Is Canada a fintech “laggard” or innovator?

By Susan Yellin | September 20 2018 07:00AM

Photo: Freepik

Is Canada an ongoing straggler or a consistent innovator when it comes to financial technology?

While Canada was cited as being far behind the United States and Asia at a recent conference where financial technology is involved, others strongly differed, saying Canada has been on the cutting edge for years when it comes to areas such as the equity markets.

“Clearly, Canada is a laggard,” Matthieu Cardinal of Finance Montréal told those attending the Investment Industry Association of Canada’s (IIAC) fintech conference in Toronto in June.

“We have a ways to go to keep up with the global pace of innovation in the fintech space,” said Cardinal, noting the U.S. is way ahead, especially when it comes to wealth management and Asia is moving up quickly.

Cardinal said China’s biggest fintech companies have “tremendously high” adoption rates because they’ve built social platforms first and then added financial services on top – bringing in people first and then providing them with data. “The number of SMEs over there is very important, so having a social platform on which you can manage your inventories, manage your investments and make your payments – well, guess what? It’s very convenient.”

Blockchain technology

The Australian Securities Exchange has announced it will be the first major exchange to adopt blockchain or distributed ledger technology (DLT) to record shareholdings and manage the clearing and settlement of equity transactions. DLT uses a shared ledger to permanently record transactions in such a way that it is practically impossible to be tampered with.

“In Canada, there is a shared conscience that we have to evolve more quickly to keep up with the global pace of innovation in the financial services industry,” said Cardinal, whose non-profit organization aims to help current companies transform digitally as well as support the new generation of fintech start-ups.

At a later session, Richard Carleton, CEO of the Canadian Securities Exchange (CSE), disagreed with the “laggard” label. “We’ve been incredibly innovative in the equity market space for several generations at this point.”

Carleton said the very fact that Canada is so close to the U.S.— the largest pool of equity capital in the world – means the country has a substantial scale deficit that we need to make up some way. That’s especially true if Canada wants to maintain a vibrant primary market for capital formation and a vibrant secondary market to provide investors with the liquidity they need to reduce costs of capital for entrepreneurs in Canada.

Canadian firsts

“We don’t give ourselves enough credit,” said Carleton. He listed off a number of Canadian firsts: the first exchange in the world to introduce computerized trading; the first major equities exchange in the world to introduce decimalization; the largest North American exchange to opt for fully electronic trading when it closed its trading floor in 1997; home to the first successfully traded exchange traded funds and in February, will be launching a new clearing and settlement facility in Canada, using blockchain technology.

“We have an enormous track record of innovation. We see it continuing,” he said. “There are a lot of smart people working hard to try to solve real world problems that make the Canadian marketplace world class.” 

The CSE, dubbed “the exchange for entrepreneurs,” began operating as an exchange in 2004. Its goal is to provide a modern and efficient alternative for companies looking to access the Canadian public capital markets.

Carleton said many entrepreneurs in Canada are looking at alternative ways of raising capital, noting that in the U.S. last year more than US$7 billion was raised through token offerings. While some of these offerings were fraud and most were done illegally, it showed that there is an appetite from investors for new products.

“And there is an underserved segment of the entrepreneurial community, particularly in fintech, that needs new, lower-cost channels to raise capital.”

Carleton said Canada has a smooth and efficient system in most areas of the business except for the back office. But DLT will allow companies to do things such as process royalty payments without going through as much as a five-stage process in addition to saving millions of dollars.

How fintech companies are thriving nowadays depends on a number of factors.

Successful fintech companies in North America have taken a piece of the value chain – usually the least regulated – figured out what people are looking for most and then delivered it back to the industry, said Kendra Thompson, managing director, Accenture Wealth & Capital Markets.

The situation in Asia is much different. Fintechs there aren’t even looking at what the industry in Asia already has to build on it – they’re creating their own services, said Thompson.

So far in North America, there have been few companies to take up the stance the Asians have, said Thompson. But she noted that in the past few months, she has been part of two programs where Chinese fintechs are partnering with American banks and starting to do exactly that.

“Up until about six months ago, I saw very little of that taking place in North America, but we’re starting to see the first signs,” she said. “So I do feel it’s worth knowing what’s going on in China because then – and not if – they will challenge the paradigms of how we think of delivering investment advice.”

One of the reasons why Canada hasn’t seen as much innovation as other countries is because of the heavy regulations that come with the delivery of financial services, said Andrew Jappy of AIJ Consulting.

While Canada does have its share of robo advisors, those that have gone standalone are finding it difficult to make a go of it with clients who only have an average of $30,000 in assets. Some robo advisors have now pulled advisors into their services to make their businesses profitable. But it’s challenging for small and medium-sized businesses to become disruptors or innovators because of heavy regulations, said Jappy.

Thompson said some players have taken a piece of the margin and set the base floor, meaning anyone in the advice business needs to be adding more to their value proposition if they want to charge more.

“Everything you see and market today is a pilot, a first release, it’s the start of an idea – not the end of an idea,” said Thompson. “All these models will change and partner, some will be bought and some will disappear. They are commodifying part of your margin. And that means if you are in the relationship business you need to ensure that the piece you are layering on top of investment management is valuable to your client, that it is not easy to replicate through digital and that there is a way to charge for that that is flexible and makes sense to your customers.”