The State of Canadian FinTech in 2016
January 7, 2016
In 2015, the financial technology or “fintech” revolution took flight in Canada. From coast to coast, tech-enabled upstarts are working hard to improve the financial well-being of everyday Canadians. Fintech companies achieve this goal by leveraging technology to make things faster, design a better customer experience, all while working to charge less than the big banks. See this infographic to view the various segments of Canadian banking that fintech players have begun to address.
The Canadian media has been tracking the burgeoning financial technology industry closely, shedding light on how advancements in financial innovation help move things forward for consumers. As you can see above, 2015 saw not only the launch of our tech-enabled lending platform, Borrowell, but also the growth of many new players.
Why is fintech an important subject for Canadians? Technology is not only making banking more convenient for consumers; it is encouraging upstarts to look at what the banks do, and try to do it better. Historically options have been limited by the domination of Canada’s largest institutions. Canada has one of the most profitable financial industries in the world, with the world’s highest banking profits per capita. Some celebrated RBC’s recent news reporting a record annual profit of $10 billion. For the team at Borrowell, this news confirmed something else—in 2016, we want to see even greater financial disruption. Canadian consumers have suffered from limited choice, higher rates, and opaque fees for far too long.
An oft-quoted report from McKinsey & Co. estimates that 20 per cent to 60 per cent of profits in five core banking business links will be at risk by 2025, with consumer finance the most vulnerable. We believe this trend will continue in 2016, and we have 4 predictions for what we believe is to come in 2016.
Below are Borrowell’s Top 4 Predictions for Canadian Financial Innovation in 2016:
- FinTech startups will continue to partner with the banks. At RBC’s annual meeting last spring, CEO Dave McKay noted the importance of collaborating with fintech companies — “even the ones trying to disrupt us.” This is a global trend. Around 60% of fintech startups around the world now offer services directly to banks and other financial services organizations. In Canada, CIBC forged a partnership in online lending through a deal with small business lender Thinking Capital. Another example is TD and PC Financials’ backing of UGO, a digital wallet service that as of this fall had attracted 50,000 users since launch.
- If you can’t beat them, acquire them. We predict that a Canadian financial institution will acquire at least one Canadian fintech startup. A prominent U.S. example of this is Visa’s 2015 investment in online payments firm Stripe. This investment valued the technology innovator at approximately $5 billion. Another example of this is Spanish bank BBVA’s acquisition of Simple, a data-driven online banking startup for $117 million USD. Acquiring a tech startup isn’t just a way for Canada’s big banks to keep up with the latest innovations. Analysis by consulting firm T. Kearney shows that the return on investment from financial services companies buying technology-focused companies far exceeded the returns from financial services firms acquiring ‘like’ financial services firms.
- International FinTech players will continue to arrive on Canada’s shores. 2015 saw the entrance of American near-prime lender AvantCredit and business lender OnDeck. We predict that 2016 will welcome the arrival of players from China, Europe and elsewhere. We will see more competitors because there is a big opportunity to make consumer finance faster, fairer, and friendlier for Canadians. Consider a recent Harvard Business School report that noted that it can take up to 25 person-hours to complete out the necessary paperwork to qualify for a small business loan from the bank. Online lending is a consumer-friendly antidote to that painful process.
- More critics will try to create fear about financial innovation. There are voices in the industry who stigmatize financial technology. For example, a recent post in the Globe and Mail argued that ‘fintech’ lending could lead to systemic risk because fintech startups are unregulated and don’t have the same safeguards when it comes to risk management as the big banks. In fact, fintech startups like Borrowell take an equally rigorous approach to risk management and security as the banks. The difference is that fintech players use technology to offer services in a more transparent and faster manner. What’s more, critics fail to point out that fintech startups are regulated and governed by many of the same sets of rules as the incumbents. For example, Borrowell is subject to consumer lending rules and has to obey securities laws.
Our COO, Eva Wong, said it best with her quote at a recent conference: “online lending in 2015 is what online dating was 4-5 years ago.”
While the booming financial technology industry has gained a foothold in the popular consciousness, it is still working for general acceptance. At Borrowell, we think creating fear about financial technology players is similar to the fear-mongering created by the infamous Toronto cab driver who recently latched onto a nearby Uber.
Like Uber and other innovations that have made things faster and fairer for consumers, we believe that financial technology is not only here to stay but is poised for massive growth. What will be important will be continuing to regulate and monitor new players, while creating an environment where incumbents and new players can work together to make things better for consumers.