Studying FinTech: Competition and innovation in the financial services sector
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Introductory remarks by John Pecman, Commissioner of Competition
12th Annual Forum on Payments Compliance in Canada
March 1, 2017
Good morning everyone. I would like to thank the Canadian Institute for inviting me to speak with you today.
This year’s forum is themed “Sustaining a strong and growing economy in challenging and uncertain times”, and that is a good fit for what I’d like to discuss: which is the Competition Bureau’s interest in the financial services sector.
Let me start by saying that the Competition Bureau’s raison d’être is ensuring that both consumers and businesses prosper in a competitive and innovative marketplace. We do this by cracking down on cartels and abuses of market power, reviewing mergers and ensuring truth in advertising.
You’ll also find the Competition Bureau exercising another, complementary part of its mandate: that is, advocating the benefits of increased competition in regulated sectors of the economy.
Competition and innovation
We know that businesses in competitive markets are driven to innovate. They have a strong incentive to develop new and better products and services to attract and retain customers. They pursue more efficient production techniques and business models.
Competition drives innovation, which in turn drives productivity, efficiency and economic growth.
Our counterparts in Japan have a slogan: “no competition, no growth.”
When innovation is unnecessarily stifled—by regulation or otherwise—the result can be a less competitive and less dynamic marketplace.
We have seen in the transportation and hospitality sectors how technology-enabled innovation can inject new competitors into a market—companies like Uber and Airbnb—bringing big benefits for consumers, big growth opportunities for business, but also big challenges for regulators.
As policy makers react, the Bureau offers them guidance to ensuring that legitimate public policy objectives are met, while at the same time providing maximum scope for market forces. If we strike the right balance, we can meet important policy goals like safety and consumer protection, and at the same time Canadians can also enjoy the benefits of competition including cost efficiencies and innovation.
The financial services sector
In these "challenging and uncertain" times, we can help sustain a strong and growing economy by promoting competition and innovation in areas like the financial services sector, a pillar of the Canadian economy. In 2014, the sector accounted for approximately 10% of Canada’s gross domestic product. In 2015, the sector’s 4.5% growth rate was five times that of Canada’s overall economy.
Like many important industries, the financial services sector is evolving quickly in an increasingly digital marketplace. The technologies and innovative business models emerging in financial services (FinTech) have the power to challenge the status quo. Through FinTech, there is an opportunity to increase competition and spur even greater innovation.
But to realize the competitive benefits that FinTech innovation can offer, financial sector policy and regulations need to keep pace. This is why the Bureau launched a FinTech market study last May to explore the competitive impact that innovation is having on the sector and identify barriers to entry faced by new companies. We wanted to determine to what extent there is a need for regulatory reform to promote greater competition.
Our study is focussed on technology-led innovations that affect the way that Canadian consumers and businesses commonly seek out and use financial products and services in three categories: lending, payments and financial advice.
Our ultimate goal is to provide guidance for policy makers on how best to nurture an environment that allows Canada’s FinTech companies to innovate, grow and compete globally.
What we’ve heard so far
Since May, we’ve heard from nearly 100 stakeholders across all segments of the financial services sector: banks, FinTech entrepreneurs, consumer and business groups, regulators and international agencies.
And last week, we brought together leaders from each of these groups for a one-day workshop to discuss the key themes that have emerged from our consultations.
FinTech innovation is all about balance
We heard from thought leaders like Kevin Lynch, Vice Chair of BMO Financial Group and formerly Canada’s most-senior public servant, who observed that FinTech innovation is all about balance.
On the one hand, he told us, FinTech entrants bring innovative new models to traditional financial services: they can increase inclusion, reduce costs, provide greater flexibility and more optionality for consumers. On the other hand, he said, they also bring new risks in terms of consumer protection, cyber-security, and systemic risks (given the scale-ability of the underlying platforms) that must be considered and mitigated.
Dr. Lynch told us that impediments to FinTech growth include achieving scale in small domestic markets – underscoring the need to go global – and modifying consumer banking behaviours.
Embrace open banking
We also heard from Dr. Robert Atkinson, Founder and President of the Information Technology and Innovation Foundation in the United States: his advice to Canada is to become a technology leader by embracing open banking.
Open banking enables personal customers and small businesses to share their data securely with other banks and with third parties, to manage their accounts with multiple providers through a single digital app, to take more control of their funds, and to compare products on the basis of their own requirements. The transition to internet-protocol-based financial transactions could ultimately do to banking what Skype did to the telephone. Dr. Atkinson told us that, while there do remain some challenges to be overcome, open banking is fundamentally a more efficient, lower cost, more globalized, and more consumer-friendly model.
The United Kingdom’s Competition and Markets Authority would agree. In their 2016 report “Making Banks Work Harder For You,” the CMA concluded that older and larger banks don’t have to compete hard enough for customers’ business, while smaller and newer banks find it difficult to grow. This means that many people are paying more than they should and are not benefiting from new services. To tackle this problem, the CMA is implementing a series of wide-reaching reforms, including the requirement for banks to implement open banking by early 2018. The reforms also recognize non-banks as legitimate players in the marketplace, which must comply with regulations that are appropriate to their business. This means that FinTech payment service providers, for example, don’t need a banking license in order to facilitate payments or payment-related services for their clients, and earn customer trust. Such reforms tend to even the playing field between bank and non-bank financial service providers, which increases competition, as banks have to work harder to win consumers’ business.
The UK’s experiences in implementing these changes will provide Canada with valuable lessons as we consider modifying our own systems to become more innovative and consumer-friendly.
There were also a number of other key consensus points at the workshop that I’d like to highlight for you:
Some regulation is necessary but too much is a barrier to innovation
The need for appropriate regulation wasn’t in dispute. New entrants, in particular, recognize the essential role that regulation can play in winning consumer confidence. However, we need simpler, fewer, more flexible and technology neutral regulations if we want to stimulate innovation in the sector. Regulations need to be less prescriptive and more principle-based, allowing businesses to be nimble and responsive to market demand.
Collaboration is key
We heard that both the big banks and start-ups are interested in regulations that make it easy for them to partner. They may not see eye-to-eye in many areas, but both benefit when innovative new services can connect to the existing banking infrastructure.
To paraphrase the great economist Sir John Hicks: Canadian banks have led a “quiet life” for a long time, with little disruption. Banking profits have been steady and trust has been high. But banks are quickly realizing they must adapt to remain competitive in these rapidly changing times.
As Intel founder Andy Grove said: “only the paranoid survive.”
Canada’s banks need to be paranoid to survive too.
Yet, they are not alone. Partnership and collaboration could lead to excellent outcomes for both incumbents and new entrants in the FinTech sector in Canada.
We heard that Canada is a strong brand – both domestically and globally. Our banking system was lauded for weathering the global financial crisis. Now our FinTech ecosystem— startups, incumbents, regulators and policy-makers — should exploit that reputation.
If Canada wants to be a FinTech leader, it will need a champion
When we look to the international stage, it’s clear that countries with a FinTech champion and strategy achieve innovation faster. I’ve already mentioned the United Kingdom, where the Competition and Markets Authority has advanced regulatory reform in fundamental areas like open banking. Singapore is another country that is recognized for surging ahead, following a series of strategic activities that brought FinTech stakeholders together in a cluster to accelerate their growth.
Regulators are engaged and willing
I’ll end on a final point that I think is a positive one in these “challenging and uncertain times”. It is the fact that regulators are paying attention, and many are already taking steps to update their regulations. We saw this at our workshop. Everyone at the table is engaged and willing to work together to create a regulatory framework that is both sound and innovative.
For example, just last week, the Financial Conduct Authority (FCA) of the United Kingdom and the Ontario Securities Commission (OSC) in Canada announced a new cooperation agreement to promote FinTech innovation. Under the new agreement, innovative FinTech businesses in Ontario and the UK will be able to apply for support to help reduce regulatory uncertainty and time to market. Canadian FinTech firms that are referred by the OSC can expect to receive assistance from the FCA in understanding the UK market and its financial regulation. This will surely give our FinTech companies an advantage as they seek to accelerate their globalization strategies.
The Bureau’s market study and our final recommendations on driving competition and innovation in the financial services sector will be informed by what we’ve heard so far. We’ll be publishing a final report by the end of 2017.
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