Canadian fintech deal volume robust so far in 2018; payments modernization and open banking expected to drive further investment
Canada's fintech sector has seen an unprecedented volume of deals during the first half (H1) of 2018, although the value of those deals is down compared to last year, finds KPMG International's latest Pulse of Fintech report.
Fintech VC, PE and M&A activity in Canada
2014 – 30 June 2018
"Evolving customer expectations, recent changes stemming from the 2018 federal budget, as well as 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," says John Armstrong, National Industry Leader for Financial Services at KPMG in Canada. "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."
"Our country is riding the wave of digital disruption that is changing the financial services ecosystem globally," adds Armstrong. "Toronto and Montréal, in particular, have emerged as strong fintech hubs and top global destinations for financial and intellectual capital. As financial services regulation in Canada continues to evolve, we are bound to see an even greater increase in activity in the space."
Canada saw $263 million invested in fintech deals across venture capital (VC) and mergers and acquisitions (M&A) in H1'18. While this number is encouraging, it is off the pace seen in the second half of 2017, when $510 million was invested. "The spike in the number of deals, however, indicates buyers are focused on getting in early on new technology," says Armstrong. "Canadian fintech hubs are maturing at a rapid pace and large financial institutions have recognized the need to invest in the space to meet the evolving needs of their customers."
Artificial intelligence bright spot in Canadian fintech
Artificial intelligence (AI) continued to be a dominant focus areas for investors in Canadian fintech during H1'18. Canada is increasingly regarded as a global leader in AI innovation with highly regarded specialists in Toronto, Montréal and Edmonton attracting significant investments to those cities. A number of banks have also acquired companies in the AI space, in part as a talent grab in order to fuel their own innovation activities.
Armstrong adds: "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."
Canadian leadership in AI innovation stems from a decades-long focus on building high-quality educational institutions and attracting prime academic talent. This, in turn, has positioned Canada as a key breeding ground for the next generation of entrepreneurs and professionals in AI and machine learning.
VC investors and fintechs preparing for payments modernization and open banking
As part of its financial sector review, the federal government is in the process of updating the Bank Act, which is expected to occur in 2019. The new legislation and regulations are expected to mandate some level of "open banking" similar to what has been implemented in the UK, Europe and Australia. In addition, Canada is undertaking a multi-year payment system modernization initiative aimed at upgrading critical infrastructure, creating a real-time payments rail and providing greater access to the country's clearing system.
"Government initiatives are expected to spark additional growth in Canadian fintech," says Armstrong. "The payments modernization initiative and the update to the federal Bank Act will unlock new opportunities for fintech players in the payments space and around open banking. While both initiatives are still in process, investors recognize that change is coming and are positioning themselves accordingly."
Learn more by accessing the full report, including references to Canada on pages 16, 17 and 22: www.kpmg.com/fintechpulse
*Unless noted otherwise, all figures are in USD.
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