Canadian FinTech: Emerging from the shadow of the US?

Despite promising developments, there are still some questions that remain unanswered...

Canada is often overshadowed by and seen as the US’s friendly neighbour next door. When looking at the FinTech space, is this also a fair label or can Canada burst into the global FinTech spotlight?

 

Canada’s strong economic performance, job creation growth, and openness in terms of regulation, are all positive headlines that should, in theory, help the Canadian FinTech scene flourish. Just as encouraging is the fact that the Big 5 Banks, i.e. Bank of Montreal (BMO), Toronto Dominion Bank (TD), Canadian Imperial Bank of Commerce (CIBC), Royal Bank of Canada (RBC), and Scotiabank (SB), all appear open to collaborating with FinTechs and developing campaigns to grow the Canadian talent in the industry.

All the efforts to make Canada a FinTech hub appear to be there, but is it enough to rise out from the shadow of the US and become a credible centre? Are Canadian FinTechs really offered the opportunities they need to flourish within their own country and effectively compete against those in the US and on the world stage?

Before answering this, it is worth taking a step back and remembering that FinTech adoption is a critical ingredient of success. The 2017 FinTech Adoption Index by EY showed Canada as one of the countries with the lowest adoption rates for the first half of the year (at 18%), compared to the global average of 33%. Not great news for Canada.

 

The Canadian way

And what has the Canadian response looked like? Well, in order to increase awareness of FinTechs, the services they can offer, and the innovation that they can bring, many of the Big 5 Banks have started to partner up with Canadian Universities. This type of strategic partnership not only helps build technological capabilities and awareness, but also adoption as the majority of FinTech users tend to be Millennials and Gen-Xers, thus student involvement is a useful driver.

We’ve seen two interesting examples recently, in the form of BMO and Scotiabank. BMO earlier this year partnered with Ryerson University to create a four month long accelerator programme to help students and start-ups explore new technologies and innovations whilst BMO itself explored new opportunities for partnerships and technologies. Scotiabank has followed a similar approach. Earlier this year it donated C$5M(US$3.9M) to the Vector Institute, a research institute focused on the development of Artificial Intelligence, and C$1M (US$780K) to NextAI, an organisation that helps support FinTech growth at Canadian Universities.

 

Regulators: Friends or foes?

A factor, on the other hand, that seems to be weighing down the growth of Canadian FinTechs is actually the current regulatory landscape, especially the Bank Act. The Act, which is currently under review and to be updated in 2019, puts constraints on how Canadian banks may invest in FinTechs and frustratingly lacks clarity on how they can partner with them.

Encouragingly, the Department of Finance’s review of The Bank Act is said to emphasise the importance of competition and innovation in the financial services industry, especially as it applies to the concept of open banking. The department is still reviewing the potential impact of data sharing between banks and FinTechs (as we are seeing in Europe with PSD2), however it views the need to foster and monitor the collaboration between them as a necessity.

Other financial regulators are also keen to help Canada become a player on the international stage. For instance, Ontario’s Securities Commission (OSC) has allowed start-ups to partake in LaunchPad, a sandbox environment, in which they can test products and services without having to comply with industry regulations. Furthermore, to enhance its understanding of FinTech’s role within regulation, OSC has created regulatory bridges with Australia’s Securities and Investments Commission and the U.K.’s Financial Conduct Authority to share and collaborate on industry insight. Québec’s financial services regulator, Autorité des Marchés Financiers (AMF), launched a FinTech Lab to incite and guide the development of start-ups in the area.

 

Investment approaches

Like elsewhere in the world, incubators and accelerators appear to be on the up. CIBC, for example, opened a FinTech hub in Waterloo, Ontario which provides students, start-ups, and FinTech experts with the opportunity to collaborate. CIBC also aims to help FinTechs through partnerships such as its referral agreement with Thinking Capital, an SME FinTech lender. Scotiabank also created its own FinTech incubator, dubbed The Digital Factory, which is meant to help the bank forge partnerships with Canadian FinTech start-ups.

Other banks are investing in venture capital firms or creating their own investment programmes. RBC and BMO, for instance, are both investors in The OMERS Venture Fund. Last month Caisse Bank and Desjardin Bank joined efforts to create a FinTech fund of their own. This effort saw each invest C$25M (US$19M) with the intent for these funds to be used to support FinTechs who specialise in Artificial Intelligence. TD Bank as well set up its own FinTech Fund with a C$30M investment of which it has dedicated C$3.5M (US$2.7M) towards patent application funding for new ventures. In 2016, Canada had 26 FinTech deals worth US$138M, meanwhile the US’s shadow grew even larger with 381 deals worth US$4.6BN.

 

Maybe tomorrow?

Canada is slowly making headway in developing its FinTech ecosystem. The idea of producing, attracting, and retaining talent in Canada is strengthened by efforts such as incubators, accelerators, and hubs. This type of campaigning is starting to be encouraged by both Canadian regulatory bodies and financial institutions alike.

Nevertheless, there are a magnitude of questions that yet remain unanswered:

“Is that enough to create an attractive environment for FinTechs where currently consumer adoption or demand appears to be low and where there are capital funding constraints?”

“Should The Bank Act be updated to support FinTech growth, will the potential opportunities created match up to those available in the US?”

“Do the greater investment opportunities offered in the US pose a threat to talent retention in Canada?”

“Can Canada really demand a place on the global FinTech stage and will it be able to hold a top tier positon or will it remain in the shadow of the US?”

 

The jury is still out for many and we will be watching Canada’s developments very closely!

 

 

Photo credit: Shona Sabah, Senior Consultant