How confident are you that the government will achieve having a fully implemented open banking framework by 2025? What do you think are the biggest stumbling blocks to achieving this goal?
The last time the government said it was going to implement consumer-driven banking by no later than January 2023, the way I interpreted it was that they were going to give the Big Five carte blanche to work together and stand something up. When you considered all that had to be done, and how little had been done, this was the most plausible interpretation. It's hard for me to imagine how the government would have been able to accomplish that timeline without looking to the industry.
We're in a different world now. As the federal government's open banking lead, Abraham Tachjian did a lot of work to put together a consumer-driven banking instruction manual, which was delivered to the Minister of Finance. Most of the big questions have been answered, but a few remain. For example, there's one about governance. The government said it would mandate a government-led entity to oversee the system. Who is that entity? Is it new or existing? How is it going to be set up for success? How much money will that cost?
The government's goal is certainly possible. I'd go further and say it's plausible if and only if we take the next logical step after the policy statement, which is to implement it. Implicit in that policy statement is the government has made many decisions about big things, which means there's little left to do.
The success of an open banking framework is often noted as being dependent on the establishment of a Real-Time Rail for real-time payments. Do you think this is the case? Is there an advantage to having an open banking framework without an RTR?
There are many use cases that don't require a real-time payment system to work. Reporting rent payments to build your credit score. Budgeting. More automation around bookkeeping and reconciliation. The list goes on.
But a more modern payments infrastructure, which allows for secure and seamless third-party payment initiation, would expand the scope of innovation. For example, imagine an app that not only budgets for you but also manages all your bill payments for you in a way that maximizes the cash you have on hand.
Good regulation is good, but good regulation with good technological infrastructure is even better. Open banking, by itself, will benefit Canadians. But open banking and a real-time, data-rich payment system? That's going to mean more.
The federal government has begun opening up the membership in Payments Canada by amending the Canadian Payments Act. The intent seems to be to allow all payment service providers that are subject to the Retail Payments Activities Act to be eligible for membership. Is that realistic?
The main reason for joining Payments Canada is to directly access their payment systems. But direct access to payment systems is not for everyone in the payments value chain, just like how being a farmer is not for everyone in the agricultural value chain. We also need the suppliers of capital, equipment, the distributors, and the storefronts. The same is true of payments. Everyone will do what they have a comparative advantage in—and Canada will be better for it.
Right now, there are some companies for whom it makes sense to directly access payment systems. Take Wise, a global fintech company, as one example. In the United Kingdom, when they got direct access to the faster payment system, they were able to immediately reduce costs by 20% and the time it takes their customers to move money to seconds.
So, some payment service providers will join, and others will not. It's hard to predict who will and who won't because we still need more details around what the RTR is, what it will do, and how much it will cost to use.
What kind of impact do you expect that these various regulatory changes will have on the fintech sector?
It depends on the time horizon. In the short term, I think it will reduce the number of fintechs more than it will increase it. More regulation will increase the cost of doing business, and so we should expect to see people try to get gobbled up by a bigger player or drop out of the market entirely. In the long run, I think we'll see more growth in fintech. While regulation increases the cost of doing business, it also unlocks opportunity. Entrepreneurs with more regulatory certainty will find a way to thrive by outdoing their competitors.
What are the biggest challenges currently facing the fintech sector?
I'm partial to the idea that the biggest challenge in Canada is our cultural context. Consider that the U.S. isn't known for having a world-class regulatory system to promote innovation in the financial sector, and yet the U.S. has many fintech success stories. Compared to us, the U.S. has a bigger customer base, more money-chasing ideas, and greater access to the most talented people in the world. How did they get that way? It's possible they're more risk-loving than we are. Perhaps Americans are more comfortable with people trying something extremely ambitious and failing, whereas Canadians are happier to bask in the glory of old success than risk undoing it, like surviving the financial crisis of the 2000s. The former culture will make bolder and faster progress on whatever it does than the latter.
What would Canada need to do to catch up to other G7 countries? Do you think we can even catch up?
We need to change the culture. To do that, we need louder and prouder fintech success stories. At the margin, smarter regulation will help. But it won't take us all the way there. It will simply let us try to compete. We need to raise the status of grand ambition so more people try to do really hard things without shame. When they fail, they'll try again. When they succeed, they'll inspire the next generation of founders to mimic their grand ambition. It's the start of a new and virtuous cycle to break the pattern of an old and not-so-virtuous one.
Looking at what is happening in the regulatory space, what would be your three top recommendations for fintechs?
I have just one: dispel yourself of the myth that you should focus exclusively on building great products, and you can afford to neglect your relationship with the government. The market for financial services is not like the market for software. Permissionless innovation works in the latter but not in the former. Financial services is one of the most heavily regulated markets, and so nothing happens that isn't ordained by the government. Even if you're not regulated by the government, your partner bank is, and your bank is required by the government to manage the risks you pose. The rules are also always changing, and so there's always a risk that your competitors are using the law as a cudgel. There's a certain amount of facetime you need with the government to simply protect yourself. Recall the old saying that if you're not at the table, then you're on the menu.
What's your 10-year forecast for the fintech sector?
Whatever the prediction markets, if there are any, are saying.
Alex Vronces is the executive director of Fintechs Canada, the unified voice of Canadian fintech. Fintechs Canada is an industry association of Canada's most innovative financial technology companies. Alex has also worked as a policy wonk at Payments Canada, the Canadian Chamber of Commerce, and dabbled in journalism.
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