Scotland’s fintech sector in buoyant shape in 2019

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With heightened international interest in home-based firms, the sector is on a roll, says David Lee.

Fintech can never be purely a numbers game, however significant big data might be to its growth, but fintech infographic arc tells an important story.

The infographic features 89 Scottish-based businesses classified as fintechs – compared to just 33 in our fintech supplement this time last year. That is impressive growth by any standards.

“The presence of fintech in Scotland has been established and has real substance,” says Stephen Ingledew,chief executive of FinTech Scotland. “We will have 100 fintech businesses in Scotland very soon. There is a real breadth to the agenda which has extended opportunities in Scotland.

“We have created a community of firms, with older and newer businesses coming together in a wider, very supportive and very innovative environment. That is attracting others who want to be part of it.

“Start-ups are coming here from other parts of the world, while other firms are evolving to play more of a role in financial services.”

Stephen Ingledew. Picture: John Devlin

Stephen Ingledew. Picture: John Devlin

Ingledew highlights B2B (business-to-business) payments specialist Modulr, which moved to Edinburgh with one person and now employs more than 40. Previse, a specialist in speedy payments to business suppliers, has created similar job numbers after bringing an office to Glasgow in late 2017, while Encompass set up its first office outside Australia, also in Glasgow, to develop its smart KYC (Know Your Customer) software.

There have been significant milestones over the last 12 months, notably Nucleus Financial listing on the Alternative Investment Market (AIM) last July and Edinburgh-based FNZ – which provides technology platforms to the likes of Standard Life Aberdeen, Santander and Lloyds Bank – being valued at £1.6 billion after changing hands in October.

The acquisition of Castlight by Experian just over a year ago was another significant deal, which was followed by others, including Californian cybersecurity giant Fortinet acquiring ZoneFox last October.

“These are big stories, which show that more and more Scottish fintechs are becoming money making ventures,” says Graeme Jones, chief executive of Scottish Financial Enterprise (SFE) and a major motivating force within the fintech revolution.

Ed Molyneux.  Picture: Contributed.

Ed Molyneux. Picture: Contributed.

He adds: “There are different paths, and acquisition by a larger business – as we have seen with Castlight, ZoneFox and, of course, FreeAgent – is one of them.

“FNZ has remained independent and the message is to keep going if you want to, but if your model suits being acquired, that’s a good path too.”

Smaller home-grown companies, such as ShareIn, Broker Insights and many more, are starting to motor, while Jones also sees “colossal potential” for back office jobs in large financial institutions in Scotland.

Barclays announced last year that it plans to bring its technology, functions and operations teams to a new campus in Glasgow, doubling its current workforce in Scotland to 5,000. “Similar stories will emerge this year which are very substantial,” adds Jones.

Skills

The SFE chief recognises the talent challenge of having enough people to fill new and constantly evolving fintech jobs. And academia is rising to the challenge, with MSc courses in fintech starting at both Edinburgh and Glasgow universities in September to add to existing qualifications offered by Stirling – and Strathclyde, which will welcome its third fintech cohort this year.

However, upskilling the existing financial services workforce is a far bigger challenge. Research suggests that only 5 per cent of almost 100,000 people employed in financial services in Scotland have the data and tech skills needed to thrive in the next generation. The universities will take that to about 7 per cent, but there’s still a huge job to do.

Another serious challenge for fintech is funding. Jones recognises this, but thinks things are getting better: “Proving the commercial strength of a new product can take a long time and lots of money. That’s where venture capital comes in; if you need 18 months to get it to market, then you need someone to provide patient capital.

“That was a very difficult situation in Scotland two years ago but it’s a lot better now.”

Allan Leal, banking partner with Burness Paull, says there are still challenges: “Many fintech businesses look to offer solutions to problems in the lending sector, but one problem they often face themselves is accessing funding from that same sector to allow them to grow and scale up.

“The problem is around financing companies ready to make the jump. Start-ups have a wealth of funding options but regular lenders, especially high street clearing banks, are wary of supporting fintech unless it is small start-up loans, or once they have healthy balance sheets and turnovers in the single-digit millions.

“What makes lenders uncomfortable is often that mid-level where business are getting towards their first £1m turnover year but have no real assets to offer the lender as security. The risk is therefore higher. Innovative solutions around allowing lenders to use and beta-test products for free – or at reduced cost – in exchange for investment can potentially sweeten the deal, but are more likely to appeal to VC, angel or corporate investors than the high street banks.

“In Scotland, of particular note in the VC arena is the Scottish Investment Bank, and Business Growth Fund. Crowdfunding is also becoming more popular with a number of fintech businesses, Revolut or 
Monzo for instance, having used combinations of these types of funding.”

Stephen Ingledew insists things are improving: “We’ve had various sessions with funders looking for investable propositions and appointed Vivolution in Glasgow as a network integrator to help firms navigate that.

“One of our roles is to help fintech businesses present themselves as investable. It’s not simply supply and demand, it’s how we bring them together so it works for both parties.”

Another vital connection – and arguably the key to fintech success in Scotland – is the link between young fintech businesses and established financial services institutions. To get to market, young fintechs often require the large institutions to adopt or adapt their technology or solution – but it is not always an easy path. The significant practical problems of ‘plugging in’ new technology to legacy systems is underpinned by deeper cultural barriers.

“Most fintechs are set up to solve customer problems and most long-standing financial services firms have never had that at the heart of their DNA,” says David Ferguson, chief executive of Nucleus Financial and Chair of FinTech Scotland. “My real frustration is that all large financial services CEOs talk about fintech, but it isn’t a strategic priority in established businesses.

“How do we catalyse the connections between start-ups and more established businesses, and how can fintech help them reinvent and re-engineer themselves for the future?”

Ingledew admits the pace of change needs to pick up: “There is always an impatience to go faster. Do the larger institutions want to move faster? Yes. Should there be more practical engagement with young fintechs? Yes. This will be a big focus over the next 12 months.”

Collaboration

Ingledew names Lloyds Banking Group, Baillie Gifford and Prudential as three institutions leading the way on routes to market for young fintechs. “It’s about deeper collaboration with emerging businesses, not just in terms of technology but human relationships. It’s not just a traditional supplier relationship, but something more fundamental.

“It’s about working with younger businesses to identify a specific challenge, then co-creating a solution. It’s a very collaborative model and not always easy for big companies to embrace. What small firms have might not quite fit what a big company wants, but co-creation can allow experimentation to deal with problems and challenges.”

Georgina Bulkeley, RBS director of strategy and innovation for retail banking, and a member of the FreeAgent board, agrees: “I think competition from young fintechs is healthy and encourages incumbents to sharpen their game and enter into partnerships. No organisation has all the answers.”

This cross-fertilisation of old and new businesses in Scotland – in what might be called a managed ecosystem – offers opportunities for young fintechs to be what they want to be.

“Scotland’s fintech community will never be as big as London’s but we’ve created an ecosystem where diverse businesses take different paths that suit them best,” says Ingledew. “They might set up an office here and grow, like Modulr, be taken over by bigger players, like FreeAgent, Castlight or ZoneFox, or grow organically then go to market like Nucleus.

“It’s also a great place to go out to other markets; firms like The ID Co and Float have more than 50 per cent of revenue coming from overseas.

“There is a level of vibrant activity but still big challenges, especially around routes to market, commercialisation and cashflow. If you can get that route to market right, funding will come your way because 
people will see you have an investable business. That’s where leaning on the ecosystem comes in.”

No new fintech rankings have come out since Scotland was listed 15th in the global ‘charts’ – and although Ingledew has targeted an ambitious top five slot, he is not too hung up about that. “It’s really got to be about outcomes,” he says. “We are not in competition with London or New York, we have to be able to offer something different and it’s all about connections and acting together. The cake is big enough for everyone.”

Ingledew says there is undoubtedly growing international focus on fintech in Scotland: “We are gaining credibility and the momentum has gathered pace in 2019. There is a real interest in Scotland as a place to base a fintech because it has a ‘village’ feel, a sense that everything is easy to navigate.

“Fintech businesses are attracted by what we are doing and how we are doing it – linking up data, open finance, academic quality, small businesses, large financial institutions and the consumer voice, backed by a very supportive Scottish Government.

“We have got real momentum, which is great – but it’s almost impossible to keep up,” Ingledew adds. When even he admits to this struggle, something really special is clearly happening.

Maintaining the momentum won’t be easy, but to paraphrase from Jaws: “In 2020, you’re gonna need a bigger info-graphic.”

Going for GOFCGO

Finding that USP in a competitive global fintech environment is a challenge, but open banking – or open finance – has emerged as a key theme. The Global Open Finance Summit in December 2018 at the McEwan Hall in Edinburgh put a strong flag in the ground.

“It put Edinburgh on the map as we had regulators and interested parties from across the world,” says Stephen Ingledew, chief executive of FinTech Scotland. “It was hugely successful and it’s coming back for 2019. All the global partners want to come again and it will be bigger.”

Scotland wants to build on this by bringing GOFCOE (Global Open Finance Centre of Excellence) to Edinburgh.

An important milestone was passed in March when the project – a collaboration involving FinTech Scotland, the University of Edinburgh, Scottish Enterprise and the Financial Data And Technology Association –
went through to the next round of Strength In Places, run by UK Research and Innovation to create innovative sector hubs.

The next submission, in September, will determine whether GOFCOE is awarded £20 million to develop the project in Edinburgh.

“The very positive feedback was based on us creating a strong consortium and putting a focus on social outcomes,” says Ingledew.

“GOFCOE would give us a more formalised structure for innovation using data, which is more and more important to Edinburgh and Scotland.

“It’s data analytics and AI that international firms really home in on. GOFCOE could really push that on and the city deal is huge on data-driven innovation and how we use different data sets and draw conclusions from them.

“Bringing in all these data sets means that we can innovate outside normal confines.”

Building bridges

FinTech Scotland is building bridges with other global centres, working in close partnership with Scottish Development International (SDI).

Earlier this month, fintech businesses from Hong Kong and Singapore came over to Scotland to learn more about basing themselves over here.

“Getting them together with our own
 fintech firms was brilliant – just watching 
them engage and talking about how they can work together,” says FinTech Scotland’s Stephen Ingledew. “It really pulls them 
into Scotland.”

The Hong Kong-Scotland ‘bridge’ has already delivered results. Actelligent – which creates a hub between investors, private fund managers, retail investors and overseas investment markets – established its UK and European base in Edinburgh, creating 20 jobs.

Another recent visit from a South Korean delegation has real potential, according to Graeme Jones of Scottish Financial Enterprise, who says: “Seoul is one of the fastest-growing financial centres in the world and it is looking to build a bridge with Scotland and we have agreed to do that.

“We want to build global bridges but also increase traffic coming across those bridges.

“We are not having to reach out as much as we did – other global hubs know us and reach out to us. Scotland is on the global map and looked at as a great role model.

“Collaboration between big business, emerging fintechs, government and academia is really working here. It’s quite unique.”

A little big update on the big deal

The £53 million acquisition of FreeAgent by RBS in early 2018 is still the big deal for fintech in Scotland. But how is it all going a year on since the ink dried?

Georgina Bulkeley, director of strategy and innovation for retail banking at RBS and one of three staff from the bank who sit on the FreeAgent board, says: “We work together – it’s a 50:50 board, which is deliberate so we can bounce stuff around and try to come up with solutions that small businesses want

“We worked with FreeAgent before we acquired them and wanted them to retain that entrepreneurial spirit, to continue being themselves. Ed Molyneux [right] is a dynamic CEO and we wanted to help FreeAgent, not stifle their creativity.

“Overall I feel we have done that; we work with them every day. There are tangible benefits – customers can connect FreeAgent to their account; it’s simple and creates a seamless customer experience.

“People might think ‘It’s just accounting’, but it’s much more about the range of support small that businesses need.”