McKinsey & Company says the financial services industry is primed for disruption
The global fintech industry has been growing fast in recent years, but Canada has so far not seen the explosive disruption of some other developed economies.
But according to the authors of a new report, Canada’s financial services industry is primed for disruption and an attractive market for technology firms who want a slice of the banking and wealth management pie.
McKinsey & Company’s Toronto team have published their report noting that so far, uptake of digital financial services lag those of other G-7 nations and setting out five factors that will determine if that is to change.
They acknowledge the scale of Canada’s banking industry which at $180 billion accounted for 7.9% of GDP in 2023, well above the 5.8% of the U.S. equivalent and the 5.6% average among other developed economies.
Profits within Canada’s banking and insurance sectors is also a factor in the attractiveness of the market for fintech challengers, along with the concentration of the industry which is dominated by the top 5 banks and top 6 insurers, accounting for most of each industry’s revenues in 2022.
But even though Canada is similar to Australia in terms of smartphone adoption and internet speeds, Australia is the sixth largest fintech market (2022 data) while Canada is among the bottom developed nations for adoption of digital banking, digital B2B services, and fintech solutions.
Among the reasons why, except for some significant fintechs such as Wealthsimple and Nuvei, revenues for the industry remain subdued include Canadians’ reluctance to switch providers with relatively high satisfaction scores with their primary financial institutions.
The report’s authors suggest that newcomers to Canada may be a niche for fintechs to focus on, especially if they are offering services that immigrants can struggle to access when they first come to Canada such as credit facilities.
They also say that partnerships between fintechs and incumbents, currently rare, may be the route to scale.
Regulatory challenges
Canada has the talent and venture capital needed to help a fintech industry thrive, the report says, but there is a significant challenge from the regulatory environment.
With no defined Open Banking framework – although there has been progress on this recently - and a cautious view of allowing one for fear of destabilizing the financial system, those who were interviewed for the report said they are challenged with navigating the country’s regulatory stance as they identify opportunities for innovation and growth.
The report’s authors say that while many conditions are conducive to a Canadian fintech boom, there is no way to know when this may happen, with an uneven growth pattern likely.
“Fintechs, incumbents, and investors will therefore need to place their bets with extreme care. But it remains that the sector has large untapped opportunities that interested players should prepare to grasp,” the authors conclude.
