Make room for the rise of fintech, Competition Bureau urges regulators

‘Tiered’ system for newcomers recommended

TORONTO • As technology changes the financial services landscape, with fintech companies competing and partnering with traditional banks and insurers, regulators are being urged to keep up by adopting a “tiered” approach to regulation based on the risk a failure would pose to the financial system.

The recommendation is contained along with 10 others in a report released Thursday by the federal Competition Bureau, which also urges regulators to be technology- and device-agnostic, applying rules based on the function of a financial product or service, rather than on the platform or device used.

The Bureau spent months gathering information and consulting on financial technology to assess the impact — as well as barriers to entry and expansion — in areas such as lending, investment dealing and advice, equity crowdfunding and Canada’s retail payments system.

The market study that emerged urges financial sector regulatory authorities and policy-makers “to ensure future regulatory change creates space for innovation in this important sector of the Canadian economy.”

Over the past few years, banks have seen their traditional business lines infiltrated by new competitors — dubbed fintechs — that use a combination of online or mobile technology and data to offer fast access to traditional banking products and services, from loans and money transfers to securities trading.

The arrival of the fintechs sparked debate over whether the new services should be subject to the same regulations as established financial institutions. Fintechs were generally against rules that mirrored those of established firms, arguing the regulatory burden would drive costs too high and frustrate innovation. Some traditional banks have embraced fintech platforms that reduce costs and make it quicker and easier for clients to sign up for financial products and services.

The Bureau says the tiered approach it recommends for regulation would create a level playing field for smaller players because “functions whose failure poses lower risks to the financial system should not necessarily face the same strict oversight as those whose failure poses higher risks.”

At the same time, the Bureau concluded that regulation based on a financial product or service — rather than on the technology or device used to get it — would “ensure that all entities that perform the same function carry the same regulatory burden and consumers have the same protections when dealing with competing service providers.”

The competition watchdog makes a number of recommendations aimed at lowering barriers and fostering innovation within the system in its report, which notes “Canada lags behind its international peers when it comes to fintech adoption.”

For example, regulators are urged to promote greater access to core infrastructure and services, including the payments system, to “facilitate the development of innovative new fintech services.”

The Bureau is also urging regulators and industry players to explore the potential of digital identification verification, a technology billed as a cost-effective way to verify client identity to satisfy financial regulations and global know-your-client obligations.

“This would reduce customer-acquisition costs for service providers, ultimately reducing the costs of switching for customers and facilitating regulatory compliance,” the report says.

In another recommendation, policy-makers are urged to “embrace” systems that provide better access to consumers’ data so “fintech can help Canadians overcome their inability or unwillingness to shop around and switch between their service providers.”

The Bureau is encouraging more collaboration throughout the financial services sector, including between fintechs and regulators, and suggests that expansion of fintech across Canada, and even internationally, would be aided by harmonized regulation across geographic boundaries.

“Greater collaboration will enable a clear and unified approach to risk, innovation and competition,” the report says.

While there has been some harmonization between provinces, such as a joint statement from the Canadian Securities Administrators on cryptocurrencies, regulators such as the Ontario Securities Commission have adopted regional tech innovation hubs on their own.

The competition watchdog urged policy-makers to identify a country lead for fintech, which it says would create a one-stop resource for information and “encourage greater investment in innovative businesses.”

Fintech has been evolving in Canada and internationally, from initial disruption in the sector to more collaboration. Some traditional banks have embraced fintech platforms that reduce costs and make it quicker and easier for clients to sign up for financial products and services.

Canadian Imperial Bank of Commerce, for example, forged a partnership with Montreal-based small business lender Thinking Capital. On CIBC’s website, prospective borrowers are referred to Thinking Capital and told they can apply for funds in minutes and receive a loan of between $5,000 and $300,000 in as little as 24 hours.

Bank of Nova Scotia forged a similar partnership last year with Atlantabased fintech Kabbage Inc. to provide “fully automated” small business loans of up to $100,000 in Canada and Mexico.

Amid the shift, some industry watchers have cheered disruption-driven tech innovations in traditional lines of business, while others questioned whether it is only a matter of time before collaboration between fintechs and traditional banks gives way to consolidation, with clear winners and losers emerging.

In its report, the Competition Bureau urges policymakers to review regulatory frameworks frequently to ensure they “remain relevant” and do not “unnecessarily inhibit competition.”