What role should government play in FinTech innovation?
By Christian Lassonde and Claudia Hepburn, Impression Ventures
With FinTech innovation moving at a rapid pace around the world, it’s important that Canadian regulators understand that creative disruption in the financial services sector is critical to the ongoing strength of this pillar of the Canadian economy.
But not everyone seems to agree. This past June, Ottawa sent two very different messages to the FinTech community.
The first message was from Navdeep Bains, Minister of Innovation, Science and Economic Development, when he opened the doors to the start-up community, welcoming advice on the federal government’s role in innovation. Minister Bains understands that the Canadian economy needs more than natural resources and traditional financial services sectors to thrive. He suggested that encouraging the development of the innovation economy is a priority for the government.
Entrepreneur and VC Marc Andreessen famously opined that, “software is eating the world.” If Canada does not to take technology development seriously, international competitors governed by nimbler regulation will erode the sector. Minister Bains’ open door is a promising start. It offers hope that the Trudeau government is willing to think flexibly about how to foster innovation without subjecting Canadian consumers to undue risk. The attitude bodes well for the growth of Canadian FinTech, the innovation sector and the Canadian economy — but is no guarantee of sound policy outcomes.
The second message came from Carolyn Wilkins, Senior Deputy Governor of the Bank of Canada, at a speech in Calgary. It had a cautious and much less encouraging tone. “Authorities should support innovation,” she said, “but the bar will be high… and appropriately so.” She reminded her audience that “innovation could create new problems,” and “moral hazard”. Her view of how “policy makers and regulators” should address FinTech innovation was bureaucratic: (1) develop a solid analytic framework, (2) create “regulatory sandboxes” and (3) research the effects of new technologies. These slow-moving responses may have made sense a century ago, but they’re hardly a recipe for success in 2016.
The way forward
FinTech covers a broad array of technologies designed to improve core banking, insurance, foreign exchange, trading platforms, digital currencies, payments, lending and wealth management, to name a few. If, as many predict, a few of these innovations upend traditional industry models, regulators around the world should be fighting to create the policies that ensure those innovations are nurtured locally.
How? The best regulation will be light touch and bespoke. It will not slow down innovation, protect incumbents or throw more public funding at start-ups. It will reflect that regulators’ core duty is to level the playing field for all business, thereby reducing the hurdles to investment, employment and innovation, and increasing the supply of talent through sound education and access to labour. It will also specifically avoid a heavy-handed, one-size-fits-all approach to FinTech. Some FinTech, which does not touch the movement of money, requires little or no regulation, other FinTech should be compliant with all current banking regulation, while a third group will require fresh thinking on best policy.
Of course, there are bad actors in all industries and FinTech is no exception. A few entrepreneurs choose to ignore the rules and, when they do, they are prosecuted. The venture community has a role to play in educating entrepreneurs and improving compliance. Our firm, Impression Ventures, which focuses on Canadian FinTech, helps ventures understand the regulatory environment, navigate the hurdles and comply. It does not invest in entrepreneurs who ignore the law.
Minister Bains’ approach to innovation is open, curious and promising. Governments and regulatory agencies should view FinTech not as a threat to the financial sector, but as way to strengthen it. FinTech innovation will help the sector by creatively destroying structural inefficiencies and by developing innovation for export. Our governments and the Bank of Canada should remember that an overabundance of caution in the name of “consumer protection” would be reckless. FinTech is a genuine opportunity for Canada to compete and export software on a world stage. Let’s work with our governments to seize it.