Some fintech players viewed Masrani’s comments as an unnecessary attack on their businesses, and one that unfairly lumped together all non-bank providers offering financial products and services.
“It’s disappointing to see established incumbents responding to innovative challengers with such knee-jerk and closed-minded comments,” said Kevin Sandhu, chief executive of Vancouver–based consumer lender Grow.
He and other fintech players say they fear a push to regulate will stifle the very innovation through technology and computer-driven data mining that is bringing banking services to Canadians more quickly, and at a lower cost.
Mogo tops 200,000-member milestone as Canadians flock to fintechHunting for unicorns: Three emerging Canadian fintech firms to consider
“Fintechs, by definition, are different than the incumbents, and as a result, they present different points of exposure and risk,” he said. “Saying that the same regulations that apply to large, multi-national banks should apply to smaller, nimbler, and niche fintech companies is effectively forcing a square peg into a round hole.”
Dave Feller, the chief executive of Vancouver-based online lender Mogo, said the call for more regulation of fintech is akin to the response of other entrenched industries to alternatives resulting from a shared economy.
“It is no different than the taxi industry trying to use fear and regulation to stop Uber from providing an experiences that customers are demanding,” said Feller. “Regulation is ultimately about protecting the consumer and ensuring that there is competition that is providing relevant and affordable choices — not stifling disruption.”
The question of what to do about fintech isn’t limited to Canada.
Around the world, established financial players and regulators are grappling with the emergence of technology-based banking products and services that fall beyond the umbrella of traditional regulation.
In Canada, the fintech sector is small relative to other countries, but it is growing rapidly, with one firm opening for business and another expanding in just the past couple of weeks.
LendingArch is a new a platform for consumer loans, based in Calgary, while Vancouver-based small business lender Merchant Advance Capital has expanded from offering loans to extending unsecured lines of credit to small businesses.
Though the impact of the upstarts has been limited from a financial point of view, Canada’s big banks are already repositioning themselves, redirecting resources into their own technology-based operations and, as Masrani’s speech acknowledged, entering into partnerships with fintechs when it helps to serve their customers better.
The message from the CEO of Canada’s second-largest bank, however, has been consistent: he thinks policy makers and regulators should step in to ensure there is a level playing field, including across-the-board consumer protection, fair competition, and integrity of the financial system.
“I think it’s important that other players who play in the financial services industry be subject to the same requirements as the banks [to] maintain the financial integrity of the whole system,” Masrani said.
Currently, fintechs operating in this country are governed by a patchwork of provincial regulations, registration protocols and consumer protection and privacy rules.
While many, such as Grow, Toronto-based Borrowell and Mogo — which has a revenue sharing agreement with Postmedia Network — lend money to Canadians, their business models and financing methods don’t subject them to the scrutiny of the federal Office of the Superintendent of Financial Institutions, a regulator that imposes strict and prescriptive capital and liquidity requirement on Canada’s banks.
Fintechs, by definition, are different than the incumbents, and as a result, they present different points of exposure and risk.
It is extremely unlikely fintechs would ever get off the ground if they were required to adhere to the extensive and expensive regulations that govern the banks. It would also require a legislative overhaul to bring the fintechs under OSFI.
There has been some suggestion that fintech lenders could fall within the purview of provincial securities regulators, if it is determined that matching borrowers and lenders online constitutes dealing in securities. But this has not been the case for most — at least so far — because they rely on funding from institutional or well-heeled investors, which qualifies them for exemptions from filing documents with market watchdogs such as the Ontario Securities Commission.
There are changes on the horizon in at least one part of the financial services ecosystem that could lead to a significant shift in the way traditional bank and fintechs are regulated.
The Canadian Payments Association, which oversees payments across the country, kicked off a massive modernization program in April with a plan to regulate based on what service is provided — a radical shift from the traditional method of imposing rules on an industry or specific type of institution.
“What we’re proposing is … regulation should be based on what you do, not who you are,” says Jeff Van Duynhoven, a veteran banker who is now executive director of the modernization program at the CPA.
“So if you do payments and payments are subject to regulation, everyone should have the same sort of regulation. If you hold money on deposit, everybody should be subject [to the rules governing deposits],” he explained.
The intention is to “level the playing field” in terms of consumer protection and security of the financial system, regardless of whether Canadians make payments by cheque or with the latest app on their mobile device, Van Duynhoven says.
However, he acknowledged that his project is in its very early stages, and the radical shift in how financial services are regulated could be many months or even years away.
Stephen Clark, a veteran financial services adviser who is now a partner in financial services practice at law firm Fasken Martineau DuMoulin LLP in Toronto, says it’s not too early to be asking questions about consumer protection and systemic risk.
“There are those that would argue that these players are small and cannot have a negative effect,” Clark said. “But as more and more of these players enter the market, the question has to be asked about whether there is a risk.”
He said all fintechs have the capacity to take market share from existing players, but upstarts in the payments segment have the potential to have a greater impact on the established system.
“The policy concern in the payments space is the fact that Canadians need to know they can rely upon their payments providers in the system,” he said. “What happens if that payment fails? The merchant is left scrambling.”
In the U.K. and Australia, regulators are coordinating with industry players including fintechs and have already begun to grapple with how to balance innovation with protection of consumers and the financial system, says Diane Kazarian, national financial services leader at PwC Canada.
Global firms number in the thousands, and more than US$19.1 billion had been invested in fintechs by the end of 2015, according to a joint report from KPMG and CB Insights.
When the numbers get that large, there’s a lot at stake. A recent report from global consultant McKinsey & Co. pegged the number of fintech firms at 12,000, all hoping to capture some of banking’s profit pool of more than $1 trillion.
Another report published last month, this one by PwC, revealed that incumbents believe more than 20 per cent of their traditional business could be at risk by 2020 due to the development of fintech.
“As more and more of these players enter the market, the question has to be asked about whether there is a risk.”
In Canada, more than 80 fintech firms had been launched by March, or expanded into the country, according to PwC. Most operate in the consumer and business loan and payments segments.
Fintech players acknowledge the differences in regulation, and some say they’re open to talks with policymakers and regulators about what type of oversight might make sense in the future.
Anthony Lipschitz, chief strategy officer of Montreal-based business lender Thinking Capital, is on board — as long as the changes don’t stifle innovation.
“Unnecessary and costly hurdles could curb innovation and slow the pace of growth — without providing any benefit to Canadian consumers and small businesses,” he said.