Developed economies and forward-thinking enterprises are fast adopting a more global-oriented style of doing business because the benefits are simply obvious. Digital transformation is expected to add an economic value of about $100 trillion to the world economy by 2025, and platform-driven interactions are expected to drive two-thirds of this value creation, so the World Economic Forum.
It is one thing to recognize the importance and benefits of digital transformation, and yet another thing to successfully implement and sustain it. This might partially explain why an advanced country like Canada has had stunted growth as far as digitization goes.
Reports have it that Canada, unlike other developed economies (the UK, USA, Australia), is laggard in the global fintech market, both in volume and value. But the good news is that the government is now taking pragmatic steps to engender a robust fintech industry, with the overall goal of catching up with the rest of the world as a leading fintech hub.
According to the International Data Corporation, Canadian spending on digital transformation was forecast to hit C$28 billion and grow by 7% in 2020, and this is despite the challenges posed by the raging COVID-19 pandemic. But a thorough observation reveals digitization has brought about some progress in the fintech industry and financial services industry in general.
How Digitalization is Changing the Financial Industry in Canada
Central to digitization is the use of data — effective use of data, to be exact. The Government of Canada, having recognized the importance of data and the need to regulate how data is used, intervened pragmatically. We can see this in two all-important data-driven policies rolled out by the government between 2019 and 2020 — Open banking and the Digital Charter.
The Canadian Digital Charter Implementation Act of 2020, for instance, provides a framework for the use of consumers’ data by the financial services industry in a way that prevents abuse and protects the privacy of Canadian end-users in an increasingly digital economy. The Digital Charter outlines 10 principles that reflect how the judicious use of private data would promote users’ trust in the digital ecosystem and help to grow the Canadian economy. These are:
It is a framework that relies on the government, businesses, and citizens working hand-in-hand to ensure that privacy is protected, users’ data is kept safe, and Canadian financial companies can actively participate in creating world-class products and services that fully deliver the benefits of a digital economy.
Another initiative by the government that reinforces the adoption and propagation of digitization in the Canadian financial services space is the concept of Open Banking. Open banking was enacted in 2019 for implementation in 2021 and is intended to lead the way in the development of a framework that effectively integrates technology and best standards that are suiting for the consumers, service providers, and the economy. This framework will also foster trust between fintech, banks, and regulatory organizations, with the benefit of the Canadian consumer in mind.
Open Banking Initiate Canada (OBIC) lets them developing innovative financial products and services that meet consumers’ needs using key data harvested from the same consumers. But for the consumers, open banking provides access to more choices, better control over personal banking information, and data security.
Open banking empowers consumers to be the owners of their financial transaction data, giving them the freedom to share personal data with third-party companies like fintech. Therefore, consumers can access alternative or better financial services. On the other hand, this system will promote and sustain healthy competition among players in the financial service industry, including fintech.
We see quite convincingly that government policies play a key role in driving digital transformation. Canadian consumers also — being at the receiving end — have the power to dictate what they want, thereby shaping the nature of the services and the quality of values rendered by service providers (banks and fintech) in the industry. Emerging new technologies equally play an important part in dictating digital trends in the global financial services industry.
What Are the DX Challenges Facing Fintech in Canada?
Accessing credit facilities, for instance, becomes as easy as swiping your phone, comparing different offers, and choosing the most suitable for your business and personal needs. The financial technology industry seems positioned to innovate and create lasting value in the long run.
But as with every other sector, some challenges must be overcome in fintech for Canada to chart a truly impacting course that places them on the same pedestal as the leading countries in the digital space. Here are some of the barriers to digital transformation in fintech in Canada. Provided alongside these barriers are possible suggestions that can be implemented to move past them.
1. Regulatory Barriers
According to a report compiled by Deloitte, the Canadian regulatory framework has been quite weak in supporting Fintech adoption in the country. For instance, some companies in the U.S. introduced peer-to-peer lending models that gained traction and succeeded, but a similar offering in Canada failed to succeed because they were unable to operate effectively within the regulatory framework provided by the Ontario Securities Commission (OSC).
Ideally, to give consumers access to services and products that are tailored to their needs, fintech must be encouraged to innovate and create services that were previously not available.
Perhaps, Canada can draw some actionable regulatory insights from other countries that have successfully created thriving fintech industries. To attract investors and encourage innovation, the regulatory authorities in the country must embrace policies, and laws that are adapted to global digital trends. Bold thinking and innovative solutions are necessary to move the industry forward.
2. Legacy Systems
With change comes the need to adjust. Unfortunately, we’re not always prepared for change, even though change does sometimes mean moving forward. Global phenomena like the rollout of 5G, advancements in the Internet of Things, and Machine Learning will require a deliberate effort to transition from traditional legacy systems.
To make the transition easier and seamless, IT firms and fintech startups can adopt a middle ground between the two systems. For instance, before data is moved to the cloud, it can be processed in the local drive or hardware where it was created or initially collected. This lightens the workload of the cloud when lifting the data.
3. The Challenge with Creating Fintech Apps
Building and rolling out fintech apps that truly meet customer needs can be quite challenging. From innovation and user data management to more pressing issues like data security and financing — the list is almost endless — fintech startups in Canada, like their counterparts in other countries, also grapple with challenges.
Besides creating an app with a high user-friendly interface, it must be an app that has no option for failure. This costs a lot of money to maintain. The government has an active role to play here. By providing a special support system and credit facilities accessible to fintech, the Government of Canada can encourage rapid growth of the fintech industry.
4. High Level of Trust in the Financial Sector
The Canadian financial sector is one of the strongest in the world. This fosters a relatively high level of consumer and government trust in the financial sector. This arises from the quality of service and level of sophistication of the country’s financial institutions.
Consumers are, therefore, a bit laid back to seek alternative financial solutions from other financial service providers. In this case, a shift towards alternative banking and financial services will require massive support from stakeholders, such as regulators and policymakers.
5. The COVID-19 Pandemic
According to Jim Westcott, research manager at IDC’s Canadian Digital Transformation: Application and Professional Services research program, “COVID-19 has impacted the Canadian economy in several ways, including how businesses have prioritized spending on existing and new IT projects and technologies”.
While COVID-19 poses a challenge to the emergence and adoption of digital transformation strategies, many Canadian organizations have been able to navigate the pandemic and create long-term strategies for delivering digital transformation initiatives during the post-pandemic era. But despite the forecast for growth in digital transformation spending in Canada, growth has been relatively slow due to the pandemic.
However, experts believe that the fintech industry will recover quickly between 2021 and 2023, with a five-year CAGR of 13%.
The obvious benefits of digitization cuts across several areas; from more values to the consumers to an advanced industry, and a finer economy at large. The top three factors that will drive digitization in Canada are consumers’ preferences, government active support and regulations (the plan to increase the agility and operational effectiveness of non-traditional financial services providers), and healthy competition among fintech startups and other financial institutions.
Thankfully, the government is already creating an enabling financial system with innovations like Open Banking and the Canadian Digital Charter.