The Canadian fintech explosion

Adam Nanjee sometimes uses his smartphone the old-fashioned way — to talk — but he thinks its real value now is in using it as your banker.

Nanjee, Head of Financial Technology and Innovation at Toronto’s MaRS Discovery District, says Canada’s innovators are moving this country fast toward leadership in developing fintech — digitally based financial technology.

“Fintech is absolutely exploding right now. There’s a tremendous amount of talent in the ecosystem and tremendous things are happening,” he says.

New apps and back-office tools are being developed in finance, mobile payments, peer-to-peer lending and robo-advice at startups across the country — in Toronto and Vancouver as well as Waterloo, Ottawa, Montreal and Atlantic Canada.

Don’t be deceived by what looks like slow public uptake. True, only 8.2 per cent of digitally active Canadians have used two or more fintech products in the past six months, according to EY’s Fintech Adoption Index.

But the survey says Canadians’ adoption of fintech may triple within 12 months, making this sector a truly disruptive technology. That’s both a threat to old-style bricks-and-mortar financial institutions and an opportunity for nimble ones.

“As the trend continues to catch on, traditional financial services companies will have to be much more aggressive and creative to keep their current customers,” says Gregory Smith, Partner at EY’s Financial Services Advisory practice.

As Nanjee says:

“Look at it this way — 99, maybe 100 per cent of the population has a cellphone, so why shouldn’t they have banking at their fingertips?”

Andrew Graham, CEO of Borrowell, says the biggest developments in the next year are likely to take place in three areas — mobile banking, investment and financial advisory services and peer-to-peer lending.

“Since we launched Borrowell last year we’ve seen $450 million in loan applications from 35,000 people,” he says.

Another online alternative lender, Vancouver-based Mogo Finance Technologies Ltd., raised $50 million in its initial public offering in 2014. Though Mogo’s shares have declined since the IPO, co-founder twins Greg and Dave Feller believe that they and other lenders can thrive in the fintech space, drawing millennials and other tech-savvy borrowers who don’t want to go into a bank.

Indeed, the drive toward fintech seems relentless. Today more than $1 billion a week is spent globally on fintech development.

A survey released jointly by the MaRS Fintech Hub, which Nanjee heads, and Information Venture Partners, an early-stage investment fund, says that while in 2013, spending on fintech development in Canada was $12 billion it’s expected to rise to $14.8 billion by 2018.

While major financial institutions are sniffing around to build their own digital presence, startups lead the pack in many ways, in both investment and the products and services they develop. Since 2013, the biggest Canadian fintech investment deals have included:

• Ottawa-based e-commerce platform Shopify ($100 million)
• Verafin ($60 million) a fraud detection tech firm from St. John’s
• Stock-trading platform Lightspeed from Montreal ($35 million)
• Blockstream from Montreal ($21 million), a digital or “crypto”-currency platform
• Vancouver’s financial services platform Zafin (U.S. $15 million)
• Toronto’s online lender Financeit ($12 million).  

Canada’s Big Six banks are investing heavily to keep up. Janet Ecker, President of the Toronto Financial Services Alliance and a former Ontario finance minister, says it’s critically important to the entire sector that the big players don’t fall behind in innovation.

“The question is, can they be nimble enough to adapt?” she says.

“On one hand, the big financial companies have large bureaucracies. On the other hand, they have great resources and stability and when they find a technological solution, they’re able to adapt it.”

One trend in Canadian fintech is an increasing focus within the big banks on developing their own in-house digital labs, which mimic startups.

Scotiabank, for example, announced last year that it’s planning a digital “factory” in Toronto, deploying 350 tech experts to develop in-house fintech capability. CIBC, for its part, has sponsored “hackathons”, where developers pool their brainpower, and it has set up post-millennial workspace in Toronto that offers hangout space, with pizza and foosball.

The big banks, the startups and the experts are all betting on fintech growing in Canada because the technology is getting more sophisticated and so are the customers. EY’s survey of fintech use found that the biggest barrier to its adoption in Canada was simply that people didn’t know about a lot of services that exist; 57.2 per cent of Canadians surveyed said lack of awareness was their top reason for not trying.

EY’s survey also found that early adopters tend to be younger and relatively wealthy. The answers among adopters point to what they like and what will likely attract them to more — half said ease of set-up was their main reason for preferring online and on-screen financial transactions, and another 20 per cent said they like fintech’s lower fees.

“This growing demand for digital service won't be limited to just millennial or small clients either,” says Neville Joanes, Portfolio Manager and Chief Compliance Officer at Wealthbar.com, a Vancouver-based robo-advisor that launched last year.

“We already see clients of all ages and levels of wealth who prefer the online model. The latest 2015 World Wealth Report even included a section on digital advice, which shows that significant numbers of high net-worth individuals are already considering digital advice platforms.”

Joanes thinks the momentum is building in Canadian fintech and there will soon be another outburst of new automated products and services.

“Things like insurance, personal virtual accounting services, estate planning and even basic legal services. All of them will be aimed at making various mundane but important financial chores far more convenient and offer them at lower cost,” he says.

Ecker agrees, and says that the fintech revolution is likely to also spread to “block chain” technology — the digital underpinning for Bitcoin. Graham says that this technology decentralizes the ledgers that central banks like the U.S. Federal Reserve or the Bank of Canada use to establish currency and lending rates.

“It’s a huge challenge for regulators,” says Ecker, who notes that it also fosters growth in the startups that specialize in fintech security. 

She’s optimistic about fintech’s future: “You’re going to see increasingly sophisticated uses of customer data to more intimately serve customers’ needs.”