Canada needs get ahead in fintech

Canada is an innovative nation, but for some reason or other it is lagging behind its peers when it come to new financial technology. More co-operation between the banks and the fintechs is needed if the country is not to be left behind, as Financial Post suggests.

In the summer of 2018, the Canadian government announced, “it needed someone to study the landscape for financial technology companies, or fintechs, and figure out how they were getting along with the big banks and other financial institutions,” journalist Geoff Zochone reported. As he said, “Large multinational companies have jumped out to a headstart in the race to succeed, and Canada runs the risk of falling behind. At stake is nothing less than our prosperity and economic well-being.”

Toronto-based Fintech Growth Syndicate Inc., won the contract for the study, which became a 240-page report, the first of its kind made available in Canada.

The report used only publicly available data sourced from more than 60 different websites and discovered, amongst other things, that there were “approximately 1,000 fintechs across Canada offering services or products related to crowdfunding, insurance, wealth management, cryptocurrency, artificial intelligence, capital markets, lending and payments.”

Although most of the companies were startups and had small staff numbers, when combined they employed more than 30,000 people and they had an estimated combined value of $30.5 billion. This was exciting. However, what it also showed that very few of the fintechs had partnerships with the banks. Instead the study found “Canada’s Big Five banks may have been increasing their engagement with fintechs, but “the majority of their efforts” were still on building their own products and digital experiences.”

The result is that one of Canada’s biggest industries is innovating at a snail’s pace, plus the country is lagging behind its peers in adopting new financial technologies. It also means the Canadian consumer is probably paying more for financial services than they should.

Sue Britton, director at Fintech Growth Syndicate Inc., said, “To the extent that we could find publicly available information, we were able to show that, yes, there are some fintechs that are partnering with financial institutions. But certainly the majority of those partnerships are on the financial institutions’ terms. They’re not groundbreaking new business models … It’s not going to make the marketplace more competitive, because it’s going to, in fact, if anything, grow the business for the incumbent.”

Sticking with the status quo may be Ok for the banks in the short-term, and consumers may not mind, because they are used to the ‘traditional’ banking services. And it appears that they see no need to shake up Canada’s acclaimed stability on financial services. However, as Zochone says, “the incumbents could wake up one day to find their lunches being eaten by big-tech firms such as Amazon.com Inc. and Apple Inc., which are already offering a payments solution, some more aggressively than others.”

Britton added, ““What our big banks aren’t doing is moving as quickly as other parts of the world, innovating their business models, extending financial services to more small businesses or reducing their fees.” She added, “Perhaps, as Abraham Lincoln famously said, ‘give me six hours to chop down a tree and I will spend the first four sharpening the axe,’ they are still sharpening the axe.”

Royal Bank of Canada chief executive Dave McKay reported in March of this year that he was increasingly concerned with the prospect of Facebook Inc., Amazon.com, Apple, Netflix Inc. and Alphabet Inc.’s Google (the FANG companies) getting into banking. He told Bloomberg, “They are getting between us and the moments of truth of our customers, and currently what they do with that is they sell that insight back to us in the form of search and advertising and other perspectives, and they earn a certain amount of economic rent.”

It will take time for Canada to begin adopting tech like other countries, Britton said. But it will happen.

“It’s not a blip, it’s not a bubble, it’s not a one-off,” she said. “It is the future.”

The 2019 outlook for banking

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I’ve just come across a new report from Deloitte titled ‘2019 Banking and Capital Markets Outlook: Reimagining transformation’. I was interested to read its opening sentence: “The global banking system is not only bigger and more profitable but also more resilient than at any time in the last 10 years.”

According to The Banker’s Top 1000 World Banks Ranking for 2018, total assets reached $24 trillion and the return on assets was 0.9 percent. This data would seem to say that at the end of the decade following the financial crash (caused b the banks, lest we forget) banks are in great shape. You may feel they don’t deserve it, but that appears to be the situation.

Banking health isn’t global

However, this healthy environment isn’t a global phenomenon. Deloitte’s says that the USA is ahead of its European counterparts. This is due to “aggressive policy interventions and forceful regulations” Deloitte’s claim, and the result has been healthier American banks.

By contrast, European banks have been held back by structural deficiencies, overcapacity, low/negative interest rates, and the absence of a pan-European banking regulatory agency have all likely contributed to European banks experiencing persistent profitability challenges.

European banks have been shrinking in size, retreating from international markets and exiting businesses that were profitable for them in the past. To illustrate this, just look at the fact that the profits of the top five European banks dropped from $60 billion in 2007 to $17.5 billion in 2017.  However, Western European banks seem to be faring better these days, with an ROE that grew to 8.6 percent in 2017, compared with 5.5 percent in 2016

On the other side of the world, the Chinese banks have been the big story. Not only has the Chinese banking industry has surpassed that of the European Union (EU) in terms of size, the world’s four largest banks in 2018 are Chinese. Compare this with 2007 when there were no Chinese banks in the world’s Top 10.

A recession is coming?

But the Deloitte report sees some gloom on the horizon. Deloitte economists are predicting a 25 percent probability of a recession in the United States in 2019, and this is likely to weaken US economic growth in 2020, if not in late 2019. Although we are almost at the year’s end already. And the Deloitte forecasts for GDP growth by region shows most of the regions in decline, or flatlining  just past 2020.

Where can the transformation happen in banking?

Partnership with fintechs is one approach. Deloitte says more digital transformation is required. However, Deloitte asks, “But how much of this change is purposeful and strategic? “ It comments: Banks should bolster their conviction and reimagine transformation as a holistic, multiyear process and “change how they change.”

Deloitte also suggest that the transformation “should fundamentally start with banks reaffirming their role in the global financial system.,” but it adds a warning: “Banks should discard grand visions of becoming “a technology company” and instead focus on customers, enhance trust as financial intermediaries, facilitate capital flows, and provide credit to the global economy with data as the bond that sustains the amalgam of technologies—AI, automation, cloud, core modernization, etc.—best suited for the purpose.”

 

 

 

3 predictions for the digital financial future

The financial industry is going through a sea change. So many aspects of it are under scrutiny: from debates over cashless societies, to universal basic income, and the implications of digital currencies. Money has always been a hot topic, but it has become even hotter.

Blockchain changed the conversation

The advent of blockchain technology is in part a reason for this sudden increase in interest. As Lauren deLisa Coleman writes for Forbes, we are seeing financial giants like JP Morgan enter the digital currency space, alongside Facebook and IBM. And she points out, “But amidst such vast activity around digital currency overall, there is a specific and growing interest toward trend shifts pertaining particularly to token exchanges.

Talking about Token Exchanges

Coleman reports on the discussions at a New York event: Token Exchanges: The promise of liquidity, compliance and stability, where lawyers comprised the majority of the audience. Joel Telpner, partner and Chair Fintech & Blockchain Practice at Sullivan & Worcester LLP, addressed the issue of turbulence in the digital currency space: “We’re all collectively paying the price at the moment, but it’s important to keep in mind that this is not a bad thing. Most all new forms of technology have experienced a high level of unreasonable exuberance in the early days and after that period, business becomes much more stable.”

A more mature environment

Interestingly, he also suggested that now is the time to create a new ecosystem with new players: “”We’re at the end of the beginning,” he remarked. “This is about moving from the wild, wild, west to a more mature level of the digital currency space and tokens. Those that remain have to work hard and understand that success will come from fundamental principles in business and governance, and it will certainly pay off.”

3 key things to watch out for

He then identified what he believed are the three key regulatory areas to watch this year that could be game changers:

1. He believes the US Securities and Exchange Commission (SEC) will make a statement about the status of digital currencies and tokens — which are tokens and which are not.

2. The CFTC (Commodity Future Trading Commission) will become more involved in the token space given that this collective regulates commodities.

3. Stablecoins will come under a regulatory spotlight and decisions will be made about how to regulate this particular type of digital currency.

The event also revealed that a consensus of opinion indicates the issue of custodianship will come under focus this year as well. In addition, there will also be an eye to how trade is conducted in this space and how securities are managed securities once they are issued.

But, one of the most hotly debated topics in the industry is which jurisdiction will establish itself as a leader in the space: Telpner’s response to this was: “”But this approach was wrong in 2017, 2018 and still wrong to think like this in 2019, because all countries are working hard to regulate this space. Stop chasing jurisdiction.”

Is the crypto market history repeating itself?

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At the turn of the twentieth century, Jesse Livermore wrote a book titled “Reminiscences of a Stock Operator.” It’s about his life as a trader. One of the things he said back in 1900 was this:

 “When you read contemporary accounts of booms or panics the one thing that strikes you most forcibly is how little either stock speculation or stock speculators to-day differ from yesterday. The game does not change and neither does human nature.”

And he also wrote: “I used to think that people were more gullible in the l860’s and ’70’s than in the 1900’s. But I was sure to read in the newspapers that very day or the next something about the latest Ponzi or the bust-up of some bucketing broker and about the millions of sucker money gone to join the silent majority of vanished savings.”

Doesn’t this sound familiar? It does to me. It’s pretty much what people are writing about the cryptocurrency market. It’s a bubble, it’s a Ponzi scheme, it’s another boom and bust.

But the most important point he makes is this: that the game doesn’t change and neither does human nature.

The derivatives market provides us with a good example of the sameness between what is happening in crypto now and markets of the past. A derivative is “an arrangement or product (such as a future, option, or warrant) whose value derives from and is dependent on the value of an underlying asset, such as a commodity, currency, or security.” Derivatives trading has been around since ancient Mesopotamia. For example, a tablet from 1809 BC documents a Mesopotamian merchant borrowing silver, promising to replay it with sesame seeds “according to the going rate” after six months.

The Briitish South Sea Company of 1711 led to a wave of new joint-stock companies with dubious business plans that created one of the first bubbles, alongside the Dutch tulip fever.

What emerged from this was the realisation that derivatives, and now the crypto market, need governance and regulation. Self-policing must be encouraged, and work in tandem with government-enforced rules. Bad actors must be kicked out of the market, just as they were in early days of the London Stock Exchange.