A growing crop of financial technology services companies have entered the Canadian market in recent months, providing alternatives to consumers looking for lower investment management and borrowing fees.
The country is becoming a hotbed for these "fintech" firms, threatening a dramatic shift in the financial services sector, driven by technology and a set of savvy entrepreneurs.
Last fall, former BMO Nesbitt Burns investment banker Nauvzer Babul launched Smart Money Capital Management, a computer-assisted financial management company. Smart Money invests in exchange-traded funds (ETFs) and charges clients an annual asset-based fee of 0.45 per cent on top of ETF fees, which together totals less than 1 per cent, Mr. Babul says.
That compares with Canadian mutual funds that run, on average, about 2.5 per cent. "Canadian investors are used to paying high fees," Mr. Babul points out. "So this is a bit of a shock to the system."
Smart Money and other automated investment companies in Canada are modeled after "robo adviser" firms operating south of the border. They target do-it-yourself investors looking for financial models with lower fees. The difference in Canada is that regulations require online wealth advisers to have a conversation with clients before investments in their portfolio are allocated.
"We are more bionic than robo," quips Randy Cass, founder of online adviser Nest Wealth Asset Management, which has a Netflix-style subscription-based service. Clients under the age of 40 pay $40 a month – to encourage them to invest early – while older investors pay $80 a month for a service that selects and monitors a portfolio of ETFs.
"We use technology to efficiently do the things that should be done for everybody and we have people to support individuals in understanding how it works."
Mr. Cass says the model appeals to investors looking for some active management, without paying the high fees charged by some traditional money managers.
"I think we are just seeing the tip of the iceberg" for fintech, Mr. Cass says. "This is an industry – financial services as a whole and wealth management in particular – that has yet to be truly disrupted like other parts of the day-to-day lives of average Canadians."
The shift is evident in the amount of interest and investment being poured into the sector. On Tuesday, the Toronto-based innovation hub MaRS Discovery District announced a series of strategic partnerships to drive fintech innovation and entrepreneurship. A new FinTech Cluster will connect leaders in the technology and financial services sector with startups developing next generation products.
"There is a tremendous desire from financial institutions to tap into these innovations," says Adam Nanjee, a former vice-president of business development at MasterCard Canada, who will head the new division at MaRS.
He says investors are tracking the trend, which is being driven by millennials and the technology itself.
"Everyone wants their finances and their technology to be digital," Mr. Nanjee explains. "A lot of these technological advancements are driving the financial institutions to say, 'We really need to be ahead of this curve.'"
Global investment in fintech has tripled to nearly $3-billion (U.S.) since 2008, and it is set to increase to $8-billion by 2018, according to a report from management consultancy Accenture. It says global investment in fintech companies has grown four times faster in the past three years than overall venture investing.
There are several types of fintech companies, including ones that offer alternative lending and stock recommendation platforms. In the United States, two major online lenders recently went public on the New York Stock Exchange, including online lenders On Deck Capital Inc. and LendingClub Corp.
Steven Uster of Fundthrough agrees with the premise that the financial services sector was "ripe for disruption."
"We believe that we are only at the beginning of this trend of startups popping up and filling a hole in financial services by using technology," says the co-founder and CEO of the Canadian-based business-to-business online lending platform.
Borrowell is another Canadian online lender that caters to consumers looking for cheaper loans than what's being offered at bricks-and-mortar banks.
Founder and CEO Andrew Graham, who left his job at President's Choice Financial a year ago to start Borrowell, says the service caters in large part to millennials who don't feel the same need as their parents to go into a bank branch to apply for a loan.
"Millennials are also more willing to experiment and try new brands and products," Mr. Graham says.
Another emerging fintech startup is Nvest, an early-stage, crowd-sourced stock recommendation platform. Nvest compiles recommendations from its users, many of which are average retail investors, and builds a performance history others can track. The credibility of recommendations is based on a user's past performance.
Nvest co-founder Fredrick Zhou likens it to LinkedIn for stock recommendations. "Nvest is a place where investors post their trading resume."
Investors are taking notice. Nvest recently received funding from the University of Toronto Early Stage Technology program and it is in the process of pitching the business to angel investors.
Some fintech players are also being backed by big-name investors, including a few financial services industry veterans looking for the next investment wave.
Joe Canavan, a former mutual-fund executive turned venture capitalist, is investing in a handful of fintech companies, including Borrowell and online investment company Wealthsimple. The bet is that the successful ones could eventually go public, be bought out, or even receive funding from some of the big banks, once they see how quickly consumers are adapting to the new technologies.
"People are being disruptive and see these gaps in the system where a lot of the big oligopolies can't play, don't want to play or are too slow to play.
"We can play here," says Mr. Canavan, who was a former chairman and CEO of Assante Wealth Management and a handful of other wealth management firms before he launched Canavan Capital in 2010.