Prior to 2016, few people had heard the term “FinTech” or had any idea of what it meant. Today, FinTech is attracting headlines in major media outlets. Emerging FinTech companies are achieving unprecedented success in raising capital and the Canadian government is announcing plans to encourage innovation in financial services like never before. There is significant excitement about the promise of FinTech to revolutionize financial services in Canada and globally. Carolyn Wilkins, the Senior Deputy Governor of the Bank of Canada, recently proclaimed: “It is no exaggeration to say that we are in the midst of a defining moment for innovation in financial services.”
There is significant potential for FinTech to disrupt the traditional methods by which financial services are distributed and consumed in Canada.
Canadian FinTech at a Glance
FinTech encompasses a wide range of companies, from traditional enterprise software companies providing technologies specifically designed for financial institutions to technology-enabled financial services companies that use technology to make it easier to apply for a loan, send money, get investment advice, buy goods, raise capital or engage in secure transactions using a distributed ledger. In the case of technology-enabled services, there is significant potential for FinTech to disrupt the traditional methods by which financial services are distributed and consumed in Canada. Established or ‘traditional’ bricks and mortar financial institutions in Canada have signalled that they intend to strongly embrace FinTech to deliver value to customers, improve efficiency and fend off new competitors, while emerging companies are aggressively courting the customers of those institutions with services that emphasize the user experience, convenience and low cost.
In the lending space, Canada has seen significant growth in emerging FinTech companies that operate online lending businesses for consumers (e.g., Borrowell, Mogo, Progressa) and small business (e.g., Thinking Capital, FundThrough). There is no requirement to be a licensed bank to lend money in Canada and therefore emerging FinTech companies present direct competition to Canadian banks with significantly lighter regulatory burdens (some provinces have licensing requirements for non-bank lenders and all provinces regulate the disclosures made by lenders to consumers). However, some Canadian banks have recently announced partnerships with FinTech lenders; for example, CIBC partners with both Borrowell and Thinking Capital to offer more lending options and speedier loan approvals to its consumer and business customers.
The explosive growth of automated, online investment advisory services (referred to as online advisers or robo advisers) was one of the earliest examples of FinTech going mainstream. Canada has a number of online advisers operated by both emerging FinTech companies (e.g. Wealthsimple, Wealthbar) and established financial institutions (e.g. BMO SmartFolio, Questrade). Unlike the online lending space, online adviser partnerships between emerging FinTech companies and banks are rare. Online advisers must be registered with provincial securities regulators and comply with the same requirements that apply to traditional portfolio managers.
All aspects of the insurance business are heavily regulated in Canada – from underwriting to distribution to claims adjustment. As a result, FinTech has had a smaller impact on the Canadian insurance industry. But FinTech can bring novel data analytical tools and digital platforms to the insurance business and we expect significant change in the future as established insurance companies embrace new technologies and in some cases partner with emerging companies (e.g. Zensurance, League).
Enterprise software and other platforms
The examples above are just the tip of the Canadian FinTech iceberg. There is a wide range of emerging Canadian companies that offer FinTech solutions to consumers, to established financial institutions or to consumers through established financial institutions. Consider the example of Sensibill – Bank of Nova Scotia recently launched Sensibill’s innovative digital receipt technology through their online banking platform and mobile banking app and a number of other banks in Canada and globally are piloting the technology for launch in the near future. Other examples can be found with online payments (e.g. Paycase, Plooto), loyalty programs (e.g. Drop Loyalty), alternative banking platforms (e.g. Clearbanc), financial due diligence solutions (e.g. OutsideIQ), fraud detection (e.g. Verafin), investor relations and market intelligence (e.g. Q4) and loan portfolio management (e.g. Aspire).
Existing Regulatory Framework
Given the relatively recent attention of elected officials and regulators to FinTech in the Canadian market, it is perhaps not surprising that there is no special regulator (or regulations) targeted specifically at FinTech companies. This does not mean that FinTech companies are not subject to any regulations – on the contrary, they are subject to the same regulations that the bricks-and-mortar companies would be subject to if they were providing the same services (with the exception of regulated financial institutions who are subject to several additional regulations). Such regulations often include both licensing (for example, securities dealer, mortgage broker or insurance) and ongoing compliance requirements.
This “same application” of regulations – although fair at one level – creates potential compliance issues for FinTech companies that either do not have the funds to fully comply with all the regulations or, because of the virtual nature of their business model, do not fit neatly into the existing regulatory compliance framework. Both the federal and provincial governments in Canada appear to be aware of this issue. In August 2016, the Canadian federal government published a Consultation Paper soliciting feedback from stakeholders on the future of the financial sector. The consultation paper acknowledges the growing importance of FinTech companies and focuses specifically on how the financial sector framework should support innovation and competition, particularly from new entrants, while maintaining stability and consumer protection.
At the provincial level, the Ontario Securities Commission (OSC) recently announced the formation of OSC Launchpad. OSC LaunchPad is designed to engage with FinTech companies, supports FinTech companies in navigating the regulatory requirements and aims to keep securities regulation in step with digital innovation. Although nascent, OSC Launchpad played a significant role in developing an exemption from certain Ontario securities laws for AngelList, a digital platform that enables syndicates of angel investors to invest in emerging companies. This is one of the first of what we expect to be many examples of Canadian regulators developing temporary and tailored exemptions to regulatory requirements in order to enable FinTech companies to test new services in the Canadian market, without comprehensive adherence to all the financial services regulations that would otherwise apply. In addition to OSC LaunchPad, both the OSC and the Quebec Autorité des marchés financiers (AMF) have announced FinTech working groups with mandates that include analyzing technological innovations in the financial sector in order to anticipate regulatory and investor protection issues. Also, the OSC and the Australian Securities and Investment Commission (ASIC) recently announced an agreement to support innovative businesses in their respective jurisdictions and the OSC hosted a FinTech hackathon called #RegHackTO.
FinTech is still in its early stages in Canada, and for now might look more like an evolution than a revolution. However, the pace of change is gaining momentum and will likely accelerate in the year to come. We expect that the Canadian federal government and provincial governments will continue to embrace Canadian FinTech initiatives through industry outreach, rule changes and support of organizations such as MaRS that act as technology incubators and accelerators. For emerging FinTech companies, there are significant opportunities to disrupt the Canadian financial services industry, but careful consideration of the existing regulatory framework and dialogue with regulators is necessary. For established financial institutions, the opportunities to use FinTech are equally significant, while the lessons from other industries of the consequences of failing to embrace technology are stark.
Editor’s Note: Borrowell, FundThrough, Progressa, Wealthsimple, Sensibill, Paycase, Plooto, Drop Loyalty, OutsideIQ, Verafin, Zensurance, Q4, Clearbanc and Aspire are Osler clients.