Accrued: After Hours - Episode 12
Welcome to the twelfth edition of Accrued: After Hours! Whether you’re a fintech enthusiast or a professional in the fintech industry, this episode will keep you informed on the condition of Canada’s financial services sector.
Tal Schwartz, a top writer and advisor for the Canadian fintech industry, joins hosts Tedd Huff and Colton Pond in this week’s episode, Canadian FinTech Revealed: Tal Schwartz reveals Canada’s best-kept FinTech secrets. Together they discuss the growth and challenges that financial institutions face. They also discuss how to enter new markets and expand globally. There is much to learn from Tal’s insights as he has helped to shape the landscape of financial services in Canada.
You can stream the Accrued fintech podcast, (brought to you by LoanPro), in all the usual places.
Here’s what went down
Here’s the key themes about fintech growth touched on by the industry experts:
- Limitations for Canadian banks
- Canadian fintech growth
- Cross-border expansion for fintech companies
Limitations for Canadian Banks
Tal’s experience in the Canadian financial sector enables him to share with Tedd and Colton the unique hurdles faced by fintech companies. Many fintech companies view Canada as a soft launching pad for further growth. Yet, Tal advises against this business strategy due to the drastic regional differences across the country. Canadian customers in Quebec, Calgary, or Vancouver for example have unique preferences and comply with different regulations. Quebec in particular is most different and has very strict language laws. French and English are both developed markets and need to be included for the optimal customer experience. Thus, launching in Canada can be more complicated than you might think.
In addition to these challenges, Tedd, Colton, and Tal discuss how Canadian regulators are slow to implement regulatory changes occurring globally. An example of this is Canada’s hesitance to establish a codified open banking regime. Without one, banks rely on fintech aggregators and are forced to share transaction information with third parties. This stifles innovation for financial institutions. Additionally, a decline in rate caps from 47% annually to 35% ER will cause prime lenders to not be able to service riskier borrowers. This change in the allowable interest rates will not only affect these lenders, but all businesses as they will still need accessible credit in some way. Tal even speculates that if not through regulated channels, some will look to unregulated ones. This will cause a drag on Canadian economic conditions as businesses will not be able to contribute at the same rate of productivity as they would have otherwise.
Tal believes that Canada’s greatest challenge is their lack of sponsor banks. A strength of the US financial services industry is the flexibility provided to businesses due to the large number of sponsor banks. These banks allow versatility in providing regulated financial services to non-regulated third parties. The landscape is different in Canada as the “Big 5” companies own 95% of the market share, with only four or five existing sponsor banks. As Tedd points out, there is very little incentive for big banks to offer sponsor banking as these larger companies have a heavy focus on regulation. They don’t want to do anything disruptive that could get them in trouble. This shuts out the opportunity for small financial institutions to attract large amounts of deposits through partnering with local fintech companies.
Canadian fintech growth
Despite its challenges, banking as a service has grown in Canada over the last decade. Online originators and services have emerged, altering the fintech industry. While online services have existed in the global fintech market for some time, it‘s newer to the banking sector in Canada. The US fintech market has multiple big players in B2B financial services that drive the industry. Canada is beginning to see the equivalent of these fintech players in their own market. Tal mentions Float as an example. The organization has gained revenue growth in the mid-market, especially after the effects of COVID. From Colton’s prompting, Tal also shares that there are many under-the-radar emerging fintech companies who will likely become the next big players in the market. Tal highlights Arbor and Yield Exchange as two up-and-coming fintech companies that he is excited to see succeed. These two organizations have developed significant growth due to their focus on innovation and fintech solutions.
Banking as a service has been one of the most significant drivers of fintech innovation globally. There are so many companies that wouldn’t exist if not for a partnership with a regulated financial institution. In order for Canadian fintech to really catch up with other developed markets, we absolutely need to have a thriving banking as a service system locally
A key method of growth for the fintech sector is mergers and acquisitions. Tal shares that the two largest home improvement lenders, Finance It and Simply Grew, recently merged with a combined market share of almost 97%. Similarly, Fairstone merged with Home Trust to dominate the subprime lending sector. This is substantial because there isn’t a major subprime focus in Canada. Big banks tend to focus on prime borrowers to mitigate risks and lack the capabilities to match what Finance It and Simply Grew are able to provide. This is reshaping the financial services sector by opening the doors to more subprime and riskier lending.
It would be out of character for Tedd and Colton to not discuss how artificial intelligence is changing the landscape of the fintech industry. As we look to the future, we will see artificial intelligence especially helping financial institutions in the growth of fintech products. These include underwriting, collections, and customer services. Tedd warns that it is important to pay attention to key trends to enhance the customer experience. You should also keep up with regulations to prevent misleading marketing as artificial intelligence becomes more popular.
Cross-border expansion for fintech companies
Investments across nations are important for global fintech revenue growth. Collaboration in different markets influences the spread of innovation, business models, and talent. Canada’s fintech market is small, limiting the amount of growth and interest from Canadian customers. For fintech businesses in Canada seeking global growth, organizations such as Export Development Canada, Atlantic FinTech, and C100 exist to help businesses face challenges such as hiring locally, compliance, and establishing a partner network. Tal gives an example of a company seeking growth that initially launched their product in Canada. They found a lack of interest in their fintech products and decided to move to the US where the market is more developed. There they found success. The US is a much larger market than Canada, which means it is also more competitive. Watch for emerging markets or underdeveloped sectors where you can invest in opportunity quickly to find success.
Tal provides advice for any investment activity in the Canadian fintech sector. The first factor to consider is which market will be of most value to your business. The language market between French and English is an important decision to consider. Understanding the laws will be key to staying compliant. Furthermore, the “Big 5” dominate prime finance in Canada. Considering underserved markets and underdeveloped tools would allow companies to find more business opportunities. When seeking to fill these gaps or provide mainstream financial services, one way to stand out is through technology adoption. Advanced technologies are enabling financial institutions to offer services entirely online, which is a new and welcome change in Canada. Tal concludes his advice by reminding us to be aware of key fintech players. This knowledge when seeking investors or partners will be invaluable as companies are interested in knowledge of other fintech businesses in the area. Be aware of the landscape, and you will succeed.
The primary decision of whether you expand into another market or not is, ‘Is this market worth the investment?’ Because there are going to be tons of challenges expanding into another market.
Key takeaways
1: Understand regional differences before launching
Before entering the Canadian fintech market, you must understand the regional differences. Each province has its own regulations. These relate to language, finances, and the law. Tailor your business strategy to these local specifics for a better chance of success.
2: Prepare for language barriers in the financial services industry
Many languages are spoken in Canada, with French dominating in Quebec. There are strict language laws that you should be aware of to stay compliant. As part of your business strategy, ensure your product and marketing materials are in both English and French as both are developed markets in Canada. This will help you maximize growth and follow local laws.
3: Focus on business banking opportunities
The business banking sector of Canadian fintech is growing quickly. Consider developing products and services that cater to B2B financial needs. This particular area of fintech shows potential for growth in digital products and technological innovation. Developing products with online capabilities will help you increase revenue growth and access new opportunities in the fintech sector.
4: Monitor fintech sector regulations
Stay updated on the regulatory environment for Canadian fintechs. Rules around open banking and available interest rates can have a significant impact on your business. Keeping an eye on these changes helps you adapt quickly and stay compliant.
5: Leverage AI for better customer service
Artificial intelligence plays a key role in supporting Canadian fintech companies as emerging technologies are changing the financial services industry. Use artificial intelligence to improve customer service, underwriting, and collections. This technology can help you provide a better customer experience and streamline your operations. Be aware of regulations to avoid misleading marketing in this area.
