Systems-level approach urged for Toronto's financial sector to fully capitalize on fintech

Removal of silos urgently required

Toronto's powerful financial sector lacks an effective ecosystem to fully benefit from the explosion in information technologies transforming the services financial institutions offer and how startup companies are capitalized. A new report commissioned by the Toronto Financial Services Association (TFSA) and the Ontario Centres of Excellence (OCE) says that while all the components required for a "dynamic and thriving Fintech ecosystem" are present, they are largely siloed, prohibiting the level of growth and innovation essential to become a top-tiered global financial services hub.

Entitled the Current State of the Financial Technology Innovation Ecosystem in the Toronto Region, the strategic mapping study was prepared by the Innovation Policy Lab at the Univ of Toronto's Munk School of Global Affairs. The report — released November 5th — succinctly captures the current evolutionary status of fintech in the Toronto and Kitchener-Waterloo regions and suggests that working to remove barriers between fintech innovators and traditional financial companies is an urgent priority.

"It is not too late to capitalize on the unique assets found in this region and the opportunities they provide for a dynamic financial services and Fintech ecosystem. But the time for action is growing shorter," states the report.

Dr David Wolfe and Dr Dan Brezitz — co-directors of the Innovation Policy Lab — conducted their research between June and August of this year. Their research entailed interviewing 54 executive-level individuals at 47 different firms, associations, or government offices. A test run of the report was conducted via a pre-release workshop hosted by the TFSA. The authors discovered growing recognition among all of the big banks and the startup community of the importance of fintech and the need for increased collaboration.

"I'm cautiously optimistic … All the elements are there but we have to pull it all together," says Wolfe, the report's co-author. "There are huge digital opportunities across every sector including financial services and while not every sector will seize that opportunity, I'm optimistic that the new (federal) government gets it."

Wolfe says recognition is the first step towards addressing the weak linkages, the status quo mentality in established financial institutions and the disconnect between regulators and technological advances the are conspiring to inhibit the growth of the sector compared to leading countries such as the UK and US.

Wolfe says there's a growing recognition among the nation's top bankers that fintech is going to grow and have an impact on their operations and client base.

"Even since the publication of the report, there is more and more evidence that the banks get it and others as well. Each of the six big banks are moving to respond to the growth of fintech and each recognizes it as disruptive," he says, pointing to Scotiabank's Digital Factory innovation slated to open next year in downtown Toronto. "The big challenge for banks is to decide whether to (innovate) internally or to partner with startups."

"The biggest problem facing the ecosystem is the banks' unwillingness to commit, that is, their reluctance to cooperate and collaborate with startup firms working in the Fintech space. While some interviewees see banks as providing some capital and connections, most interviewees perceive a cultural and institutional divide between startups and the banks. — TFSA report

While there is no easy fix to building a robust fintech ecosystem in the Toronto region, the report says there are "a few promising venues for constructive public-private interventions" that will enhance its chances of competing more effectively with leading fintech nations.

Not surprisingly, the regulatory environment is a key area where governments can break with the status quo. The current regulatory environment, while solid and highly respected, compels many Canadian fintech companies to relocate or remain more conservative in their scale-up efforts. The report suggests looking to the UK for inspiration.

"Finding ways in which the Canadian regulators ... can develop procedures to stay abreast of new technology developments and their predicted impact on the market, while allowing for very rapid small-scale experimentation (leading to scale-up in cases of success), is an action venue of great potential," states the report. "Such initiatives, would not only make Canada a more attractive global hub for Fintech development attracting high quality entrepreneurs and investors, but would also create institutionalized pathways for information diffusion, collaboration, and the development of a vibrant ecosystem."

"With the rapid rise of Fintech, there is a growing and significant disconnect between the regulators and the latest technological advances. The result is that current regulations make it extremely difficult to undertake the low-level-rapid-experimentation that is necessary to develop safe, useful Fintech products … What has traditionally been seen as a source of competitive advantage for the financial service sector, our regulatory system, is now seen by many to be an obstacle in the context of the evolving Fintech ecosystem" — TFSA report

Inexpensive space where fintech companies can meet, be incubated and collaborate is an issue where the report urges action, as is the lack of venues for networking and knowledge sharing.

Wolfe says a critical issue for large financial institutions is to assign more senior people to handle pressing Fintech issues.

"The challenge is getting people making decisions up at a high enough level in the corporate hierarchy," he says. "Financial institutions in Canada are strong and dynamic and run by the best talent in the country. They recognize they can't ignore fintech and have to respond ... Financial institutions have a very strong brand ... so lets use the brand and leverage it to create a new entrepreneurial brand around fintech."

For a copy of the report: www.tfsa.ca/resources/reports-studies

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