Canadian fintech deal volume up in H1 2018, but deal value down

09 August 2018 Authored by Consulting.ca

Venture capital and mergers and acquisitions deals in Canada’s fintech industry reached a value of $263 million in the first half of 2018, down from the $510 million recorded in the second half of 2018. However, deal volume surged to over 50 deals in H1 2018, almost surpassing the number of deals in all of 2017.

Fintech is a hot industry, as is almost any industry that applies ‘digital’ to anything. From digital payments to mobile-based apps for crowdsourced lending or robo-based investment advisory, fintech is offering consumers more convenient, intuitive, and cheaper banking options. The only catch is that fintech has to contend with more regulatory hurdles in financial services than digitalization in other industries. However, countries around the world are slowly updating their regulations around financial services (e.g. open banking) to allow for the growth of fintechs.

KPMG’s latest Pulse of Fintech report finds that fintech investment in Canada has remained robust over first half (H1) of 2018, recording a high volume of deals. "There were more than 50 deals in the first half of 2018 alone,” said John Armstrong, National Industry Leader for Financial Services at KPMG in Canada. “That is almost as many as we saw in all of 2017, the busiest year on record for Canadian fintech."

In H1 2018, $263 million was invested in Canada in fintech deals across venture capital (VC) and mergers and acquisitions (M&A). Though deal volume was higher, the total value was well off the pace of H2 2017, which saw $510 million invested. It also doesn’t compare well in terms of deal value to the outlier H1 2017, which saw the massive $4.8 billion acquisition of Toronto-based payments and lending fintech DH Corporation by Austin-based Vista Equity Partners. In comparison, the $65 million raised by robo-advisory Wealthsimple was the biggest deal of the first half of 2018.Fintech VC, PE and M&A activity in Canada"The spike in the number of deals [in H1 2018], however, indicates buyers are focused on getting in early on new technology," remarked Armstrong. According to the KPMG report, the big Canadian banks have seen the need to invest in fintechs, and as a result are working towards developing partnerships and making strategic investments in the burgeoning area.

KPMG expects payments modernization and regulatory changes around open banking to spur on greater fintech investment in the future. The federal government is currently updating the Bank Act, with new legislation slated for 2019. It’s expected to include open banking regulations like those that have already been implemented in the UK, Europe, and Australia.

Open banking basically allows banks to share customer data with fintech firms and third-party financial apps more securely. Before open banking, customers would send their bank login info and account details to the app, and it would ‘screen scrape’ to get the needed banking info – a less than ideal process in terms of security.

Additionally, Payments Canada is currently in the process of upgrading its critical infrastructure to create a real-time payments rail. Instead of taking one to three days for payments to clear, real-time payments are concluded in seconds, providing consumer convenience and flexibility. In a world of ‘instant’ everything, why not payments?

"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,” Armstrong added. “While both initiatives are still in process, investors recognize that change is coming and are positioning themselves accordingly." For example, the report notes that US-based infrastructure-focused fintech firm Plaid recently expanded into the Canadian market in anticipation of the upcoming changes.

AI an area of strength

KPMG relates that artificial intelligence continued to be a principal focus area of fintech investment in Canada in H1 2018. Canada has acquired a reputation as a leader in AI, with notable hubs in Toronto, Montreal, and Edmonton. Banks are continuing to acquire AI firms to fuel their own innovation, with, for example, TD Bank snapping up AI predictive analytics firm Layer 6 earlier this year. Banks have also been investing in robo-advisory, either independently or through partnerships with fintechs like Wealthsimple.

"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,” remarked Armstrong.

According to KPMG, Canadian strength in AI derives from decades-long investment in the area at academic institutions, which has attracted prime talent. The base of strength has, in turn, made the country a hotbed for the next wave of AI and machine learning innovators.

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