Large Institutions’ Control of Canada’s Financial Services Sector Limits FinTech Growth

What is the current state of Canada’s financial services sector and how is FinTech transforming it?

Canada has a relatively consolidated market across financial services. The large Canadian financial institutions have a strong lock on the banking and transactional world.They control about 80% of the distribution of wealth management products, with 20% being independents and insurance companies. But the banks struggle with one key word: legacy – legacy technology, legacy people, legacy channels and legacy silos. Legacy ultimately leads to a lot of challenges as banks try to create more customer-friendly experiences. Financial institutions in Canada have been very product-focused and have not necessarily put the customer at the centre of their offering. They are all trying to change but it is very difficult because of legacy. They have massive profit pools that they benefit from, which they do not want to disrupt. Fundamentally, they are built on payment rails – the deposit systems and the transfer systems across banks – that are antiquated and falling very far behind the rest of the world. For example, these payment rails currently take three days to clear, which is unheard of. Real-time rails are absolutely critical.

“The large Canadian financial institutions have a strong lock on the banking and transactional world.”

It is very hard to generalize in terms of FinTech’s bridges to the big financial institutions. Each has its own unique approach. Some are extraordinarily good at partnerships; for instance, National Bank is one of the leaders in terms of partnering with FinTechs and Equitable Bank has partnered with Wealthsimple to deliver a high-interest savings account. I believe there are many banks in the country that are very good at partnering and understand the need for rapid-trial processes and testing. However, certain incumbents are not good at that and need to work on it. For example, I think certain banks will be winners in the world of FinTech; they will spend the money and throw in the resources necessary to win. When some banks spend $2 or $3 billion a year on technology and have a very set vision and want to own the ecosystem, it is not a very easy sandbox to play in for young FinTechs. Our FinTechs are open for business and willing and excited to partner with anybody in the country. But our expectation is that large groups must respect start-ups, their independence and their need to partner with everybody. We frown on big players asking Canadian FinTech start-ups for exclusivity because that ultimately ends up being unfavourable for both the large institution and the start-up in the long term.

How do government policies and regulations affect Canada’s FinTech ecosystem and what must change policy-wise to push the sector forward?

As a generalization, the regulators are moving from a purely prudential role to one where they are putting customers first. Regulators like the Ontario Securities Commission (OSC) and the Autorité des marchés financiers (AMF) are very forward-thinking in terms of consumer outcomes. That is positive for experimentation and for FinTech. Certain other regulators have remained prudential, and safety and solvency focused. This is also important because we cannot afford to have a major failure due to the state of consolidation in our sector.

I would have a few regulatory recommendations to accelerate FinTech and increase consumer protection and outcomes in Canada.

First, we need a national regulator – rather than regional ones – for FinTech. This is important as the current regulators have a very heavy workload and FinTech may be a distraction for them. Having a streamlined regulatory process for innovators is very important to allow a healthy ecosystem to flourish as the cost – in terms of time and dollars – of regulation to small players can be overwhelming. The incumbents should keep the current set up, because doing a full reorganization would be a distraction and slow down innovation.

“Until new FinTech players can access infrastructure directly rather than via a bank, they will only be able to be as good as their partner who has no real incentive to allow the emerging player to shine.”

Second, we need Open Banking and something similar to General Data Protection Regulation (GDPR). This will allow consumers to own their own data and end up having greater choices in terms of services to choose from. The current system makes it hard for consumers to be given the best advice given the difficulty of accessing a complete picture of the customer situation. The customer experience is further hurt by the fact that there are significant perceived and actual costs to moving accounts. With great access to their data and greater visibility, consumers will be able to make, or be advised to make, better choices. Portag3 has produced a submission on Open Banking to the Competition Bureau of Canada that outlines our position on this.

Third, we need real-time payment rails that everyone has access to – not just the banks. Payment rails will become increasingly data rich. If only one group of financial institutions has access to them, it will place the rest of the ecosystem at a disadvantage.

Right now, you need to be a bank-licensed organization to have access to the payment rails. Those institutions also shoulder the cost of the rails. An alternative designation that gives access to the rails and ensures equitable sharing of cost burden would be very effective. Direct access to payment systems will allow innovators to deliver many customer experiences that are otherwise not offered. Canada is falling quite a bit behind other geographies in this regard. An example of how direct access can improve products in a different area can be seen with Wealthsimple’s building of their own back-office. The user experience was terrible when Wealthsimple had to use one of the very few back-office providers. By delivering its own solution and being vertically integrated, Wealthsimple was able to deliver a highly differentiated user experience which drove its success. Until new FinTech players can access infrastructure directly rather than via a bank, they will only be able to be as good as their partner who has no real incentive to allow the emerging player to shine.

How does Canada’s FinTech industry compare to its European, American and Asian counterparts? What challenges must we address to increase our competitiveness?

We have the best talent in the world, the best technical prowess and the best schools. There is no reason why Canada cannot build the next global-leading FinTech companies.For example, we think Wealthsimple will be the leading wealth management FinTech in the world. However, the current financial ecosystem in Canada is not as FinTech-friendly as some other parts of the world.

Two things were done in Europe that were very favourable to innovation. One was Open Banking and the other was the General Data Protection Regulation (GDPR). Making sure that customers are able to access their information in a bank and permit other people to access that information is very important. I think that is one of the major functions of FinTech.

“The current financial ecosystem in Canada is not as FinTech-friendly as some other parts of the world.”

When looking at consumers’ access to data, European and American consumers have better access to data for two totally different reasons. Europe has legislated the need for financial institutions to give consumers access to data whereas the US’ competitive landscape – with thousands of banks and hundreds of insurance companies – has organically led to the adoption of consumer data aggregation at a rapid pace.

In terms of sheer size, Canada’s FinTech sector is nowhere close to Asia. Ant Financial is a FinTech worth $150 billion, but I am not even sure if we have a FinTech unicorn in Canada yet. Because Canada has not been open on the data front and because our payment rail systems are antiquated, it is very hard for Canadian FinTechs to deliver customer experiences on par with other countries.

Is Canada’s expertise in AI, blockchain and engineering – and the large companies this talent attracts – translating into success in the FinTech space?

The flow of large US corporates, such as Microsoft, into Canada is a true indication that they have identified our talent as being attractive. Now, is that a positive for the country? I do not know. Ultimately, I do not see a shortage of engineering jobs in any Canadian city. Microsoft or any other foreign players coming into a city, and sometimes receiving government subsidies to do so, is a negative in my mind for the creation of prosperity in Canada. Large international corporates coming here is wonderful for training, but all companies should be competing on an even playing field and not receiving subsidies. Ultimately, foreign companies are going to use our talent and develop intellectual property (IP), but the profit that IP generates will often be captured in their home country.

“Large groups must respect start-ups, their independence and their need to partner with everybody.”

There are impressive Canadian companies working at the intersection of AI and finance. For instance, an AI company in Toronto named integrate.ai provides a direct solution to financial institutions to help them optimize their customer onboarding flow and provide signals as to which customers should be called by an employee. That company is absolutely critical to increasing the competitiveness of Canadian institutions and will succeed in Canada. But it will hopefully also succeed internationally, since it improves a critical element in the financial services value chain. Similarly, the number of engineers throughout the world that are leaving their roles to build start-ups that are blockchain-related is incredible. That is a signal of the importance of blockchain long-term and Canada has strengths in this domain. I am uncertain about the resolution and clear visibility of blockchain’s role in Canada’s economy, but the potential in terms of efficiency around things like contracts just makes sense.

How will Canada’s financial services sector look in 2050?

The way people access financial services will be different. A new set of platforms will emerge and advisors that used to be entirely product-focused will have a much broader array of services to deliver in a highly technology-enabled platform. Platforms will be cross-selling a wide variety of products that are extremely well suited to their customer segments. The idea of one-size-fits-all products will be gone. It will be a world of new platforms targeting very specific customer segments with an incredible amount of personalization.

“We have the best talent in the world, the best technical prowess and the best schools. There is no reason why Canada cannot build the next global-leading FinTech companies.”

In terms of which segments of the financial services industry are ripest for disruption now, wealth management and insurance look like the low hanging fruit for FinTech because they are not dependent on payment rails. If the payment rails open up and everyone gains real-time access to them, we will have an incredible amount of innovation in personal finance, transactions and other areas as well.