FinTech takes flight: Insights from the 2016 Canada FinTech Forum

McCarthy Tétrault was a sponsor of the recent 2016 Canada FinTech Forum held in Montreal on September 20-21, 2016.  Steve Forbes was the conference’s keynote speaker.  McCarthy’s introduced the excellent conference panel on blockchain in the financial services industry, with Haskell Garfinkel (PWC) as moderator and Jerry Norton (CGI UK), Todd McDonald (R3), Sujan Menezes (Microsoft) as co-panelists.  The number of attendees at the conference more than doubled over the 2015 conference, demonstrating the ever-growing level of interest in the nascent FinTech industry for both start-ups and incumbents. Below, we set out a high level summary of some of the insights we took away from the conference.

Major take-aways:

The Future of Financial Services: we will see greater collaboration between traditional financial services providers and Fintechs. The market for financial services will change as Fintechs are putting pressure on large integrated banks, but the landscape of market players will not necessarily drastically change.  One can trace a fairly direct line between the 2008 “financial crisis”, the end of banking “as we knew it”, the need for FI’s to dramatically reduce their exposure to risk and the rise of Fintechs that can drive innovation (while scaling back risk for FIs)

  1. When Regulation Meets Technological Innovation: regulators are more and more open to technological innovation and initiatives such as sandboxes aim at helping innovators develop products that are compliant with regulation. There has to be a level-playing field where rules apply to Fintechs, and principle-based rules help achieve this goal. New technology such as robo advisors and other technology raise issues with respect to fiduciary duty and investors’ protection.
  2. Blockchain presentation and panel: blockchain helps market players replicate the trust model of traditional banks, and minimize the need for intermediaries. Addressing issues relating to identity will be crucial in the coming years. Blockchain has the potential to revolutionize trade finance. The technology is currently immature as we are trying to understand how it will shape the way financial services will be delivered. Mature, robust version of blockchain may be 2-3 years away (the technology is complicated!). Nevertheless, Fintechs that want to exploit the potential of blockchain should focus less on the technology (and “buzzwords”) and much more on identifying problems that need to be solved.

Notes:

The Future of Financial Services, with R. Jesse McWaters (World Economic Forum)

  • There has been a shift in the attitude of banks towards Fintech. They first did not see Fintech as a threat, but then developed deep concern, before moving to developing an interest in Fintech in order to deliver better services to their customers.
  • Five observations of the Fintech market:
    • (1) It occurs where customers' friction meets large profit pools: it is false to say that it is not deliberate and predictable.
    • (2) Fintech has the most impact where business models are platform-based, data intensive and capital light.
    • (3) New entrants are employing parallel strategies, competing with incumbents while also leveraging their infrastructure.
    • (4) Not all innovations are directed directly at consumers: Fintech is also delivering new capabilities and unexpected efficiencies to financial services providers and wholesale players. E.g. Fund Apps.
    • (5) RegTech is being developed: compliance will be made easier. There has been a shift in the UK with the Innovation Hub, where the regulator offers informal direction on compliance of products being developed (sandbox concept).
  • Fintech tomorrow: 5 narratives
    • (1) Role of scale in financial services: Fintech could erode the benefits of scale in many aspects of financial services, as new information platforms and growing importance of digital distribution will make it easier to export processes to centralized service providers.
    • (2) Emergence of machine learning and artificial intelligence: will change the talent needs of financial institutions and will raise the question of how staff will work with the technology. E.g. stress testing large banks for compliance reasons will be made in a more efficient manner.
    • (3) Interconnectivity – the impact on large, integrated banks: pressure will be applied to unbundle large banks, as interconnectivity will emerge among Fintech players, pushing large institutions out of a market they were the only ones able to compete in. This means that it will reinforce cooperation between large institutions and Fintechs.
    • (4) Blockchain could re-shape the global financial infrastructure: the implications of blockchain are difficult to predict, but certain part of the infrastructure will definitely change, such as (i) the role of central counterparties, (ii) the access of banks to leverage and (iii) the interaction of banks with regulators.
    • (5) Identity: identity is fundamental to financial services and there are enormous costs and risks related to those questions.
  • Two big questions for the future:
    • Which Fintech players will grow to achieve minimum efficiency scale? Players will necessarily change, but not necessarily as drastically as we would think, e.g. BlackRock that bought robo advisor services to offer service to its clients.
    • What are the building blocks of successful collaboration between incumbent institutions and new entrants? There will be changes in the retail and wholesale markets.

Blockchain and Financial Services: Are We on the Cusp of a Systemic Revolution?, with Todd McDonald (R3)

  • Intro: In a world of increasing compliance costs and regulations, some are trying to replicate the trust banks create in a more effective way. Blockchain is one of the solutions and offers to reduce intermediaries.
  • What is blockchain? A distributed ledger.
    • Bitcoin is an example of an application of the blockchain.
    • Paypal tried to move money from peer-to-peer but did not succeed as there is still an intermediary (although it did succeed in removing several intermediaries from the typical merchant-customer credit card transaction model)
    • Bitcoin (using blockchain) offers true peer-to-peer virtual currency transfer
  • What does blockchain offer?
    • Share perception that becomes trust: minimizing the need for an intermediary that would confirm facts and identity.
    • Smart contracts: automating the movement of assets.
    • Regulation: moving to regulation that could be applied in ‘real-time’
    • Trade finance: taking it out of the 17th century
    • KYC: having more control over identity instead of having to trust a third party with our most precious data
  • R3’s “Corda” project aims to address one of the principal data privacy concerns raised by the blockchain distributed ledger framework, by ensuring that only the parties that have a right/need to see the data related to a transaction participate in the distributed ledger

Blockchain and Financial Services: Hope or Hype?, with Haskell Garfinkel (PWC), Jerry Norton (CGI UK), Todd McDonald (R3), Sujan Menezes (Microsoft)

  • One of several presentations that drew a fairly direct line between the 2008 “financial crisis”, the end of banking as we knew it, the need for FI’s to dramatically reduce their exposure to risk and the rise of Fintechs that can drive innovation (while scaling back risk for FIs)
  • The Hype: lots of Fintechs are skipping the POC stage and getting to the next stage by skipping steps that are essential.
  • The Hope: we know where blockchain will have the most impact – in areas of high-friction –, and we are getting to know those areas better.
  • State of the technology: very immature as of now. We will need support services that do not yet exist, and we do not have a clear understanding of the operative costs of the technology.
  • Two areas in which Fintech experts are being asked the most questions: trade finance and digital identity.
  • Challenge: to work through the supply chain to coordinate actors that are uncoordinated at the moment.
  • When moving products/services to a blockchain context, one should not simply replicate/reproduce the original product (e.g. letters of credit) and move it to blockchain, but rather should work to understand what the product/service is actually attempting to accomplish and then replicate the functionality (but not the form) in the new environment.
  • Predictions: blockchain will help offer consumers reduced costs and more time efficient services. Consumers will not necessarily directly witness the implications of the blockchain, but will certainly benefit from it.

For more information about our firm’s Fintech expertise, please see our Fintech group‘s page.

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