Sibos 2023: Mapping the Canadian fintech story

North America boasts the world’s largest financial services industry, with the US in particular leading the way.

Canada has been setting itself up as a formidable force in the fintech sector

A recent report by Boston Consulting Group (BCG) and QED Investors claims there will be a 6x increase in fintech revenues from $245 billion to $1.5 trillion by 2030, with the US alone accounting for 32% of global fintech revenue growth.

However, despite the US often dominating the headlines, Canada has been setting itself up as a formidable force in the fintech sector. With this year’s Sibos taking place in Toronto, let’s take a look at Canada’s recent fintech journey, including the highs and lows and what lies ahead for the country.

The highs and the lows

Following the disruptions of the Covid-19 pandemic, the year 2021 marked a record year for investment in Canada’s fintech scene. According to data compiled by PitchBook for KPMG in Canada, funding rose to almost $7 billion that year, with a record 217 deals, which surpassed the previous annual record set in 2017.

With more than 1,200 active fintech companies in 2021, the outlook looked bright. But with the global economic downturn in 2022, Canada, much like the rest of the world, could not remain immune.

Surely enough, fintech valuations in 2022 declined more than five-fold according to KPMG, with the number of deals slowing “significantly” towards the end of the year.

However, to put this into context, KPMG notes that despite the downturn, it was still the “second-best year” for Canada in terms of deal volume.

Analysts predicted the trends from last year to continue into 2023, and as per KPMG’s latest H1 2023 report, funding in Canadian fintechs dropped three-fold to pandemic levels.

Despite this, seed rounds and early-stage fintech investments, which contributed to more than half of last year’s funding activity, have remained consistent this year as well, with early-stage and seed funding accounting for 34 of the 57 deals seen across H1 2023, which is encouraging for the future of the industry.

Going ahead, fintech companies have a lot to be mindful about – from fears of a recession to rising inflation and interest rates – all of which are making investors tighten their purse strings.

But it doesn’t have to be all bad news.

“It’s not surprising to see a decline given the market rout, and the fact that fintech investments hit such feverish heights in 2021,” comments Geoff Rush, financial services industry leader at KPMG in Canada.

“But to put things into perspective: last year’s activity was still stronger than 2020, and we also saw the second highest number of deals ever, so clearly investors were still finding many attractively priced opportunities.”

Glass half full

The consistency seen in seed and early-stage funding activity in the past two years brings about some positivity for young fintech companies in Canada.

Georges Pigeon, a partner in deal advisory and transaction services for KPMG in Canada, highlights investors’ interest in funding new start-ups, suggesting the time could be now for new firms to look for funding, although at the possibility of flat or slashed valuations.

Investments in Canadian fintechs in H1 2023; Source: PitchBook, KPMG in Canada

The recent report by BCG and QED Investors confirms this sentiment.

“Overvaluations have become more difficult to justify without strong fundamentals—such as good unit economics, recurring revenues, patents, strong brands, and loyal customer bases,” the report states.

“Some of this filtering is good for the industry, as weaker business models are becoming stressed and effectively being weeded out.”

Amid the doom and gloom, KPMG expects certain areas in fintech to be well received by investors, including artificial intelligence (AI), blockchain and machine learning.

“There are a lot of financial services companies that rely significantly on technology and are looking to adopt more emerging technologies such as generative AI, so that should bode well for the fintech space in the near to long term,” Rush says.

Nicky Senyard, CEO and co-founder of Canada’s Fintel Connect, believes recent market developments have proven to be beneficial for the fintech industry.

“These developments have prompted a shift towards business models that have a genuine emphasis on sustainability, as opposed to mere speculative ideas, making these fintech products robust and likely to enhance their long-term viability,” Senyard says.

Room for growth

Canada’s fintech sector has been growing steadily, both in terms of the number of start-ups as well as the number of hubs.

Senyard says the current funding landscape “has fostered a sense of realism, offering a clearer perspective on the dynamics of the market”.

“Canada enjoys a distinctive position, benefiting from its ability to look over the fence, and observe and learn from the US while navigating its own unique financial ecosystem.”

She gives the Canadian mortgage sector as an example, saying it operates differently than its US counterpart.

“As the property market evolves and interest rates stabilise or decrease, we can anticipate the emergence of innovative mortgage products and solutions.”

According to Tracxn, as of July 2023, there were almost 3,000 fintech firms operating in Canada. Some of the top funded companies include WealthSimple, an online robo-advisory and stock trading platform, and KYC and AML solutions provider Trulioo.

In terms of talent, according to CBRE’s 2023 Scoring Tech Talent report, Canada’s technology workforce grew more than 15% from 2020 through 2022, onboarding 150,000 employees. In terms of tech hubs, Toronto was also recently named Canada’s largest tech market and fifth largest in North America.

Vancouver is the country’s second largest fintech hub, with Calgary (home to fintech firms Katipult and Finofo) also experiencing a 61% growth in tech talent. This activity signals that Canada is quickly becoming a burgeoning hub for tech companies.

Predictions for the future

Looking forward, in tandem with the gloomy global forecasts for the remainder of the year, KPMG expects Canadian investment activities to remain on the lower side.

Pigeon also suggests the fintech space is undergoing “a bit of a mentality shift”. He notes that companies saw huge amounts of capital flowing from VC investors in 2021, allowing them to pull through 2023, and maybe even 2024, due to streamlining and restructuring measures to make the cash last longer.

“So instead of a ‘growth at any cost’ mentality, many fintechs are now focusing on sensible growth while preserving the cash they have on hand for as long as they can with an eye to achieving sustainable profitability in a not-too-distant future,” Pigeon says.

On the flip side, he adds that the current funding environment spells trouble for the more mature fintechs that haven’t yet found a path towards profitability, predicting that such firms may have to make difficult decisions, including shutting down or selling at reduced valuations.

For Senyard, the key focus for fintech companies in the near future lies in “delivering the right solutions to Canadian customers”, which include alleviating financial stress and empowering them with financial literacy tools and strategies for their financial well-being.

“This is where fintechs have their sweet spot,” she concludes.

The global fintech market has experienced a tough year, and only time will tell how it emerges on the other side. But as BCG says in its report, fintech is indeed a “long-term growth story”, and while the “fintech winter is just one season, a sunnier spring and summer should follow”.