Canadian Fintech Primer with Tal Schwartz

Podcast Episode

Audio Player

00:00 | 26:25

Fintech Layer Cake

Canadian Fintech Primer with Tal Schwartz
Dec 05, 2024
Season 2
Episode 32
Lithic

In this episode of Fintech Layer Cake, Reggie Young speaks with Tal Schwartz, founder of the Canadian Fintech Newsletter and Exit North Ventures. Together, they explore the Canadian fintech ecosystem, comparing it with the U.S., discussing unique market dynamics, and highlighting opportunities in embedded finance and regulatory innovation. Tal also shares insights on building a Fintech fund and why Canada is primed for fintech growth.

Transcript

Reggie Young:
Welcome back to Fintech Layer Cake, where we uncover secret recipes and practical insights from fintech leaders and experts. I'm your host, Reggie Young, Chief of Staff at Lithic. On today's episode, I chat with Tal Schwartz, the author behind the Canadian Fintech Newsletter, which is Canada's biggest fintech publication. I've been tracking Tal in his newsletter for a few years now. I think it's one of the best sources if you want to keep up with all things fintech in Canada. Lithic recently expanded our card issuing to Canada, so I was excited for this conversation. Tal and I cover how the US and Canadian fintech markets compare, current Canadian fintech trends, the Canadian sponsor bank market, and much, much more.

Tal Schwartz:
Thanks for having me. I'm Tal Schwartz, based in Toronto. I spent my whole career in the Canadian fintech space. The way I got into the industry, my first gig out of McGill, I helped start this trade association called the CLA, the Canadian Lenders Association. At the time, it was a really small trade group for lending companies in the non-bank space. But over the next few years, it turned into the largest financial services organization in the country. Every bank is a member, hundreds of fintechs that are members.

I did mostly policy and market research-type stuff. I always did a lot of writing. Later, that turned into this newsletter that I write, which is now the most popular fintech publication in the country. It goes out to about 12,000 people every week. I also host lots of big conferences across the country, like the Bankers Summit and the Lenders Summit, for a few thousand folks within the fintech space. My latest hat is I launched an early-stage Canadian fintech-focused venture fund called Exit North Ventures.

Reggie Young:
I love it. Congrats on the launch. Exciting time. I've done some policy work with groups before. I think it's a super underappreciated leverage point for fintechs and folks in the space. You build an incredible network. You often find out what's happening in the industry in a way that's not getting reported in news outlets. Super useful groups to be part of, for sure.

Tal Schwartz:
Yeah, totally. For so many fintechs, compliance is a bit of an advantage and allows you to get to market quicker. Through that experience, I got to meet with all of these emerging technology companies that at the time were super small. Now, a lot of these guys are market leaders, and that's what turned me on to the space.

Reggie Young:
Love it. Maybe we could start out chatting about fintech in Canada from a high level. Give me an overview of the Canadian fintech market. I'm anchored to the US market, but I'm curious, what's the general state of fintech in Canada? What is bank sponsors, regulation? Where are the big product areas and all that kind of fun stuff?

Tal Schwartz:
Canada is a little bit unique. We have a super concentrated banking system. You have these five big banks that control 90-plus percent of all financial assets in the country, massive institutions. All five of those are in the top 12 across North America. Everything within the fintech industry sort of revolves around that market dynamic. That being said, despite that oligopoly, you still have some massive international fintech brands that were built in Canada. Everyone knows Shopify, but companies like Wave, which was acquired by H&R Block, Verafin acquired for $2 billion by Nasdaq, are big international companies.

Locally, you have lots of non-bank domestic players. In the lending space, you have companies like goeasy, which is one of the largest non-bank consumer lenders, similar to OneMain in the U.S. Companies like Wealthsimple, which is really similar to Robinhood, has about 50 billion in assets under management. Companies like Coho and Neo, similar to Chime in the US, showing lots of similarities.

From an infrastructure and policy perspective, Canada is unique, sometimes not in the best way. We've had an interbank pseudo P2P payment system for decades. That being said, a lot of our payment infrastructure is super old and has been trying to update it for years with very little progress. A big part of that is because of this market dynamic with these big banks owning a lot of these infrastructure providers.

A big issue arises when you have Interac, this interbank payment system between banks, cooperatively owned by the banks. Recently, they received a federal mandate to create Canada's new real-time payment system. Essentially, they've been asked to build the system that disrupts their core business. There’s obviously no incentive for them to do that.

We're also years behind in areas like open banking and real-time payments, but we recently made significant advancements around retail payments oversight, now being regulated by the Bank of Canada. Some fintechs have been approved to participate in the new real-time payment system, not just banks.

Reggie Young:
Interesting point, Tal. Is there any overlap between the major banks and sponsor banks? In the US, many up-and-coming fintechs work with community banks rather than major banks. Is there a similar dynamic in Canada?

Tal Schwartz:
Absolutely. The dynamic exists in Canada as it does in the US. Large banks directly own significant consumer relationships, making it less incentivized for them to disintermediate themselves by enabling a potential competitor to acquire more customers.

Reggie Young:
Interesting. And how about the similarities, any top ones between US and Canada that come to mind?

Tal Schwartz:
I always joke that the Canadian market and the US market is exactly the same, just that the Canadian market is five years behind. There's a grain of truth there regarding product innovation and regulation. Product regulation arcs often happen a bit earlier in the US and are eventually repeated in Canada, such as with robo-advisors and buy now pay later products.

Reggie Young:
Definitely lots of competitive landscape similarities. And expanding into Canada, I imagine that fintechs come across unique challenges. What is it like for a fintech to enter the Canadian market?

Tal Schwartz:
Canada is unique. It's a sizable market but not huge, about 40 million people, similar to California's population but split into 13 provinces and territories with different legal systems. Many international companies look at Canada as a pit stop on their way to the US, which has often been an unsuccessful approach. An example is Revolut, which couldn't obtain a banking license and ultimately withdrew. However, platforms like a firm that acquired local buy now pay later company PayBright succeeded by gaining local licenses and expertise.

Reggie Young:
Those are key insights. Shifting gears, what current trends are you observing in Canadian fintech?

Tal Schwartz:
One trend is the verticalized integration of mortgage lending in Canada. Many new lenders are entering the market first as brokers. As they build their brand without strict compliance requirements, they later transition into direct lending. They are buying or starting their own real estate brokerages, which has led them closer to borrowers pre-mortgage, as seen with companies like Pine and Questrade.

Reggie Young:
That's fascinating how they're packaging the whole experience, truly integrating from the outset.

Tal Schwartz:
Especially with the high level of household debt prevalent in Canada. This verticalized approach ensures lenders are aware of borrower behavior and market rates.

Reggie Young:
In the next few years, where do you see big opportunities for Canadian fintech founders?

Tal Schwartz:
There's a gap in early-stage capital for fintechs. Through my newsletter and network, we created Exit North Ventures to address this issue. There is a budding area of opportunity in embedded finance, especially as customers are getting familiar with these products. Emerging companies like Teal and OneVest are innovative examples in the embedded finance space.

Reggie Young:
That does make sense. There are numerous niches for growth in embedded finance still. Is there something you think fintechs aren't discussing enough?

Tal Schwartz:
What isn't highlighted often enough is why Canada is such a great place for fintech innovation right now. We have exceptional technical talent, strong universities, a good immigration system, emerging regulatory clarity, and a vast financial services market. Ultimately, Canada is an exciting place for fintechs to thrive.

Reggie Young:
Absolutely! It's a privilege to have this conversation with you today about the fintech scene in Canada. If listeners want to connect with you or learn more about your newsletter and venture fund, where should they go?

Tal Schwartz:
You can find me on LinkedIn and subscribe to the Canadian Fintech Newsletter, along with learning more about Exit North Ventures.