The federal government put the word out last July: it needed someone to study the landscape for financial technology companies, or fintechs, and figure out how they were getting along with the big banks and other financial institutions.
Sue Britton’s firm, Toronto-based Fintech Growth Syndicate Inc., won the contract for the study. In January, the group said it turned in a 240-page report, the first of its kind in Canada, that used only publicly available data sourced from more than 60 different websites.
What it found, among other things, was that there were approximately 1,000 fintechs across Canada offering services or products related to crowdfunding, insurance, wealth management, cryptocurrency, artificial intelligence, capital markets, lending and payments.
The majority of those companies were startups, founded in the years following 2012, and employed less than 99 people each, though combined they had more than 30,000 people. Perhaps more eye-catching was the estimated value of fintech startups in Canada: $30.5 billion.
What the study did not find, however, was 1,000 partnerships with financial institutions: Canada’s Big Five banks may have been increasing their engagement with fintechs, but “the majority of their efforts” were still on building their own products and digital experiences. They were also busy trying to update their “bowl of spaghetti” technologies and systems, some of which may be decades old.
As a result, one of Canada’s biggest industries is innovating at a relatively tame pace, the country is lagging its peers in adopting new financial technologies and consumers of all types may be paying more for services than they should. The financial industry’s existing business models could eventually come under pressure as well.
“To the extent that we could find publicly available information, we were able to show that, yes, there are some fintechs that are partnering with financial institutions,” Britton said. “But certainly the majority of those partnerships are on the financial institutions’ terms. They’re not groundbreaking new business models … It’s not going to make the marketplace more competitive, because it’s going to, in fact, if anything, grow the business for the incumbent.”
Retaining the status quo may be all well and good for big banks and insurance companies for now. It may even be good for their customers — and most financial consumers have a connection to a big bank or insurer — who may be enjoying a smoother user experience or a new platform at their current institution of choice.
But legacy financial companies face a bit of a conflict of interest when it comes to innovation. After all, they have earnings targets to hit, shareholders to keep happy and thousands of employees and existing systems already in place to meet those goals. Why risk cannibalizing such profitable businesses or, moreover, give the vaunted stability of Canada’s financial industry a jolt?
Yet the incumbents could wake up one day to find their lunches being eaten by big-tech firms such as Amazon.com Inc. and Apple Inc., which are already offering a payments solution, some more aggressively than others.
“What our big banks aren’t doing is moving as quickly as other parts of the world, innovating their business models, extending financial services to more small businesses or reducing their fees,” Fintech Growth Syndicate said. “Perhaps, as Abraham Lincoln famously said, ‘give me six hours to chop down a tree and I will spend the first four sharpening the axe,’ they are still sharpening the axe.”
It’s also possible that no one is even swinging an axe in the financial sector, despite the federal government’s efforts to push the innovation envelope in various industries.
Competition Bureau research “points to low levels of financial technology adoption in Canada relative to other countries, and limited consumer engagement driven, in part, by frictions associated with shopping around and switching,” according to a document published in February by the interim commissioner of competition. “These factors are symptoms of a market that is not functioning to its full potential.”
Britton believes the major banks and insurers face the innovator’s dilemma, first outlined in a 1997 book by Harvard professor Clayton Christensen: An incumbent with a big base of existing customers and shareholders demanding good returns is unlikely to welcome a company that could disrupt its own business.
On the other hand, “You don’t want to wake up one day and be Blockbuster,” she said.
Nobody, of course, wants to be compared to a bankrupt video-store chain, which is why the financial sector is certainly aware that the big-tech companies are making inroads into their business.
Royal Bank of Canada chief executive Dave McKay reportedly noted in mid-March that he was increasingly concerned with the prospect of Facebook Inc., Amazon.com, Apple, Netflix Inc. and Alphabet Inc.’s Google (the FANG companies) getting into banking.
“They are getting between us and the moments of truth of our customers, and currently what they do with that is they sell that insight back to us in the form of search and advertising and other perspectives, and they earn a certain amount of economic rent,” he said, according to Bloomberg.
RBC and the other big financial institutions know they need to up their game, something that was noted by Luge Capital, a Canadian venture fund focused on fintech and artificial intelligence, when it did its own scan of the fintech landscape for a report published last October.
Luge Capital, which has been backed by institutions such as the Caisse de dépôt et placement du Québec and Sun Life Financial Inc., found the climate for possible partnerships between startups and big banks or insurers had improved.
“Large incumbents have customers, well-established brands and vaults of financial resources,” the report said. “As a venture capital fund with large financial institutions backers, such as Sunlife, Desjardins, CDPQ and La Capital and Le Fonds FTQ, we see first hand their desire to partner with early stage innovators.”
The biggest banks may still have the “vast majority” of the market share in financial services, but there has been a shift recently, said Karim Gillani, general partner at Luge Capital.
“In the last three to five years, there’s been a widespread recognition amongst the FIs (financial institutions) that they need to work with the early stage or smaller fintech companies in order to enhance their service offering for their customers,” he said.
Gillani said there was value in financial institutions exploring new ways of “offering functionality,” such as robo-advisers as a form of wealth management, something several banks have already done.
“It’s a demonstration of how banks are shifting their view from the traditional wealth-management experience to something that’s more automated and driven by technology so that it becomes appealing to a different segment of the population,” he said.
The federal government might open another door for the fintechs to get to the market. Ottawa is currently considering the idea of open banking, which is supposed to give people more control of their data and make it more portable.
The competition commissioner, in a submission made in response to a government consultation paper that outlined the benefits and concerns of open banking, said the framework could allow consumers to shop around and compare prices, potentially stirring up competition by lowering search costs.
“Banks would be forced to compete harder for consumers, and consumers would have access to a broader range of services, if the benefits of technology could be more fully exploited through open banking,” the submission stated.
Yet bringing third parties into Canada’s financial system — renowned for its stability — has raised some concern for at least one federal regulator, who pointed out that such decentralization “magnifies non-financial risks and diffuses accountability.”
Ben Gully, assistant superintendent at the Office of the Superintendent of Financial Institutions, raised the issue in a little-noticed speech in February, noting that new tools will be required to manage these concerns.
“Technology will enable or accelerate further decentralization of financial market participants and blur the boundaries of a traditional regulated financial institution,” he said, according to a copy of his remarks.
In other words, increasing the number of touch points increases the number of potential vulnerable spots and the likelihood that the buck no longer stops with a bank, which is where regulators are used to seeing it stop.
Instead of worrying that banks carry enough capital, watchdogs now have to worry about the type of cloud storage or anti-virus software that lenders use, but do not entirely control.
“We have seen the link between non-financial risks and their impact on reputation, such as the public and stakeholder responses to third-party privacy breaches,” Gully said. “These can quickly affect an institution’s operations, its ability to grow its business and, potentially, its bottom line.”
But it’s hard to see the financial industry shunning technology completely. The uses for paper bankbooks and even brick-and-mortar branches are becoming fewer and farther between as customer preferences shift toward mobile and online banking and other financial services.
There are also strong signs that other sectors are chomping at the bit for the financial industry to adopt more innovations.
For example, Wayne Pommen was in Las Vegas earlier in March looking over hundreds of tables and chairs and signs, all lined up to match retailers with the tech companies vying to serve them. It was a scene not dissimilar to a speed-dating event.
“I’m in a sea of logos,” Pommen, chief executive of Toronto-based fintech PayBright, told the Financial Post in a phone interview during a break in the action.
PayBright is a consumer lender, paying retailers the next business day while allowing customers to pay off their purchases in instalments, and the retail conference was the perfect place to announce some news: Pommen’s firm revealed a partnership with Swedish fintech unicorn Klarna Bank AB, which could allow thousands of merchants worldwide to offer the PayBright option to Canadian customers.
The money for PayBright’s payments comes from the same place as it does for a lot of folks: banks. The company has received funding from Canadian Western Bank, as well as the Canadian Business Growth Fund, which is backed by the Big Six banks, as well as major insurers.
Pommen said the big banks may have massive consumer bases and lower costs of capital, but the fintechs can offer faster ways to deploy technology and develop better user experiences.
“Most banks and fintechs have realized there’s huge benefits to partnership,” he said.
A report released on March 25 by Toronto Finance International, a tie-up between government, the financial-services sector and academia, found growing collaboration between financial institutions and fintechs, but “key challenges” on both ends of these partnerships.
“In our discussions with executives of Canadian financial institutions, one problem outlined was difficulty in finding the right fintech offering enterprise-ready products or services meeting the scalability and security requirements of FI’s systems,” the report said. “Also, with a relatively lower technology adoption rate as compared to other global fintech hubs, Canadian businesses tend to look for proven solutions when partnering with fintechs.”
The Toronto Finance International report — which noted financial institutions can provide fintechs with mentorship and guidance in addition to financing — also found that Canadian fintech hubs were trailing when it came to embracing disruptive technology.
But Canadian consumers, most of whom bank with at least one of the Big Six, may have no idea such alternatives exist.
“Some think that consumers don’t want fintech solutions because adoption in Canada is lower than other regions, and that there isn’t a need to aggressively enable a more competitive financial services market,” FGS said. “But maybe it’s not because Canadians don’t want fintech products — it’s that they don’t know that opportunity is out there.”
The number of those products is also increasing, with or without partnership, but may be losing some steam.
At the time of Fintech Growth Syndicate’s study, only parts of which were shared with the Financial Post, there were 995 fintech companies in Canada. That has since increased to more than 1,050, it said, although the rate of new companies being created has been in decline in recent years. The TFI report found that the number of fintech startups founded in the Toronto region dropped to nine last year from 33 in 2014.
To help make some of those companies successful, Britton suggested governments look at their own structures. The United Kingdom’s Financial Conduct Authority acts as the financial-services watchdog and has a mandate to promote competition. OSFI, as one example, does not have such a mandate.
It will take time for Canada to begin adopting tech like other countries, Britton said. But it will happen.
“It’s not a blip, it’s not a bubble, it’s not a one-off,” she said. “It is the future.”