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The Era of Disruption
Dr. Kevin LynchVice-Chair BMO Financial Group
andFormer Clerk of the Privy Council and Cabinet Secretary,Government of Canada
FinTech Workshop, Competition Bureau of Canada
Ottawa, CanadaFebruary 21, 2017
February 21, 2017Canadian Competition Bureau FinTech Workshop 2
Observation 1: Global trends, and national reactions, are fundamentally reshaping our world, for both better and worse ---but the status quo is not a strategy for future success, anywhere. Key drivers of this global growth --- trade liberalization, technological change, human migrations – now under attack by populist movements.
Industrial revolution 4.0 –
changing everything,
everywhere
Governance 1.0 - growing
“governance gaps”, globally
and nationally
Climate change 2.5 – is
global warming being
arrested? mitigated?
Energy 1.5 - a revolution
in demand, supply +
geopolitics
Demographics 2.0 - aging is
affecting health costs, fiscal
stability, economic growth
World of distrust -
anti-globalization, anti-immigrant,
anti-establishment sentiments
Globalization 3.0 – a
hyper-connected world, led
by global supply chains
February 21, 2017Canadian Competition Bureau FinTech Workshop 3
Observation 2: The new global normal is accompanied by a transformation of risks. These risks are: more systemic; more global; more geopolitical; more interconnected; and more insecurity-related --- in short, risks today are “more macro, less micro”, and corporate risk management approaches need to adapt. Global firms increasingly need “foreign policies” as well as domestic policy/risk agendas.
WEF’s “Top 10” Global Risks in 2017
3. Large scale
involuntary migrations
1. Extreme weather events 6. Failure of climate change
mitigation and adaptation
7. Interstate conflicts2. Natural disasters
10. Failure of national governance
8. Unemployment,
underemployment and
social stability
9. Man-made environmental
disasters
5. Cyber attacks
4. Terrorist attacks
February 21, 2017Canadian Competition Bureau FinTech Workshop 4
Observation 3: A world of distrust --- two-thirds of the 28 countries surveyed by the Edelman Trust Barometer (including Canada) are now distrusters; meaning that less then 50% of the general population expresses trust in the mainstream institutions of government, business and the media. Trade displacing jobs, technological change displacing jobs, short-termism displacing long term investing by corporations, populism displacing liberalism and open markets --- are all elements of the loss in trust.
50%+ of the general population distrusts their institutions of gov’t, business and media – the elites – in 20 countries, including Canada
Only 37% of the general population globally trusts corporate CEOs
59% of the general population in Western countries trusts a search engine more than traditional media
Trust in government globally has fallen to 41%“Trust inequality” between informed public and the general population is over 20% in US, UK and France
40% of Brits believe that facts matter less than authenticity and beliefs
67% of the general population believes CEOs/firms focus too much on short term results
53% of the general population in Western countries do not believe the present system is working
February 21, 2017Canadian Competition Bureau FinTech Workshop 5
Observation 4: It is disruptive technology that is driving change, churn, and transformation --- and, we are at another technology inflexion point, with disruptive innovations imminent in many fields and sectors. What is most amazing is the scaleand scope of these disruptive technologies, and the pace of their adaptation.
THE “PACE” OF DISRUPTION(time to reach 50 million users)
Source: Citi GPS: Global Perspectives & Solutions
38 Years
75 Years
13 Years
4 Years
3.5 Years
35 Days
Telephone
Radio
TV
Internet
Angry Birds
THE “DISRUPTION QUESTION”
McKinsey estimates that 45% of the jobs in North America can be automated. Do we have the technology capacity, management skills, education systems and culture to handle this scale and pace of disruption? --- Will we be disruptors and early adaptors, or simply among the disrupted?
THE “SCOPE” OF DISRUPTIVE TECHNOLOGIES
Source: McKinsey
Virtual & augmented realities
New computing technologies(quantum, neural, …)
Nano materials
Space technologies
Energy storage
3D printing
Internet of things (linked sensors)
Blockchain, distributed ledgers
Neurotechnologies, geo-engineering
Artificial intelligence (AI) and advanced robots
February 21, 2017Canadian Competition Bureau FinTech Workshop 6
Observation 5: The uncomfortable truth about Canadian innovation --- despite pockets of global excellence, and some best-in-class research strengths in universities, Canada is pretty mediocre in business R&D and innovation. We have to go from “reasonably good” to “globally great”, and at the pace of our global competitors, to rebuild Canadian competitiveness.
Canada’s ranking on innovation:
22nd
Canada’s ranking on business spending on
R&D/GDP:
22nd
Canada’s ranking on productivity growth
over 1995-2012 period:
26th
Canada’s business productivity level relative to US:
70%
Canadian innovation ecosystems in global
top 15:
Per person gap in incomes relative to U.S.
due to productivity/ innovation deficit:
0
Canadian research universities in the global top 100:
4 $11, 500
Innovation Reality
February 21, 2017Canadian Competition Bureau FinTech Workshop 7
Observation 6: The advent of Fintech has been driven by three forces: technology (mobile, telephony, big data, AI); trust(customer mistrust in traditional financial institutions after global financial crisis); and, generational (new tech-savvy generation, comfortable with online shopping, is ripe for online financial services).
CHARACTERISTICS OF FINTECH DISRUPTORS
o Platform technologies, with enormous scale-ability
o Disrupt existing business models, enabled by technology
o Focus on a financial service function, not firms per se
o Big data, big computing power, AI-enabled predictive analysis
SCOPE OF FINTECH DISRUPTORS
Credit – peer-to-peer lending platform
Payments – mobile payments; peer-to-peer payments, remittances
Investments – crowdfunding
Deposits – virtual accounts
Financial advice – robo-advisors
Processing – distributed ledgers, blockchains
Fintech is challenging business models across financial services; it will disintermediate functions not firms; it will intermediate some of the financially excluded; it will increase competition; and it will test regulators.
February 21, 2017Canadian Competition Bureau FinTech Workshop 8
Observation 7: Innovation in financial services --- it is all about balance. Fintech entrants bring innovative new models into traditional financial services: they can increase inclusion, reduce costs, provide greater flexibility and more optionality for consumers. They also bring new risks in terms of consumer protection, cyber-security, and systemic risks (given the scale-ability of the underlying platforms).
“There’s talk of innovation out here. Winds of
change are headed your way. Lock your door,
pull the shades and hide under your desk.”
The biggest risk is not innovating
Fintech
“These new regulations will fundamentally
change the way we get around them.”
Well designed regulations enhance trust
February 21, 2017Canadian Competition Bureau FinTech Workshop 9
Observation 8: WEF surveyed global regulators for their views of Fintech. The vast majority of regulators surveyed in 2016 see Fintech innovators as both a driver of new/improved opportunities for financial services customers and a source of new risks. But they do not think they are a source of systemic risks today (China is an exception). Globally, the biggest impact to-date is on payments, with digital-only banking platforms a rising second. The impediments to Fintech growth include achieving scale in small domestic markets and modifying consumer banking behaviours.
Challenges with achieving scale within small domestic markets
Gaining consumer trust/ modifying consumer behavior
Accessto capital
Lack ofstart-up support/ incentives e.g. tax, Fintech hubs, etc.
Regulatory hurdles
Reticence of incumbents to collaborate
OtherAccess to data
Legal hurdles
32.1%
25.0%
14.3%10.7%
7.1%3.6% 3.6% 3.6% 0.0%
At present, do you believe Fintech innovators are significant contributors to systemic risks?
85.7% 14.3%
Source: WEF Global Agenda Council on the Global Financial System
What is the most significant impediment faced by domestic Fintech innovators?
Fintech innovators have not had an impact in my domestic marketplace
Alternative lending platforms
Digital-only banking platforms
Alternative payment service or remittance providers
“Robo-Advisors” and other innovative wealth management solutions
Crowdfunding platforms (equity or otherwise)
Insurance marketplace/aggregators and alternative insurance providers
Providers of new wholesale products or process
externalization services
28.6%
28.6%
35.7%
50.0%
7.1%
21.4%
7.1%
21.4%
Which categories of Fintech innovators have had the most significant on your domestic financial services marketplace to date?
February 21, 2017Canadian Competition Bureau FinTech Workshop 10
Observation 9: Regulation and Fintech --- regulation is evolving (but less quickly than technology) and disjointed (across countries and within certain countries). For regulators, balancing the gains from innovation and competition against the unknowns of resiliency to cyber attacks and fraud, to systemic risks, to monetary transmission, and to consumer protection, is the key challenge.
(1) Financial regulation: the theory:
• Promote effective competition (in part through innovation)• Ensure consumer protection• Maintain systemic stability and the integrity of the monetary policy transmission mechanism
(2) Financial sector regulation: the practice:
• Mixture of principle-based regulation and prescription-based regulation• Mixture of coordination and fragmentation across national jurisdictions• Mixture of certainty and uncertainty (including extra-territoriality)• Mixture of simplicity and complexity
(3) Financial sector regulation: the challenges:
• Highly prescription-based regulatory systems are often seen as barriers to innovation• Principles-based regulation more conducive to Fintech innovators• Lack of clarity in Fintech regulation creates uncertainty – allows experimentation but creates investor
risk about future Fintech regulation
February 21, 2017Canadian Competition Bureau FinTech Workshop 11
Observation 10: The Tech North Report: “Building Canada’s first technology supercluster—The Toronto-Waterloo Innovation Corridor” identified Fintech as an emerging sector where Canada can be a global player, with global champions. In addition to world class talent and leading technology combined with a sophisticated financial center, the Report suggested other enablers for global Fintech success including “open data initiatives”, governments open to Fintech use in operations, and regulatory “sandboxes” for experimentation and building trust.
Source: McKinsey Tech North: Building Canada’sfirst technology supercluster
February 21, 2017Canadian Competition Bureau FinTech Workshop 12
Observation 11: Putting Fintech into the broader context of growth. Canada has a serious growth problem --- our trend (potential) growth is around 1½%, almost half that of the past 30+ years. Innovation in all sectors of the economy, including financial services, is essential for rebuilding Canada’s growth potential.
Rebuilding Canadian growth will require innovation:
• In what we produce, and how we produce it• In where we sell, and how we brand it• In who (talent pool) does it, and how we attract,
retain them• In how we finance innovation, fund start-ups,
facilitate business investment, allocate capital, and manage savings
Canada is best served by a sound and innovativefinancial services sector. The global financial crisis
demonstrated Canada is capable of global regulatory excellence and leadership.