While FinTechs have enjoyed a reputation for disrupting financial institutions, with the rising popularity of blockchain and AI, it’s now the FinTechs that must evaluate how to stay ahead of emerging technologies or get left behind.
When it comes to leveraging AI in FinTech platforms, there is still a lot of work to do. But Chris Sugden, managing partner at Edison Partners, indicates that companies should still be thinking about setting the foundation. “Most FinTech companies are a fairly long way from true AI. However, machine learning is everywhere,” said Sugden. “AI will affect all aspects of financial services and FinTech firms in the coming years. The key is to ensure your company has the data, or fuel, from all types of sources to power your machine learning and AI platform and that the data can be activated.”
With demos from startups and panels from thought leaders, the Empire Startups FinTech conference in Toronto explored the present and future of FinTech.
Investing in FinTech
Like most Canadian tech verticals, venture capital is one of the common ways FinTech startups fund their businesses for growth. But according to one panel at the top of the event, startups shouldn’t immediately think of VC as the default.
“None of these companies are staying in Canada because of the regulations.”
– Anne Connelly
“It’s important to say that that’s not the only way, and for many people, it’s probably not the best way to fund their business,” said Andrew Graham, CEO of Borrowell. “It’s great if it’s the type of business you want to build and talk to VCs as part of your fundraising strategy, but it may not be the type of business you want to build so you may want to think about other funders.”
For its part, Borrowell last raised $57 million in equity funding and credit facilities from Portag3, Equitable Bank, and White Star Capital.
For those who do look to VC, the relationship goes beyond money. Expertise and networks were emphasized by all on the stage, and Stephanie Choo, partner at Portag3, said that its network is a key part of selling their brand to potential investees.
“You can get money from a lot of different sources, but the value add that a venture fund brings—and our venture fund specifically brings this idea of the network—and part of our thesis has always been about bringing together the ecosystem of FinTech companies globally, but also an ecosystem of great LPS that we also believe can work really closely with our companies,” she said.
Access in different ways—including to technology—is also a determining factor for startups that partner with banks. Cameron Peake, co-founder and COO of Azlo, said that the company has chosen its banking partners based on what APIs they could work with. “Identifying a banking partner that has metrics and APIs, with our ability to influence influence operations and components on the back end is important and really attractive,” said Peake.
Startups thinking about taking VC money should check if they’ve invested in similar companies and what sectors they invest in, said Graham.
Opportunities in regulation
In the age of GDPR and ICOs, government regulations are top of mind for every company. The conference aimed to address the issue of regulations potentially killing smaller financial services organizations, while identifying new opportunities for FinTechs to step in.
Digital identity, and how governments and financial institutions will establish it, is a challenge that similar events have worked to make sense of. For keynote speaker and investor Pascale Bouvier, it will be critical for financial technologies to have technologies that can easily vet individuals and transactions.
“I’m very bullish on digital identity solutions either that apply to individuals or corporations. AML/KYC is a major issue for any financial institution that is regulated by the central banking regulator,” said Bouvier. “It’s costly, errors are usually even more costly, most of it is manual. I don’t expect it there to be one solution—I think there will be many solutions—but I watch closely from an investment perspective.”
"AI without data doesn't mean anything." – Hossein Rahnama, Flybits
— Beau Humphreys (@beauhumphreys) June 27, 2018
While startups have faced hurdles with navigating regulations, the Canadian government has its own challenges in setting the standards. Andrew McCoomb, associate at Norton Rose Fulbright, said that Canada has been designated as a “problem region” by other countries for its regulations.
“We’re a problem region in terms of some antiquity when it comes to those rules, so we have something new to come next year,” he said. “By and large, it reflects a lot of the changes technologically we see with the way money is being handled and processing the information we have in those transactions and the expectation in these new rules is that FIs can drill down a lot further than they previously ever have.”
While governments wrangle with regulating the fast-paced tech industry, the panel advised FinTechs to constantly engage with regulators to ensure they’re complying, and work with them to influence and inform policy. Startups can also future-proof themselves by making their content agnostic—a move Pam Perdue, chief regulatory officer at Continuity, decided to take.
“What we decided is that the business process, before you automate, it has to be standardized,” said Perdue. “In our solution, we built it to be so it’s kind of content agnostic, and you analyze the business process, and you allow experts in jurisdictions to weigh in on specifics of their regulatory environment.”
Barriers to blockchain adoption
Anne Connelly, who is part of the faculty at SingularityU, said that many people in North America don’t understand the need for a currency that isn’t government-backed. But in countries where there is instability, cryptocurrency and bitcoin can be life-changing. She gave the example of a country like Zimbabwe, where the peak inflation rate can hit the tillions.
“If you wanted to send a transaction using blockchain technology, there are very limited services.”
“If you can’t guarantee the money you make on Monday will buy you a grain of rice on Friday, what good is a government-backed currency?” said Connelly. “When you look at how lucky we are in America to have a relatively stable financial system, that is not the case for the vast majority of people living around the world. That’s where I see the benefit of free choice in your financial system, and being able to choose the Zimbabwe dollar or a bitcoin.”
There’s still a lot of work to be done in the blockchain space for wider adoption. One of them, as moderator Mawadda Basir pointed out, lies in the technology itself: if you incorrectly write an address to send the crypto to, it sends to that address even if it doesn’t exist, which has led to “millions” of bitcoin in limbo at the moment.
For Tip Blockchain John Warman, there’s also a barrier to entry for people who aren’t tech-savvy. While he said his 97-year-old grandmother can navigate and use Whatsapp, that’s not the case for something like blockchain. Accessibility should be top of mind.
“If you wanted to send a transaction using blockchain technology, there are very limited services that also require technology knowledge,” he said.
The panelists indicated that uncertainty over regulation issue plaguing all FinTechs are especially pronounced in the blockchain space, leading to a brain drain in an area that Canada has a chance to lead. Ethereum was invented in Toronto, and many blockchain communities have sprouted up organically across Canada, enabling the exchange of ideas.
“None of these companies are staying in Canada because of the regulations,” said Connelly. “ICOs aren’t happening here, all of us devs are going to other countries. We have an amazing opportunity as a country to take hold of this industry that has organically grown right here, and actually turn it into something meaningful. But that’s a government issue and a regulation issue, and if we don’t get serious about innovation in our country, everyone is going to go.”
BetaKit is an Empire Startups media partner.