Development of a consistently implemented, policy-driven Canadian fintech strategy focused on fostering innovation is essential and strengthening the fintech ecosystem in the Toronto area should be seen as an imperative for the country’s financial services sector and governments, contends the Toronto Financial Services Alliance (TFSA).
Researched and written by Accenture and McMillan LLP, findings are based on primary and secondary research, including a survey and 39 interviews with executives in the government, financial services and fintech sectors.
Although steps have been taken to build global leadership, “we are still in the middle of the pack,” comments Janet Ecker, president and CEO of the TFSA, a public/private partnership whose mandate is to enhance and promote the long-term competitiveness of Toronto region as a Top 10 international financial services centre.
“Other global centres are not standing still, and neither can we. Strengthening the fintech ecosystem will be critical to the continued success of our global financial industry,” Ecker continues.
The Toronto region “lacks the maturity and experience of Silicon Valley, the highly attractive investment climate of New York and the established government support of the United Kingdom and Singapore,” states the report.
The region’s “ecosystem risks falling further behind as other established and emerging fintech hubs move to seize a global leadership position in this important industry. This could undermine the competitive strength of Canada’s financial services industry as a whole,” it cautions.
“While good regulation has given Canada a world-class reputation for the safety of its financial system, we haven’t kept pace with other leading fintech centres in creating a regulatory ecosystem where fintech innovation can thrive and grow,” suggests Robert Scavone, a partner in McMillan’s financial services group and lead author of the report’s regulatory section.
To ensure a strong position globally, the report recommends six key calls to action:
Collaboration – closer and more frequent engagement among fintech start-ups, well-established financial institutions and the venture capital community;
Capital – improved access to sophisticated seed-level and local later-stage capital for Canadian fintechs;
Regulation – reduced regulatory burden on emerging fintech companies, and modernized regulatory frameworks to attract foreign investment and further reflect changing business models, technologies and priorities;
Research – encourage commercialization of research for financial services to further establish the region as a global leader;
Talent – creation of opportunities and conditions that will attract top talent with experience growing and scaling fintech companies; and
Awareness – raising of the region’s profile on the global stage as a fintech hub.
More specifically, with regard to fostering openness, the report suggests governments develop and articulate a clear fintech strategy, elements of which include identifying specific priority areas, aligning public sector support to incentivize innovation, and establishing an industry-led panel to advise on all matters related to fintech.
“While some have shared that fintech activity in the region is a litmus test for growth and innovation in the financial services sector, it is important to note that financial institutions play an instrumental role in the innovation cycle by bringing benefits to Canadian customers at scale,” the report maintains.
With regard to current distribution of fintech start-ups by financial services offerings in the Toronto region, the largest percentage (26%) relates to banking – payments, other (14%) and banking – lending (13%). Insurance, for its part, accounts for 6% of the pie.
“Governments also need to modernize regulatory frameworks to reflect changing business models, technologies and priorities,” the report recommends.
“In Canada, the goal of both governments and sector participants must be to create the kind of long-term conditions that benefit all participants in the ecosystem, from fintechs to financial institutions, venture capitalists and researchers,” it points out.
With regard to research, “governments, universities and businesses alike need to do more to encourage the commercialization of research. The real-world application of ground-breaking research is what launches businesses, creates jobs and grows our economy,” the report suggests.
TFSA reports that the Toronto/Kitchener-Waterloo corridor currently benefits from a strong core of financial institutions, top-tier research facilities at local academic institutions, a strong talent base and relatively low business operating costs compared with other global fintech ecosystems.
That said, “the analysis also identified the need to develop a clear, consistently implemented, policy-driven Canadian fintech strategy focused on fostering innovation among all participants in the ecosystem to address ongoing challenges,” it adds.
“If not addressed, these challenges could risk the Toronto region falling behind other international financial centres,” it concludes.
“Today’s report represents a snapshot in time, but every day, new and more powerful technologies will inevitably bring change and disruption to our financial services industry – in Canada and around the world,” says Robert Vokes, managing director of Accenture’s financial services practice in Canada, characterizing fintech as an increasingly important sector of the economy.
“Our regulatory landscape is confusing and fragmented, and compliance can be a significant barrier to entry for fintech start-ups, discouraging collaboration with incumbent financial institutions,” Scavone cautions.
“Here in Canada, the current regulatory framework in financial services, as it applies to technology, is widely viewed by fintechs as antiquated, cumbersome and a significant impediment to innovation and growth. Navigating the regulatory maze can be expensive and time consuming for fintech start-ups,” the report states.
Noting that a flexible and responsive regulatory environment is essential for fintechs to thrive and for traditional financial institutions to test innovative technologies, “a balance, therefore, needs to be found that preserves the traditional role of regulators (to protect consumers, investors, the capital markets and the broader financial system) while creating a more modern and responsive framework that encourages innovation among start-ups and traditional players.”
Canada can learn from other fintech centres around the world that are “experimenting with such tools as regulatory sandboxes, which Canada is only just beginning to try out,” Scavone recommends.
A “regulatory sandbox” allows an emerging fintech company to “test its business model for a limited time without having to run the full gauntlet of regulations or a financial services company can try out a new technology without being bound by the usual regulatory restrictions,” the report explains.
“This approach may encourage innovation and collaborative partnerships and allow fintechs and traditional players to get new ideas to market more quickly and at a lower cost,” it adds.
The fintech sector is leveraging new technology (such as artificial intelligence and big data) in an effort to design and deliver the financial services solutions of the future,” states the report.
“Fintech is on track to become an influential and, ultimately, dominant force in financial services – to the extent of effectively shaping the sector going forward,” it maintains. “It will best serve our region, our province and our country if our own local fintech sector, in partnership with existing financial services companies, is at the forefront of this transformation,” it adds.
“The future global giants in this field will be determined by the choices made today and in the coming years by entrepreneurs, financial institutions, researchers, investors and policymakers,” the report adds.