Michael R. King is co-director, Scotiabank Digital Banking Lab at Ivey Business School, Western University
Most commentators agree that Canada has many of the elements required to support a vibrant financial technology sector, notably a stable and secure financial system, a high concentration of financial institutions, access to a large pool of talented employees and expertise in the underlying ABCDs: artificial intelligence, blockchain, cryptography and data science.
But a key shortcoming is the absence of a clearly defined fintech strategy championed by the federal government.
Britain, Australia and Hong Kong have published national strategies for this key sector over the past 18 months, seeking to create jobs domestically and exports globally. But Canada has no national strategy. Instead we are witnessing regional fragmentation, with separate reports commissioned by Toronto, Montreal and Vancouver arguing each should be the centre of fintech in Canada. Sound familiar? We only have to look at Canada's system of provincial securities regulations to see where this is heading.
While each of Canada's regions has clear strengths, doesn't this approach miss the point? Why are we competing internally, rather than co-ordinating nationally and competing globally to dominate the emerging fintech industry? The answer is a lack of federal leadership.
In Britain, Australia and Hong Kong, the equivalent of the finance minister has taken charge, creating a fintech advisory council with private-sector expertise, consulting with key stakeholders, co-ordinating different levels of government and publishing a national strategy. As Australia's Treasurer stated in the 2016 report Backing Australian FinTech: "I want to help create an environment for Australia's FinTech sector where it can be both internationally competitive and play a central role in aiding the positive transformation of our economy." Recall that Australia has the same federal system as Canada, with a smaller population and a financial sector dominated by a few large incumbents.
In a 2014 speech, then British Chancellor of the Exchequer George Osborne said: "Key to the government's long-term economic plan is cementing Britain's position as the centre of global finance. It's only by harnessing innovations in finance … that we'll ensure Britain's financial sector continues to meet the diverse needs of businesses and consumers here and around the globe, and create the jobs and growth we all want to see in the future." Following the Brexit vote, Britain is highly aware of the risk of losing its dominant financial sector. In a recent speech, Bank of England Governor Mark Carney threw his voice behind fintech, noting that it will democratize financial services and contribute to a more resilient financial system.
While Canada often looks south for inspiration, in this case the United States is showing us what not to do. The U.S. fintech sector is being held back by regional competition between Silicon Valley and New York, and regulatory uncertainty. A 2016 report by KPMG ranked California and New York as distinct fintech regions alongside Australia, Germany, Hong Kong, Singapore and Britain (Canada did not make the list). A key shortcoming: Fintechs are subject to supervision at the state level and separately by the Department of Business Oversight in California and the Department of Financial Services in New York. Regional competition and regulatory uncertainty may have contributed to last year's 50-per-cent drop in fintech investment, with KPMG reporting only $12.8-billion (U.S.) invested in 2016 versus $27.0-billion in 2015. While Canada bucked this trend with a record $138-million (Canadian) of fintech investments last year, Canada's investments are measured in millions, not billions.
Finance Minister Bill Morneau's Budget 2017, Building a Strong Middle Class, is headed in the right direction with its focus on innovation, networks and clusters, and the digital economy. The budget highlights that Canada's financial system should work for all Canadians. Fintech provides the means to make financial services available more broadly and more cheaply online or by mobile phone. Startups create jobs and increase competition, which will benefit consumers and small businesses the most.
A great model is the federal government's commitment of $125-million toward a Pan-Canadian Artificial Intelligence Strategy, with centres of expertise in Toronto-Waterloo, Montreal and Edmonton. This expertise will benefit many sectors, with the budget highlighting agriculture (agritech), natural resources (clean tech) and health care (health tech). Banking and financial services will similarly benefit from this investment. But Budget 2017 only mentions fintech three times, despite the financial sector representing 7 per cent of GDP and 4.4 per cent of all jobs in Canada. That seems to be an oversight.
Canada's financial sector is looking to the Minister to champion our fintech sector. As the budget states, "The Government has an opportunity – and a responsibility – to lead the way when it comes to digital innovation." When it comes to fintech, the time to lead is now.