Canadian Fintech Primer with Tal Schwartz

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.

Fintech Layer Cake is powered by the card-issuing platform Lithic. We provide payments infrastructure that enables companies to offer their own card programs. Nothing in this podcast should be construed as legal or financial advice.

Tal, welcome to Fintech Layer Cake. Excited for our conversation today. Why don't you start out by giving listeners a little bit about yourself and all the fun, new recent announcements you've got going on?

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, 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 obviously knows Shopify, but companies like Wave, which was acquired by H&R Block, Verafin acquired for $2 billion by Nasdaq, Solium acquired by Morgan Stanley, big international companies.

Locally, too, you have lots of non-bank domestic players. A good example would be, in the lending space, you have companies like goeasy. It's one of the largest non-bank consumer lenders, really similar to OneMain in the U.S. You have companies like Wealthsimple, which is really similar to Robinhood, has about 50 billion in assets under management. Companies like Coho and Neo, really similar to Chime in the US. Lots of similarities.

From an infrastructure and policy perspective, Canada is also unique, sometimes not in the best way. In some ways, Canada is- you can say that we're a bit of a leader in certain areas. We adopted tap-to-pay and NFC payment cards years ago. We've had an interbank pseudo P2P payment system for decades. That being said, a lot of our payment infrastructure is super old and trying to update it for years with very, very little progress.

A big part of that is because of this market dynamic of having these really big banks that own a lot of these infrastructure providers. My favorite crazy example of this is you have Interac, which is this interbank payment system between banks. It's cooperatively owned by the banks. Recently, a couple of years ago, they received a federal mandate to build and implement Canada's new real-time payment system. Essentially, they've been asked by the government to create the system that disrupts their core business. There's obviously no incentive for them to do that. That's just a weird, crazy market dynamic that I think is so emblematic of some of the issues that we face in Canada.

Lots of other policy examples, we're years behind in areas like open banking and real-time payments. Every year, there's another delay. A few bright areas. We've, in the last year, made some pretty big advancements around retail payments oversight, which just recently launched. Basically, high-level SPs are being regulated in Canada, and that's being overseen by the Bank of Canada. Some fintechs also have been approved to participate in the new real-time payment system, not just banks. Again, it's immaterial if we don't have a real-time payment system, but it's a good signal.

Then you mentioned sponsor banks. That's also an interesting one. In Canada, you have very, very few sponsor banks. Depending on who you ask, it's like three to six maybe. Really, it's just two. You have Peoples Group, which is massive. In the States, you call them a wholesale bank, like a P2P banking provider. PC Bank is another big partner bank.

You have two middlewares, Synctera, which is actually a Canadian-based or at least Canadian-originated company. Neo Financial is another one providing that middle-layer service for sponsor banks. There aren't too many wow examples of sponsor banking, fintech partnerships in Canada, but there are some really, really big ones in the retail space. What I mean by that, retail being- PC Bank is owned by one of the largest grocery stores in the country. Rogers is one of the largest telco providers. They have a financial services arm, which is a licensed bank. Canadian Tire as well, it's this massive home improvement store chain in Canada, also has a banking arm. You see a lot of these co-branded card/loyalty programs that, in a way, is an example of innovations within sponsor banking.

Then now you're starting to see come to the market some examples of that next generation of retail bank partnerships. Tim Hortons, which I'm sure some listeners are at least familiar with the word coffee chain, that's one of our favorite Canadian retail brands. They recently launched a true sponsor banking model in partnership with one of those middle-layer financial. They've launched cards and deposit services and different savings products through them.

Reggie Young:

Interesting. Get your bank account with your coffee. I love it. Just curious, you were talking about how there's five, whatever, large mega banks. Is there any overlap between them and the sponsor banks? I'm thinking about in the US, a lot of the fintech sponsor banks are more community-type banks. JPMorgan does a little bit of stuff with fintech, but really a lot of the up-and-coming fintechs, mid-stage, even late-stage. I'm thinking about Chime. Chime is not working necessarily with JP Morgan as their sponsor bank. They're working with some more community banks. Is that a similar dynamic then in Canada?

Tal Schwartz:

Yeah, for sure. The reason for that dynamic in the US would be the same dynamic in Canada. If you directly own so many bank relationships directly with consumers, you don't really have so much of an incentive to disintermediate yourself by enabling a potential competitor or potential reputational liability to try to acquire more customer accounts.

The equivalent of Cross River in Canada would be Peoples Group. They're providing a huge amount of payment settlements for fintechs across the industry and more traditional Banking-as-a-Service type relationships. But those big five that I mentioned before don't really play in the space for the same reason that you just described.

Reggie Young:

I like that framing, too, I think. Folks, when you're in fintech and you're kind of oriented around fintech, it's easy to think like, oh, the company that I work at is its own thing, but actually the banks- to use Chime as an example, Chime thinks about itself as Chime is a business, but the banks they work with Chime is a marketing distribution arm, less so an independent company. So interesting.

Tal Schwartz:

Totally. That's why earlier, I pointed to these retail bank partnerships because that is an amazing distribution, like Canada's biggest airline, Air Canada, doing tons of co-branded cards. They have tons of direct-to-consumer relationships that are super valuable for a bank to distribute through as opposed to maybe an emerging fintech that is still trying to get to scale and still going through all the compliance- trudging through the compliance mud to try to get to a point where they can actually be legit distribution partners.

Reggie Young:

What about similarities between US and Canada or any kind of top ones that come to mind in the fintech scene?

Tal Schwartz:

I always joke that the Canadian market and the US market is exactly the same. It's just that the Canadian market is five years behind. There is a grain of truth there from both a product innovation perspective and also from a regulation perspective. You can see these product regulation arcs that happened a little bit earlier in the US and then inevitably were repeated in Canada, like with our robo-advisors, you had Betterment and Wealthfront in the US. Pretty early in Canada, companies like Wealthsimple. A little bit later, Buy Now Pay Later as well. In the States, you had a lot of market penetration. Pre-COVID, it ramped up. And then during COVID, you started to see regulators come down harder on the product. In Canada, that was all shifted a few years.

You're seeing the same trends with digital mortgage companies, small business banking fintech, spend management companies. You have like the US player and then like the Canadian player a few years a little bit later. There's some advantages to that, of course. As a Canadian entrepreneur, it's so helpful to be able to go and see what's happening in the US and then say, okay, I can predict the future a little bit and we can implement those solutions domestically.

For regulators too, it's helpful. They can go and spy potential issues that are happening south of the border. Right now, I'm thinking like, oh, the consent orders against a lot of these sponsor banks in the US, and the regulators here can think, oh, well, as this market expands, maybe this is something that we should correct for early. Of course, there's a risk there that they overcorrect for a market they haven't really developed. We hope they don't do that, but there are also advantages.

Reggie Young:

That's an interesting point. I read these consent orders that come out in the US, and I very much think about it from, are we making sure that we're keeping up with them, or the bank's keeping up with them? But there's also this international angle of, oh, if you're a bank or a fintech in Canada, you can also look and say, what are the best practices for AML programs and whatnot based on what the US is doing. So interesting point.

Crossing a border with a product always seems like a lucrative, interesting option. And then sometimes you get in the weeds, and it's maybe not so straightforward. What is it like for a fintech to expand into Canada?

Tal Schwartz:

I think there's some misconceptions about this. Canada, like I said, it's a fairly unique market. It's a big market, but it's not huge. There are about, whatever, 40 million people here. It's basically the same population as California. Imagine California was then split up into 13 different provinces and territories and you add two different official languages and two separate systems of law, actually two totally different systems of law, plus all of the market dynamics that we just talked about with huge amounts of bank concentration. You may think, oh, okay, maybe I won't enter California. That seems confusing and tough to navigate.

The misconception there being a lot of international companies look at Canada, like our stable economy, our stable financial system, our proximity to the US, and say, hey, this is an awesome pit stop on the way to the US. Often, that's fairly an unsuccessful approach to expand into Canada. My favorite example of this is Revolut. Revolut famously came to Canada. They're like, wow, this country's banking sucks. They pay such high fees. We're going to shake things up. They were unable, surprise, surprise, to receive a banking license domestically. Then in 2021, they packed up and they gave up.

The opposite of that, in the same year, you had a firm acquire a local buy now pay later called PayBright, which was the market leader in that space. That was an incredibly successful way to enter the market. The firm is now by far the market leader within that space. They've just acquired local licenses and local expertise.

I would say, to caveat all that, the exception to the rule, obviously, there needs to be an exception, and this is a newer one, Alan, which is a European health insurer, this year entered the Canadian market. It's the first new Canadian carrier to be licensed in the country. Do you want to guess how long and how many years?

Reggie Young:

Thirty years?

Tal Schwartz:

A little bit more than 30 years. 70 years.

Reggie Young:

Huh? Wow.

Tal Schwartz:

Isn’t that interesting?

Reggie Young:

That's crazy.

Tal Schwartz:

So it's possible.

Reggie Young:

That's interesting. I'm thinking about in the US, we have ILC bank charters, which Square got one. We really haven't had many since that. There was an initial bump and then quieted back down again. Now there's, I think, some growing interest in it. It's like, who knows? It could be the start of a trend. It could be a one-off based on the fact that they're a sophisticated existing business. But that's crazy.

Tal Schwartz:

It's really crazy.

Reggie Young:

What are some of the current Canadian fintech trends you're seeing?

Tal Schwartz:

I write about a lot.

Reggie Young:

Folks should go subscribe and then read the newsletter for a while.

Tal Schwartz:

Oh, thanks man. Yeah. Canadian Fintech Newsletter. My background is, as I said, in the lending space, so I have a little bit of a bias to pay a little bit closer attention to that industry. One trend that I've been tracking in Canada for a little bit is what I would describe as the verticalized integration of mortgage lending in Canada. Canadians love mortgages. We have some of the highest household debt in the developed world. About two to three-ish million mortgages are originated every year in Canada. Nearly half of that comes through the broker channel. So you're going to a brokerage, and they're placing you with a specific lender.

The way that a lot of newer lenders have entered the market in Canada is by first launching as a broker. If you're a broker first, you don't need as much capital. There are far less compliance requirements. It's a great opportunity to build a brand and build a platform without having to take on those burdens. Then eventually, you transition into direct lending. That's like Ratehub and nesto and Pine, all did that very successfully.

What those companies are now doing is going one level closer to the borrower. They're all either acquiring or starting up their own real estate brokerages, which I think is cool. In the last year, Pine acquired a company called Properly, which is a real estate brokerage. Questrade acquired a company called Zolo. RBC, which is obviously one of the biggest banks in Canada, acquired a company called OJO. All of these businesses are very, very similar. I guess what it's doing for the lender is getting them a little bit closer to a borrower before they even know that they need a mortgage, like when they're just perusing different houses on a listing site.

Reggie Young:

Right. That's fascinating. Kind of package the whole experience to be able to see the life cycle of somebody when they're starting to look versus when they've got the mortgage and are servicing it. Interesting.

Tal Schwartz:

Exactly.

Reggie Young:

I mentioned the mortgage broker angle is interesting, too. I imagine, starting from that place, you have a lot of really good visibility into what that market looks like, what the rates are, what dynamics, user behavior, and everything is. So smart strategy.

Tal Schwartz:

For sure. Yeah. Those are the profit centers for most of the Canadian big banks. Even if you go one layer away from the banks, when you look at the mortgage market, you have this class of originators and servicers called MFCs, mortgage finance companies, which is their own designation in Canada. Basically, they just pick up servicing rights from other originators and then sell the actual assets to the bank. There's two to three really big MFCs, and they're all partially owned by banks.

So you have this oligopolistic dynamic in so many different areas of Canada. I'm sure we'll talk about this more, but there's something about Canada that just sniffs out market leaders, I guess, like a winner-takes-all type environment. And so whether that's in the mortgage industry or in another niche credit segment, it's very common to have just one or two companies representing the lion's share of volume in a specific industry.

Reggie Young:

Interesting. Fun market dynamic. For the winners, it's fun.

Tal Schwartz:

Yeah, and really big opportunity for the fintechs as well.

Reggie Young:

Right. Totally. In the coming, I don't know, one to three years where you see some of the big opportunities for Canadian fintech founders, I imagine this might be a top of mind with the new fund.

Tal Schwartz:

Yeah, definitely. This is something we talk about very often with the fund. Maybe before I answer that, I'll tell you a little bit more about the reason why we created this fund in the first place. Through this newsletter that I write, I meet hundreds and hundreds of different fintech founders in the space. There's definitely a lack of early-stage capital going to those types of companies. And then at the same time, through that same network that we've built through the newsletter, I also developed amazing relationships with much more mature, exited founders as well. This fund itself is a combination of those two things. One, amazing deal flow and distribution to all the top minds within financial services in Canada, and also leaning on the expertise of these amazing exited founders to diligent companies and to mentor them and to help find the next generation of exited- or to drive the next generation of fintech exits in Canada. And so hence the name.

In terms of some of the areas that we're looking at, you'd be so shocked to hear that embedded finance is definitely a burgeoning area of growth within Canada and one that a lot of other investors are taking a look at. The history of the product suite in Canada is it's been very retail focused up until now. Customers, as they shop, are very familiar with- although they wouldn't call it embedded finance, they're very comfortable with the concept of embedded finance. I'll be talking about buy now pay later, receiving an embedded warranty or insurance product, a checkout where you're buying something, maybe buying travel disruption insurance when you're paying for a flight. There are big Canadian fintechs for those specific niches.

What we're starting to see now is going even more niche with some of these embedded fintech products. There's a company called Teal, which was recently, or a few months ago, acquired by Mercury, which is an embedded accounting platform. There's another cool one called OneVest, which is an embedded wealth management platform. You have the same thing happening for embedded loans, for embedded payroll. There are a few areas that I'm looking for players to emerge. It's definitely a really exciting area of innovation within Canada.

Reggie Young:

It makes sense. I think it's continued to be an area in the US for a while as well. There's a lot of niches you can go into with embedded finance still that are untapped. Cool. Is there anything you've been thinking about a lot lately that you think folks in fintech aren't talking about enough, could be Canada, could be general fintech, anything?

Tal Schwartz:

Yeah. I think what people love to think and talk about in Canada is the challenges that we face when trying to build big businesses here. We talked about a lot of them, this bank competition dynamic, the lack of an open banking framework. You have very fragmented regulatory regimes across the country, not very many sponsored banks. But what I think people don't talk about enough is why Canada is such an exciting place for fintech innovation right now. We have really amazing technical talent. We have some of the best universities in the world, a really strong immigration system. We are on the cusp of receiving regulatory clarity on a lot of these financial infrastructure elements.

Also rates in Canada are coming down way faster than they are in the States. We have these amazing tax incentive programs for engineering that takes place in Canada. It's the reason why a lot of companies set up offices in Canada is to take advantage of that. The obvious one is we have a massive financial services market here. It's actually one of the largest ones in the world. Larger players are the folks who are providing liquidity for the rest of the industry. They are the natural clients and acquirers of a lot of these fintech companies. As someone who likes to write about the industry a lot and now also is an investor in the industry, I see Canada actually as one of the most exciting places to be building in fintech in any market. And it's something that I don't think gets discussed too often.

Reggie Young:

Yeah, I love it, some of your comments around, oh, a lot of Canadian founders can look at the US for playbooks of what's worked well there that we could build here. Obviously, each country has its own idiosyncrasies, and things that'll work vary country-to-country. Yeah, exciting time for sure. 

Awesome, Tal. This has been a great conversation. If folks want to get in touch with you or find out more about subscribing to the newsletter as all of our listeners should do, or check out the new fund, where should they go?

Tal Schwartz:

You can find me on LinkedIn. I spend way too much time on LinkedIn. You can subscribe to the newsletter. It's called Canadian Fintech Newsletter. It should be an easy name to remember. And then the venture fund is called Exit North Ventures.

Reggie Young:

Awesome. Thanks so much for coming on and helping teach me and our listeners about the fintech scene in Canada.

Tal Schwartz:

Thanks so much for having me.