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"The Era of Disruption": a FinTech presentation by Dr. Kevin Lynch

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The Honourable Kevin G. Lynch, former Clerk of the Privy Council, Government of Canada –currently Vice Chair of BMO Financial Group – delivered this opening keynote address at a workshop, “driving competition and innovation in the financial services sector,” hosted by Canada’s Competition Bureau on February 21, 2017.

In his opening keynote, Dr. Lynch presents 11 key observations about FinTech in a global context and explains its importance as a potential motor for growth in the Canadian economy.

During the workshop, the FinTech community—including Canadian start‑ups, entrepreneurs, bankers, provincial and federal regulators, and international experts—were asked to discuss how best to ensure that Canada’s FinTech sector delivers competitive benefits to the marketplace.

This is one of six FinTech presentations from the workshop that are available on SlideShare.

Results from the workshop will inform the Bureau’s market study into technology-led innovation in the Canadian financial services sector.

For more workshop resources, please access our FinTech portal: http://ow.ly/oQzj30aJSf1.

La présentation de Kevin G. Lynch est également disponible en français à partir du portail dédié à l’étude de marché du Bureau portant sur la technologie financière: http://ow.ly/ne8q30aJSaz.

Publicada em: Economia e finanças
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"The Era of Disruption": a FinTech presentation by Dr. Kevin Lynch

  1. 1. The Era of Disruption Dr. Kevin Lynch Vice-Chair BMO Financial Group and Former Clerk of the Privy Council and Cabinet Secretary, Government of Canada FinTech Workshop, Competition Bureau of Canada Ottawa, Canada February 21, 2017
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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 scale and 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 Facebook 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
  6. 6. 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
  7. 7. 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.
  8. 8. 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
  9. 9. 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 Access to capital Lack of start-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?
  10. 10. 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
  11. 11. 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’s first technology supercluster
  12. 12. 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 innovative financial services sector. The global financial crisis demonstrated Canada is capable of global regulatory excellence and leadership.