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Competition Bureau weighs in on fintech: urgent action required

Jeffrey Graham is a senior partner in the Toronto office of Borden Ladner Gervais LLP where he practises in the financial and technology sectors.

For several decades, federal policy makers have been attempting to create more competition in our financial-services environment. Initiatives to facilitate the creation of additional domestic banks, provision of greater flexibility for foreign banks to choose forms of establishment and, more recently, allowing provincial credit unions to convert and become national co-operative banking institutions, have not really made much of a difference. Our large and highly respected major financial institutions continue to dominate.

The Canadian Competition Bureau has released its final market study report into technology-led innovation in Canada's financial-services sector. The study is a valuable addition to a growing body of analysis and evidence that we need to do more to ensure that Canada is not left behind, as fintech has the potential to make an increasingly important impact on the availability and delivery of financial services to Canadians.

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In its study, the Bureau notes that since the 2007-08 global financial crisis, a new wave of financial-services firms has emerged, leveraging the latest technologies. In a number of jurisdictions, these firms are helping to reshape their domestic financial-services sectors and, in some cases, the leading firms are becoming national champions with global reach. The bureau notes that Canada lags behind its peers in fintech adoption; a number of reasons for slow adoption are suggested, including regulatory and non-regulatory barriers. The study makes a number of important recommendations to financial-sector regulators and policy makers focused on retail payments and the retail payments system, lending and equity crowdfunding, and investment dealing and advice.

Could it be that fintech could actually address the long-standing challenge of creating more competition in domestic financial services? Will the bureau recommendations, if adopted, make a positive impact in achieving that objective?

To the first question, it is too early to form a definitive view. Given the dominance of the major financial institutions, it is hard to see Canadian fintechs making a material impact on competition, although an increasing number are commercial successes and growing to a scale that will enable some to explore international markets. Rather, it is more likely that many will continue to be sources of creativity and innovation and become partners of and suppliers to the larger financial institutions, much as the biotech sector has become the home of significant innovation for the global drug companies. That being said, there is no doubt that the burdens identified by the bureau are a drag on the ability of many of these fintech firms and we have good reason to urgently act to eliminate these barriers. Urgent does not mean within the next several years; urgent means taking action now. It remains to be seen whether federal policy makers realize how important it is for early and decisive action.

At the same time, it is clear that while the bureau has contributed to a growing consensus on issues such as the need to embrace broader open access to systems and data though applications programming interfaces (open banking) and a great co-ordinated effort with respect to digital identification verification, many other issues that cry out for action are not addressed in the study. For example, there are many within both the fintech sector and regulated financial institutions that believe that our anti-money-laundering regime, and the agency primarily responsible for the administration of the regime, is in need of a fundamental reset. Our current anti-spam legislation has made all responsible businesses in Canada, including the financial sector, less competitive than common sense and good judgment would justify.

In addition, the most important impediment to Canada's success in fintech, and virtually every other part of the innovative economy, is also not addressed in the study. For as long as we have been seeking ways to increase competition in the financial sector, we have also been debating how to ensure that early-stage, emerging and maturing technology businesses have access to adequate capital to ensure that as they mature they stay in Canada, within the control of Canadians.

It should be noted that a number of the jurisdictions that have identified fintech as a priority sector have developed and implemented strategies to encourage investment by individuals and institutional investors in their innovative economies, including fintech.

Are we, as Canadians, going to continue with half measures that fail to make a significant impact on our commitment to finance our innovative economy? Unless we are willing to debate openly the merits of similar strategies to those adopted elsewhere, we run the risk of failing to fulfill our full potential as a leading innovative economy, which includes a leading fintech sector. Surely we are up for this most important of public policy challenges.

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