Behind the Fintech Hype

Fintech has been with us for years, starting with ATMs and then through online banking. But today’s fintech startups are doing more than ever before to reshape the financial services industry — changing the way consumers spend, save and invest through mobile and online applications.

To prevent becoming mere intermediaries in the financial services business, banks and other financial institutions are being forced to change how they interact with consumers, employees and their competition, to remain relevant in the modern day movement of money.

“We believe we are in the early innings of what will be a meaningful transformation across several elements of the financial services sector,” says Will Hutchins, director of Toronto-based capital funding solution company Espresso Capital. “We are seeing new companies emerge across Canada developing innovative solutions aimed at disrupting traditional business models and creating new ones.”

Yes, we’ve heard this before: That technology and startups will change our world. But how far will the fintech revolution take us? To explore this, we’re delving into some common perceptions about the fintech industry — and the truths behind them.

What Counts as Fintech

“Fintech” is short for financial technology, and it’s a broad label. It covers payment apps and digital wallets, online lenders, robo-advisers that manage investments automatically, budgeting tools, insurance startups, and the software banks themselves run behind the scenes. Blockchain and cryptocurrency projects sit under the same umbrella.

What ties them together is that they take a job a bank or broker used to do in a branch or on paper and move it onto a phone or a website. That’s why the question isn’t really whether fintech will arrive. It’s already here. The real question is who ends up owning the customer: the startups building the new tools, or the established institutions that hold the deposits, the licences and the trust.

Is fintech changing the way banks do business?

Banks have enormous resources, power, and customer data, but are only now marshalling their forces by creating spaces for technology to develop. We look at how the power dynamic works.

ANSWER: YES

Will blockchain revolutionize finance and contracts?

Blockchain is a secure distributed ledger that could change the way that valuable items are transferred. While the hype might be justified, it is not yet adopted and has, ironically, suffered recent hacking issues.

ANSWER: MAYBE

Will fintech overturn financial institutions and regulations?

Even startups that have found a successful niche, or have scaled well, have to work within the regulatory environment and with existing players.

ANSWER: NO

Investors still see big returns in fintech. Global investment in fintech ventures rose 75 per cent to $22.3 billion in 2015, and was up 67 per cent in the first quarter, reaching $5.3 billion.

With the right product, the right access to customers, and the right relationships with existing players, fintech has the potential to truly revolutionize the financial services sector.

How the Three Answers Held Up

Looking back, the three verdicts have aged well, and the “maybe” on blockchain turned out to be the most accurate of all.

The hacking issues mentioned above came to a head almost immediately. In June 2016, an attacker began draining ether from The DAO, an investment fund built on the Ethereum blockchain. According to a later U.S. Securities and Exchange Commission report, about 3.6 million ether, roughly a third of everything The DAO had raised, was diverted before the community pushed through a “hard fork” to return the funds. The same report concluded, in July 2017, that DAO tokens were securities, a clear sign that regulators weren’t going to leave blockchain finance alone.

Banks kept experimenting, but often at arm’s length. JPMorgan built its own Ethereum-based platform, Quorum, and in August 2020 it was acquired by blockchain software company Consensys as part of a strategic investment by the bank. That’s a good example of the “yes” answer in action: rather than being overturned, a major bank ended up partnering with, and investing in, a startup.

The “no” answer has held up too. Fintech didn’t sweep away regulation. If anything, governments have moved to build rules around it.

Canada Builds Rules for Open Banking

One of the biggest barriers for Canadian fintech startups has been getting access to customers’ financial data safely. Many apps relied on “screen scraping,” where a customer hands over their banking password so the app can read their account.

Canada’s Budget 2024 described that practice as unsecure and committed to a Consumer-Driven Banking Framework, also known as open banking. Under it, people would be able to share selected financial data with banks, credit unions and accredited fintechs without giving away access to their bank account. The budget named the Financial Consumer Agency of Canada as the body that would oversee and enforce the framework.

That’s exactly the dynamic this article described: fintech growing within the regulatory environment, not around it, and with the established players still at the table.

What It Means for Founders

For anyone building in fintech, the lesson from the past decade is that technology alone rarely wins. Regulation, trust and distribution matter just as much. A startup with a better app still needs permission to handle money, a way to reach customers, and often a bank partner to hold deposits or move payments.

The startups that have done well tend to treat incumbents as possible partners and regulators as part of the product plan, not obstacles to dodge. That’s less exciting than talk of a revolution, but it’s how most of the real change in financial services has actually happened.