For a relatively small country, Canada punches well above its weight class in the financial industry.
Not only is the country home to some of the world’s biggest financial institutions, it’s also home to some of the most stable, as demonstrated by their resiliency during the global banking crises of 2008.
In fact, of the world’s 20 largest banks by market capitalization, three are based in Canada, with most of the remainder scattered between the United States, the European Union and China.
“Little Canada, with 35 million people, actually does pretty well,” said Andrew Graham, the co-founder and CEO of Borrowell—a Canadian FinTech that specializes in low-cost personal loans and free credit scores—during his opening remarks at the Alt-fi Toronto Summit in early December. “I think that’s something we should all be proud of as a country, and it’s led to really steady growth in our banking system.”
Graham, however, went on to explain to the audience gathered at the MaRS Discovery District that Canada’s FinTech industry hasn’t yet enjoyed the same level of influence.
Comparing his list of the world’s biggest financial institutions to a list of privately held FinTech unicorns (or financial industry startups valued at over a billion dollars), many of the same countries appear.
“The US has a whole bunch of FinTech unicorns, so does Europe and so does China,” said Graham. “Canada, unfortunately today, has zero.”
The imbalance between the relative successes of Canada’s major financial institutions and the relative anonymity of its FinTech sector was a key area of focus throughout the daylong AltFi Toronto event. The stage played host to a range of experts from tech and finance, from Canada and abroad, each offering their thoughts on why the country’s FinTech industry is lagging behind, and how best to enable it to catch up.
Are Canadians ready for FinTech adoption?
As the home of three of the world’s top 20 banks by market capitalization, Graham suggested in his opening remarks that perhaps Canadians don’t really need FinTech the way other markets do, as their financial needs are already being well served.
“Canadian consumers—perhaps because we have such a strong banking system—have been slower to adopt FinTech,” he said, citing EY research that showed the country lagging far behind the rest of the world in FinTech adoption.
“This is a little strange, because when it comes to technology more broadly, Canada has been a very rapid technology adopter,” he continued, explaining that Canadian Internet and social media usage outpaces most other major economies on a per-capita basis.
Graham went on to explain that despite being a relatively tech-savvy nation, Canadians already have access to world-class financial institutions that enjoy strong customer loyalty, especially compared with other countries.
So why bother focusing on developing our FinTech industry here in Canada? Graham gives two important reasons. “As strong and stable as the Canadian banking system is, there are big opportunities for Canadian consumers to do better,” he said, citing relatively high prices for financial services, speed of transfers and a lack of competition.
The other reason Canada needs FinTech is its relatively slow pace of innovation, especially when compared to emerging economies like China. “The degree to which China has become cashless is truly incredible,” said Graham. “I remember walking down the street and seeing someone busking for money, a musician, and instead of a guitar case or a hat there was a QR code where people could send him money that way.”
Throughout the day, speakers from a range of FinTech backgrounds acknowledged the success that traditional financial institutions have had here in Canada, explaining how difficult it is for innovative, alternative solutions to earn market share.
“It’s not like people are not willing to transact online, they just have a level of comfort with the banks,” said Eva Wong, Graham’s co-founder and Borrowell’s chief operating officer. “To a lot of Canadians, their bank is like their high school boyfriend, and he’s maybe a little dull but you’ve known him all your life, and you’re worried about dumping him and trying something new and exciting.”
Waiting for open banking to open the floodgates
When compared to other jurisdictions that are surpassing Canadian FinTech innovation by leaps and bounds, one element that many have in common is open banking policies that allow third parties to access consumer financial information. Europe’s open banking policy—known as the Payment Services Directive or PSD2—came into effect earlier this year, and speakers suggested similar policies would help stimulate FinTech innovation in the Great White North.
“There really is no equivalent to that in Canada,” said Graham in his opening remarks. “There’s studies going on, but we have nothing close to open banking or PSD2 in Canada today.”
Wong explains that open banking has reduced a lot of friction for digital financial service providers in Europe and elsewhere around the world, adding that similar products in Canada are more clunky for users without it.
“Today, with online lending [in Canada] you still need some sort of proof of bank account, a lot of the times people are also still asking for paystubs, for paper documents that need to be reviewed,” she said.
Those extra steps ultimately make the FinTech option more cumbersome than traditional alternatives, explained fellow panelist and vice president of partnerships and capital markets for OnDeck Capital, Amar Ahluwalia.
“As Eva mentioned there’s a lot of friction involved in the actual process itself, and that’s not the best experience for users,” he said. “By having an open banking system not only are you removing that friction so your data will be flowing more seamlessly, but you’re also going to add the element of creating larger ecosystems of partnerships that will evolve over time to allow for a more seamless experience.”
Ahluwalia adds that open banking would be “game changing” for the FinTech industry in Canada, allowing providers to offer “bespoke” solutions to customers, tailored to their individual needs. “For example, a restaurant, having the ability to have flex payments tied to the performance of the restaurant would be really important to them,” he explained.
Not only would open banking empower FinTech startups to compete on the same playing field as major financial institution incumbents, but it would also help prop up other members of the finance ecosystem in Canada.
“I love the big five banks, they’re all awesome, but the next level, the challenger banks, the credit unions, the financial institutions that are far more focused on member experience, having an open banking data policy is going to allow those guys to provide some game changing innovative products, and create a banking ecosystem in Canada that is much better for all of us,” said Ahluwalia.
Canadian regulators’ hesitation towards pursuing an open banking policy, however, is not unfounded. While speakers were enthusiastic about the opportunities an open banking policy would bring to the industry in Canada many also expressed a need for caution. After all, recent history has proven time and time again what can happen when consumer data is no longer locked away in a digital bank vault.
“With the concept of openness to data comes the good and the bad,” said fellow panelist Jeff Mitelman, the CEO and co-founder of Thinking Capital. “The good is the product innovation and user experience, the bad is that there’s always going to be bad actors in the system. It’s naive to think it’s not going to happen.”
Despite what Mitelman would characterize as reasonable concerns about the prospect of open banking he explains that the FinTech industry is currently operating on information from the past; open banking would allow them to start working in real time. “When you get access to real-time data, as opposed to using something that happened in the past—a financial statement or some proxy to cash flow—you get to make decisions that are so much more appropriate,” he said.
For the mean time, FinTech companies in Canada are finding workarounds, but sourcing the data they need to offer their products remains far more complicated and costly than it would be under an open banking system.
“We are working with great companies like Flinks, that offer great solutions, and KOHO, so that we can bring innovation to the market, but we’re using workarounds,” said Mahima Poddar, the vice president of product and corporate development for Equitable Bank. “Because we don’t have that infrastructure it’s point-to-point solutions with whatever we can cobble together, but that’s not practical, it’s quite expensive, and it limits the number of these partnerships that we can bring together.”
Canadian regulators are in a tough position when it comes to open banking, as it can open the floodgates to a better, more user-centric and innovative financial technology industry, but also instances of fraud, hacking and data theft.
Credit Karma’s chief revenue officer and co-founder, Nichole Mustard, believes that Canadians will come to terms with the risks and benefits of open banking, much like they have other technologies in recent years.
She explains that the concept of getting into a stranger’s car was foreign only a few years ago, as the concept of autonomous vehicles remains today. Before she trusted Uber and Lyft, however, she learned to trust mapping application like Google Maps to find her the best route home. Only once she was comfortable with that layer of technology were consumers ready to take it one step further by adding a car and driver to the equation.
“Each of these innovations aren’t necessary planned together, but it’s what will eventually enable self driving cars,” she said. “When you think about finance, the trust of allowing technology to make decisions for you and the experience of allowing that to happen again and again and how they come together, that’s how we move towards autonomous finance.”
Mustard adds that it will take some time for the financial industry to earn that same level of trust, but believes the more we utilize digital financial services, the more we trust them to operate autonomously, without asking for our permission and personal information with each use.
The need for greater government support and regulation
When it came to assessing the government’s job in supporting the FinTech industry in Canada, speakers and panelists applauded their willingness to consult with industry players in order to build a regulatory framework, but felt that framework was coming together too slowly to match the pace of innovation.
“I think we need greater support from the government overall,” said Ahluwalia, adding that the Australian government recently announced a 1.4 billion dollar securitization program to help non-bank lenders fund loan products for small businesses. “It’s activity like that which could spur momentum in Canada, and it’s been sorely missing.”
Mitelman agrees, adding that while the dialogue with the federal government of Canada is healthy and productive the industry is yet to receive any real government support.
“We have not made up our mind as to the role government needs to play in this ecosystem, and that uncertainty is not contributing to the growth of the ecosystem,” he said. “There are so many different approaches to growing a business, the government has not made itself a factor or an enabler in that growth, that’s the big distinction from other geographies.”
One of the ways in which a small amount of government support would go a long way is access to data, explains Mitelman, specifically the Canadian Revenue Agency’s data related to income and taxation. “If we did nothing but think about how to unlock that data and make it available in a dynamic way, the number of entrants to the market that you would see would be exponential,” he said.
The co-founder and CEO of financial data provider Flinks, Yves-Gabriel Leboeuf, however, said the industry should put equal if not greater focus on the Competition Bureau, as regulations currently provide unfair advantages to traditional financial institutions.
“Most FinTech startups that are not currently one of the large financial institutions in Canada should or might be scared about how the existing data is being regulated,” he said. “That is a very important component in the overall access to financial data, so I would say this is where Canadian regulators should take action.”
Despite frequent calls for the government to assist in growing FinTech in Canada, Leboeuf doesn’t think they will be answered anytime soon, suggesting the industry should get used to operating without their help. “We should not expect the Canadian government to change everything to make everything perfect,” he said.
Canadian FinTech talent in short supply
With three of the world’s leading financial institutions and a booming technology industry, one might expect Canada to have a wealth of knowledge and expertise to bring to the global financial technology industry, but not all speakers felt the country had enough of a supply of talent to become a world leader in FinTech.
“It’s not that I’m down on Canadian talent—I’m very bullish on tech and FinTech companies, I think there’s so much growth that’s just starting—I just don’t think there’s going to be the volume of talent that we need here,” said Wong of Borrowell. “There’s not nearly enough FinTech talent in this space to meet the need,” agreed fellow panelist Mitelman.
Mitelman went on to explain how, as a company of a couple hundred, Thinking Capital has had to spend significant time and resources training and onboarding staff from adjacent industries. “That’s an enormous challenge, because the onboarding takes a long time, and you’ve got to go pretty deep to make it effective,” he said.
The other problem often faced by Canadian FinTech companies when it comes to finding local talent is the competition, as startups are rarely able to offer compensation packages comparable to what is offered by traditional financial institutions.
“The idea of converting a bank executive into a FinTech, getting some of that institutional knowledge and applying it to a new opportunity or to an extended market opportunity, it’s just unrealistic,” said Mitelman. “The FinTechs traditionally cannot pay what those institutions will pay, the benefits aren’t comparable, and there’s a very small percentage of that population that would come over for a chance at a meaningful upside.”
OnDeck’s Ahluwalia, however, felt it was still better to start a FinTech company in a country that has strong financial and technical talent, adding that it’s not just banking executives that will help the industry flourish.
“We have some amazing tech clusters all across the country, from Vancouver to Toronto to Montreal, and you’re also starting to see some migration across various banking ecosystems, traditionally individuals that have not been involved in FinTech but have skills around credit and analysis,” he said. “The good thing about Canada is that we have that strong banking foundation, that’s going to allow many individuals in those proxy areas with expertise migrate over to FinTech.”
What role can foreign FinTechs play in growing Canada’s ecosystem?
Despite the challenge of finding qualified talent in Canada speakers representing international FinTech brands felt that industry players would be able to import the talent it needs from elsewhere around the world.
Angus Sanders, the U.S. head of strategy and business operations for U.K.-based peer-to-peer lending marketplace Funding Circle, sees an inherent advantage for large companies that have human capital resources they can leverage from other markets.
“Talent is obviously challenging everywhere,” he said. “Having said that, now that we’re a big global company we are able to leverage our talent locally in our other markets, so when we go to a new market we’re able to bring some people in.”
While the strategy can work as a temporary solution, however, Sanders and other panelists representing multi-national brands stressed the importance of also partnering with local talent before bringing their products into new markets.
“We’re getting better at understanding the similarities between different markets, so we can start working with them more quickly, but it does take a bit of time to learn about data sources and how their system works,” said Sanders, adding that different countries also have strong cultural differences when it comes to credit and loans.
For example, American small businesses often accept borrowing money as a necessary step in their growth and development, while small businesses in one of their other main markets, Germany, often see borrowing as a sign of weakness or desperation.
Mustard of San Francisco-based Credit Karma refers to such nuances as the “localization twist,” which she says are vital for FinTech companies entering new markets, even across her country’s Northern border.
“We did take a U.S.-based approach, but thought about how to extend that internationally, and I like to talk about the 10% or the 20% localization twist,” she said. “When we came here we were proud to announce that we’re available in Quebec [in French], which makes us the first C-to-C service that truly services all Canadians.”
Mustard explains that its important for international companies to maintain the competitive advantages that allowed them to be successful in their home markets, but also be prepared to adjust according to local needs and preferences.
“Right now we have 6 people in the U.K. doing in-home interviews, and they’ll do 100 interviews over the course of the next two weeks,” she said. “They literally sit down with people in their homes and talk about things like, ‘how does money make you feel?’ ‘How do you manage your money?’ ‘Can you show me how you manage your money?’ and just getting those first hand experiences.”
Even within her home country, Mustard says the company is making a deliberate effort to explore the diversity of its customer base by pushing away from the coasts and spending more time in Middle America.
With all the resources that are lacking in Canada, some believe the country has to rely on foreign multinationals like Credit Karma to show Canadians what’s available, and what’s possible, from a healthier and more vibrant financial technology industry.
“What we need to do is focus on building an ecosystem,” said Graham towards the end of his opening remarks. “Foreign FinTech companies, you are absolutely an important part of that, and we welcome you.”
Towards a stronger Canadian FinTech sector
Though speakers often had a direct interest in the strength of the Canadian FinTech industry many took a wider view, explaining how its growth could benefit other players in the ecosystem, and the country more broadly.
Graham, for one, believes that the biggest beneficiaries of a strong FinTech industry in Canada are the traditional financial institutions.
“If what you want, ten years from now, is to still have three or more Canadian banks on that list of the top 20 banks, I think you’ve got to have big Canadian FinTechs on that list of top global FinTechs,” he said. “I don’t think banks can do all the innovation themselves; they need to be part of an ecosystem where they’re being pushed, where they’re partnering with and in some cases acquiring really smart FinTech firms.”
Despite the long-term benefit that a stronger FinTech industry could provide the established financial industry, however, some speakers felt there wasn’t enough of a short-term incentive to pique their interest in promoting open banking and other policies that would accelerate the growth of the FinTech sector.
“Short term, banks will lose from open banking, because they make a lot of money off of things that customers probably don’t know about, and once they get some visibility into it they won’t want to pay for them,” said Daniel Eberhard, the CEO of mobile banking alternative KOHO. “If you take a longer time horizon, these companies and this innovation is coming to Canada whether you like it or not, and it takes a holistic ecosystem to be successful; so open banking will accelerate the bank’s delivery of value to consumers by making a more competitive marketplace. I think in the long term its good for banks.”
Equifax’s digitial innovation lead, Yassir Jiwan agreed with Eberhard, taking that sentiment one step further.
“I believe from the get-go that for sure you have challengers benefitting, but I also strongly believe established institutions will also benefit, especially those are looking at this now, and some of them are,” he said. “Who will benefit the most? The economy, the country overall will benefit, because right now, based on the structures we have, we are chocking off gas from the engine.”
Further into the day, OnDeck’s CEO Noah Breslow made an announcement to the audience in regards to OnDeck combining their Canadian operations with Evolocity Financial Group. In this exciting move for both companies, the combined enterprise will offer a wide range of innovative financing options to the Canadian small business ecosystem.
While the Canadian FinTech industry has many challenges to overcome—including consumer sentiment, access to talent, a lack of government regulation and no open banking policies—the main message many will take away from the Alt-Fi Toronto Summit is the importance of pushing forward. Not only will a strong FinTech sector benefit those directly involved, but it will also strengthen the country’s entire financial system, from the big banks and credit unions to the startups and individual customers.