Answer ... Canada has a wide variety of active fintech businesses and most sub-sectors of the fintech industry have become embedded in Canada. Money transfer and payments are likely the most embedded and widely adopted sub-sectors of the fintech industry. Personal finance, wealth management and robo-advising are also well embedded. Finally, lending services, which comprise non-financial institutions and platforms, can be considered well embedded within Canada.
Answer ... A very broad range of products and services are offered in all areas of fintech.
Answer ... Fintech players are most typically structured as limited liability companies incorporated at either the provincial or federal level.
Answer ... While there have been a limited number of fintech businesses which have financed through initial public offerings, fintech businesses are more typically funded through alternative early stage funding sources, as opposed to raising money in the capital markets or through taking on traditional bank debt.
Investment by venture capital funds is a key source of funding for many of Canada’s top fintech companies. According to the PwC/CB Insights MoneyTree™ Canada Report Q4 & Full-Year 2018, venture capital funding in Canada totalled C$456 million for fintech in 2018, up from C$441 million in 2017.
Investment through the ‘exempt market’ (other than venture capital funds) is another common early stage funding source. Generally, if a company plans to offer securities to the public, it must do so under a prospectus. However, some exemptions from this rule permit a company to raise capital without the time and expense of preparing a prospectus. Common exemptions include issuing securities pursuant to an offering memorandum, or to ‘accredited’ investors that meet certain criteria imposed by the provincial securities commissions, including meeting certain income or financial asset tests.
Financing may also come through a strategic partnership. There are several examples of Canadian banks partnering with fintech companies in order to access innovative products and solutions to provide to their customers.
Federal and provincial government funding and investment programmes are also available for innovative businesses – for example, through the Business Development Bank of Canada and the Strategic Innovation Fund.
Answer ... The Canadian banking system is dominated by five large chartered banks. These institutions are conservatively operated and strictly regulated. However, recent amendments to the legislation regulating Canadian banks removed restrictions on certain types of relationships among banks and fintech companies, which may lead to greater partnership opportunities between banks and fintechs, whereby banks either source technology from, or develop technology in partnership with, fintechs.
Answer ... There is no prohibition in Canada on outsourcing back office functions and there are service providers available for fintechs to access. Outsourcing is a relatively common practice among Canadian businesses generally, but perhaps not for start-ups where expenses must be tightly managed.
No federal or provincial laws in Canada generally regulate outsourcing transactions. What regulations will apply to an outsourcing transaction will depend on the nature of the transaction itself and the industry sector in which the business is operating. For example, the federal Office of the Superintendent of Financial Institutions (OSFI) has published Guideline B-10, Outsourcing of Business Activities, Functions and Processes, which sets out OSFI’s expectations for federally regulated entities that outsource or contemplate the outsourcing of one or more of their business activities to a service provider. Although provincially regulated financial entities, such as provincially regulated credit unions, are not specifically subject to Guideline B-10, it is the general practice of provincial regulators to require compliance with Guideline B-10 as well.
Fintechs that outsource should consider privacy legislation in connection with any customer or employee data that is being provided to service providers. The federal Personal Information Protection and Electronic Documents Act provides that a business that has collected personal information remains responsible for such information where transferred to third parties for processing, and requires the business to use contractual or other means to provide a comparable level of protection while the information is being processed by third parties. Outsourcing agreements should therefore contain provisions addressing confidentiality and requiring the parties to comply with all applicable privacy laws.