2023 Fintech and Financing Conference & Expo

Torys: Fintech in Canada Review

Torys LLP | Brigitte Goulard , Konata Lake,  Molly Reynolds | Nov 15, 2021

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Approaches and Developments

Canada has a strong, globally competitive financial sector that has proven to be stable, resilient and well respected. However, compared to other developed countries, Canada has experienced delays in rolling out frameworks, including legislation, that enable the fintech ecosystem to evolve in a way that is reliable and safe for end users, while still allowing them to leverage the power of technology.

Fortunately, several key government and regulatory efforts are now gaining momentum and will enable Canadians and fintechs to benefit from the following trends:

Banking as a service

Banking as a service describes a model where regulated financial institutions integrate their digital banking services offering directly into the products of other non-regulated entities. This allows retailers and merchants with a strong brand presence to offer their customers digital banking products (debit cards, loans, etc.) without having to incur the substantial costs of obtaining a banking licence.

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Although the banking as a service offering is currently not as widespread in Canada as in other jurisdictions, this may change as a result of Canada's plan to give banks greater flexibility to engage with fintechs, to modernise its payment systems and to introduce an open banking framework.

Fintech offerings to small- and medium-sized businesses (SMBs)

The high number of SMBs in Canada have a significant impact on our economy; their vulnerabilities to downturns such as the pandemic highlight the importance of collaboration between financial institutions, businesses and government to develop fintech solutions to support this segment of the economy. As SMBs reopen following the pandemic, they will be very receptive to new digital platforms enabling them to better, and more profitably, serve their customers.

Fintech lending sector

The fintech lending sector - and, in particular, the Buy Now Pay Later offering, which already has a strong presence - in Canada is expected to continue growing. The non-bank lending platforms (sometimes offered in partnerships with regulated entities) offered by retailers provide consumers an alternative payment method to pay for goods and services allowing them to pay in instalments, generally without fees or interest. Very attractive from a retailer and customer perspective, these products can be challenging from a regulatory perspective, and could result in more scrutiny from regulators as they continue to thrive in the marketplace.

The Canadian Fintech landscape

The Canadian fintech ecosystem is internationally competitive. In a recent report, Toronto ranked in 8th place among global cities, while Vancouver, Montréal and Calgary placed 12th, 14th and 16th, respectively1.

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From coast to coast, fintechs are relatively well distributed across Canada (based on population concentration). 415 fintechs are based in Ontario, 103 are based in Québec, 165 are based in Western Canada (with the vast majority of those based in British Columbia) and 14 are based in the Atlantic provinces2.

Canadian jurisdictions are also seeing significant in-bound investment from fintechs. Montréal, is one of Canada's leading fintech hubs, and houses a number of key investors. While the Atlantic provinces have relatively smaller hubs, there is significant activity such as a US$2.75 billion acquisition of a St. John's-based fintech by Nasdaq in late 2019.

What's captured in fintech

Fintech is a broad term that captures many different verticals. Each of these verticals are large markets in themselves, differentiated by the problems they aim to solve. The most common (and largest) Canadian fintechs categories in operation are Payments, Lending (personal and small to medium businesses), and Back Office. However, fintechs in RegTech (i.e., risk management), WealthTech and Personal Financial Management (PFM) are also seeing significant growth. RegTech startups continue to set funding records, WealthTech activity has seen a significant increase in retail and enterprise activity and PFM has responded strongly to the financial challenges of the COVID-19 pandemic, with some PFM fintechs responding particularly well to provide financial support to Canadians in economically uncertain times.

The ecosystem

Any healthy startup ecosystem needs accelerators to support the growth of established firms and incubators to nurture the earliest stages of a company. Though competitive to get into, they provide important services for fintech firms such as expert advice, funding, mentorship, networking and training3.

See:  How to grow young fintech talent

The funding for such programs typically come from a variety of sources including financial institutions and technology companies. Well-known accelerators and incubators in Canada include Innovate Calgary, Ryerson's Digital Media Zone (DMZ), and MaRS Discovery District. DMZ has a specific fintech stream: DMZ-BMO Fintech Accelerator4.

The talent

In 2020, CBRE research assessing tech labour and the ability of markets to score tech talent concluded that tech talent is particularly resilient and has proven to be so during the COVID-19 pandemic. Canada has been benefiting from the fintech "brain gain" (the difference between the number of technology degrees granted versus the number of technology jobs created). Toronto ranked fourth just behind San Francisco Bay Area, Washington, D.C. and Seattle, among 50 of the largest markets which were analyzed to create a scorecard ranking them comparatively using metrics like market depth, vitality, and attractiveness to companies seeking talent and talent seeking employment. Data from the Business Development Bank of Canada (2018) has also shown that Canada's skilled foreign workers as a percentage of its population has been on the rise and is six times more concentrated than that of the U.S. (attributable to a progressive labour migration policy). Though the pandemic did see a drop off in immigration, initiatives such as virtual work permits have been proposed as economic stability returns. Also contributing to domestic growth has been the strength of Canada's university-backed incubator system5.

REGULATORY BODIES AND APPROACHES

The Canadian financial regulatory system is fragmented with oversight of various parts of the financial system divided among a variety of federal and provincial regulators.

Federal

The three principal federal regulators of financial institutions are: the Office of the Superintendent of Financial Services (OSFI); the Canadian Deposit Insurance Corporation (CDIC);  the Financial Consumer Agency of Canada (FCAC); and the Bank of Canada (BOC),  The Financial Transactions and Reports Analysis Centre of Canada (FINTRAC), Office of the Privacy Commissioner of Canada (OPC)

Provincial regulators

Provincial securities commissions regulate the securities markets with a focus on investor protection and ensuring efficient markets. Self-regulatory organizations also play a role in securities regulation. The Investment Industry Regulatory Organization of Canada (IIROC), overseeing investment dealers, and the Mutual Fund Dealers Association of Canada (MFDA), regulating mutual fund dealers, are two examples.

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Fintech businesses have been encouraged to engage with staff of the Canadian securities regulators through a "regulatory sandbox" to discuss novel products and services, the anticipated treatment under applicable securities laws, and to obtain any required approvals and/or exemptive relief to operate in Canada.

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