Canada’s fintech environment presents an opportunity not only to increase economic prosperity and efficiency but also to democratize how Canadians use financial services, writes Darren Gill.
By Darren Gill, August 15, 2019
Imagine the owner of a small but successful café in Prince George. She is seeking capital to finance a second location but is unable to access a loan from a bank. She is not sufficiently well-connected to seek out her own investors and doesn’t have a wealthy family to lend her the money. How can she access the capital she needs to open that second location?
Now imagine there were a safe online service for finding would-be capital investors. Our café owner could connect with a private individual who holds investible capital. The two parties could enter into a contract on their own terms, mediated by the service provider. This peer-to-peer (P2P) approach to lending would match ventures with investors who might not meet each other but for the online platform.
This is the emerging future of financial services delivered through financial technology (fintech). Sadly for our theoretical café owner, the current regulatory environment does not allow for this sort of open exchange.
Given current regulations, P2P loans qualify as securities and therefore require regulators’ approval of detailed informational prospectuses. This means the small café owner must hire lawyers and specialists to draft documents and disclosures even when simply seeking a loan – something she wouldn’t have to do had she gone to one of the banks. But if the banks won’t take her, what is she supposed to do?
Hurdles like this that lock small players out of capital markets are entirely unnecessary. The fintech service provider to our industrious Prince George café owner and her investor would manage risk on its platform to ensure that neither party ends up being short-changed.
P2P lending is just one example among many of strict regulation holding back the creative disruption of financial services. Fintech companies are subjected to the same strict regulations that apply to traditional financial service providers. They must also adhere to comprehensive regulations covering consumer protection, privacy, anti-money laundering, data security, and more. Financial regulations are clearly in the public interest, including with fintech. But governments need to modernize our financial regulations to better encourage innovation in the Canadian marketplace.
Government initiatives such as the 2019 modernization attempts to the Bank Act and Canadian Payments Act have been widely applauded by industry but these initiatives largely aim to increase the flexibility of established financial institutions. One size—the quadruple XL that suits our biggest financial institutions—doesn’t fit all. There is considerable room for innovative policy reforms for fintech, such as employing opportunity zones or creating regulatory exemptions for P2P lending involving small businesses, like our café owner in Prince George.
With artificial intelligence, new forms of competition, and greater efficiency, fintech could revolutionize how financial services are delivered, especially for Canadians under serviced by the traditional financial services industry.
Take Toronto-based WealthSimple, for example. It already provides high-quality investment advice and robo-advising via an online platform. Such services, traditionally only available to the economically privileged, are now being offered to the masses and at a fraction of the cost. Fintech also holds the promise of giving rural, remote, northern and Indigenous communities banking services similar to those of urban Canadians, and at reduced costs.
Less burdened by regulation, P2P lenders in the US have been facilitating loans between investors and entrepreneurs since 2005. Capital-seekers can now look beyond the big banks for more competitive rates and more convenient procedures for getting a loan.
Payments, money transfers, insurance, and other types of financial services are ripe for modernization and disruption. Even amongst the big banks, there is a push towards digitizing services and incorporating new technologies. The fintech revolution benefits players of all sizes.
While Canada’s fintech environment has been recognized as a leading global hub,  fintech adoption rates lag behind much of the world. According to the EY Fintech Adoption Index 2019, Canada’s adoption rate is at 50 percent, versus 64 percent globally. Part of the reason has to be restrictive regulation.
Canada’s fintech environment presents an opportunity not only to increase economic prosperity and efficiency but also to democratize how Canadians use financial services. But regulation has failed to keep up with the momentum of fintech. Policy-makers and regulators need to stop holding back the power of the fintech revolution.
Darren Gill is a law student at Dalhousie University’s Schulich School of Law and a Summer Policy Analyst at the Macdonald-Laurier Institute.
