Michael Katchen
Co-Founder & CEO - Wealthsimple
Part of the Spotlight on FinTech

Legacy Vs Innovation: The conflict that will determine the future of Canadian FinTech

Takeaways

  1. While Canada has a stable and healthy financial sector, the incumbents’ existing profit pools and the legacy infrastructure it is built upon makes it very difficult for its large players to move fast and adopt new technology.
  2. A few Canadian financial regulators are champions of FinTech, but in general, there is a disconnect between legacy regulations and what the future of our financial services industry must be.
  3. Canadian companies need to expand their vision beyond Canada by thinking global and bigger. We have the talent, the technology and the resources to build global companies, but we are, by and large, limiting ourselves to the domestic market.

Action

The government must develop the policies and regulatory framework that make Canada the best place in the world to start a FinTech company. Then it must shout it from the rooftops; let the world know that if you want to start an innovative financial company, Canada is the place to do it.


How would you assess the current state of Canada’s financial services industry?

Canada has a very stablefinancial services sector that navigated the crisis well, and provides a good breadth of services for Canadians. But, we still have a long way to go to be global leaders in the future of financial services and FinTechover the coming 10 years. Canadians still pay some of the highest fees of any country in the world when it comes to financial services. There is also a lack of transparency around what people are paying for and the sorts of information that we have equipped the average person with.

“The necessity to innovate is real now. Historically, we did not need to innovate at the pace at which we do now, in order to be successful.”

There are huge opportunities to improve the financial services sector. New services are trying to bring access to high-quality products to a broader set of Canadians. Canada also has a regulatory regime that is interested in supporting these solutions. The Ontario Securities Commission (OSC) has been a great champion for FinTech and they came out with LaunchPad to try to make it easier for entrepreneurs to get started in the financial services sector.


Where does Canada stand in the global FinTech landscape?

Canada has a unique pool of talent with world-class technological and financial capabilities, particularly in Toronto. This makes us well positioned in FinTech.

Historically, Canada has a system that has been built by and around a few very large institutions. We do not have a history of intense competition and the adoption of products at the pace of other countries. Financial innovations have just been offered by a small set of large institutions that have not had the incentive to innovate, drive down costs and create new product categories. There is a lot of room to improve the breadth of financial services Canada offers.

“Canada has a unique pool of talent with world-class technological and financial capabilities, particularly in Toronto. This makes us well positioned in FinTech.”

With respect to how we compare, let’s take the UK as a reference point. The UK has a single regulator, the Financial Conduct Authority (FCA), and it is very easy to navigate who you have to deal with to get products and services to market. Canada has the OSC, the Investment Industry Regulatory Organization of Canada (IIROC) and the Mutual Fund Dealers Association of Canada (MFDA), among others. These bodies do have some overlap, but the larger issue is that they are overwhelming and confusing to navigate and coordinate. The FCA in general has tried to be a leader when it comes to FinTech. They were one of the first to have a sandbox, which tried to help FinTech companies get to market faster in a streamlined way. They were one of the first to use a passport system, which allowed companies to get a license in other countries with similar regulatory standards. I think we are now working on one between Canada and the UK.

One thing  Canada has going for it, compared to other markets we’ve worked in, is that the regulators are more accessible here. They are trying to understand the way the markets are moving and are trying to build relationships with FinTech companies. They are trying to understand the challenges of the regulatory regime in Canada whereas the FCA is a little harder to approach.


Is our financial sector – and Canada in general – too conservative when it comes to risk-taking, innovation and disruption?

The necessity to innovate is real now. Historically, we did not need to innovate at the pace at which we do now, in order to be successful.The challenge is that banks, and their existing profit pools, and the legacy technology infrastructure on which they are built, make it very difficult for them to move fast. They are going to have to figure out how to move and innovate faster and how to deliver products clients want. There are so many alternatives competing now and because of them banks will have to be more agile to compete.

“Banks and their existing profit pools, and the legacy technology infrastructure on which they are built, make it very difficult for them to move fast.”

I have been a pretty outspoken supporter of the need for Canadians to think global and bigger. I believe that there is a culture here of historically settling to build Canadian – not global – businesses. But, it is necessary for our country to build global businesses in order to continue to prosper and thrive. For instance, why is it that Mexico produces 16 times as much beer as Canada when Canada has one of the largest fresh water supplies in the world and is one of the largest barley producing countries in the world? Mexico is neither of those things. There is a whole slew of different industries where we have the ingredients to build world champions and for some reason we have not figured out the recipe. One of my favourite books, “Why Mexicans Don’t Drink Molson” raised this issue with respect to beer, dairy and numerous other industries.

“One thing Canada has going for it, compared to other markets we’ve worked in, is that the regulators are more accessible here.”

Today, Canada does two things: we pull things out of the ground and we finance that activity. That is basically what Canada’s economy is and it is not what our economy is going to be 20 years from now.


What should the government focus on to improve Canada’s international competitiveness in FinTech?

The government is doing some of the right things for sure. But, we need to improve on the regulatory front. While a few regulators around the country are very supportive of innovation and FinTech, there is still a disconnect between the legacy of all the existing rules and the bridge to what the future needs to look like. Often, for FinTechs like us to get up and running, we have to seek exemptions. Canada does not really have a culture of adopting exemptions and adapting them into new rules.

“As a FinTech entrepreneur in Canada, I would love to see our government say that it wants to make Canada a destination for the smartest FinTech minds around the world – and deliver.”

When we launched Wealthsimple, we had to meet suitability requirements, which means we had to make sure that all investments are aligned with the client’s risks and goals before we assign her an investment portfolio. At the time, the only way to meet these suitability requirements was in person; you would have to meet with the client face-to-face. We brought the challenge to the regulators that our clients, who are generally younger professionals, do not want to meet an advisor face-to-face. In fact, they do not want to speak to an advisor at all. The suitability requirements at the time forced the conversation face-to-face, and unintentionally forced an entire generation to never get access to investment advice. So, we worked with them for months on a workaround, which was to replace the in-person meeting with phone call. Then a year after launch, we managed to convince regulators to move away from phone calls to just an online risk assessment. Today, we offer an online risk assessment through an exemption of a suitability requirement. We are the only firm in the country that is allowed to do suitability online rather than in person or by phone.

That is just one of the areas where the government has an opportunity to improve the friendliness towards innovation and FinTech in Canada by turning exemptions into new rules that pave the way for new companies to build on top of them. It can use this aggressively as a strategic way to attract FinTech companies to Canada as well. As a FinTech entrepreneur in Canada, I would love to see our government say that it wants to make Canada a destination for the smartest FinTech minds around the world – and deliver.

“There is a culture here of historically settling to build Canadian – not global – businesses. But, it is necessary for our country to build global businesses in order to continue to prosper and thrive.”

Put simply, the government must develop the policies and regulatory framework that make Canada the best place in the world to start a FinTech company. Then it must shout it from the rooftops; let the world know that if you want to start an innovative financial company, Canada is the place to do it.


How important is promoting diversity and expanding socially responsible product offerings to the future of Canada’s FinTech sector?

At Wealthsimple, diversity and inclusion are very much part of our vision. The data is very clear: women are underrepresented in the tech and finance industries, especially in leadership roles. Our belief as a company is to be credible in our vision to build products that help our clients live the life they want and achieve their financial goals over their lifetime,we have to have a diverse workforce that represents the needs, wants and challenges of our clients. So, for us, ensuring diversity is a very business-focused necessity.

“Our clients, especially younger ones, do not want to just invest to make money, they want their money to represent and reflect their values.”

In terms of our services, we launched our Socially Responsible Investing and Halal Investing options a couple of years ago and they have been incredibly popular amongst our clients. The whole industry is now moving in this direction. Our clients, especially younger ones, do not want to just invest to make money, they want their money to represent and reflect their values. On top of that, it is amazing that socially responsible investors are actually better investors than their peers because they are more disciplined about their money. They are making choices that represent more than just seeking returns and as a result they are more thoughtful, more disciplined, and do better over the long-term.