into effect in 2018. Fintech in France and Luxembourg has made greater strides. The U.S. is very close to formally moving forward with open banking with its Rule on Personal Financial Data Rights. 

Canadian fintech could be moving faster. While Canada’s federal government plans to introduce open banking framework legislation in its 2024 budget, there is currently a lack of an established open banking framework. This may cause entrepreneurial ideas to move where they can thrive.

The Ongoing Search for Capital Investment

Investment funding presents a significant hurdle. Venture capital, private equity, and merger and acquisition activity have decreased steadily since 2020. KPMG’s PitchBook data shows that Canada had 57 fintech investments in the first six months of 2023, amounting to U.S.$353.7 million. That total dropped significantly from 87 deals in the second half of 2022, totaling U.S.$1.09 billion. 

With less access to capital than the U.S. and Europe, Canadian fintechs are finding it difficult to scale. Our talented innovators show immense promise, but initiatives get stalled as they’re finding their first customers. This is typically due to a lack of funding and an inability to find marketing support to execute on growth strategies. Or, when entrepreneurs find more investors in the U.S., we lose homegrown innovations to competitors.

The new venture studio model could help attract more seed money. In the new model, the venture capital firm drives the innovation process. It identifies a gap in the market, develops the idea to address it, and searches for entrepreneurs with the competencies to realize it.

In principle, the approach produces more innovations and brings them to market faster. But while the venture studio model is advancing in Canada, it hasn’t reached the same maturity as in other countries. This means that the growth of fintech is expected to continue as a result of upcoming legislation and considering the talent pool available in Canada. The challenge is to continue to bring in investment due to the significant amount of costs and effort related to launching and scaling the business.

The Ups and Downs of Big Bank Partnerships

Big Canadian banks are invested in fintechs and these partnerships help fund innovation, create products, and offer them to global peers. Ideally, bank support would enable a fintech startup to hit the ground running and scale products globally. 

From another perspective, these partnerships may have an impact on fintechs offering personal financial management tools. The aggregation of financial data into a single app remains a valuable service, giving customers visibility and control over their finances. However, as big banks join forces with fintechs, they build those capabilities into their own apps. As that functionality ceases to be the differentiator it once was, fintechs need to ensure they find ways to stand out. 

Building a Leading Fintech Sector

A thriving fintech sector drives both innovation and competition. While Canada ticks the innovation box, it’s harder to say whether Canadian fintech has succeeded in driving competition in the financial landscape. In banking, major players continue to dominate and this is consistent with the dynamics we see in other markets like the UK and Australia. 

The original promise of fintech innovation and competition was to reduce the cost of banking and create new efficiencies for end customers. Canada shows mixed results and still has work to do. The following steps will help the sector achieve those aims.  

1. Move faster on enabling regulation 

Canada lags behind other nations on the regulatory front. It urgently needs to implement an open banking framework. Regulatory action is an enabler that will drive change and help scale the digital economy further and faster.

Leaders in the financial space agree there’s been sufficient time and energy already devoted to agreeing on the standards and the accreditation process. Still, while other jurisdictions enable market-made models or move ahead with government and industry-led frameworks, Canada remains stalled at the level of debate. 

The demand for change is not just coming from the fintech sector. Consumers are demanding that their governments take legislative steps to protect their data rights. They want policy that lets them compare services and move between financial institutions in ways that serve them best.

In the U.S., the Consumer Financial Protection Bureau is soon to implement a Personal Financial Data Rights rule that will protect consumers, let the market innovate, and hasten the move to open banking. When that rule comes into force, Canada will face incredible pressure to follow suit.

With more fintech services and innovation coming from the U.S., Canadian fintech organizations will need to move fast to offer equivalent services and attract and retain customers.

2. Demonstrate value to consumers

On the global stage, it remains unclear how many people are taking advantage of fintech offerings. Some finance leaders have been vocal about the lack of customer opt-in to data sharing despite the financial burden it places on banks. 

The Canadian fintech sector should pay heed. To ensure retail and business customers use their services, it should explore ways to demonstrate their value in:

• Data privacy
• Transparency
• Cybersecurity
• Financial inclusivity
• Flexibility and personalization
• Lower costs

Payment and other digital innovations have streamlined financial services, providing measurable benefits. However, consumers quickly grow accustomed to new efficiencies, raising the bar even higher. The fintech sector needs to stay ahead of the curve, both responding to customer expectations and communicating that value to users. 

3. Seize upstream and downstream opportunities

In other countries, banks and fintechs are doing more than improving the end-to-end customer journey. They’re partnering to extend it further upstream and downstream. The Canadian fintech industry should jump on the trend and explore embedded finance, which places financial services inside non-financial experiences along the value chain.

Open and embedded finance can make buying a first home simpler and smarter. A customer can choose to share financial data with a real estate platform to improve their search. The mortgage application process can be launched earlier, with offers that take the customer’s financial situation into account. Later, the platform can use those insights to offer financing for home maintenance services or sustainable green upgrades from other partners.

While the average Canadian might be unaware of what drives these process improvements, the quality of those experiences will register. Embedded financial services in an end-to-end journey can help fintechs differentiate from banks.

4. Prepare for a return to capital flow in 2025

Rising interest rates in Canada have had a dampening effect on available capital for deployment to fintech. Thankfully, this is a temporary aberration and most economists expect interest rates to return to the 2.5% range by the end of 2025.

Once capital flows more freely, fintech in Canada can get back to leveling the playing field and disrupting the financial ecosystem in ways that can help benefit consumers and create new opportunities for a wider range of financial providers.