Data and Innovation: How Fintech Startups are Challenging Canada's Banking Status Quo

The Status Quo

The Question of the Soul of Canada’s Future

Canada boasts a stable and incredibly regulated financial system, a system that prides itself on security and trust. However, it is ever more critical to look at the practices and direction of Canada's banking industry. With the ever-growing concerns over the decisions made by the government and its extensive regulatory history in the telecommunications, construction, and even grocery industries, which promote oligopolies, we wouldn’t be wrong to look for the root or possibly the biggest enabler of these institutions.

Canadian Regulatory Authorities and Their Impact on Fintech Companies

The Office of the Superintendent of Financial Institutions (OSFI) plays a significant role in shaping the landscape for fintech companies in Canada. However, the very institution that brings incredible trust into the banking industry in Canada plays an incredibly significant role in the problems that plague the industry in the first place.

OSFI imposes incredibly stringent requirements for all federally regulated financial institutions, where more often than not, the regulatory requirements are consistent no matter the size of the institutions. These are usually unfairly disadvantageous to any fintech trying to compete with the large banks or even meaningfully collaborate with the large banks. Go no further than Wealthsimple in 2018, where the company was planning to expand its operations into traditional banking by applying for a banking license in Canada. However, the strict and monumental capital and regulatory requirements by OSFI, which showed no leeway to smaller fintech companies, made it challenging for the company to meet these requirements. Wealthsimple had to go back to its investment services, and we never got to see how a company with user experience as its primary USP would fare in an environment dominated by these large and well-established banks.

Another example of a fintech failing to meet the strict requirements set out by the OSFI is MONGO. MONGO offers a range of financial products, where they face incredible costs for regulatory compliance. These costs impacted MONGO’s ability to quickly scale its operations and introduce new products, which was the entire point of the company. Most fintech companies pride themselves on their ability to be agile and incredibly quick to innovate, and the OSFI is built to regulate this.

In essence, these regulatory frameworks and strict guidelines make it incredibly difficult for fintech companies to compete with banks. Fintech companies simply cannot hope to have the capital backing that the large banks have, making it hard for them to contribute and benefit the banking industry, pulling it out of its current oligopolistic nature. Although these regulations are incredibly important, their disregard for the specific needs and differences between the resources of large banks and fintech companies limits the potential of the future of Canadian banking.

A Small Action Can Cast a Very Large Shadow

We need not look at countries of similar magnitude and potential as Canada; rather, we should consider places where eased regulatory pressure has led to incredible strides in innovation and user centricity. Examining examples from more developing countries like Pakistan and India, we find that even nations plagued with various issues have discovered remarkable ways to innovate the banking space. These innovations might seem simple but would be a regulatory nightmare to implement in Canada, where the user would ultimately pay the final price.

Flexibility and Innovation: Pakistan’s State Bank

Pakistan's main regulatory authority for banking matters, the State Bank of Pakistan, demonstrated incredible flexibility when it came to fintech companies in Pakistan. Historically, Pakistanis were incredibly mistrustful of traditional banks, especially the large conglomerates they saw around them, which were seen as tools for the powerful to exploit the poor. These large conglomerates charged exorbitant rates of interest and had incredibly invasive privacy policies. This allowed fintech firms to play an important role in bridging the gap of trust between users and financial institutions.

Enter Easypaisa in 2009, which revolutionized the space, where the population of users of banking products went from 3% of the total population to over 18% in 2024. The platform allowed users to make instantaneous payments and didn’t have to wait for the payment to go through. The solution also brought forward a completely different way of handling debt, which was backed by no-interest loans.

?Easypaisa's influence led to a unique new demographic of lenders. Finja took the approach of only giving debt to institutions that planned to use the debt to conduct only profitable business operations, with the fintech taking a proportion of the profit so generated, making the entire process more comparable to venture capitalists than traditional banking lenders. Because Finja was not restricted by the confines of more stringent regulations, it had the opportunity to give out debt to businesses that they traditionally wouldn’t have been able to.

This alternative approach made the financial institution more dependent on the success of the said business and put the debtor more at ease when taking on debt. This similar lending model was also replicated in a diverse set of industries in Pakistan, such as Haball in digitizing payments and supply chain financing, and Bazaar in the B2B supply chain space. And in the end, what we saw was the end user being the biggest beneficiary of these fintech's.

Innovation and User Centricity: India's Bharat Bill Payment System (BBPS)

India's Bharat Bill Payment System (BBPS) is yet another example of the simple yet impactful achievements of a more lenient regulatory ecosystem. BBPS has a simple sell: make the lives of an average Indian slightly better by making bill payments easier. The most you can do in Canada is register all of your bank accounts in one account, but this does nothing in the context of seeing your recurring yet variable bills. An example that would help us understand the subtleties of bad user experience is that one month your gas bill might be $10, another it might be a $100; there would be nowhere for you to tell on a singular platform what your bills are unless you manage your bills manually.

The point to be made here is simply that user centricity is critical, and the biggest hurdles in achieving this are intense regulation and the oligopolistic tendencies of the Canadian banking ecosystem.

What is Elysium?

The critique that may be arising now is that problems faced by countries like Pakistan and India are far too different from the problems faced by Canada. Although I might disagree, arguing that the very differences in influential and societal factors underscore why it's so important to learn from them, more democratic and similar examples need to be shown for those who might still have doubts. The difference becomes especially important due to the data protection, conservative natures, and fears that come into the minds of the average Canadians. So, what is our Elysium on planet Earth?

Open Banking: Was it the British all Along?

The UK is often cited as the best example of what a developed country can achieve with the right decisions and regulations. The UK's Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) struck a balance between ensuring data security and stability while fostering innovation. They did this by first creating controlled environments with temporary regulatory relief. This allowed ideas to be fostered and built upon, before the effects of strict regulation could stop their progress. Combined with their initiative of mandating that the largest banks open up their customer data (with consent) to third-party providers through secure APIs, they were onto something seriously interesting (Open Banking).

Monzo and Revolut are some of the best-case studies demonstrating the results of open banking. Revolut allows their customers to hold multi-currency accounts with real-time currency exchange, while also enabling cryptocurrency trading. Monzo, on the other hand, allows its customers to receive real-time transaction insights. Canadian banks aren’t nearly as detailed in terms of their reporting, as you have probably noticed. All of these features, at the end of the day, make it easier for you and me or the small mom-and-pop shop down the road, the customer, to be the primary beneficiary of the innovation and competition, leading to us having a smoother and safer banking experience

The Eclipse

Canada lies at a crossroads. While the country prides itself on the trust it has built in its financial institutions, founded on stability, this has hindered its presence in innovation within the space. This has led Canada to make the same mistakes in the financial sector that it has already made in areas such as mortgages and cellular bills.

We can easily see from the world around us that the space for innovation is immense and revolutionary, often in the smallest but most impactful ways, always keeping the user at its core.

The Conclusion

Simply put, there is only one way forward for Canada: rethinking its regulatory approach completely and fostering a more supportive and collaborative environment. This means adopting practices that encourage competition, protect consumers, and ultimately ensure that the benefits of financial advancements are accessible to all Canadians.