In a city like Edinburgh, home to a strong financial services sector as well as a thriving technology scene, the current environment presents great opportunities for fintechs to continue to thrive. To fully capture this opportunity we will, however, need to ensure there is close collaboration between both sectors.
Established financial services players have held a predominant position, traditionally serving as the first point of call for customer services including banking, payments or investments. This has enabled them to build a significant data-rich customer base and made them an ingrained part of our society.
While many established financial services players are investing in their own fintech solutions, being innovative and groundbreaking in their approach to developing new products and services can be challenging within existing cultural boundaries.
Fintech businesses, however, are not constrained by the same cultural and risk-driven structures that exist within many established banks and financial services firms and therefore tend to be more focused on providing interactive, more personalised customer experiences.
Traditional financial services firms can also face a challenge trying to introduce new products and services whilst relying on legacy IT systems. Fintechs can look to design end-to-end solutions from scratch with IT optimised to deliver the customer service. If a traditional financial service firm can leverage that solution, it will drive a better outcome for clients.
What fintechs lack is the size and scale of customer data held by financial institutions which is essential in today’s marketplace. Established financial services sector players are usually more adept at dealing with regulators, which is valuable experience to any emerging fintech.
These factors create an ideal platform for collaborative working as it enables established financial services players to leverage existing customer platforms and regulatory knowledge while capitalising on a fintech’s agility and ability to quickly develop innovative solutions to benefit their business. While collaboration has clear benefits, there are also barriers as each party may have different business priorities.
An established player’s internal governance could, for example, stop collaborative ideas and momentum in their tracks. Developing contractual solutions can help overcome these issues.
It often requires a degree of flexibility with a fintech committing to achieve technical outcomes and pre-designed governance procedures for sign-off of various risk levels but it can help a potentially fruitful relationship work.
Established financial services firms should also recognise that fintechs need money upfront in most arrangements, so the contract could provide for an early payment timeline dependent on milestones being reached with due diligence carried out in advance to provide comfort for compliance and risk teams.
The value of a fintech can manifest in its intellectual property which could be its unique asset. Unless a collaboration is intended to result in the acquisition of the fintech and its IP, the established financial services firm should be respectful that such IP must also be subject to protection under contractual agreements with potential caveats for exclusivity in the use of such technology.
The real key in achieving sign-off to a collaboration contract between traditional financial services organisations and fintechs is a degree of internal cultural change, education and alignment from the former’s technology teams as well as its legal, compliance and risk functions.
Fortunately for the sake of the growth and development potential this approach can offer to Scotland’s economy, we are seeing positive movement.
As a result, the jeans and trainer-clad scrums of the fintech sector are increasingly mingling with suited bankers and others within the financial services sector.
As our financial services and technology sectors look to the future with hope and a degree of trepidation, it is essential we build on our world-class status as a fintech hub.
Alan Nelson is a partner at law firm CMS.