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Business Commentary Fintech innovation – an imperative for the success of Canada’s financial sector

Jennifer Reynolds, president and CEO, Toronto Finance International (TFI)

The financial district at Bay Street, Toronto.

Kathryn Hatashita-Lee, Photographer/istock

Canada is home to the second-largest financial centre in North America, which quite often surprises our neighbour to the south, not to mention the international business community. In terms of its status as a global financial centre, Toronto currently ranks seventh, after New York, London and four Asian financial centres.

Employment in Toronto’s financial sector has increased 25 per cent in the past five years, representing one out of every 12 jobs in the metro area. To put that in perspective, only two other financial centres globally have grown at a faster rate: Beijing and Shanghai. While our stature as a global financial centre has elevated, sustaining that momentum will require a strong innovation ecosystem to support the competitiveness and growth of the industry in the future.

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The financial services industry is being transformed on a global scale and technology is driving innovation in all elements of the business. From providing new alternatives in financial technology, or fintech, to customers to driving cost efficiencies in their operations, financial institutions need access to a world class pool of talent to drive success in the future.

With that challenge in mind, Toronto Finance International undertook its second report on the Toronto region’s progress on developing a leading global fintech hub. The good news – the region is singularly equipped to drive a fintech innovation ecosystem. Not only does Toronto have a deep pool of financial services talent, it is situated in North America’s third-largest tech cluster.

The Toronto-Kitchener-Waterloo corridor has the second-highest density of tech startups globally, and over the past five years more tech jobs were created in the region than in San Francisco, Seattle and Washington combined. The region is also a leading producer of science, technology, engineering and math (STEM) graduates in North America. This talent pool has helped to foster a growing fintech hub and attracted more significant investment to the sector.

The report found that investment in fintech has increased at a compound annual growth rate of 118 per cent since 2010, one of the highest growth rates for global fintech hubs. Increased access to later stage funding, an emergence of fintech-focused venture capital (VC) firms and the establishment of global accelerator offices in Toronto has led to an improved environment for fintechs to scale their operations.

The ecosystem is also attracting capital from outside of Canada, with 43 per cent of deals in 2018 including U.S. VCs. While this growth in financing activity is positive, the scale of investment it represents does pale relative to other global fintech hubs. Since 2010, total fintech pre-IPO equity financing activity in Toronto was just under US$1-billion, which compares with US$7.5-billion in New York and US$5-billion in London over the same period. To drive a deeper, more mature innovation ecosystem, more significant investment will be required, from both domestic and international investors.

To attract a larger share of investment into the fintech sector and accelerate growth and innovation, progress in three key areas is required. First, we need a more co-ordinated approach that incentivizes innovation and drives collaboration among ecosystem participants. In other leading global fintech hubs, such as London and Singapore, there has been a more co-ordinated approach by government and regulators to develop and articulate a clear fintech strategy to align and prioritize efforts to drive the growth of the fintech ecosystem. Modernizing regulatory frameworks to reflect changing business models and technologies is critical to fostering innovation in the financial sector.

Second, we need increased support and collaboration between the players in the ecosystem. Growth in VC funding at both the seed and later stage, along with increased opportunities to partner with the financial sector, are required for a more mature fintech ecosystem to develop. Furthermore, while the Toronto region has a strong presence of globally recognized universities and research teams, heightened focus on commercializing research is required. Attracting and retaining top talent is essential to every leading fintech hub and more pro-active focused measures should be taken by government, in consultation with industry, to develop policies and initiatives to attract talent to the sector.

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Finally, to drive top talent and investment to the region, greater global awareness of the Toronto financial centre and the region’s fintech ecosystem is essential. Leading global fintech ecosystems such as New York, London and Singapore are able to attract fintech talent through their profiles on the global stage. Greater resources and focus on building Toronto’s international profile would significantly improve its ability to attract top talent and investment.

Leading global financial centres are focused on fostering vibrant fintech ecosystems to drive the innovation they will need to compete in the 21st century. For Canada to maintain a top global financial centre and competitive financial sector, we too need a pro-active approach to developing a thriving fintech ecosystem.

Editor’s note: A previous version of this article incorrectly said a report by Toronto Finance International found that investment in fintech has increased at a compound annual growth rate of 118 per cent since 2013. In fact, that compound annual growth rate is since 2010.
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