The success story so far for fintech in Scotland - and an optimistic outlook for the future

Scotland’s fintech ecosystem is attracting attention, not only in the UK but around the world, as an example of how to achieve innovation by drawing together business, universities and government to drive economic growth.

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The Scotsman championed the creation of national industry body FinTech Scotland in our first Fintech Focus supplement four years ago, therefore it has been pleasing to report on the exponential growth in fintech companies and the establishment of game-changing institutions like the Global Open Finance Centre of Excellence (GOFCoE).

The number of Scottish fintech SMEs within FinTech Scotland has increased by more than 50 per cent during the 18 months since the Covid-19 pandemic hit the UK, with the number of fintechs growing from 119 in March 2020 to 181 today.

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The number of strategic partners within the organisation, which includes large corporates such as IBM, Equifax and Prudential, has gone from four to 30

Stephen Ingledew

Crucially, overseas fintech companies are choosing to invest here with the number of international fintech SMEs growing in excess of 40 per cent over the last 12 months.

In recent months, companies such as YayPay and Pace AP from the US, WeFund from Australia, and Pulse Market from Ireland have chosen Scotland as a base.

Stephen Ingledew, executive chair of FinTech Scotland, says: “The fintech industry in Scotland is still building on significant momentum. That in itself shows the demand and the ideas are here to meet the challenges of a more digital world.

“We have a terrific melting pot of so many diverse firms and that in itself is attracting other firms in or encouraging new firms to be created.”

Nicola Anderson, chief executive of FinTech Scotland, adds that the growth seen in the industry has been driven by a wide variety of applications of finance services technology, and that the sector is now converging with other industries.

She says: “We’ve seen innovation grow in personal finance and wealthtech, retail lending and debt management.

“There is growth in payment technology and payment innovation. We’re starting to see developments in crypto and digital currencies, and we have great strength in regtech [regulatory technology], helping to boost security and resilience as well as simplify industry compliance obligations.

Anderson continues: “There are also innovative businesses originally created for other industries beginning to see a market opportunity in fintech and financial services. Regtech is a brilliant example of that, where innovation, data and technology businesses developed for other regulated industries, such as oil and gas, are finding an application in financial services.”

The Global Open Finance Centre of Excellence (GOFCoE) was established in Edinburgh just over a year ago and was awarded £22.5 million in funding over five years from public body the UK Research and Innovation’s Strength in Places fund last September.

GOFCoE will also play a key role in supporting the fintech ecosystem in Scotland through the creation of a “sandbox”, which will allow companies to test their propositions in an environment which replicates the secure data architecture found in the financial services industry.

The centre is working with NatWest data to provide an insight into how our finances have been affected by the pandemic while it is also working on a project with Virgin Money exploring how the “poverty premium” affects people on lower incomes.

It is the creation of GOFCoE and the partnership model of FinTech Scotland, bringing together the University of Edinburgh, government and industry, that has led to it being recognised as the UK’s first accredited fintech cluster.

On a visit to Edinburgh this year, Liz Truss MP, international trade secretary, observed that the sector in Scotland was “thriving”.

She said: “The UK is a world-leader in fintech and that’s why we’re breaking down barriers, pushing new frontiers in our free trade agreements and opening up markets to boost this growing industry.

“From Australia to Singapore, we are using our independent trade policy to drive foreign investment into UK fintech and increase export opportunities worldwide.

“Scotland’s fintech sector is thriving, and I want to ensure that we fuel the future global growth opportunities for fintech businesses across the UK.”

This partnership model is also evident in the SME Advisory Board that FinTech Scotland has created which is made up of leaders from the fintech entrepreneurial community focused on skills, funding and commercialisation opportunities.

Stephen Ingledew likens FinTech Scotland’s role to that of a coach directing the different players connected to the industry.

He says: “Fintech is for everyone and it is not just for people in ‘fin’ and ‘tech’. This thinking hasopened up more possibilities not just within Scotland but also further afield.

“We have never positioned Scotland as being in competition with other parts of the UK, or other parts of the world – it is always about how we can work together.

“In Scotland, through Fintech Scotland, you have this collaboration between the regulator, the FCA and the universities.

“We see our role as being a bit like a coach on the side of the pitch with the players being the regulator, fintech companies, larger companies, tech companies and government.

“Our role is to get those players to play better together to createmore innovation.”

For Scotland’s fintech sector to grow, it will not only have to continue to attract inward investment from overseas financial services firms, but increase exports from its home grown companies.

There are some “green shoots”, with Modulr opening an office in the Netherlands with the ambition of expanding its services into mainland Europe. However, according to Ingledew, there is still much more to do. He says: “Over the last couple of years we have become a very diverse community and have attracted international businesses from Europe, USA, Australia and Asia.

“We want, however, to encourage fintechs to think about the international opportunity and not just their home markets.”

FinTech Scotland is developing a ten-year roadmap which will support the growth of Scotland’s digital economy and development of fintech innovation across the UK.

The plan implements one of the recommendations highlighted in the recent Kalifa Review of UK FinTech, which referenced Scotland as the second-largest fintech cluster in the UK, and the opportunity to build on this position through strategic research and innovation.

The roadmap will focus on financial inclusion and net-zero ambitions, and it is set to be published before the end of this year.

Ingledew believes the roadmap will see fintech companies work within fields outwith financial services.

He says: “We are working on a ten-year research and innovation road map that looks at what the key areas are right now and the ones that are emerging.

“It will examine the opportunities around open finance , regulation and payments, while also looking at future areas such as the role of fintechs in the climate challenge and its potential role in the agricultural sector.

“We are setting out a roadmap of innovation opportunities to bring together entrepreneurs, universities and big companies with a view to getting them involved in developing some of those ideas into products and new businesses.”

One sector that is also crossing over with fintech in Scotland is space. The country is home tomore than 130 companies linkedto space and the sector has ambitions to become a $4-billion industry by 2030.

Ingledew adds: “The space sector in Scotland is fascinating in the way that it has evolved.

“Scotland is a significant producer of satellite data and fintech Trade in Space is using this data to help the insurance industry manage risk more effectively.”

ESG – or economic, social and governance issues – will become increasingly important to fintechs, not only as regards themselves but, with reporting expected to become mandatory next year, the role they can play in assisting companies from all sectors in filing accurate reports.

Ingledew says: “We are seeing a number of fintech firms pivot towards ESG.

“Pulse Market is an example of a Scottish fintech which has pivoted towards this opportunity by transforming the ways that companies procure goods and services using ESG criteria.

“Fintech entrepreneurs don’t have to be rigid and climate tech is a growing opportunity. I envisage a growing number of businesses getting involved in that space.”

There remains a strong appetite for investment into Scotland’s fintech industry, which is allowing many enterprises to increase their capacity and scale.

In the latest Fintech Focus supplement, we look at the prime candidates for scaling up over the next 12 months.

Oli Henderson of EY says: “Businesses involved in payments are attracting significant interest as a result of the move online and the increasing move to a cashless society.

“We have also seen especially big interest around regtech businesses which specialise in areas like fraud prevention, client identification, anti-money laundering, and advising on ‘know your customer’. In an increasingly online world, the offerings of these businesses have become a lot more important for financial services firms as they look to protect themselves and importantly their customers.

“Additionally, financial institutions that were perhaps a bit slow to embrace new technology have had to become more digital and nimbler in their ability to create new products quickly to meet customers’ fast-moving needs. That involves collaborating more with fintechs that can provide the solutions to create these products.”

The impact of the pandemic across the world’s economy was catastrophic, but the agility of fintechs allowed many of them to adapt and react faster than other sectors.

Fintech has a central role to play, connecting businesses and customers in a financial way that allows products and services to be better served and used. And in a post-pandemic world, the use of fintechs has never been more appropriate.

This article first appeared in the October 2021 edition of Fintech Focus. A digital version can be viewed here.