Back in 2008, a paper appeared on the internet under the pseudonym of Satoshi Nakamoto, proposing a “peer-to-peer” electronic cash system dubbed bitcoin.
The plan was for a “cryptocurrency” that would enable transactions over the internet without using a bank as an intermediary, and part of the proposal was the use of what has become known as blockchain – a technique for proving ownership and that contracts have been enacted over time, explains Peter Ferry, co-founder and commercial director of Edinburgh-based start-up Wallet.Services.
It’s going to touch many aspects of business, government and society in ways that will make quite profound changesPeter Ferry, Wallet.Services
“It makes those a matter of unchangeable or immutable public record,” adds Ferry, a former market development manager for Scotland at technology giant Microsoft. “It’s open to everybody and the side effect is that it has cut out the middleman when transferring value over the internet.”
He adds: “It sounds really simple but it’s beautifully profound. If you can cut out the middleman, you potentially transform the way money behaves, and perhaps even all sorts of other interactions in life.”
Ferry believes the technology could be rolled out to other walks of life, such as securing health records – as is currently happening in Estonia – or registering property sales. “That’s at least as big an impact on society as the impact of blockchain on financial services. We believe that in the next three to five years it’s going to touch many aspects of business, government and society in ways that will make quite profound changes.”
High-profile hacking scandals like the leaking of athletes’ medical records from the World Anti-Doping Agency have highlighted the ever-present threat of cyber attacks, but Ferry believes blockchain is potentially more secure than traditional online systems precisely due its “open and democractic” nature.
“It’s fair to say that regulators around the world are running to catch up and to undertand how cyber-currencies can be managed in the context of regulatory frameworks. In the meantime, there are a lot of companies and individuals out there innovating and working out how they can use these currencies to remove latency in the financial system, boost economies and create jobs.”
Although financial technology – or fintech – has huge potential for Scotland in the years ahead, academics at the University of Strathclyde have warned that failing to adopt the latest innovations could lead to the loss of 14,000 jobs and £635 million in wages.
Last year saw £10 billion invested in fintech start-ups globally and Daniel Broby, director of the university’s Centre for Financial Regulation & Innovation, has predicted that the sector has the potential to create nearly 15,000 jobs in Scotland over ten years.
Wallet.Services, based at the CodeBase technology incubator, is developing the infrastructure to help governments and businesses adopt blockchain more widely and Ferry says the start-up aims to build a “global business rooted in Scotland”.
Likening the emergence of the technology to the rise of social media and the dominance Amazon has built up in the global retail market, he says few people outside the “techies” in the blockchain community realise how radical the shake-up could be.
However, when asked to predict one key development that will revolutionise the finance sector, Graeme Jones – chief executive of trade organisation Scottish Financial Enterprise (SFE) – points to blockchain.
Jones tells The Scotsman: “It’s a process where value is transferred at the speed of light but you don’t need papers to substantiate it. There’s no custody or settlements departments or share certificate exchanges.
“The combination of blockchain technology and better communications is creating an environment where it can mature very rapidly. You could even buy and sell houses with blockchain.”
Scotland, and Edinburgh in particular, is often hailed as a success story in terms of its technology sector and start-up culture, helped in no small part by the quality of its higher education establishments, but Jones says there are lessons to be learned from elsewhere.
“The big hubs that we’re competing against are the likes of Berlin, Paris, Manila, and Copenhagen and Stockholm are also positioning themselves in the fintech space because that creates a ‘halo effect’. For a lot of modern cities, it makes so much sense to sell the fintech brand and show they’re capable of transformation and innovation.
“In Scotland we have tremendous diversity in our financial services sector, but we probably haven’t had a global-facing overarching strategy for fintech. If you were parachuted into North America and asked if they though Edinburgh was a fintech hub, the answer at the moment would be no. We don’t shout about it enough but we need to project ourselves out there as a really fantastic place to come and do business.”
Ferry adds: “My word of warning would be that the Scottish Government needs to get its head around this technology and start to move more quickly. With everything that’s happening around Brexit, our relationship with the rest of the UK and talk about currency in Scotland, we could do something really interesting with this technology and steal a march on the rest of the world.”
Banking on a fintech revolution
SFE recently established a “young professionals” group, which last week held its first event at Standard Life House in Edinburgh, with more than 100 industry figures – including Patrick Eltridge, chief information officer at Royal Bank of Scotland and Phill Gillespie, chief product officer at personal finance software developer Money Dashboard, discussing how fintech can disrupt the financial services arena over the coming decade.
French IT services group Sopra Steria, which employs more than 5,000 people across the UK and has offices in Edinburgh and Glasgow, has just joined SFE, which Jones says reflected the growing importance of data science to the finance sector.
“All the big banks and asset managers that have retail businesses absolutely require it,” he adds. “They’re using predictive analytics and ‘big data’ to know who their customers are what services they might be looking for. It’s often called ‘next best action’ and it does away with those annoying mailings trying to sell you another credit card or travel insurance when you don’t want it.”
Jones is also due to meet representatives from Swiss banking software developer Avaloq, which has a growing presence in Edinburgh, to talk about fintech and SFE’s efforts to position the city as a global hub.
One of the most tangible effects technology has had on the finance sector is the drop-off in the number of customers using traditional bank branches as they shift more transactions to the internet. Clydesdale’s owner said last week that it would be closing about 50 more branches, while Bank of Scotland last month announced 23 closures “because of changing customer behaviours”.
Jones says: “Busy branches will stay open, but it must be soul-destroying to work in a branch with no customers. It’s the end customer that’s driving these changes. There’s no question of the banks doing away with branches altogether – they’re a very important asset – but they need to make sure they have branches in the right locations.”