Canada’s financial-services industry seems to be a textbook case of an industry primed for disruption by fintech.
First, its banking industry is large compared with other G-7 countries. Banking revenues of $180 billion accounted for 7.9 percent of GDP in 2023, compared with 5.8 percent in the United States and an average of 5.6 percent among other developed economies. Canadian banks are also more profitable than those in other developed economies (Exhibit 1). Likewise, Canada’s insurance revenue pool is large. With estimated revenues of $136 billion in 2022, it’s one of the world’s ten largest insurance markets. These attributes make Canada a tempting target for fintech attackers.
Second, the Canadian financial-services industry is highly concentrated—often a sign that innovators are itching to shake things up. As of 2022, the top five banks generated more than three-quarters of banking revenue, while the top six insurance firms generated almost 50 percent of revenues in the sector.
Third, Canada ranks among the world’s top five countries for smartphone penetration, internet usage, and higher education levels—measures that suggest a readiness to embrace new technology.
Yet Canada has not followed the textbook as fintech has grown in other developed countries. Australia, for example—a country with a similar concentration of large financial-service providers—had grown to become the world’s sixth largest fintech market by 2022. However, Canada has not been able to match Australia’s growth. Canada ranks among the bottom five developed countries for adoption of digital banking, digital B2B services, and fintech solutions. Only 13 percent of Canadian banking consumers use fintechs, for example, compared with 32 percent of those in the United Kingdom and 42 percent in the United States. That leaves huge untapped potential. Canadian banking revenues from retail and small and medium-size enterprises (SMEs), for example, reached $135 billion in 2022, of which just 3 percent went to fintech. That’s about $5 billion short of what might be possible were penetration levels similar to those in the United States, where fintech penetration is 8 percent (Exhibit 2).
That’s not to detract from the progress made by some fintech players in certain segments of the Canadian market, particularly wealth management and payments. Wealthsimple, an online investment management service, had assets under management worth $30 billion by 2024, for example, while payments processor Nuvei, which completed an IPO in 2020, processed payments worth $141 billion and generated revenues of $870 million in the first nine months of 2023.
Some fintech infrastructure companies are also emerging—and their success will be key to the growth of fintech as they build the infrastructure and systems upon which digital financial-service offerings depend. Neo Financial is one such company, offering consumer-facing products as well as infrastructure services for payments, cards, and digital accounts. In 2023, Tim Hortons, a large Canadian restaurant chain, selected Neo to power its new credit card offering.
The question therefore becomes what it will take to build on this momentum and for Canada’s fintech industry to fully bloom. To find out, we interviewed more than 40 leaders in the Canadian financial services industry, including investors and academics as well as leaders working for fintechs, incumbents, and lobby groups. The research points to five areas where developments will be critical to the long-term growth of the industry: consumer behavior, partnerships, funding, the regulatory environment, and talent.
Consumer behavior
It’s hard to persuade Canadian consumers to switch financial-service providers. Take retail banking, which, according to McKinsey analysis, accounts for more than 60 percent of banking revenues. Our 2023 McKinsey Retail Banking Consumer Survey showed that 61 percent of respondents had used the same bank for ten years or more and that the number who might be inclined to switch banks had fallen, from 10 percent in 2021 to 9 percent in 2023. It’s hardly surprising, then, that 40 percent of the fintech leaders we interviewed highlighted difficulties attracting Canadian consumers to their platforms.
Consumers’ reluctance to switch might be explained by the fact that they are comparatively satisfied with their banks. Canadian banks’ customer satisfaction score—a measure of how likely consumers are to recommend their bank to others—has fallen of late, but it is still considerably higher than that of banks in Europe, where millions of people have switched to digital providers (Exhibit 3). Canadians are also reluctant to switch providers because of the difficult and time-consuming process involved. For example, consumers have to create a list of all their accounts and automatic payments and update this information with the new bank.
The road ahead
The key to attracting consumers can be to focus on the right ones, seeking to gain share in niche segments that are not well served by traditional financial institutions. One UK fintech was able to capture market share from large incumbents by targeting tech-savvy millennials and Gen Zers who were won over by the promise of a flawless digital experience that gave them 24/7 access to their finances globally—something traditional banks were unable to offer at the time.
In Canada, one niche segment might lie with people who have recently settled in the country. Canada has one of the world’s highest immigration rates and welcomed about 500,000 people in 2022. Of these, 60 percent were between 20 and 39 years old—the age group more likely to use fintech products. Many immigrants also come from Europe and countries such as China and India, where digital banking is more common, so they may be more open to using innovative banking offerings than many Canadians. As one fintech leader pointed out, “In other countries with more digitization, people no longer use cheques. Here, we still have huge volumes of them.” (In 2023, 28 percent of total Canadian payments values were classified as paper-initiated payment items, such as cheques.)
Fintechs might also find success in offering financial services that often are not available to new immigrants, such as credit facilities, or setting up an onboarding process that makes it easier for those who are new to the country to open an account. Lack of an established credit record or address can complicate newcomers’ access to financial services.
With the right products, opportunities might also lie with incumbents’ traditional consumers. Canada has a high rate of financial inclusion—about 98 percent as of 2021—leaving next to no room for fintechs to build a consumer base by targeting entirely new retail-banking consumers. But they can offer bank consumers new services. For example, our analysis shows that more than 20 percent of retail banking revenues derive from people with middle to low incomes in the 18–44 age bracket, the majority of whom subscribe to very few banking services. “The issue is not that people in Canada are unbanked; it’s that they are underbanked,” said one fintech leader. Many of these bank customers might be attracted by a fintech solution that helps them track and manage their spending, for example.
Partnerships with incumbents
Most incumbents once viewed fintechs as a threat. Today, however, partnerships between the two parties are more often seen as mutually beneficial and have thus become common in many developed markets. By 2021, incumbents in the United States each had an average 2.5 fintech partnerships, compared with 1.3 in 2019.
In Canada, partnerships remain scarce. Some credit unions and small and medium-size banks are working with fintechs—ATB Financial and Equitable Bank are two examples. But 68 percent of the fintech leaders, investors, and academics we interviewed identified challenges associated with bank–fintech partnerships. These included long sales cycles of up to 24 months, costly and arduous risk management and compliance requirements, and stringent exclusivity clauses. “In the United States, banks are way more willing to partner with fintechs and use them as a consumer acquisition channel,” remarked one fintech leader.
Incumbents also say that regulatory compliance requirements hamper the formation of partnerships. And some feel that partnerships formed to date have been disappointing, often proving to be no more than standard vendor relationships. They also say there is a shortage of world-class Canadian fintechs with which to partner.
The road ahead
The key to more partnerships will be greater awareness of the benefits. Incumbents should also make sure they do not overlook local partnership opportunities because of a perceived need for global partners. There are two main types of partnerships. The first is a fintech enabler model, whereby incumbents harness a fintech’s innovation and agility to optimize their own internal processes, adopting proven technologies and business models (and sometimes consumer bases). Cost savings are also possible. The second is an infrastructure provider model, whereby fintechs leverage parts of the incumbent’s technological infrastructure, including licenses and payments infrastructure, thereby reducing the cost and time associated with going to market with their own products.
In both models, the partners share the risks and rewards and ultimately help grow the financial services sector by giving consumers more providers from which to choose and products that are more sophisticated. Tink, a European cloud-based platform, is an example of the enabler model. Through its partnerships with more than 6,000 financial institutions, Tink has built an open-banking platform that connects financial-services providers to consumers’ bank data, helping providers make fast onboarding assessments and attract and engage consumers.
Funding
Growth of the fintech sector inevitably depends upon the availability of capital to support growing companies. And while there is no shortage of Canadian venture capital (VC), the US fintech market remains a primary target for investors due to its larger size and maturity. Fifty percent of the investors we interviewed said they also invested in US fintechs. VC funding tends to work well in markets with technology clusters such as Silicon Valley—something that is lacking in the Canadian fintech ecosystem.
The funding figures reflect the draw of bigger, more mature markets. Between 2017 and 2023, VC funding for Canadian fintechs grew at 1.8 percent per year, on average, compared with 18 percent in the United States. Today, Canadian funding for fintech as a percentage of banking revenues is similar to that in Australia, compared with larger mature markets such as the United Kingdom and the United States, and 60 percent of the fintech leaders we interviewed said they had encountered challenges securing local funding (Exhibit 4).
The road ahead
More investors may come forward as economic conditions ease and interest rates fall. When they do, our analysis suggests it will be important to spread funding more evenly across maturities to boost the sector’s growth. Between 2018 and 2023, funding for late-stage firms grew at 13 percent per year, while midstage funding fell by about 23 percent and early-stage seed funding stagnated. Without more early- and midstage funding, it will be hard to support more growth in the sector.
Earlier-stage funding is likely to grow alongside investor confidence as more fintechs grow and complete successful exits, joining the ranks of Verafin, a Canada-based regulatory technology company that was sold for $2.75 billion in 2021. In addition, the founders of successful buyouts may well become angel investors in new start-ups. Executives at PayPal, bought by eBay in 2002, went on to fund other start-ups in Silicon Valley, including Affirm, Facebook, Stripe, Square, and YouTube. And executives at Canadian software company Research In Motion, the creators of the BlackBerry cell phone, have invested in other businesses in Canada’s high-tech cluster in the Waterloo region.
Funding for B2B fintech solutions will likely spur growth of the sector. Infrastructure solutions, for example, will not only support the entire fintech ecosystem but could also give fintechs a competitive edge over incumbents whose legacy infrastructure can be slow, inflexible, and costly. “Traditional infrastructure in financial services today is relatively outdated and archaic,” said one interviewee.
Funding for fintech solutions for SMEs could also propel growth; SMEs have long been underserved by traditional financial-services providers in markets around the world, despite the fact they represent about 90 percent of businesses, according to McKinsey research. The Canadian market is no different.
Much depends on fintechs themselves if more funding is to materialize, however. Investors are more likely to back companies that create disruptive products and valuable intellectual property that prove competitive on a world stage. Yet more than 30 percent of the investors interviewed said lack of innovation was one reason for not funding more Canadian fintechs. They felt there were too many “me too” products and solutions.
The regulatory environment
Regulatory developments will play a key role in the growth of fintech in Canada. In some markets where fintech has become established, regulators have encouraged new market entrants by, for example, creating tiered licensing regimes that align with the risk of their offerings and introducing what are regarded as innovation-friendly regulations that facilitate real-time payments systems and open banking. Open banking permits third parties to access consumers’ financial data with their consent, making it possible to identify suitable product offerings, for example, or to help consumers easily switch their checking account to a different bank.
Regulators of the Canadian financial system, which has long been a global model of stability and security, have been more cautious. Canada is, for example, one of the few OECD markets without a defined open banking regulatory framework. Many interviewees said they are challenged with navigating the country’s regulatory stance as they identify opportunities for innovation and growth.
The road ahead
The regulatory environment may be changing. In December 2023, the federal government began a consultation process to consider measures it could potentially take to strengthen competition in the financial sector, including measures that might support fintechs. It has also announced its intention to introduce the budget for open banking framework legislation in 2024, and it is working to establish a real-time payments system. These changes could help unlock faster growth in the sector, increase competition, and reduce costs for consumers.
Talent
Innovation in a market is tied to the availability of talent, which in turn is bolstered by the quality of education. On this basis, Canada is set to support a thriving fintech ecosystem. It boasts an excellent educational system that produces a high percentage of STEM graduates relative to the population. In 2020, 24 percent of Canadians were STEM graduates, compared with 18 percent in the United States. The nation’s digital skills are growing quickly, too. In 2022, Calgary, Toronto, and Vancouver saw digital skills growth of 6.3 percent, surpassing New York City, San Francisco, and Seattle, where growth averaged about 4.7 percent.
In addition, immigrants to Canada tend to attain higher education. As of 2023, 68 percent of landed immigrants had attained postsecondary certificates or university degrees. Canada’s education system and its number of highly educated immigrants help explain why the country has been at the forefront of important innovations in recent years. Companies operating in Toronto and Montréal have been instrumental in the development of AI, for example.
A hurdle to cross in fintech, however, is a lack of more experienced talent in the sector. Some interviewees said that while junior positions could be filled, it was harder to find senior people with the experience of growing a start-up—people who had “seen the show before,” as one interviewee put it. “We’re trying to go from the start-up to the scale-up stage, and it is hard to find executive-level talent that has seen the show repeatedly and experienced growing a company from 20 to 50 to 1,000 consumers. It seems the talent pool is shrinking as we get bigger,” one interviewee told us. Twenty-nine percent of fintech leaders surveyed said they had found it hard to recruit local experienced talent.
The road ahead
The challenge of finding experienced talent will likely ease as the ecosystem matures. And just as the founders of companies that have made successful exits might finance more fintech start-ups in Canada, so too could founders help promote start-ups’ growth by acting as advisers.
The government may also consider attracting experienced fintech talent to Canada by further promoting existing initiatives and programs intended to encourage entrepreneurs and investors elsewhere to establish a presence in Canada.
The Canadian fintech sector appears set for growth. The right product offerings are likely to attract Canada’s many digitally savvy consumers who are open to innovation. Improved financial conditions will likely see more funding for fintechs—funding that could prove particularly powerful if spread more evenly across maturity stages and focused more on B2B solutions. Partnerships between incumbents and fintechs have the potential to benefit both parties. There are signs of change on the regulatory front, and there is an abundance of talent to help develop new products.
Nevertheless, it is hard to say just when the Canadian fintech industry will come into full bloom, given that it depends on progress in all the areas discussed. Moreover, it’s unlikely that progress will be spread evenly across the industry. Some categories might rapidly offer tremendous opportunities, while others might stall, whether that’s due to global trends or the peculiarities of the Canadian market. 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.
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