There are lots of innovative products and services being developed in Scotland’s fintech sector, from the borrowing platform created by LendingCrowd to the identity and data protection provided by Payfont through to the refinement of even smarter apps by the big high street banks.
But it’s something far subtler that has caught Lorna Finlayson’s attention.
“The word that jumps out at me whenever I think about fintech is ‘collaborative’ – that’s almost the most disruptive element in some sense, because it’s not about people sitting in silos working away on their own; by their very nature they’re collaborative people,” explains Finlayson.
“It is being said that fintech will democratise financial services. It’s very client-driven, with the product coming second.
“A key fintech objective is to widen the accessibility of the financial system.
“That’s one of the ways in which we see fintech start-ups interacting with the large, established financial services companies.
“The technology they are developing may be disruptive, but it’s also very collaborative. The big businesses that turn their backs on fintech will be at a significant competitive disadvantage.
“Fintech is going to touch most areas of financial services, so if they don’t embrace it then they are going to be left behind.”
Finlayson has first-hand experience of what it’s like to disrupt the world of finance. As company secretary at Direct Line Financial Services, she was at the forefront of pioneering the telephone-based services that have now become commonplace across the industry.
One of the ways in which large and small players in the fintech sector can collaborate is through established financial services companies supporting start-ups.
“A great example of that in action is Scotland’s first fintech accelerator, which Entrepreneurial Spark is opening at Royal Bank of Scotland’s Gogarburn head office this month,” says Chris Gotts, head of Burness Paull’s corporate finance division.
“Having an accelerator based inside a large financial services company gives the opportunity for budding entrepreneurs to gain access to the expertise of a larger firm, through mentoring and the interactions that come from sharing an environment like that.
“It also gives the start-ups access to a potential large customer and an environment to market test their products or services.”
It’s not just about big financial service companies supporting fintech start-ups, though.
Gotts is passionate about the need for advisers – whether they are lawyers or accountants or other professionals – to lend a hand, too.
He points to Burness Paull’s involvement with Aberdeen-based Elevator, the business support service covering the former Grampian and Tayside regions.
“We are working with several of the companies that have passed through Elevator’s incubator space,” Gotts adds.
“It’s about advisers taking a holistic approach and looking at the client’s whole business, and in our case more than just providing legal advice.”
Once fintech companies are past the start-up stage, access to finance becomes one of the major challenges that they face.
Gotts is optimistic about the funding landscape in Scotland, highlighting the role that high net worth individuals and business angels play in financing businesses.
He also points to the support available from the Scottish Investment Bank, the investment arm of public agencies Highlands & Islands Enterprise and Scottish Enterprise, especially through its co-investment fund, which provides capital alongside business angel syndicates and other partners.
“At the later stage, once a company is bringing in revenue, there is also development capital available from the likes of the Business Growth Fund and Maven Capital (including the Scottish Loan Fund),” he adds.
“Business angel syndicates are also starting to club together so they can invest alongside one another, which should help to plug the ‘venture capital gap’ – that space above around £2 million that used to be filled by venture funds.
“With London and the south-east of England being such a large financial services hub, it can be difficult to attract investors to Scotland.
“That’s why initiatives such as Informatics Ventures’ Engage Invest Exploit (EIE) event in Edinburgh this month and in London later in the year is so important.”
FreeAgent, the Edinburgh-based accounting software developer, joined the London Stock Exchange’s Alternative Investment Market (AIM) last November, which Gotts hopes will prove to be a milestone for the Scottish fintech community and which could lead to other businesses considering the capital markets as means of delivering funding and growth.
“Listing on the stock market isn’t just about the money you raise through your initial public offering (IPO) – it also gives you access to institutional shareholders that can help to fund your growth and gives you the ability to offer shares alongside or instead of cash when it comes to strategic acquisitions,” he points out.
“It also raises the profile of your business and brings it to the attention of potential customers, partners or acquirers.”
Outside the fintech space, Gotts believes the acquisition of Sky- scanner by Chinese peer Ctrip for £1.4 billion in November 2016 will raise the profile of the wider digital technology community in Scotland, which he hopes will bring further investment and other benefits.
Disruptive technology such as peer-to-peer (P2P) lending and crowdfunding not only creates challenges and opportunities for players within the financial markets but also shines a light on the need for robust regulation.
Finlayson praises the work that the Financial Conduct Authority (FCA) has carried out to engage with fintech firms.
“The FCA’s response to the wave of fintech developments has been its Project Innovate, promoting disruptive innovation which provides competition to established models and offers new services.
“One manifestation of this is the world’s first regulatory sandbox, where both start-ups and established firms can road test new products in a safe space – helping these new models get to market and at the same time allowing the regulator to gain a better understanding from which to develop its own regulatory framework to meet the challenges of new technologies.
“The concept of regulation technology or ‘reg-tech’ is also music to the regulators’ ears because software is being created that will not only help companies to monitor their own internal compliance regimes but also provide the details needed for more accurate regulatory supervision.
“A lot of the focus on fintech has been on the customer-facing elements – such as apps and websites – but there’s also a lot of excellent work going on in Scotland when it comes to the ‘back office’ functions, like making the internal processes more efficient and improving the infrastructure behind the technology.”
With all this technology comes concerns about the security of valuable customer data.
If companies get their data compliance wrong then the penalties can be severe. At present, the Information Commissioners’ Office can level fines of £500,000 for data security breaches – but this figure is due to rise to €20m (£17m) or 4 per cent of turnover when the European Union’s General Data Protection Regulation is introduced in January.
But Scottish companies are rising to the challenge. “I’m blown away by some of the technology being developed to keep clients’ data secure,” admits Finlayson.
While Scotland is undoubtedly gaining a reputation as a fintech hub, both Finlayson and Gotts highlight the strong competition that’s coming from other locations, including traditional international financial services rivals such as Frankfurt, London and New York, alongside emerging fintech centres such as India, Ireland and Israel.
Yet they believe Scotland has both a strong ecosystem – made up of companies, public agencies and universities – and many historic strengths.
“It goes back to that question about ‘What is fintech?’ because it’s a relatively new badge,” says Gotts.
“Scotland has always been strong in financial services, while fintech is an emerging sub-sector of the digital technology sector with a truly global reach.”
“Bringing the two together provides a really strong platform – that’s why everyone is so excited about it, and that’s why businesses and business leaders in Scotland must act now to harness the incredible potential of fintech.”
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