Canadian Lawyer - sample

26 N O V E M B E R / D E C E M B E R 2 0 1 6 w w w . C A N A D I A N L a w y e r m a g . c o m up 4.3 per cent from $20.5 billion in 2014. Average return on equity, however, dipped to 15.6 from 16.6 per cent the year before. Spurred by the crawling economy, Canadian banks have restruc- tured some operations to increase efficiencies, streamlined their cost base and "become fitter, faster organizations," noted a report on fintechs by the advisory firm PwC Canada. Yet there is an inescapable sense that a transformation in the way that consumers access financial products and services is underway. Canada's fintech sector is relatively new and small, with some 100 companies, but it holds promise. The ecosystem, the majority of which is clustered in Toronto-Waterloo, Van- couver and to a lesser extent in Montreal, is home to a thriving technology startup culture that is buttressed by labs, incubators and accelerators. Public awareness in Canada over the existence of fintech offerings, while subdued, is expected to grow thanks in part to changing demographics. Millennials, now the largest generation in the Canadian workforce, are digital natives, and they expect nothing less than seamless mobile solutions across all industry segments, including financial services. "What we're seeing is a demographic shift where younger consumers are not necessarily going into a branch to do their banking but are very comfortable trying financial services that are purely digital, off their desktop or on their mobile phone, so it's really changing the customer engagement model," says Salim Teja, executive vice-president of ventures for the Toronto-based innovation hub MaRS Discovery District. But it's not just mil- lennials who are open to financial service alternatives. A survey by the advisory firm EY predicts that Canadian adoption rates of financial services developed by financial technology firms could triple to 24.1 from 8.2 per cent in the space of a year, across all age groups and income levels. "Customers are more demanding than in the past," Carolyn Wilkins, senior deputy governor of the Bank of Canada, said recently in a speech. "They are looking for more convenient and cheaper access to financial services that are well integrated with the rest of their online activities." The technology revolution, driven by digitization, the ubiquity of mobile devices, cheap data processing, analytics and the cloud is poised to do just that. What's more, it has created opportunities that threaten to erode a business model that served banks well over the years. The days when banks could service all of a client's needs, be it financing, investing or transactions, is in peril. While few, if any, of the new players are interested in the business of taking deposits, some sectors of retail banking such as consumer finance, mortgages, lending to small and medium-size business, retail payments and wealth management, are ripe for the tak- ing, and are precisely the segments that the majority of fintechs are targeting. By promising to lower costs, improve service and broadening access, the technology-led companies are counting on seducing growing numbers of consumers and chipping away at the customer base incumbents worked hard to maintain. A case in point is Mogo Finance Technology Inc., an online lender based in Vancouver. It has a new mobile app that allows one to sign up for an account in less than three minutes, provides a free credit score, a free prepaid card and takes an "instant" deci- sion on a personal loan using algorithms, IP addresses and links to social media. But it's not only the upstarts that are trying to shake up the financial services industry. Technology giants such as Apple, Google and Samsung, too, are new players in the mar- ket, and they boast innovation know-how as well as something that Canadian banks have — deep pockets, powerful brands and trust — that can be used to make inroads into banks' traditional bastion. "Fintechs are not changing the underlying products and ser- vices that consumers receive," says John Jason, a financial services lawyer specializing in regulatory law at Norton Rose Fulbright LLP in Toronto. "But what we are seeing now is this cadre of indi- viduals developing technology outside of the banks to the extent that you don't need a financial institution to provide a product — that's the big change." That big change could potentially undercut the bottom line of incumbents. According to a report by McKinsey & Co, glob- ally banks could lose from 10 to 40 per cent of revenues by 2025 and up to 60 per cent of their profits in the consumer finance segment, as new competitors either poach market share or drive down prices. It's no wonder then that these new companies have caught the attention of the investment community, even though they have yet to be tested by the rigours of a serious downturn in the economy. In 2014, investment from private capital in fintech companies amounted to US$12.21 billion, an increase of 201 per cent compared with 2013, according to a joint report by the Digital Finance Institute and McCarthy Tétrault. In 2015, fintech investment surged by 75 per cent to US22.3 billion, with 1,100 fintech deals announced. More of the same is expected this year. Not that banks are technological luddites. Far from it. Banks are, and always have been, investing in innovation in financial technology. Canada's banks introduced Canadians to the Interac system, Moneris payments processing, email money transfers as well as web and mobile banking. "They are very sophisticated Fintechs frankly want to be nimble and not have a governance structure that slows down the decision-making process. That is something that sets them apart from big institutions that for good reason are a lot more prudent about engaging in certain types of activities. Kashif Zaman, Osler Hoskin & Harcourt LLP

• Cover