The field of financial technology (fintech) is one of the fastest-growing parts of the UK economy, employing more than 61,000 people and generating an estimated £20 billion in revenues each year.
But could the sector in Scotland grow in importance to rival the North Sea oil and gas industry, which became a net drain on public finances for the first time last year amid the slump in crude prices?
It may seem a relatively recent innovation, but the term fintech appears to have been coined in 1972 by Abraham Leon Bettinger, vice-president of Manufacturers Hanover, a New York bank, to describe technology “combining bank expertise with modern management science techniques and the computer”.
Nowadays it encompasses areas such as crowdfunding, digital currencies like bitcoin, e-banking, payment technologies, peer-to-peer lending and “robo” advice – automated investment advice delivered using algorithms.
After London, Scotland boasts the UK’s next two largest international financial hubs in Edinburgh and Glasgow. The sector contributes more than 7 per cent of Scotland’s GDP and employs about 85,000 people, with a further 70,000 working in associated professional services. Combined with the more than 90,000 people employed across the country’s digital technologies arena, the catalyst for growth is clear.
However, amid the opportunities offered by fintech, academics at the University of Strathclyde have warned that failing to adopt the latest innovations could lead to the loss of 14,000 jobs and some £635 million in wages. On a brighter note, the university’s Centre for Financial Regulation & Innovation has predicted that the sector has the potential to create nearly 15,000 jobs in Scotland over ten years.
This comes as Oil & Gas UK, the trade body for the offshore energy industry, predicts a “year of stabilisation” in the North Sea, which saw the number of jobs supported by the sector contract from a peak of 450,000 in 2014 to 330,000 last year as companies reacted to the plunging oil price by making severe cost reductions and putting the brakes on “unsustainable” spending.
It says that about two-thirds of firms are now smaller in terms of headcount than they were at the end of 2015, but it appears that “far fewer” are planning to make further cutbacks this year. However, as in the world of finance, Oil & Gas UK says that the march of technological innovation has seen a subset of smaller players emerge across the North Sea supply chain in recent years that are expecting to increase their employee numbers as they seek to grow their share of the market.
Deloitte director Kent Mackenzie, who leads the accounting giant’s fintech business in Scotland, says it would be a “very bold question” to ask whether the financial technology sector’s headcount could grow to rival that of the oil and gas industry.
He says growth in fintech is being driven by regulatory change, increased competition and consumer demand, “creating a much more open playing field for new companies”, pointing to global trends such as the ability to send money peer-to-peer via social media platforms in China.
“Technology is advancing quicker than ever, with artificial intelligence making massive strides in the last year, so against that backdrop we’ll see continued growth in the sector,” Mackenzie adds.
Meanwhile, total expenditure on the UK continental shelf dropped to £17.2bn in 2016 from a peak of more than £26bn in 2014. Investment is forecast to fall further in the years ahead as fields that are currently under development come on stream and the industry continues to adjust to the challenging business environment.
The slump in oil prices – which have fallen from highs of $111 a barrel in early 2011 to about $55 currently – mean the sector received £396m from the public coffers in 2016, net of tax payments. This is the first year that the North Sea industry has cost the exchequer more than it has contributed, according to analysis by Carbon Brief.
The sector’s contribution to public finances was £10bn as recently as 2011 and it is no longer “the cash cow” that chancellors have come to expect, the Carbon Brief report added, but the industry received a welcome boost recently when exploration firm Hurricane Energy tripled its estimate of how much oil it could recover from the Lancaster field west of Shetland to 593 million barrels. Production is expected to start in the first half of 2019 and reach a daily production rate of 17,000 barrels soon after.
Callum Sinclair, head of technology sector at law firm Burness Paull, says innovation offers a “huge opportunity” for the energy and finance industries, which can both benefit from strides in areas such as data analytics as they aim to improve efficiencies and decision making.
He adds: “When you start to look at energy trading platforms, a lot of technologies are very similar, and what we want to be discussing with our clients is that whatever sector you’re in, you need to be embracing technology. It’s starting to change, but oil and gas is still probably the slowest, most sceptical, adopter.
“The only part of the entire oil and gas ecosystem that ever touches the consumer is when they fill up their car, whereas banking is all about customer interaction, so perhaps that is driving a lot of the change.”
Sinclair says there is room for improvement when it comes to nurturing more start-ups in both sectors and guiding them through the process of sourcing funding, while digital skills shortages remain a major hurdle on the path to growth, but adds: “If you had an IT background in oil and gas, I think there would be a lot of very transferrable skills into financial services.”
In recent years the fintech sector – worth more than £6bn to the UK economy – has witnessed the rise of a large number of Scottish firms aiming to shake up the established order by melding the worlds of finance and technology to improve efficiency, drive down costs and make life easier for customers.
One notable example is FreeAgent, the Edinburgh-based accounting software specialist that floated on London’s Alternative Investment Market in November in a move that valued the business, co-founded by chief executive and former RAF fighter pilot Ed Molyneux, at £34.1 million.
Other fintech firms headquartered in the capital include cashflow forecasting start-up Float – which can integrate its systems with those of FreeAgent – and Nucleus, the financial “wrap” platform that enables users to manage their investments online. David Ferguson, chief executive of Nucleus, was last year named one of the UK government’s two fintech envoys for Scotland alongside Louise Smith, head of design in personal and business banking at Royal Bank of Scotland, tasked with helping to build a “broader, supportive ecosystem that will support the overall growth of the sector”.
And that sector is “brimming with commercial opportunity” according to the Treasury, which says Scotland is second only to London when it comes to turning out fintech-related graduates, accounting for 12 per cent of the annual pool of 97,000.
Along with home-grown firms, global players are also make their mark in Scotland’s fintech scene. They include Swiss banking software specialist Avaloq, which cited Edinburgh’s “highly skilled” pool of computing graduates when it chose Edinburgh as the base for its first development centre outside Switzerland, and US financial services giant JP Morgan, which employs more than 1,300 at its Glasgow technology centre.
Mackenzie says: “Edinburgh’s really quite special, but we must not underplay places like Dundee, Glasgow, Aberdeen and Stirling. Many tech start-ups in Aberdeen, be they financial or otherwise, have engineers at their heart, while in Dundee’s gaming sector there’s absolutely no reason why the principles behind experiences like Grand Theft Auto couldn’t be applied to simulating what a cyber-attack might look like.
“If you look at Glasgow, the creativity and arts movement can absolutely play a role in fintech. A good reference point is the emergence of Silicon Valley in the 1970s, when the major industries where movies, plastics and the military. What we see there today was started by those three, quite unique, industries fusing together and creating what Steve Jobs called ‘collision’. If you take that principle and think about the component parts we have in Scotland, and we’re able to create an environment where they all collide, potentially there’s something quite beautiful that could come out of that.”