Over the last year Scotland and the wider world have been experiencing uncertain economic and political times, but fintech is a sector that seems to be thriving. As more start-ups appear, Scotland’s fintech ecosystem has been praised for providing a secure framework for growth.
Oli Henderson, partner who leads EY Scotland’s financial services strategy and transactions practice, says: “There is really strong momentum. Nearly five years on since FinTech Scotland started as a clustering organisation to promote the fintech ecosystem, we’ve seen growth across a number of areas. When it started out, there were about 30 fintechs in Scotland, and now we have over 200.
“Scotland is now the third-biggest fintech hub in Europe, after London and Berlin. We’re in a good place and there are strong plans to take that further.”
Scotland has gathered a reputation for having a supportive ecosystem for fintechs. Henderson says: “Something we have in Scotland as a differentiator is the accessibility of support. You have universities with leading fintech-type courses and there are a number of large financial institutions based here, including the likes of Lloyds, TSB and Phoenix, that have established innovation labs to support fintech growth and collaboration.
“The Financial Conduct Authority [FCA] has a material presence on the ground in Scotland, which means fintechs can test their products and form a good dialogue with the regulator.”
Many Scottish financial institutions have collaborated with fintechs to help them launch and grow. “Innovation labs are a good indicator of collaboration. It’s key that this collaboration continues and that is, in part, a key focus of the Fintech Research And Innovation Roadmap, launched by FinTech Scotland this year. There is fast change in financial services which means older financial institutions need to keep collaborating with fintechs to keep pace in order to best serve its customers, whether it be through open banking, innovating products, or online identification,” says Henderson.
EY FinTech Lab
Mark Jannetta, EY UK fintech lab director, recently joined from Barclays where he headed up its fintech venture studio and is well-versed in the opportunities and challenges for fintechs. At EY, he is looking at how fintechs can be better supported through longer-term relationships.
He says: “We want to be focused and thoughtful in terms of how we deepen our engagement with tech firms. We want to be embedded to better understand their needs and help directly support their success on a day-to-day basis.
“The lab launches in London in Q1 next year, with its first thematic focus being financial crime. A number of really high-calibre companies applied and we have been looking at where there are opportunities to collaborate. Each three-month season, we’ll bring in about three to four fintechs where we can add value and help better position their propositions with end clients. The first physical lab is in Canary Wharf, to be followed – in quick succession – by a second site in Edinburgh.
“The lab is looking to build an ecosystem of people that are relevant to fintechs and get them in front of the right groups, such as connecting them to venture capitalists.”
Henderson says: “The funding story for fintechs has been – and continues to be – a challenging one at certain stages of the scale-up cycle. There are lots of good grants accessible through the likes of Scottish Enterprise which we have seen benefit a number of early-stage fintechs. But the question, which is similar throughout the UK, is around dealing with the next growth stage of development funding to help fintechs scale up to the next level, which can then take the interest of private capital investment pools.”
Henderson adds that during the pandemic period, fintech mergers and acquisitions kept him busy. “During that time, fintech products and solutions were in more demand as consumers had moved online. We saw a huge amount of investment going into fintech at this stage and this trend has continued,” he says.
Within the fintech world, areas such as payments and regtech have been attracting significant interest and investment, with funding coming from private equity in the UK, Europe and US, according to Henderson.
Crypto currency and digital assets
Laeeq Shabbir, director at EY, explains that blockchain and digital assets is an important topic of conversation for fintechs in Scotland.
There has been concern about digital assets following recent negative stories. Shabbir says: “The FCA had taken some steps, such as its Crypto Sprint in London, where they got prominent digital assets players to work out how to move the regulation forward. Furthermore, it was recently reported that the UK Treasury is finalising plans to further regulate the digital assets industry.”
He believes fintechs operating in crypto and digital assets now need to focus on building trust by focusing on the things that matter, such as overall governance, risk and controls, segregation of customer assets or tax.
Looking ahead to 2023
“Payments and regtech will continue to be important fintech products for financial institutions to support them in serving their customers needs. Businesses in these areas are really scaling up and will continue to do so,” says Henderson. “The FCA’s new consumer duty rules are also a huge opportunity for fintechs that can support firms to deliver good outcomes for their retail customers.
“Fintechs are also well-placed in the increasing focus on ESG reporting. They have the ability to analyse large amounts of data to help businesses and customers assess their ESG impacts.”
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