Deep Dive on Innovative Lending

Peter Misek and Michael King keynoted the Canadian Lenders Summit this month in Toronto. They speaks with Kevin Clark and Gary Schwartz about the state of the industry in Canada and how best we can advance business to catch up with more advanced markets.

Peter told Bloomberg last year that Canada is 2 to 5 Years Behind in Fintech. Let’s start by discussing the growth of Canada’s fintech industry as a large group of innovative startups enter the market.
New company creation, revenue growth and AI should make the shorter part of that prediction true.... Singapore and HK will be tough to catch afterwards
Canada is definitely lagging the UK, Australia, HK and Singapore. Each of these countries has put in place a strategy to support and promote their FinTech startups. Canada would do well to follow their example.
Can you give us concrete ideas on how Canadian companies can leapfrog market leaders in US, Australia, UK, etc. What are the three or four key ingredients to accelerate status quo in Canada?
Canadian FinTechs can catch up and pass their foreign competitors in several ways, but they are not all in the hands of the FinTechs themselves: govt procurement, open data, work with VCs / accelerators to identify real pain points, get banks to publish their high priority areas
Open Data was a regulatory rule that was ultimately embraced by most in the industry. It’s genesis was likely influenced by the UK and EU governments having bailed out many large systemic lenders. This point seems to have enabled a more forceful discussion.
In August Canada’s department of finance said that it would investigate the merits of following the UK and Europe in pursuing an open banking model, making it easier for people to let third parties access their banking data.
This move world pave the way for fintech firms and other smaller lenders to advance their business.
Realistically, what is the possibility of Canadian banks opening up their data? Scotiabank talked about a 2 - 3 year horizon based on legacy upgrades to the bank’s fragmented data architecture.
Canadian banks may embrace an open data approach, but it will likely be after we see the effects of PSD2 in Europe. Fortunately, there are many other data sources that Fintech companies can leverage and build to be successful. This is an area where we see a lot of innovation.
Another impediment to sector growth (that @IveyFinTech mentioned) is working with VCs / accelerators to identify “real pain points”. What are these points of pain in 2017?
A common complaint is FinTech startups solve problems that do not exist for FIs. Banks therefore rely on VCs/accelerators to curate start-ups, matching solutions to real bank problems. Pain points for customers are everywhere -- but you need to ask a VC or bank, not an academic!
Hmmm - there is so much white space in the market. Our view is that the most valuable startups will be those that rethink financial services and look to engage user (consumers and businesses) in a more value add way. Solving a single pain point may not be a sustainable business
So, FinTech startups maybe solving problems that do not exist for FIs and regardless, the startup needs to solve beyond a single pain point to be a sustainable business.
Looking down the road, will a blockchain protocol, allow all parties in a contract have identical data simultaneously, eliminating the need for costing and time consuming middleware services? Should some innovative lenders look into these “trust-less” ledgers?
The distributed ledger (DLT) aka a generic version of Blockchain has a very important role to play. However not every financial transaction may make sense for DLT. Speed, transaction cost, trust less nature may mean that some processes remain for the foreseeable future.
As a reminder Blockchain has a transaction limit as it is currently architected, you should wait several blocks before you trust which means 30-60min transaction time and mining is far from free. So keep that all in mind when envisioning use cases. DLTs can alter security, speed.
As all new protocols, the community will solve speed and scale. Vitalik Buterin talks about Ethereum performing “VISA-scale transaction levels” in the near future. There is a migration from proof-of-work to other models. All these may solve and mitigate your concerns.
Well not really... you can achieve Visa scale by lowering the strength of the hash function. So security would be degraded. In effect the current crypto currency architecture requires a trade off. Not saying a new architecture can’t emerge but that is the reality now.
Bitcoin is processing approximately 3 transactions per second. Ethereum is doing five a second. Uber gives 12 rides a second. As Vitalik says, it will take a couple of years for the blockchain to replace Visa.
So with Visa averaging around 2,000 transactions per second, with a peak capacity of approximately 50,000 transactional per second, mainstream blockchain payment and lending will not be near term reality.
So in conclusion we have touch on government procurement, open data, identifying real pain points in the market and get banks to publish their high priority areas. We have spoken about Blockchain as a potential disruptor down the road.
We are all in agreement that the nature of the borrower and their behaviour will continue to change and solutions will need to catch up with this behaviour.
Yes, and lenders will continue racing to build solutions to best serve borrowers. We expect business lenders to deliver more value by not only building innovative lending solutions, but offering new solutions ranging from cash flow forecasting to digital accounts payable.
I want to thank @MisekPeter @IveyFinTech and the CLA chair, @Lendified for discussing innovation in the lending industry in Canada and to best advance business.