The Future is Fintech

The Fintech symposium organised by Strathclyde Business School’s Centre for Financial Regulation and Innovation (CeFRI) was presented with a paper that laid bare the job impact of the current technological revolution in banking and insurance. It says Scotland needs to move fast if it is to become a digital financial leader. Daniel Broby spells out the consequences of action or inertia.

Financial technology (Fintech) is developing rapidly, utilising software and programming code in innovative ways. It is driving efficiency up and costs down. The digitalisation of transactions is now a cross disciplinary science. The adoption of its new method represents both a big opportunity and a big threat to the financial sector.

The Scottish financial sector needs to capitalise on it – or miss out. There are two scenarios: inertia or action. The finance and technology sectors need to come together to work on this.

In the inertia scenario Scotland drops behind in the adoption of Fintech. The paper, launched today, argues that the adoption of Fintech in Scotland should be accelerated. The paper makes clear policy recommendations that would have to be adopted to foster the right conditions for the best case scenario. The analysis shows that the economic impact of a proactive approach to Fintech could be substantial and the infrastructure spend to achieve it minimal by comparison.

The symposium, sponsored by the International Financial Services District (IFSD) heard from experts in their respective Fintech fields. Presentations were made on dark fibre, cryptography, distributed ledgers and blockchain. The concept of transaction data being made safer and faster by the use of online programming code was explored.

The use of programming code in finance is evolving at a rapid pace. Research into its implications and its potential impact is lagging. The consequences of digitalisation are being hailed as a ‘game changer' for both the banking and securities industries. As such, more has to be known about it and the consequence of big data solutions and their application over the internet.

With the adoption of Fintech, traditional paper money could be replaced with digital money and entrepreneurs will be able to raise money directly from the public. All this is good news for the consumer. The case is also made for a Scottish digital currency. This could provide the backbone of Scotland's digital financial future.

In Scottish bank and fund management operations, Fintech is already being used. This is, however, largely developed in-house and as such is not cutting edge. The gradual trend has been for traditional banks to move to off-the-shelf solutions and to leave the in-house developed legacy systems.

The scenarios outlined in the paper, developed in conjunction with the Fraser of Allander Institute, illustrate that a slow adoption of Fintech initiatives in Scotland will result in a lack of competitiveness. This, combined with a shrinking banking sector, could result in a worst case loss of 3,295 jobs in the financial sector over the next three years. The rapid adoption scenario, however would see the creation of 3,885 SME jobs in three years, which means 7,646 total jobs when indirect ones are included.

Over ten years the results are even more dramatic. The cumulative ten year cost to the total salary bill, if Scotland is inactive on this, could be as high as £597 million. However, if Scotland gets it right, the cumulative ten year benefit to the total salary bill could be as high as £1.1 billion.

The paper also asks, what can be done? Scotland needs the skills, infrastructure and vision to capitalise on Fintech. This could include:

• The adoption of a co-ordinated plan for incumbent, challenger financial companies, start-ups, Universities, incubators and the Scottish Parliament.

• The establishment and expansion of a big data support facility for the financial sector, the installation of more dark fibre connecting its financial centres and the integration of timing and other digital security measures.

• The establishment and the financial support for a Scottish backed cryptocurrency.

• Creating a fund to invest in start-up Fintech companies, thereby giving them access to capital.

Some of this is in process, some already here and some is for the future – hopefully the near future or Scotland may miss out on its chance to become a digital hub.

The paper was written by Daniel Broby and Tatja Karkkainen in conjunction with the Fraser of Allander Institute. The full paper is available here 

About Daniel Broby

Daniel Broby has enjoyed a successful career in both academia and practice. His knowledge of financial theory and markets have had important practical application. He has held a number of senior executive positions in the Fund Management industry, including Chief Executive, Chief Investment Officer, and Chief Portfolio Manager. His practical skill set includes financial modelling, portfolio construction, accounting analytics and investment process.