As the world moves towards economic recovery, now is the time for Canadian financial services to consider their global market prospects
By Roy Farah
Canada is now grappling with a second wave of the COVID-19 pandemic. Stability will come, as it did after numerous major global economic downturns in years past. However, the question that the Canadian business community should be asking itself is the following: “How can we move from survival mode to growth mode once the pandemic is behind us?”
The answer may lie in switching from our historical reliance on trading raw materials to trading in digitally delivered services. According to our recent report in partnership with Oxford Economics, The Global Services Trade Revolution, global trade in services has now surpassed the global trade in goods, with services contributing to over half (55percent) of all global trade flows, amounting to $13.7 trillion (US) of cross-border transactions in 2019 alone.
Canadian financial services, such as those offered by financial institutions and our emerging FinTech ecosystem, appear well positioned to gain further appeal abroad given increasing support for cross-border flows of financial services among corporations. These services are also gaining more popularity within the retail space, as customers continue to embrace the convenience offered by these online tools.
While cross-border flows of financial services are likely to endure some damage from the economic downturn, increased adoption of digital financial services and products should bolster longer-term growth, making this economic recovery period the opportune time for Canadian financial services to explore new markets for their products.
Tapping into the global market for Canadian financial services
The ongoing digitalization of work practices will likely reshape nearly every industry in the post-pandemic era, while increasing investment in enhanced fibre broadband coverage and the rollout of 5G networks promises to supercharge the tradability of a broad range of professional services. As a result of these trends, digitally deliverable financial, B2B and ICT services are expected to contribute nearly two-thirds (62percent) of the expected $1.9 trillion increase in the value of overall services trade between 2019 and 2025.
Moreover, digital services are proving to be more resilient during the global COVID-19 crisis than trade in goods. It’s estimated that the value of cross-border flows of financial, B2B and ICT services will decline by only around 6percent in 2020, compared to a slump of 18percent for total services trade and an estimated 13percent decline in the value of goods trade. Longer-term, the crisis has introduced new cohorts of SMEs and consumers to online financial services, setting the foundations for more rapid growth.
Domestically, a Conference Board of Canada report from 2016 found that Canada’s total exports of financial services more than doubled between 2005 and 2015, reaching $11.7 billion in 2015. This growth is expected to continue, with our global trade services report indicating that Canadian financial services exports are expected represent around 10percent of our growth in services exports between now and 2025.
Looking abroad, it’s possible that Canadian financial service institutions can see an increased appetite for their offerings coming from emerging and developed economies alike. As countries in parts of the world such as Latin America and Asia advance and grow their industrial base and become more integrated into global supply chains, the demand will increase for financial services to help to facilitate business development, transportation, logistics, marketing and other services required to grow international trade in goods.
Unlocking global growth through digital transformation
Only a few decades ago, much of the service sector was considered to be “non-tradeable” because it was assumed that most services required face-to-face interaction. This is still true for certain service activities, such as childcare, taxi driving or hairdressing. But digital technologies, especially the development of broadband networks and video conferencing, have significantly reduced the need for physical proximity for a wide array of service activities.
Looking at our own infrastructure, Canada and its businesses are primed for mass digital transformation. Major telecommunications providers in Canada like Rogers recently expanded its 5G networks to additional cities and towns across the country, and a recent IDC/SAP survey showed that during the pandemic, more Canadian companies invested in digital than not – of the 371 organizations that were surveyed, 64 percent indicated that they either maintained or increased their spend on digital.
As mentioned above, with the proliferation of digital transformation, geographic location has become less and less relevant, allowing businesses to have a larger international footprint. This is a huge benefit for Canadian businesses, as it allows them to diversify well past the 49th parallel.
Act now, reap later: how Canadian financial services can be set up for global success
As the global pandemic radically — and rapidly — alters business models, firms that lacked digital agility are now rapidly retooling, and this will continue to be the benefit of financial services given the need to achieve growth in commerce. This new mindset will further stretch and redefine applications of digital technology, opening more doors for Canadian financial services to make gains both domestically and aboard.
With customers increasingly willing to conduct transactions with foreign providers of financial services, Canadian policymakers and regulators will need to recognize the economic and trade potential in expanding the market for these services outside our borders, and ensure there are more pathways available to set financial service firms up for global success.
Roy Farah is Head of North America, Western Union Business Solutions