The world is moving fast and developments in fintech present both opportunities and challenges for our crucial financial sector
Scotland’s advantages for fintech companies are encouraging startups and medium-sized technology innovators to set up alongside larger financial services players, either as competitors or partners.
Not that traditional companies rest on their laurels. “Some have been here for hundreds of years, and have embraced technological change throughout their history,” stresses Graham Hatton, financial and business services specialist at Scottish Development International. SDI, a public agency, assists companies from outside Scotland to invest and thrive there.
Proving Hatton’s point, Edinburgh- headquartered RBS, chartered as the Royal Bank of Scotland in 1727, recently joined 36 banks worldwide in testing Blockchain (see page 4) as a distributed platform for commercial paperless transactions. Aberdeen Asset Management bases its leading technology expertise in Edinburgh. A relative newcomer, Tesco Bank, formed in 1997 in Edinburgh, now operates wholly online.
Hatton is optimistic about the impact that foreign direct investment (FDI) can have on fintech. “Whereas inward investors in this space might start up with, say, 20 employees for a particularly large one, we are seeing those quickly grow to over 100,” he says.
For example, Swiss banking software specialist Avaloq located its first software development centre outside of Switzerland in Edinburgh. The company cited the graduate talent available, and the number of universities offering ‘excellent degrees in software engineering’ as reasons for its choice.
US-owned JP Morgan’s longstanding Glasgow Technology Centre in the city’s International Financial Services District (IFSD) employs more than 1,300 people, the majority in software development including apps for the iOS and Android mobile operating systems. It is one of only two JP Morgan strategic technology hubs in Europe. The IFSD also hosts US-based Morgan Stanley’s second largest European centre after London; functions in the Glasgow offices including technology and data.
Having so many large indigenous and financial services institutions in Scotland draws fintech professionals from far afield, including London, to put down roots in vibrant communities with a high quality of life, education and connectivity.
They can also see opportunities with rapidly-growing technology specialists such as Nucleus Financial, Lending- Crowd, and Encompass Corporation.
Edinburgh’s Nucleus Financial, established 2006, provides a wrap software platform for financial advisers and their clients. Its 172 people look after nearly £10bn of assets across almost 80,000 clients, working with more than 400 adviser firms.
LendingCrowd, Edinburgh, is a peer-to-peer online lender matching investors to SMEs seeking loans. Since 2014, it has made more than 80 loans totalling more than £6.5m to UK companies and sole traders, and has 2,300-plus investors.
Australia’s Encompass Corporation arrived in Glasgow in 2015, assisted by £2.2m from state development agency Scottish Enterprise. It chose the UK as its first international base because the regulatory regime is similar to Australia’s.
Its Encompass Suite, subscribed to as Software-as-a-Service, aggregates and analyses information on corporations, individuals and property from multiple sources, displaying results for bankers, lawyers and accountants. With a further £1.8m from the Scottish Investment Bank (SIB), it is sourcing more data suppliers.
“Glasgow has a large, highly-skilled, stable and well-educated workforce,” co-founder Roger Carson says. More than 30,000 work in financial services, and local universities produce high-quality computing science and software engineering graduates.
“It has also enabled us to keep our costs relatively low, less than half of what it would have been in London,” he adds, though Encompass retains a small sales and marketing team in London to interface personally with the many potential clients in the capital. Encompass now has 35 staff in the UK, mainly in Scotland.
Fintech startups in Scotland often spin out of local universities under the leadership of graduates and/or entrepreneurs. ZoneFox’s software monitors employees’ computing activity across all devices to identify fraud or loss of sensitive material such as client lists. Assisted by £200,000 of proof-of-concept funding from Scottish Enterprise, the idea was developed by co-founder and CEO Dr Jamie Graves during PhD studies at Edinburgh Napier University, a centre of excellence for research and teaching about cyber security.
Other examples of Scottish universities responding to the sector’s needs include Glasgow Caledonian University partnering with IT giant IBM and the IT and business process services firm CGI to offer work-based degree programmes; and Abertay University, Dundee, being the first university anywhere to offer an ethical hacking degree.
Other fintech startups in recent years in Edinburgh include: FreeAgent – cloud-based accounting software for freelancers, small businesses, and their accountants; The ID co – akin to a ‘digital passport’ for users to prove their real identity online; Money Dashboard – a SIB-investee company providing free, online personal financial management; Payfont – patented e-commerce identity and transaction security for online merchants; and ShareIn – offering both a technology and a compliance service for clients including Hibernian Football Club to crowdfund directly from their own websites or to run their own crowdfunding platforms.
Glasgow-based My1Login, another company which has benefited from SIB investment, has grown since 2007 to become a European leader in providing secure identity and access management and single sign-on to all applications.
Hatton expects fintech to create dramatic new opportunities for financial services in Scotland. “Cloud computing makes it easier for young companies to scale up, and crowdfunding provides an alternative source of finance, so smaller enterprises see possibilities that did not exist before,” he observes. “Digital banks are appearing – several now have licences in the UK, and will be trading soon. With Scotland’s tech eco-system and expertise in Financial Services there is no reason why the next digital bank couldn’t start in Scotland.
“Whether judged by the success of the fintech companies here, or measured against criteria set by independent analysts such as EY, it is evident that Scotland, with its well established Financial Services sector and strong technical talent, is a leading location of choice for fintech companies to thrive.”