The Era of Disruption

Dr. Kevin LynchVice-Chair BMO Financial Group

andFormer Clerk of the Privy Council and Cabinet Secretary,Government of Canada

FinTech Workshop, Competition Bureau of Canada

Ottawa, CanadaFebruary 21, 2017

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

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

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

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 scaleand 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

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

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.

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

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

Accessto capital

Lack ofstart-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?

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

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’sfirst technology supercluster

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 innovativefinancial services sector. The global financial crisis

demonstrated Canada is capable of global regulatory excellence and leadership.