Fintech has become a major entry in the buzzword lexicon in recent years. While not a new concept – in fact, some consider fintech to stretch back to the early days of cash dispensing machines – the fintech ecosystem in today’s digital economy is a vastly different proposition.
So much so that fintech “clusters” and/or innovation centres are growing rapidly, with the collaborative input of major financial institutions, startups, accelerators and incubators. “Fintech has been getting a lot of ink lately. A lot of ventures coming in through MaRS have one way or another tried to fit themselves into the fintech mould,” said Roy Kao, senior advisor in the Finance and Commerce Group of the Toronto-based MaRS Discovery District.
There are differing opinions on the definition of fintech. “In general terms, fintech has existed as long as I can remember,” Kao said. “It existed when they moved passbooks to sending out statements so you didn’t have to go to a branch to get updates on your balance. That changed lives. I remember standing before a big clunky ATM in Manhattan in 1981 inserting my card and getting money after branch hours. That was another major milestone. Then there was Interac.”
Kao joins others who describe fintech of today as any technology platform or innovative business process that has a direct impact on financial transaction performance. “Fintech should touch the client in some way, whether they are a commercial, enterprise or retail customer; as well as touch the financial transaction in a way that improves efficiency, reduces friction and/or costs, or enhances investor protection.” This can apply to multiple investment areas, such as wealth management, retail banking, small business lending, capital markets, insurance, and more.
Many operations also apply the term to back-end payment processes, but Kao argued “That’s not ‘fintech enough’,” adding that many observers point to technologies such as AI and Blockchain as fintech. “These are enabling rather than core technologies. As such, they provide a good overall frame of reference, but there is a delineation between these and fintech.”
Once the playground for innovative startups, fintech is now on the radar of traditional financial services communities. “What has happened inside the walls for many years is all of a sudden happening outside their walls and creating a minor panic,” Kao said. “Now they are paying attention and trying to figure out cultural and human capital strategies around it to meet the pace and agility of the upstarts.”
The fintech cluster at MaRS is a perfect reflection of the evolution of fintech. Established two years ago as an innovation hub, it continues to grow as an increasing number of startups focus on solving very specific problems or processes in financial services. Kao also reports a “rising tide” of venture capital investor looking to get into this space.
Initial fintech initiatives were concentrated mainly in the payments and remittance categories, Kao said. “These are the lower hanging fruit of customer facing financial services transactions. People understand sending money between people.”
Next came the rise of the lender/borrower solutions that created an alternative finance class. “Those are starting to mature,” Kao said. “Now with the rise of AI, we will see insurance tech solutions that help organizations, including regulators and government, price and classify risk.”
Today MaRS has over 140 fintech startups representing three buckets: start stage, growth stage and scale stage. Of this total, 100 are in the growth or scale categories. In addition, MaRS is home to several innovation lab-style projects run by the likes of RBC, CIBC, IBM and Manulife.
Other accelerators and incubators are forging ties between fintech startups and financial power players. The Communitech Hub in Waterloo, Ontario, for example, is home to a TD Innovation Lab, and also has ties with Deloitte and Manulife. One-quarter of startups in the Toronto-based DMZ at Ryerson University program are fintech, and of those, one-third are in an accelerator program with BMO Bank of Montreal. Credit unions are also forging significant relationships with fintech providers.
Despite the growth in interest however, Canada lags behind a good number of other nations in fintech adoption, according to the EY Fintech Adoption Index 2017. While global adoption of fintech averages out to 33 percent (up from 16 percent in 2015), Canada is at 18 percent, well behind China at 69 percent, India (52 percent), UK (42 percent), Brazil (40 percent), and Australia (37 percent).
The EY Fintech Adoption Index – Canadian findings indicates that in Canada, 8.2 percent of digitally active consumers have used at least two fintech products within the last six months for money transfers and payments, or saving and investments. The global average is almost twice that at 15.5 percent. The report also stated that as awareness of products and services increase, consumer adoption rates could triple within the year.
Kao believes this lag can be attributed to a number of factors. First is the stability of the Canadian banking system. “People are satisfied enough with their financial institutions so that no one is en masse looking to move their traditional financial services into fintech. That could change with the demographic shift.”
Second, the biggest leaps and bounds have been in countries that do not have a robust traditional infrastructure – Africa being a case in point. “In the mobile evolution, Asia and Eastern Europe leapt ahead because they didn’t have a landline system to fall back on,” Kao said. “Stability has placed a big role in our being nonchalant.”
Another factor is Canada’s geographical makeup and branch structure. “Canada is a vast country, so adoption takes longer to simmer through and permeate the general population. Regulatory restrictions also play a role. We have a relatively fragmented system in terms of regulators and types of institutions while other jurisdictions operate through a single authority. The good news,” he added, “is that institutions are coming on board and pushing the innovation agenda.”
