Fintech opportunity knocks but risks are also rising

Scotland is well-placed to be a winner from the huge technology shifts under way but the pace of change means it can't be complacent, writes Perry Gourley.

First Minister Nicola Sturgeon with RBS chief executive Ross McEwan. Picture: Warren Media

As the guest list for the unveiling of a dedicated fintech hub in Edinburgh this week underlined, it is an area which leaders from across the public and private sectors in Scotland are currently falling over themselves to be actively involved in.

The progress of the likes of FreeAgent, Nucleus, miiCard and Money Dashboard have highlighted the potential benefits for Scotland from providing an environment where other fintech businesses can thrive.

When the specialist fintech hub, backed by both the UK and Scottish governments, will open its doors in May it will be the first of its kind in Scotland.

Based at the Entrepreneurial Spark base at Royal Bank of Scotland’s Gogarburn site, the ambition is for it to become a centre of excellence for a sector estimated to be worth up to £6 billion to the UK economy. The specialist hub will enable fintech entrepreneurs to benefit from Entrepreneurial Spark’s programme as well as the bank’s tech expertise and networks.

Fledgling firms will also be able to tap into support from Entrepreneurial Spark partners KPMG, Dell EMC and Harper Macleod, which the hub’s backers say will provide “added jet fuel to the potent mix”.

According to Graeme Jones, chief executive of Scottish Financial Enterprise, which last year established a fintech strategy group to give the industry a better handle on the changes afoot, the creation of the hub is a “huge leap forward” for Scotland as it looks to become a leading, global fintech centre.

“This is the beginning of what we hope will be a network throughout the whole of Scotland, offering a range of opportunities to companies large and small, and the ability to fully integrate with the wider industry.”

The hub is one of a series of initiatives under way in Scotland aimed at helping the nation maintain its position as a rapidly emerging fintech centre.

Those moves included the appointment of Nucleus founder David Ferguson and Louise Smith, head of design in personal and business banking at RBS, as the UK government’s fintech envoys for Scotland in a bid to help foster better links and co-ordination.

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In a sector which is moving at breathtaking speed, accurately forecasting what seizing those opportunities could be worth to Scotland inevitably involves a bit of guesswork.

There’s no doubt that fintech is already making a significant contribution to the boom being seen across the wider technology sector in Edinburgh, which now accounts for one in eight businesses, according to the latest Tech Nation Report.

Academics at Strathclyde Business School’s (SBS) Centre for Financial Regulation recently estimated in a report that the sector could create nearly 15,000 jobs in Scotland over ten years. After London, Scotland already turns out the most fintech related graduates in the UK – 12 per cent of the annual pool of 97,000 – to help meet the sector’s burgeoning employment needs.

But the scale of the opportunity also presents significant risks. The same report warned that if Scotland fails to adopt leading-edge technologies quickly enough it would have the opposite effect, with a loss of just over 14,000 jobs – or £635 million in wages.

The almost constant stream of bank branch closure announcements currently highlight how technology is already changing the face of financial services, and not necessarily for the benefit of everyone.

A report from Citi estimates that European and US banks will axe another 1.7 million jobs over the next ten years as fintech firms rapidly build scale and take business away from incumbents in some of the most profitable parts of financial services, such as loans and payments.

And according to Bank of England governor Mark Carney, there are also wider risks posed by fintech.

In a speech last month he urged global regulators to monitor developments in financial technology closely to avoid the boom and bust cycles that have beset previous major advances in financial innovation.

“The challenge for policymakers is to ensure that fintech develops in a way that maximises the opportunities and minimises the risks for society. After all, the history of financial innovation is littered with examples that led to early booms, growing unintended consequences, and eventual busts,” said Carney.

He argued that for fintech’s potential to be realised, its impact on financial stability must be managed. While fintech could reduce systemic risks by delivering a more diverse and resilient system, he argued some innovations could see those risks rise through increased interconnectedness and complexity.

However it develops, there’s no doubting that in ten years’ time the financial services industry will look significantly different than it does now. Although Scotland is undoubtedly well-placed to take advantage, given its existing financial services expertise and technology pedigree, the pace and global nature of the fintech revolution means it cannot afford to be complacent.

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