How Scotland's fintech businesses have managed to thrive despite pandemic challenges

David Lee finds fintech businesses have managed to grow and thrive during the pandemic, forming partnerships to find solutions to the challenges that arose.

David Lee on how Scotland's fintech sector has managed to grow and thrive despite the Covid-19 crisis.

Dedicated followers of fintech and sharp-eyed readers of Fintech Focus will notice a difference in the updated image reproduced above.

In previous editions of this annual supplement, the graphic has been represented as a semi-circle. This year, the number of fintech businesses in Scotland has outgrown the semi-circle and become a virtuous circle of growth.

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The number of fintech businesses in Scotland has gone up from 33 in May 2018, to 89 in May 2019, and to 143 now, with a pipeline of new firms suggesting the 150 landmark will be surpassed very soon.

By any standard, that is some achievement. In the year of a pandemic, where all businesses have faced enormous and unexpected changes, it is outstanding growth. Should we be surprised? Perhaps not. The pandemic threw up huge financial challenges which needed to be addressed at speed.

Cash transactions plummeted, digital engagement with banks soared and huge sums of money had to be moved online extremely quickly.

Technology allowed society to deal with the crisis in a way that would have been unthinkable even a decade ago – and fintech businesses were at the heart of that response as they identified problems and found solutions.

Existing projects were accelerated, solutions to previously-unseen challenges devised and new partnerships forged.

Arguably, the year of the Covid-19 pandemic was when the fintech community came of age, with Scotland playing an increasingly high-profile role. And it is a community that will be crucial as we plot an economic recovery from the pandemic.

Scotland’s recognition as a fintech cluster of excellence in January (only the third in Europe, and the UK’s first) was a sign of strength, breadth and confidence. The confirmation, in June, that Edinburgh would host the Global Open Finance Centre of Excellence (GOFCoE), was another.

Yet the resilience in the face of the pandemic is what has really characterised the sector in 2020.

As Stephen Ingledew, chief executive of umbrella body FinTech Scotland, says: “The burning platform of Covid-19 accelerated the shift to a digital financial world and has clearly benefited fintechs.

“We have many small fintech businesses who have got great ideas, but they need the bigger financial organisations with the challenges that their innovation can solve.

“Some fintechs have developed ideas to new problems; others have adapted their offering to reflect changing circumstances.”

In the three months to May 2020, the number of fintech businesses in Scotland increased by 11 per cent – a net increase of 13 businesses at the height of a global pandemic. Another 12 fintechs were at the prototype stage, with two further potential international fintech arrivals.

Ingledew is far from complacent about this growth. He says: “We’re always aware of the challenges for businesses and they are obviously heightened as a result of the pandemic. We never paint an ‘everything is rosy’ picture, but you cannot help but be positive when you look what’s going on.”

He highlights businesses raising serious money, like Nude, which aims to make first-time home buying faster and easier. It hit its initial equity crowdfunding target of £3.5 million last month. Meanwhile, cryptocurrency pioneer Zumo opened a funding round on the same platform (Seedrs) in August. And business payments specialist Modulr, which employs 200 people in Edinburgh, announced in May that it had raised almost £19m.

There are also market disruptors and innovators coming into the market, such as One Banks, which might be described as a “back to the future” fintech. It offers face-to-face banking services in communities where traditional bricks and mortar branches have disappeared, by making services available to customers of all major banks in a single location.

“This is where FinTech Scotland’s Consumer and Citizen panel has really paid dividends, in terms of giving those without banking services a voice,” says Ingledew.

Big banks’ support for fintech in Scotland generally has been crucial to progress, he says: “We started off with Lloyds and HSBC as strategic partners and now we have all the big banks. They are all happy to be part of a big collaborative endeavour, under a shared umbrella.”

He adds that this umbrella was important in delivering GOFCoE to Scotland: “It’s the first Innovation UK funding of fintech in the UK and the fact it landed in Scotland is significant. They could see we had that industry-led approach and deep collaboration between academia and small and large businesses.

“Moving from open banking to open finance should see the fintech community grow as we bring insurance, pensions and asset management under the umbrella. That could help deliver more large strategic partners in the insurance and asset management space.

“GOFCoE allows us to roll out more research and innovation in part of the fintech community, but we want to do it in other areas too, to build momentum and unlock the creativity of fintech in Scotland. We want to deepen partnerships between government, industry and academia like Scotland has done in areas like life sciences and advanced manufacturing.”

Fintech is tightly interwoven with the data community in Scotland and they support each other’s growth. “Fintech has a more specific identity, while data applies across all types of innovation,” says Ingledew. “There is really interesting cross-fertilisation going on. Bellrock Technology in Glasgow, for example, was effectively ‘energy tech’ but is now applying its technology to financial services, and the common theme is data.

“You also have firms like Nuvven using fintech and data to look at the car rental and insurance market, making the whole process simpler and more efficient.”

Ingledew is excited by the number of fintech businesses collaborating as the community grows: “FNZ [the investment platform specialist] is investing in other businesses and the likes of Soar and Zumo are working with Modulr.”

Fintechs are also coming to Scotland in the wake of “unicorns” like FNZ. Between April and June, Access Fintech (risk management in trading) arrived from the United States; Montoux (a New Zealand-based platform to improve life insurers’ business performance) set up its European HQ in Scotland, and Fast PAYE, which allows employees to access wages when they earn them rather than waiting for a monthly payment, came from London.

However, it’s not all rosy. In a recessionary economy, all small businesses face challenges around cashflow, market access and more. As Oli Henderson of EY says, investment money is out there, but investors are waiting to deploy it wisely. There have been fewer inward investment inquiries during the pandemic, and firms cannot attend trade shows or meet clients abroad to grow markets.

Lest we forget, the end of the Brexit transition period is only 112 days away, adding further business uncertainty to the unknowns of a post-pandemic world.

As Callum Sinclair of Burness Paull says: “The aftermath of the pandemic and then Brexit means we will have a tough couple of years ahead. Opportunities are out there, but it will be hard going.”

However, Scotland’s fintech community will not stand by and wait to be buffeted by economic headwinds. Having achieved its bronze accreditation from the European Secretariat for Cluster Analysis, it is going, not for silver, but for gold.

As open finance opens new doors, the number of fintech businesses in Scotland looks sure to continue to rise.

To misquote Chief Martin Brody, as played by Roy Scheider, in the movie Jaws: “We’re gonna need a bigger circle.