Category Archives: Fintech Opinions

The future of fintech: lending + services

Andreessen Horowitz |

fintech lenders in disguise - The future of fintech: lending + servicesIn 2006, LendingClub introduced a then-novel business model: the ability to offer online personal loans to millions of underserved customers. The peer-to-peer lender was a media and investor darling, hailed as a tech-enabled alternative to traditional banks. When LendingClub went public in 2014, it was valued at $8.5 billion, the year’s single largest US tech IPO. Now, five years later, that fintech pioneer has lost 85 percent of its market value.

Meanwhile, mobile upstart MoneyLion launched in 2013, also providing online personal loans—a direct competitor to LendingClub. Today, MoneyLion claims more than 5 million users and is valued at nearly $1 billion.

See:  Peer to Peer Lending: The Future of Fintech is Now

LendingClub had significant competitive advantages, from low customer acquisition costs—back then, personal loans keywords weren’t nearly as competitive on Google and Facebook was actively promoting LendingClub as an early F8 partner—to improved underwriting (the company provided lenders with access to customers’ credit score, total debt, income, monthly cash flow, and social data). So why is LendingClub experiencing growing pains while MoneyLion sees significant growth? Though the latter started out solely as an online lender, it quickly morphed into an all-in-one lending, savings, and investment advice app.

A new wave of fintech startups understand that regularity and rhythm are the basis of any good relationship. Take Tally, for example, which is building a large-scale lending business via automating credit card payments. Or Earnin, which provides ongoing value by granting customers access to an earned wage advance, say, every two weeks. Credit Karma hooks users by offering regular updates on your credit score. The services these companies provide to users—conveniently packaged in app form—go beyond loans. And by driving continued engagement, these companies don’t have to pay to reacquire customers.

In addition, the business (in this case, providing or facilitating loans) actually improves the customer experience and the overall product. Credit cards are a classic example. By using them to make payments, the consumer earns rewards—improving the experience and the product—while the credit card company makes money via the interchange. Likewise, for Credit Karma members, taking a personal loan can reduce credit card debt, thereby improving their credit score. Another example outside fintech is Google Ads (formerly Google AdWords). When useful results are returned, it actually improves the utility of Google Search, giving consumers a reason to re-engage with the broader product. Thus, a flywheel is created between customer retention and monetization.

See:  Lending Loop Surpasses $50 million Milestone and helps thousands of Canadian Businesses and Investors

In the coming years, fintech companies will continue to duke it out for dominance in various core verticals, whether that’s financing a home, paying off student loans, or managing credit card debt. But the real test of who will own the money button on your phone will be in who can build enduring customer relationships. By being holistic, fintech companies can earn a place in users’ regular app rotation—then cross-sell into new product areas. Even as businesses like LendingClub and Prosper are losing ground, peer-to-peer lending remains a $138 billion market. The next wave of lenders, though? They’re pocket-sized financial assistants.

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NCFA Jan 2018 resize - The future of fintech: lending + services The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Kickstarter To Workers and Project Creators: Drop Dead

Current Affairs | | Sep 29, 2019

kickstarter anti union - The future of fintech: lending + servicesnumber of workers at Kickstarter are currently trying to organize a union, an effort the company has actively opposed from the start. The CEO made it clear that the company doesn’t want a union and would not voluntarily recognize one. Several weeks ago, during the middle of the organizing campaign, Kickstarter suddenly fired two of the lead organizers. Sources inside Kickstarter confirmed to the press that the firings were not, as the company insisted, merely performance-related.

When the union organizers were fired, Current Affairs happened to be in the middle of a Kickstarter campaign. As a left publication, we were appalled, and didn’t want to publicly support an anti-union company. So we got together with our colleagues at Protean Magazine, Pinko Magazine, the Nib, and the Baffler (all of whom had done Kickstarter campaigns in the past) and released a statement condemning the firings and expressing solidarity with the union.

We invited other Kickstarter project creators to join us on the statement, which hundreds did, including well-known creators like Neil Gaiman, Anita Sarkeesian, Molly Crabapple, and Richard Herring. Collectively, the creators on our statement have raised millions of dollars on the platform (my estimate is $10 million, but I stopped counting around 5).

See:  Kickstarter accused of union-busting after firing workers

We were united in (1) appreciating Kickstarter’s staff and the great platform they have created and (2) being firmly opposed to the company’s anti-union activities and supportive of the workers’ rights. (If you have created a Kickstarter project, please consider signing. Read some of the statements people have made here.)

As our campaign took off and started to attract press attention, I received a message from Kickstarter’s chief communications officer. He asked me if I would like to talk on the phone so that he could address our concerns. I spoke with him, and explained that his company’s actions violated the core values of the creators on our statement. Not only that, I explained that Kickstarter was actually damaging its creators’ projects.

I had supporters of Current Affairs saying they were ambivalent about donating to our campaign because they didn’t want to support Kickstarter (who take a percentage of all funds raised). Pro-labor project creators who hadn’t yet met their funding goals were especially hurt. One creator was actually raising money for a game about union organizing, and felt he couldn’t in good conscience stay with the platform but didn’t want to lose the money he’d raised for his game.

After I told the communications officer this, he argued that Kickstarter was not, in fact, an anti-union company. I pointed out to him that since his company was in the middle of fighting against their workers’ union effort, they were anti-union in a literal and undeniable sense. I said the creators on our statement held very different values to those of Kickstarter. We did not resolve anything on the conversation, but he said the company was thinking through how to respond and he would be in touch.

Today, Kickstarter offered its response. The communications officer emailed me, and said he would like to share a statement from the CEO with the project creators. The statement said that Kickstarter:

  1. Stood by its decision to fire the organizers, and would be dispatching its lawyers to fight their claims.

  2. Would not voluntarily recognize a union even if the vast majority of workers signed in support of one.

  3. Would not pledge to remain neutral on unionization, and would continue to actively oppose the effort.

Read:  We stand with the Kickstarter Union Petition

The statement was the most blatant slap in the face imaginable to both the workers and the project creators. It says, in essence: drop dead. We do not care what you think. We do not want a union and we are going to try to stop one from forming. We will fire union organizers if we want to, and if they complain to the National Labor Relations Board, they will be facing our lawyers. Kickstarter heard the hundreds of creators who signed our statement, and they have said plainly and unequivocally that they reject our values and will remain an anti-union company.

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NCFA Jan 2018 resize - The future of fintech: lending + services The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Sep 22, 2019: NCFA Response to ASC Consultation Paper 11-701: Energizing Alberta’s Capital Market

NCFA Canada | Sep 22, 2019

ASC  - The future of fintech: lending + services

NCFA is pleased that the Alberta government is undertaking this important initiative to the  benefit of all Albertans.  We acknowledge the substantial background information provided by 11-701.  This submission responds to the brainstorming headings pp. 24 – 31 and seeks to fill knowledge gaps with recent consultation data (mainly obtained in Edmonton) and pays specific attention to equity (investment) crowdfunding and peer lending in Alberta.

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Key Takeaways

The NCFA recommends that the ASC undertake the following:

  • Review and publish a report that evaluates the effectiveness of Alberta’s investment crowdfunding and peer lending requirements compared to other jurisdictions in Canada and international competitors such as the UK, US and Australia, including a comparison of the relative cost of capital to other available financing options;
  • ASC to take a more active role as a resource for both early stage companies and investors including data collection, market analysis, and information sharing to ensure more fair and efficient capital market formation in Alberta;
  • Engage Innovate Edmonton and Platform Calgary following the detailed third-party study by Startup Genome to obtain detailed ecosystem benchmarking data for follow-on analysis of Alberta’s funding gaps;
  • Support the development of a tax relief program for investors to increase the volume of start-up risk capital allocated to non-traditional sectors (eg. financial technology) similar to the effective programs in the UK: SEIS[1] and EIS[2];
  • Work with other jurisdictions to harmonize the crowdfunding regime across Canada (CSA Staff Notice 45-324) with the goal of eliminating unjustified regulatory burden at the same time. We favour BC’s regime;
  • Modify existing requirements so that they are principles based and outcomes focused to enable businesses to comply in the way that best suits their operations – detailed or prescriptive controls should only be imposed when clearly justified;
  • Implement burden reduction amendments for crowdfunding (45-108):
    • Increase the 12 month issuer cap to $5 million or higher;
    • Increase the 12 month investor caps to $10k and allow accredited investors to fully participate;
  • Allow advertising and general solicitation on social media for all crowdfunding;
  • Allow fintech solutions to streamline KYC and suitability tests;
  • Startup crowdfunding business exemption (45-109) – remove lifetime cap of $1 million; or increase lifetime cap to minimum $5 million.

See:  [Survey Deadline Sep 20, 2019]: ASC consults on Energizing Alberta’s Capital Market

Benefits to Alberta will include:

  • Increased capital investment in the province and increased economic growth;
  • Increased investment options for investors that support small businesses across Alberta;
  • Reduced pressure on Albertan startups to raise capital from outside Alberta and Canada;
  • Crowdfunding sources remain in Canada;
  • More capital and improved access to capital specifically for small businesses, rural businesses, economically challenged sectors, and under-served groups (eg. women and Indigenous business owners);
  • More liquidity and transparency in the markets;
  • Improved probability of retaining high growth companies in Alberta; and
  • Accelerated commercialization of new products and services.

Crowdfunding helps to drive innovation, economic activity and job growth. It fills a critical early stage funding gap (‘valley of death’), enables more productive investment in venture markets, and strengthens early stage capital markets. Crowdlending also provides support to more mature companies looking to access capital that may fall outside the parameters of bank lending. And last, but not least, it helps to democratize investment by giving smaller investors direct access to the capital markets.

“Regulation may be the largest constraint to capital markets Fintech development in Canada, as we have not set out many of the same principles as in the U.S. and U.K.”[3]

This is not the time for Alberta to hold back.

Thank you for the opportunity to contribute comments.  NCFA would be happy to expand on any of the points raised in this submission.  We look forward to future developments.

See:  ‘We don’t have enough money’: Tech leaders debate constraints at Vancouver Startup Week

1.    Background and Context

Contrary to the intent of the crowdfunding exemption, Alberta’s crowdfunding requirements hinder access to capital for SMEs across many sectors. These requirements have restricted innovative opportunities for retail investors and our members feel the impact of this directly. The potential of opening up regulation is to significantly increase job creation and economic development, as experience in other jurisdictions shows. Alberta’s 417,000 small businesses would also benefit from the increased access to capital that crowdlending offers.  Canada has fallen behind international competitors like the UK and the US. Crowdfunding now provides the largest investment at the seed stage in the UK and peer-to-peer platforms now provide 15% of all new bank lending to small businesses.

2. Fintech and Crowdfunding are Being Held Back in Canada

Canada’s crowdfunding and fintech “ecosystem” should be competitive, be in line with global trends, and enable early stage entrepreneurs to access smaller amounts of capital at a reasonable cost. Unfortunately, it is not and does not. There is a ‘funding gap’ as smaller companies find it very challenging to raise debt or equity financing in Canada.

There is a 'valley of death' for start-ups at around the $250,000 level. Venture capital funding has increased, but VC dollars are mostly going to expanding firms. Angels are a lot less active than in the US and their investment amounts are lower. Banks generally steer clear of start-ups. This means fewer innovative start-ups, fewer opportunities for investors, lower economic growth and productivity and fewer jobs.

“Regulation may be the largest constraint to Fintech development in Canada, as we have not set out many of the same principles as in the U.S. and U.K.”[5]  The NCFA has conducted numerous stakeholder consultations which overwhelmingly tell us that regulatory requirements are overly prescriptive, complex and burdensome, disproportionately raising the costs of doing business for start-ups. Entrepreneurs are reluctant to start up in Canada due to high costs (relative to a small financing), along with concerns about ongoing regulatory burdens such as over-reaching and complex reporting requirements and compliance reviews.

Investors are inhibited by restrictions like caps on investment. Many talented entrepreneurs and investors move to (or invest in) overseas jurisdictions that better understand (and support) innovation and the economic potential of start-ups and SMEs.  If the NCFA recommendations were to be implemented, the experience of other jurisdictions makes clear that more capital would be raised, especially for under-serviced sectors (e.g. women and minority groups, including First Nations, and rural communities). Investors would have increased confidence and more freedom to invest as they choose – any increase in investor downside risks are anticipated to be low.

3. Alberta

The call for comments by the ASC is a leap towards positive change in the Albertan capital markets and crowdfunding landscape. While the in-depth background material supplied by the ASC in 11-701 clearly lays out the challenges for Albertan companies, there are updated consultative engagements with the entrepreneur communities in Edmonton and Calgary. These updated reports will be a useful addition to the ASC’s decision-making processes. They also provide excellent contacts for ASC’s engagement with Alberta’s major centers.

See:  ASC advances new capital-raising initiatives for start-up businesses

(a) Startup Genome Reports

In Edmonton, starting in May 2018, community meetings under the banner of the “Edmonton Innovation Ecosystem Community” engaged members of the innovation community.[6] To date, there have been 11 community consultations with key innovators on a near-monthly basis. The impetus for the first gatherings followed consultation with 50 entrepreneurs in Edmonton to gather their feedback on ecosystem performance. The EEDC engaged Startup Genome to begin measurement of the ecosystem performance. The Edmonton Report brought two key measurement instruments to the ecosystem, Global Market Reach (GMR) and Global Connectedness (GC).

startup genome edmonton report - The future of fintech: lending + services

Startup Genome Edmonton Ecosystem Assessment, May 2018

We ask that the ASC review the results of EEDC’s more detailed analysis of the ecosystem as part of their assessment of 11-701 responses. Notably, Edmonton lags behind its Canadian peers in attracting resources from within the country.  In addition, Edmonton ranked below what the report calls the Globalization Phase Average in Early Stage Funding per Startup, based on data from Crunchbase and Deal Room. The key actionable insights from this early analysis are that Edmonton should focus on increasing early stage funding by (1) widening the funnel and increasing startups with seed funding; (2) supporting the formation of more sources of capital (ie. Angel groups); and increasing access to Series A capital.  Calgary has also engaged Startup Genome for ecosystem benchmarking[7].

(b) Innovation Compass

Another work product from the EIEC meetings in Edmonton was the Innovation Compass report[8]. Due to perceived low numbers of early entrepreneur engagement, EEDC engaged ZGM Marketing to complete a third-party interview process with Edmonton Entrepreneurs to make recommendations that reflect the voice of Edmonton entrepreneurs. Engagement began in December 2018 and the final report was published June 20, 2019. The report provided community validated recommendations and directions for supporting the city’s tech innovation ecosystem. Among 14 recommendations and directions, the top recommendation was:

“Encourage pools of private investors from all sectors to move off the sidelines and start investing in local tech entrepreneurs.”

innovation compass edmonto recommendations - The future of fintech: lending + services

Highest priority recommendation from Edmonton innovation ecosystem community members in the YEG Innovation Compass Report.

(c) Edmonton Advisory Council on Startups (EACOS)

During the early meetings of the EIEC, it was recognized that a body completely separate from EEDC that reflected the voice of Edmonton entrepreneurs was needed. The Edmonton Advisory Council on Startups was formed with members representing all stages of entrepreneurship to ensure diversity. EACOS is comprised of 13 individuals representing students, seed, startups and scale-up stage companies, and investors. EACOS has published three position papers[9] aimed at increasing the size, throughput, energy, and success of the Edmonton startup community.   EACOS has identified a number of community priorities and access to capital is top of mind. EACOS has recommended:

“Intensified efforts to engage local investors into investing into local technology companies. Investors who have built capital through traditional means, like real estate and energy, need to be effectively engaged, educated, and presented with the portfolio opportunities of technology investments.”

4. Comparison: British Columbia

BC and some other jurisdictions have less burdensome crowdfunding requirements[10] that allow small firms to raise up to $250,000 per offering (twice a year), with participation from other provinces. While still not ideal, these less burdensome exemptions have proven to be much more effective than MI 45-108 in Ontario.

For background on exemptions in Canada see: https://www.bcsc.bc.ca/Securities_Law/Policies/PolicyBCN/PDF/BCN_2018-01__February_14__2018/. (This BCSC Notice expresses well many of the points we raise in this submission)

5. Canada’s Uncompetitive Position

Canada has fallen behind international comparators such as the UK. In the UK,  crowdfunding platforms were involved in 24% of all equity deals in 2017, but with 30% of seed stage deals in 2017.[11]

To see the advantages of a uniform, cross-border, and flexible crowdfunding regime, one need look no further than Regulation D in the US. The following are quotes from the recent Crowdfunding Capital Advisers Report.[12]

“2018 saw triple digit growth in unique offerings, proceeds and investors. More importantly, start-ups are successfully using Regulation Crowdfunding to raise meaningful capital in a relatively short period of time and at costs that are less than a typical Regulation D offering.

“Unlike venture capital, where less than 6.5 percent of start-ups successfully raise funds, the success rate in Regulation Crowdfunding hovers around an impressive 60 percent. A key data point for industry followers is that the average raise ($270,996) helps start-ups hurdle the “valley of death” they often face after expending their internal or personal capital.

“Regulation Crowdfunding is proving to be a jobs engine (creating on average 2.9 jobs per issuer), economic generator (pumping over $289 million of revenues into local economies)... There is still a lot of room for growth with Regulation Crowdfunding offerings as they equate to only 1.2 percent of all Regulation D offerings and only 4 percent of all capital raised under Reg D.

“The fact that the velocity of capital into funded offerings continues to be steady without signs of abnormal activity or irrational investor behaviour is a healthy indicator. Meanwhile, the rapid increase in the number of offerings and investors proves there is continued appetite for Regulation Crowdfunding from both issuers seeking capital as well as investors looking to diversify. This is true across the [US].

“Regulation Crowdfunding is also proving efficient. If we compare the average days to close (113) in 2018 and average raise ($250,635) of a successful Regulation Crowdfunding campaign to a traditional Regulation D offering, Regulation Crowdfunding most likely represents the most efficient, cost effective way to raise capital for start-ups and SMEs.”

The type of (published) data collection and analysis provided by the above report is rare in Canada, which is another serious impediment to decision making in this area. To back its recommendations, NCFA (and others) must rely largely on anecdotal evidence from its members.

6. Canada’s Competition Bureau

As the Competition Bureau has pointed out[13], a more flexible approach to regulation and better government support would provide significant economic benefits by freeing entrepreneurship. It would also help to keep our entrepreneurs in Canada (along with the related jobs), boost GDP (especially by improving productivity), and encourage the commercialization of new products and services generally.  It is well-documented that overly complex, prescriptive regulation is a much higher burden for smaller firms and so is inherently anti-competitive.  For a disappointing progress report on the Bureau’s recommendations of Dec 2017.  See: http://www.competitionbureau.gc.ca/eic/site/cb-bc.nsf/eng/04392.html

7. ASC Brainstorming Ideas and Comments

(a) Information resource for Alberta start-ups and early stage businesses on capital raising options

  • Raising capital shouldn’t be a ‘black box’. Companies and investors would benefit if the ASC could:
    • provide a roadmap to the various financing options including use of exemptions, what typical companies (and investors) that qualify look like, average time to market, related costs and effort, and capital flows;
    • publish sample templates of the expected quality of good offering documents;
    • work with industry to develop a transparent resource database that is widely available.
  • Dovetailing with EACOS recommendations on entrepreneur preparedness, more information on successive financings would benefit the Alberta tech ecosystem. The ASC could consider hosting this data in an anonymized format so that Alberta startups could learn about their local comparables.

(b) Information resource for investors in Alberta

Some market participants have suggested there might be a role for the ASC in increasing investor understanding respecting the exempt market and considerations when investing in start-up and early stage businesses

  • The ASC assuming an educational role could only be beneficial to Albertan investors, especially those that are seeking to diversify outside of real estate or oil and gas. An equity crowdfunding or peer lending platform operating in Alberta could then easily point to this resource as a third party unbiased educational resource for investors.
  • In addition to local investors, ASC could work with economic development agencies to provide education on exempt market trends and developments to international investors and funds with a new focus on emerging technology as a means to diversify the Alberta economy.
  • Highlighting a range of companies by sector and capital raised in private markets would help investors understand high growth SME opportunities.

(c) Expanding the accredited investor exemption to include educated, experienced investors

What are the right combinations of education and experience? For the educational component, should we consider courses such as those offered through the CVCA Canadian Private Capital Investment School or the NACO Academy for those investing in private markets?

  • The accredited investor exemption if expanded to include educated and experienced investors would unlock latent capital in Alberta while increasing opportunities for qualifying investors and allow for greater portfolio diversification.
  • Any expansion of the accredited investor definition should aim to ensure that investors understand the risks involved with investing in private market securities such as reduced disclosure and lack of liquidity and provide education on the evolving trends of online financing such as peer lending, investment crowdfunding, and digital assets.
  • Education should be tendered and open to all private capital market training bodies, associations, licensed exempt market dealers, and investor-orientated groups and structured to be flexible and allow a wide range of participation to enable:
    • the right balance of training expertise and collaboration;
    • wide program accessibility;
    • current and relevant training content updated on an annual or periodic basis;
    • range of “textbook” and experiential training delivery;
    • certification and listing for public verification on an ASC database; and
    • capture of investor risk acknowledgement such as ability to withstand loss
  • The certificate of training could then be used by equity crowdfunding and lending exempt market dealers and portals to validate investor training in a streamlined manner (rather than have investors go through the same process with various dealers and portals time and time again).

Given that the policy rationale for the accredited investor exemption is ‘ability to withstand loss’, would it be appropriate to impose some limit on the amount that can be invested by an educated/experienced investor that is not otherwise an accredited investor e.g., the greater of $30,000 and 5% of their investment portfolio?

  • Accredited investor and qualifying experienced-educated investors should be allowed to fully participate without caps in investment crowdfunding and peer lending offerings.
  • Accredited investors should be encouraged to invest in or along-side a Start-up Business Exemption campaign. The participation of accredited investors at higher levels will provide non-accredited investors with added value as the investment group will perform greater due diligence than investors only investing the minimum threshold amount in a Start-Up Business Exemption offering.

(d) Addressing the compliance challenges associated with confirming accredited investor status

The central party could then confirm, through a unique investor identifier, to any business or dealer to whom the investor provided the unique identifier, that based on the information provided, the investor qualifies as an accredited investor, without the need for the investor to reveal all of their personal information.

  • This is a logical and reasonable solution that mirrors recreational licensing and even academic author identification systems (see Orcid ID).
  • Unique IDs could be used as part of a background check which will help reduce the number of days required to verify ID prior to being permitted to participate on equity crowdfunding or peer lending platforms.
  • There are numerous ‘regtech’ solutions now in the market that can be assessed by the ASC for potential use and deployment.
  • Any investor verification system should be neutral to avoid a single group monopolizing a provincial (or national)system.

(e) Registration exemption for finders

We are interested in feedback on a dealer registration exemption for sales to investors that are accredited investors who also meet certain education and/or experience criteria. We are interested in how such an exemption could be tailored to adequately protect investors but help address the issues associated with smaller financings that are not being serviced by registered dealers.

  • We agree that a registration exemption for qualified ‘finders’ would help expand the pool of investors and supply more capital to early stage companies.
  • Finders should be required to notify the ASC of their identity or could be required to associate with registered dealers or engaged by investment platforms.
  • Finders not associated with registered dealers could be required to report periodically on their investor prospecting activity using technology to streamline communications. This would not only provide employment opportunities for finders but also minimize unreported finder type activity that occurs anyway while increasing the transparency in the exempt market for smaller financings.

(f) Reducing compliance costs for registered dealers when dealing with accredited investors

This applies across the piece in the crowdfunding sector. Each requirement should be cost justified by regulators.

(g) Addressing other registered dealer compliance burdens

For crowdfunding related burden reduction examples we encourage the ASC to review NCFAs submission to the Ontario Securities Commission of March 1, 2019 – burden reduction.[14]

(h) Facilitating angel investment funds

Should we consider adviser registration exemptions where accredited investors have a limited amount of capital at risk?

  • Yes, especially if accredited investor status is expanded to include well educated and experienced investors. In this scenario, with small amounts of capital deployed and a demonstrated ability to withstand a specified loss, barriers to obtaining capital from multiple crowd sources would be reduced.

(i) Facilitating the development of a retail, publicly-traded fund focused on innovative businesses

  • We feel this is best answered by VCs and institutions.

(k) Facilitating a semi-public market that allows secondary retail trading by non-public companies

  • The illiquid nature of exempt market securities is often cited as a major concern of prospective investors so anything that assists secondary trading is welcomed.
  • A secondary market for exempt securities would also benefit early employees of start-up companies by allowing them to liquidate holdings pre-IPO and thus help early stage companies to offer creative compensation packages and attract a wider range of employees to help them grow.[15]
  • A semi-public market should be open to all types of exempt securities from crowdfunding to security tokens to allow fair and efficient markets to form.

(m) Fostering crowdlending and peer-to-peer lending

  • Peer-to-peer (P2P) lending is providing SMEs with financing in many jurisdictions, including the US, the UK, New Zealand and Australia, at rates which are considerably lower than those offered by competitors.
  • The popularity of P2P lending in the UK has increased exponentially in recent years, with nearly £10 billion being transferred through such platforms in the past ten years and approximately £1.2bn having been transferred through P2P platforms in the second quarter of 2019 alone.
  • The current securities regulatory regime in Canada imposes costs and burdens that create significant impediments to the success of any P2P platform and by extension the availability of financing to Canadian SMEs.
  • The current regime in Canada is not suited to allowing companies to raise debt financing as it treats them as issuers. The regulatory requirements for becoming an issuer are simply too burdensome for small loan sizes (for example a $50,000 loan).
  • The sheer magnitude of P2P lending and its positive impact on the economies of  advanced jurisdictions elsewhere suggests that it would be beneficial for Canadian SMEs if the regulators in Canada were to adopt a regime specific to P2P lending. A regime modeled on those successfully implemented in jurisdictions, like the UK, where P2P lending has been proven to provide much needed funding to SMEs while ensuring an appropriate level of protection for investors.

About the NCFA

The National Crowdfunding and Fintech Association of Canada (the Association) represents over 2,000 fintech SMEs and individual members that support financial and capital market innovation, small businesses and technology. We are pleased that the Alberta government is undertaking this important initiative to the benefit of all Albertans.  Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

 

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Why Partnerships Are the Future for Fintech

University of Pennsylvania | Wharton Knowledge | Sep 10, 2019

future of fintech partnerships - The future of fintech: lending + servicesAs the finance industry grapples with what the next generation of banks and payment systems will look like, it’s clear that partnerships are a linchpin for riding the wave of change successfully, whether you’re a multibillion-dollar traditional bank or a startup looking to bring cutting-edge technology into the mainstream.

“The rails that these payment systems are built on date back 20-30 years – people are not starting to reinvent that alone; it isn’t an overnight thing – it’s incremental innovation adding up to something massive,” said Jennifer Lee, vice president focused on fintech at growth equity firm Edison Partners during the recent Fearless in Fintech conference at Wharton San Francisco.

At the conference, which was co-sponsored by Knowledge@Wharton and Wharton Executive Education and organized by Momentum Event Group, Denise Leonhard, head of global credit expansion, business development and expansion at Paypal, used her company’s online payments system as an example of the challenges ahead.

“We’ve built our infrastructure with all these different partners – payment networks, bank issuers … we’re all playing in a very messy soup,” she said. “What we’ve been building in the last 20 years has brought all of those partners together to make the infrastructure as seamless as possible and we’re still relying on that infrastructure.”

See:  Fintech Startup SoFi to Roll Out Crypto Trading Via Partnership With Coinbase

As financial services companies begin to explore the possibilities of technology like cryptocurrency and the blockchain, “I don’t think anybody is going to be able to do it alone…. Cryptocurrency is reliant on old-school rails to extract value,” Leonhard added. “To get to the next evolution of payments, it’s going to be really partnership driven.”

Traditional banks value startups for their speed and the opportunity to stay on top of potentially disruptive innovations. Start-ups can benefit from the scale and resources offered by larger established firms. But what are businesses doing to make sure the partnerships are valuable and viable?

“Startups and big companies live in very different world: They hire people differently, they operate differently,” noted Serguei Netessine, Wharton professor of operations, information and decisions. In 2016, Netessine co-authored a report that examined how the world’s largest companies were dealing with “the startup revolution.”

“Going into this exercise, our expectation was that big companies and startups don’t do much together,” Netessine said in an interview with Knowledge@Wharton. “But the reality was very different. What we found was that the majority of Global 500 companies have a variety of ways of partnering with startups.”

That engagement took the shape of M&A, investment funds, spin-offs, accelerators and incubators, events, support services, startup programs and offering co-working spaces – or a combination of several of these.

“You have to qualify your own goals [for partnering]: What is it you’re trying to achieve?” Netessine said. “Some companies just want to make money through investing in innovation – for example, Yahoo made a ton of money purely by investing in Alibaba. That’s fine, but sometimes the goal is very different – you want to keep an eye on what’s happening in your industry, emerging technologies, and usually those are commercialized by startups.”

Added Wharton operations, information and decisions professor Gad Allon: “Legacy firms are really good at mitigating risks. They do excessive testing and are generally very slow to adopt tech that hasn’t previously been tested and adopted by other organizations. Startups are the exact opposite. Their only advantage is speed; they move very, very fast, they undertest, they usually underdevelop… this is a partnership between two vastly different culture and value systems.”

At the Fearless in Fintech conference, leaders from established companies and relatively young startups discussed how they have navigated the path to successful partnerships.

Beyond the ‘Walled Garden’

Leonhard noted that Paypal’s approach to partnership has changed significantly since it became an independent company four years ago. “When we were part of eBay it was all about running payments for the mothership,” she said. “As a public company and really thinking how to be successful, one of our big strategic decisions was to move away from being a walled garden to much more of an open platform enabling all financial institutions to drive that ecosystem.”

When the company thinks about partnering on products today, “we always start with the need of the customer, whether that is the merchant or the consumer,” she said. “Then we look to see if we have the right building blocks internally to meet that need. Sometimes we do, but we see that it’s going to be really difficult to do, or we do but it’s not hitting the right prioritization.”

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Leonhard says Paypal does an internal pro/con exercise to see what a project would look like if it’s done internally vs. engaging with a partner, and whether there are potential partners outside Paypal who are already doing similar work. If the company decides to find a partner, Leonhard says it’s important that both sides are clear in the beginning what the expected outcomes are and how the partnership is expected to evolve over time.

“That needs to be written down in detail and clear on the key performance metrics (KPIs),” she said. “Leadership can change or someone could get excited about another shiny object – there’s excitement, and being clear about what that excitement is going to deliver. You need alignment for partnerships to work and on both sides; you need leadership buy-in, that senior leaders are going to be held accountable for it.”

Leonhard, who worked for American Express prior to joining Paypal, noted that more established firms offer smaller fintechs a level of scale they wouldn’t be able to access otherwise. “They may have a great unique solution, but they can’t actually scale, and you need scale to drive forward,” she noted, adding that strong partnerships can pave the way for successful acquisitions down the line.

“When we think about partners, especially when we think about partnering with fintechs who may be really innovating in the space … partnership is the best due diligence you could ever do,” Leonhard said. “If you do a pilot with a partner, make sure you’re kicking the tires on the tech, kicking the tires on making sure you can work together.”

Converging Resources

Anyone who has ever applied for a mortgage knows it’s a time consuming process. Mortgage loan company Fannie Mae has partnered with a San Francisco-based fintech called Plaid to try to take a little bit of pain out of a complicated system.

See:  From Innovation Hub to Innovation Culture

In 2017, the two companies launched a pilot to automate the asset verification step of the mortgage process. Fannie Mae lenders are able to connect with borrowers’ bank accounts in real time, meaning potential home buyers no longer have to go through the process of collecting paper documents to prove they have the capital necessary to afford a mortgage. The borrower controls who has access to his or her data, reviews data before it’s passed on to a new entity and has access to a history of each entity that had access to the information.

“It was good to have somebody to bounce ideas off of; it gave us the opportunity to improve our process. That’s what a good partnership is about – being open and honest.”–Natalie Hunt

Since its founding 2012, Plaid has formed a number of different relationships with banks – including some that are investors. “There is a lot we can gain from partnering with financial institutions…. Banks have scale, they have brand alignment,” said Kate Adamson, head of mortgage for Plaid. “So for fintechs trying to build the next generation of financial services, there’s a lot to be gained…. There’s a lot of common ground and frankly, having the best partnerships helps you get to that common ground in terms of values as fast as possible.”

For Fannie Mae, the partnership with Plaid has allowed customers to save 7-10 days in the closing process, said Natalie Hunt, Fannie Mae’s director of digital alliances and technology integration.

When the two companies began the partnership, one of the early challenges was getting past cultural differences between Plaid, which was founded in 2012 and has roughly 300 employees, and Fannie Mae, which has existed in some form since 1938 and was number 21 on the 2018 Fortune 500 rankings of top U.S. companies by total revenue.

“You’ve got to figure out how to get everyone comfortable,” Hunt said. “From Fannie Mae’s position, we’re a large financial institution and we’re trying to drive innovation, but we also have to do it in a safe and sound manner and demonstrate that we’ve got the right checks and balances in place.” One of the lessons that Fannie has learned from partnering with fintechs is to think about its established processes in a different way.

See:  Where Top US Banks Are Betting On Fintech

“They said, ‘Think about this this way and this way,’ and we said, ‘No, this is our checklist,’” Hunt said. “But it was good to have somebody to bounce ideas off of; it gave us the opportunity to improve our process. That’s what a good partnership is about – being open and honest.”

Adamson noted that the viability of Plaid’s product depends on creating stable relationships with banks. The company has taken a systematic approach to building those relationships, including making sure it has multiple points of contact within the banks and keeping track of different bank holidays that might create hiccups in the system.

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NCFA Jan 2018 resize - The future of fintech: lending + services The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Fintech is Driving Financial Inclusion

Crowdfund Insider | JD Alois | Sep 8, 2019

Cambrdige UK Alternative finance - The future of fintech: lending + servicesWhile much of the discourse revolving around innovation in financial services address specific sectors of the industry, such as lending, payments,  or online capital formation, the reality is that the biggest beneficiaries of Fintech may be the underbanked: the millions of people who have never had access to sophisticated financial services.

Regardless of where you are standing today, there are segments within your community that have little or no access to financial services such as a basic savings account. The disparity becomes even more obvious when you compare high-income demographics against individuals with lesser means.

Geography obviously plays a role as rich countries, such as the US or European nations, have far higher percentages of individuals having access to basic financial services. But the advent of Fintech, and perhaps more importantly, the ubiquity of smartphones and internet access is fueling a significant change.

See: The Rise of Vietnam – the new Asian Innovation hub

During the Cambridge Centre for Alternative Finance’s annual conference, which took place in the UK this past summer, Alfonso Garcia Mora, Global Director Finance, Competitiveness and Innovation GP The World Bank Group, tackled this very topic: Fintech is driving financial inclusion.

Mora shared some interesting statistics. While financial inclusion has improved globally, 1.7 billion adults (31%) remain unbanked. As of 2017, 69% of adults around the world have a financial account with 92% of “high income” individuals holding an account as of 2017.  Excluding the high-income group, Mora reported the following percentage of adults with an account as of 2017:

  • East Asia & Pacific – 53%
  • Europea & Central Asia –  58%
  • Latin America & Caribbean – 49%
  • Middle East & North Africa – 44%
  • South Asia – 48%
  • Sub Sahara Africa – 41%

Worldwide, most unbanked adults are women at 56%.

Cash Still King

Additionally, 235 million unbanked individuals earn money from agricultural employment; 100 million receive government payments in cash and 260 million of unbanked use cash for remittances.

Mora said that traditional methods such as ATMs/Debit Cards, Bank Deposits, Credit providers are slow, expensive and lack transparency. This is where Fintech can step in and improve the situation with digitally native services unburdened by legacy shortcomings.

Virtual currencies, DLT based settlements, mobile payments, and more can improve transfers and savings.

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Robo-advisors and automated wealth management can provide access to sophisticated services to the masses.

As of 2017, it is estimated that two-thirds of underbanked adults have a mobile phone – key to financial service availability. This access can be the catalyst for financial inclusion as has been experienced in Sub Saharan Africa where mobile money accounts have grown dramatically in recent years.

Of course, these opportunities bring new challenges such as regulatory issues and compliance which frequently ignores national borders. But policymakers must be cautious not to let perfect get in the way of the common good. And established finance must be partners in innovation not create unnecessary barriers to innovation.

Mora said that Fintech is making inroads globally but has not yet reached the disruptive critical mass.

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NCFA Jan 2018 resize - The future of fintech: lending + services The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Fintech is all the rage, but is the bubble about to burst?

City A.M. | Luke Graham | Sep 5, 2019

bubble burst - The future of fintech: lending + servicesFintechs are all the rage. Scarcely a day goes by without a new challenger bank or money app making headlines about how it seeks to disrupt traditional banking and solve personal finance problems.

As a result, capital is pouring into the sector – last year, global investment into financial technology ventures more than doubled to $55.3bn, according to Accenture.

But recent developments have caused concern. In July, challenger banks Atom and Curve reported losses of £80m and £10.6m respectively. Earlier this year, Monzo – arguably the poster child of the fintech revolution – recorded an annual loss of £47.2m.

Compounding these dreary financial figures were the recent comments by Maximilian Tayenthal, co-founder of the German digital bank N26.

“In all honesty, profitability is not one of our core metrics,” he told the Financial Times. “In the years to come we won’t see profitability, we’re not aiming to reach profitability.”

Those comments came shortly after N26 had secured $170m in venture capital funding, giving the unlikely-to-ever-be-profitable company a valuation of $3.5bn.

See:  Why startups are leaving Silicon Valley

This cavalier attitude to the importance of profitability has been viewed as a red flag, and some are now warning that an economic bubble has formed in the fintech space.

In fact, Rich Wagner – the chief executive of Cashplus, a digital challenger bank established in 2005 – tells City A.M. that we are “past due” on this bubble bursting.

“This bubble is probably taking longer to burst simply because of the amount of capital sitting on the sidelines, waiting to be invested in companies that in the past would not have been investable,” he says. “It is certainly something to keep a watchful eye on.”

A monsoon of easy money

Wagner argues that this bubble has formed because central banks have slashed interest rates to record lows since the financial crisis.

“The risk appetite of the general population has changed because of the low returns offered by regular savings accounts, which has resulted in a number of private equity firms having substantially more money to deploy to increase the returns of what used to be normal savers.”

Many fintechs are now reliant on regular cash injections from these firms in order to survive. But if a recession hits and this money dries up, what will happen?

“The result will be that you’ll see either a consolidation in the market – as smaller fintechs get acquired by someone – or certainly an exit by some of the many players that we currently have in the fintech space,” he predicts.

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If fintechs don’t see these risks, it may be because many of them are just a few years old and are only used to trading in a time of economic growth. This naivety from businesses that have never experienced a recession or downturn is now leading to more scrutiny by investors and commentators, argues John Mould, chief executive of ThinCats.

“We should look at fintechs as you would with any other sector,” he says.

“Is it growing, what is its cash flow, what are its costs compared to its revenues? If the numbers don’t stack up, then they are likely to fail.”

Part of the problem is that fintechs are trying to make revenue in unusual, innovative ways – like through leveraging data – rather than pursuing ordinary banking income such as from overdraft fees and credit facilities. This is harder to measure, and may have stoked fears of a bubble.

But even if the data model works out in the long term, if fintechs want to succeed in the near future, they will have to adopt more traditional models of profitability. Fergus Hay, chief executive of Leagas Delaney, points out that some firms are doing this already. But this approach also has its downsides.

“Monzo has recently shown bank-like behaviour with its latest ‘credit card rate’ loan offering,” he says.

“While this may assure shareholders and VCs, this comes at a cost to its progressive fintech brand identity.

Others, such as N26 and Revolut, are championing subscription service fees akin to Netflix. Even Starling’s broker-style marketplace offers an emerging path to profitability, but potentially at the user’s cost.”

See:  Open banking has a big branding problem, government’s public opinion research suggests

Norris Koppel, founder and chief executive of Monese, had a more positive view.

“Fintechs are here to innovate, challenge the status quo, and make customers’ lives easier,” he says. “With this comes new ways of monetisation and sources of revenue. At the same time, customers still want overdrafts, or need loans and savings. So traditional revenue sources will still be crucial.

“The difference is that fintechs can make these traditional products and services more accessible, while driving down the cost for customers, by harnessing customer data and through collaboration. This is something that traditional banks have failed to do.”

The risk of a recession

Wagner is even more negative, warning that those fintechs which have adopted traditional income streams are still failing to make money.

“The real numbers still show that they haven’t proven their revenue model, regardless of what angle you look at it,” he adds.

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NCFA Jan 2018 resize - The future of fintech: lending + services The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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Robocop vs. Terminator in Fintech; Comparing DeFi originations to Digital Lenders in the early years

Future of Finance | Lex Sokolin | Aug 27, 2019

I'terminoator vs robocop - The future of fintech: lending + servicesve got a gentle, data-backed story this week inspired by a great distinction made in this Techonomy article by the Chief Digital Officer at Schneider Electric. The thesis tracks three key lessons from attempting to bring large companies into the 21st century: (1) transform the core of your business instead of fumbling around at the edges, (2) digitize your processes and separately figure out a distinct digital model, and (3) catalyze a digital ecosystem from the new model. You can think about the distinction as either taking the existing business and slowly swapping out parts from human to machine (e.g., like RoboCop), or building the robot from scratch utilizing the latest platforms, markets, and artificial intelligence (e.g., like Terminator).

This distinction is helpful in assessing how financial incumbents are performing, and why the Tech firm approach to Finance keeps is different from the traditional model. Goldman's credit card distributed through Apple looks a lot like RoboCop to me -- same old, but in a tech wrapping. But Goldman's approach into the market with Marcus, with digital lending and neobanking at the core, feels a lot more like Terminator. This is partly why Lloyds' announcement about launching a roboadvisor in 2020 is boring -- too little, too late, while Softbank plows hundreds of billions into neobanks, neoinsurers, digital lenders, and artificial intelligence.

See:  AI Will Transform 500 Million White-Collar Jobs In 5 Years; Silicon Valley Must Help

Anyway, here's the data backed part. If you are focused on Fintech and building out digital, in whatever form, you are on the right track. A recent report from EY looking at the investment preferences of mass affluent and wealthy clients paints the picture clearly.

Just three years ago, only 18% of investors were using mobile apps to manage their money -- that number is now 40%. Face to face interactions have decreased rapidly, from 30% to 16%. But so is Web-app use! Phones have become the home for most of our attention, and financial activity is no exception.

They are our preferred method for dopamine delivery, and transactional activities like angry comments on Trump videos and free stock trading on Robinhood are a natural fit. More considered advice delivery -- things like setting up a trust, dealing with the financial implications of divorce, tax structuring across jurisdictions -- still benefits from at least 30% human interaction.time spent TV vs mobile - The future of fintech: lending + services

But mobile isn't the only growth platform for interaction. Check out the expected rise in chatbot and voice-first interactions below. People have now gotten enough smart assistants that there is an expectation of improvement in the quality of their applications and services. Today, less than 2% of respondents prefer machine assistants as a primary communication channel, but that preference rises to an expected 9% in the future. People want to talk to their machines, Star Trek style, about financial services.

The final bit I want to showcase is just how good of a "Terminator" decentralized finance is becoming. Numbers differ of course depending on how you measure things, but charts below should be directionally correct. I took the annual growth of digital lending globally in the early years, and normalized against the growth in decentralized lending. The products are different -- all of DeFi today is collateralized, while digital lending involved actual underwriting risk (i.e., credit risk, not asset volatility). Yet still, it is helpful to see the two as comparisons, with the conclusion that DeFi is growing faster despite the alien nature of its underlying technology. The sources are Autonomous NEXT and Loanscan.

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Similar things could be said of the Initial Coin Offering boom/bubble, comparing it to much slower but more sustainable growth in Fintech venture capital. Moderating growth against a correct regulatory approach is the right answer -- but innovation does often outpace the existing ruleset. It seems inevitable to me that DeFi lending will need to back into regulated banking and lending entities, or at least partner with them, to avoid being chased around or shut down by the authorities. Enabling tax arbitrage is not a long-term sustainable business model.

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NCFA Jan 2018 resize - The future of fintech: lending + services The National Crowdfunding & Fintech Association (NCFA Canada) is a financial innovation ecosystem that provides education, market intelligence, industry stewardship, networking and funding opportunities and services to thousands of community members and works closely with industry, government, partners and affiliates to create a vibrant and innovative fintech and funding industry in Canada. Decentralized and distributed, NCFA is engaged with global stakeholders and helps incubate projects and investment in fintech, alternative finance, crowdfunding, peer-to-peer finance, payments, digital assets and tokens, blockchain, cryptocurrency, regtech, and insurtech sectors. Join Canada's Fintech & Funding Community today FREE! Or become a contributing member and get perks. For more information, please visit: www.ncfacanada.org

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