The Canadian fintech sector saw unprecedented deal activity in the first half of 2018, driven by growing interest in artificial intelligence (AI), robo-advice and blockchain technology, according to a new report from KPMG LLP. The trend is expected to continue as regulation evolves to facilitate innovation.
While the combined value of venture capital (VC) and private equity investment, and merger and acquisition activity, is down from last year, KPMG reports that the volume of deals reached “unprecedented” heights in the first half, with more than 50 transactions taking place. Deal activity totalled $263 million during the period.
“Evolving customer expectations, recent changes stemming from the 2018 federal budget [and] expected changes coming via the review of the federal financial sector framework (including the Bank Act) are clearly spurring increased activity in the Canadian fintech sector,” said John Armstrong, national industry leader for financial services at KPMG in Canada in a statement. “There were more than 50 deals in the first half of 2018 alone. That is almost as many as we saw in all of 2017, the busiest year on record for Canadian fintech.”
The report notes that Canada’s large financial institutions are both investing in fintech and seeking partnerships to help drive innovation. In particular, the emerging AI sector continues to be a key focus of Canadian fintech investors, the KPMG report says.
“Investors and financial services companies have both recognized the massive opportunities presented by AI to automate processes, such as regulatory compliance and reporting. Canada continues to make great strides to become a global center of influence in AI and a welcoming home to leading AI innovators at several Canadian universities,” Armstrong said.
Alongside AI, the report also singles out robo-advice and blockchain technology as other prominent investment areas for the Canadian finetch sector.
“In Canada we continue to see the big banks invest in robo-advisory initiatives, either their own or by working with fintechs like Wealthsimple,” the report states. “Blockchain has also grown on the investment radar in Canada, with a number of large financial institutions participating in blockchain consortia. The Canadian government has also invested in payments related proof-of-concept activities, although it has made a conscious decision not to use blockchain as part of its payments modernization initiative.”
Looking ahead, KPMG says it expects to see fintech investment remain strong for the rest of the year, with looming regulatory changes in Canada representing a possible catalyst for future deal activity.
“As financial services regulation in Canada continues to evolve, we are bound to see an even greater increase in activity in the space,” Armstrong said.
For example, the report notes that the federal government is updating the Bank Act, which is expected to mandate “open banking” in some form. The payments system also is undergoing a multi-year modernization effort. “While both initiatives are currently in process,” the report states, “VC investors and fintechs recognize that change is coming and are jockeying to position themselves to take advantage of changes once they are implemented.”
“Banks in Canada are watching the new developments very carefully as there are currently limitations on what banks can invest in. Should the limitations be lifted, there could be a wave of new corporate investments in 2019 once changes come into force,” the report states. “From discussions with financial institutions, we anticipate newer subsectors like regtech, insurtech, AI and blockchain will likely draw a significant amount of attention in Canada and the U.S.”