This is the first story in a series on Canada’s fast-growing financial services industry, which helps build Canada’s export strength and global competitiveness. Upcoming stories will focus on the role of financial institutions, as well as the challenges and opportunities for Canadian companies.
When most people think of Canada’s top exports, commodities come to mind. Yet, one of Canada’s largest and fastest-growing exports is financial services.
More than half of Canada’s outward foreign direct investment (FDI) is now attributed to the financial services sector, up from 46 per cent in 2005. At $537 billion in 2015, Canada’s stock of financial services outward FDI more than doubled since 2005 and is now more than twice as large as our inward stock. In other words, Canada is a large and growing net provider of financial services to the world. Between 2005 and 2015, total exports of financial services more than doubled, reaching $11.7 billion in 2015. In fact, financial services are Canada’s largest and fastest-growing source of services exports.
“One of the great Canadian export success stories is our financial services industry,” says Janet Ecker, president and CEO of the Toronto Financial Services Alliance (TFSA).
“Our major players are growing global companies that happen to be headquartered in Toronto … It’s a good news story for Canada.”
This growth has enabled Canadian financial institutions such as banks, insurance companies, and pension funds to expand their international footprint, providing employment and economic opportunities abroad as well as back home. The financial services sector accounts for about seven per cent of Canada’s gross domestic product (GDP) and approximately 780,000 jobs.
“Investment abroad is clearly an important strategy for many financial services firms,” the C.D. Howe Institute wrote in a report, Opening up New Trade Routes for Financial Services: Canada’s Priorities.
The report also notes that financial services “figure prominently” in major trade and investment agreements involving Canada, such as the Comprehensive Economic and Trade Agreement (CETA) with the European Union and the (now dormant) Trans-Pacific Partnership (TPP).
“Domestically-based firms that engage in this strategy typically do so because it is essential to maintain their global competitiveness – without which even their domestic operations would be at greater risk of being weakened. In such cases, the ability to trade or invest across borders is complementary to a domestic growth strategy, not a substitute for it,” the report states.
Canadian firms’ share of the global financial services landscape, at 4.5 per cent, is now almost twice the share of Canada’s GDP in the global economy, which sits at 2.5 per cent.
“This is all the more remarkable given the substantial drop in the share of the value of financial services firms headquartered in other G7 economies,” the C.D. Howe Institute says in a report, Play from Strength: Canada’s Trade Deal Priorities for Financial Services.
New technologies, the need to facilitate international financial transactions due to increased globalization, and growing trade liberalization are all helping to support international growth of financial services, notes a Conference Board of Canada report, Going Abroad: Examining the International Footprint of Canada’s Financial Services Sector. It says cross-border trade and commercial presence are the two most common ways for financial institutions to participate in trade.
“Financial services such as insurance, banking, securities trading, and portfolio management are becoming increasingly tradable in the modern economy,” says the report, conducted in partnership with the TFSA. “The act of providing financial services to customers outside of an institution’s home market is now well established and continuing to expand.”
Challenges to global expansion
Despite their heft, like all businesses Canada’s financial services firms face challenges when expanding internationally. Among other hurdles, firms must navigate regulatory barriers, access top talent, and face competition both at home and in other countries, including upstart financial technology (fintech) start-ups that are looking to “democratize” financial services.
Often topping the list of challenges, financial services companies have faced more strict regulations and risk management protocols introduced in the wake of the 2008-09 global recession. The industry is now anticipating Basel 4, the newest standard on capital reserves for banks to try to protect themselves against the risk of financial crisis. That will include more stringent capital requirements and greater financial disclosure. Companies are also working with increasingly tight anti-money laundering and anti-terrorist financing standards to help reduce crime in the system.
Meanwhile, so-called fintech firms are also disrupting the market with a software-based promise to simplify saving, borrowing. and investing for consumers, particularly technology-savvy Millennials. In Canada, some examples of successful fintechs to date include Wealthsimple, Overbond and Mogo. In response, many traditional financial services companies are working to establish their own fintech divisions, or partnering with new players, to stay on top of the sector’s unstoppable growth.