Financial Regulation ”“ the opportunity for FinTech Research & Innovation
The UK’s approach to financial regulation has been key in enabling a dynamic financial services sector that supports and drives the economy, enables a progressive economic outlook, creates jobs, and plays a significant role as a global financial service centre.
The development of this Roadmap highlighted financial regulation as a priority theme because of its fundamental role in FinTech and financial services, as well as the need for financial regulation to support the positive role FinTech innovation could play in the future of finance.
Regulation remains extremely complex for all those operating in the finance industry. Depending on the complexity of the financial institution’s business model, meeting compliance obligations can mean significant costs.
Industry research suggests that some of the largest global financial institutions are spending up to 5% of revenue on regulatory compliance. Across the UK this could mean the annual cost of demonstrating regulatory compliance is as much as £6.6 billion.
Throughout the development of the Roadmap, contributors highlighted their interest in the role technologies could play in future financial regulation. Some examples are AI, advanced analytics, high performance computing including quantum computing, and distributed ledger technologies.
Priority areas in Financial Regulation
The industry contributors to this roadmap offered a view that the future looks set for significantly more change. Our analysis highlighted three topics of interest:
Simplifying compliance
Helping financial institutions create new solutions and use FinTech to help meet current, continuously changing, and global regulatory obligations.
Future risk modelling and risk management
Reinventing risk management with technology and data analytics, and enabling new approaches to fight financial crime, address fraud and focus on emerging climate risks.
- Reinventing risk management with technology and data analytics
- Enabling new approaches to address fraud and fight financial crime
- Modelling for new and emerging climate risks
Future regulation design
Enabling an agile regulatory framework that works for all, and developing future regulatory oversight or supervisory technology.
- Regulatory reporting
- Interoperability and data standardisation
Roadmap next steps: Financial Regulation
A range of proposed next steps are laid out in the published Roadmap, which specifically identifies 13 actions relating to Financial Regulation, and categorises each into one of three phases over the next 10 years. These actions are illustrated in the graphic below. The report also references 23 different stakeholders who can support the implementation of these actions, which are broken down into research projects and innovation calls.
More information about FinTech Scotland’s Research & Innovation Roadmap can be found here, where the full Roadmap can also be downloaded.
Payments & Transactions, the fintech opportunity
is discussing the key outputs in a series of blogs. This blog focuses on Payments & Transactions, which is one of the four key strategic priority themes.
The way we pay for things is changing. Throughout the development of the Research & Innovation Roadmap, payments and transactions were referred to in the broad context of the transfer of value (either money, goods, or assets) in exchange for goods and services.
The Roadmap pinpoints the significant move from physical exchanges to digital transactions, and identifies several significant trends that could mean payments will change significantly in years to come. These changes will have a significant impact on the economy, and could also have a substantial impact on citizens and businesses, which is why the future of payments is one of the four priority themes identified.
The importance of Payments & Transactions
The pandemic accelerated the move from physical to digital in many aspects of our lives, including how we make transactions. Customers’ digital expectations and a shift towards more instant electronic payments are having a significant impact on our economy, and a new digital economy is emerging strongly, with major implications for consumers and SMEs alike.
Across the development of the Roadmap, when looking at the theme of the future payments we considered the topic of digital currencies and crypto currencies. These innovations present new ways for value to be stored and exchanged. It is clear there is a still a lot to learn about the potential, the impact, and the implications of cryptocurrencies as a method for mainstream payments. Stablecoin is a form of cryptocurrency that is linked to an asset that is stable in value, and stablecoins are generating significant interest for future payments and value exchange.
The UK Government has established a crypto assets taskforce, and the UK regulators are considering the benefits and risks on a range of issues connected to this topic, including a separate digital currency backed by a central bank. Since the publication of the Roadmap, HM Treasury has confirmed its commitment to the development of appropriate regulation for crypto.
As we further explored the payments theme, we identified technologies of particular interest, such as AI, blockchain and distributed ledger tools. Industry expressed interest about how these technologies could offer a completely different way to organise and manage payment systems, providing a route to real-time, cross-border payments worldwide. These developments pave the way for a potentially very different future of value exchange. According to the World Economic Forum, up to 10% of global GDP could be stored on blockchains by 2025.
Embedded payments is one of the hottest topics in FinTech in 2022, and was another area of particular focus. Technology is advancing the methods to embed payments in everyday experiences and allow customers and businesses to pay for purchases without entering bank details, credit, or debit card information.
Historically, the payments process has lived at the edges of experience for businesses. Payments were either taken in cash, or offline, with no real lasting insights into the customer and the goods or services they purchased. Technology businesses are now fully embedding software that enables a change to this experience, creating more choice and allowing businesses to have a deeper connection with customers. In addition to high profile examples such as Uber, many embedded payment innovations are emerging, such as in-car payments, smart fridges and connected homes.
Priority areas in Payments & Transactions
The industry contributors to this roadmap offered a view that the future looks set for significantly more change. Our analysis highlighted three topics of interest:
Digital currencies
- Cryptocurrencies and stablecoins
- Distributed ledger technology
Embedded payments
- SME market
- Retail consumers
Security for digital payments
- Cyber security
- Biometrics
Roadmap next steps: Payments & Transactions
A range of proposed next steps are laid out in the published Roadmap, which specifically identifies 10 actions relating to Payments & Transactions, and categorises each into one of three phases over the next 10 years. These actions are illustrated in the graphic below. The report also references 23 different stakeholders who can support the implementation of these actions, which are broken down into research projects and innovation calls.
More information about FinTech Scotland’s Research & Innovation Roadmap can be found here, where the full Roadmap can also be downloaded.
FinTech Research & Innovation for Climate Finance
The impact of climate change across the world is disrupting national economies and affecting lives. It requires urgent action from all to address the growing issue.
In its 2020 Global Risks report, the World Economic Forum highlights that the risk signals show the horizon for addressing climate risks has shortened. For the first time in the history of the report, the top five risks that it outlines are in a single category: climate environmental change’
In the Research & Innovation Roadmap, we use the term Climate Finance to describe the role that finance, technology and data can play in addressing the climate change crisis and powering a sustainable future.
The importance of Climate Finance
Enabling a more sustainable future was a prominent theme throughout the research for the development of the Roadmap. Throughout our analysis, the influence of finance together with the potential for exponential change through technologies was thought to be a powerful combination to help the necessary transition to a carbon neutral economy.
In the UK, financial regulators are aiming to influence positive climate outcomes through a series
of new expectations, rules and guidance. The Bank of England is working to encourage an early and orderly transition to a carbon neutral economy and to “play a leading role, through policies and operations, in ensuring the financial system, the macroeconomy, and the Bank are resilient to the risks from climate change and supportive of the transition to a net zero economy.”
The Financial Conduct Authority also has a sustainable finance strategy, aiming to build greater transparency and trust, developing guidance and tools to provide mutual support to address the challenges of climate change.
Climate Finance is a complex matter. Our research with FinTech Scotland showed that it connects many things, including:
- Investment
- Regulatory change
- Better data
- Advanced analytics
- A deeper understanding of consumer behaviours and consumer engagement
- A deeper understanding of new technologies, biodiversity, carbon, and carbon markets
The challenge ahead is huge. Nevertheless, the research behind the Roadmap pinpointed three priority areas where further FinTech research and innovation could advance progress by helping nations adapt to the impact of climate change, manage the risks of transition and lead to them becoming greener, more resilient and more inclusive. All three offer Scotland and the UK an opportunity to use strengths in research and innovation, and to build collaborative action across the FinTech and finance industry and the research community.
Priority areas in Climate Finance
Environment, Social, Corporate Governance (ESG) data.
Assessing the current situation and outlining the ambition for new data sources, clearer standards and advanced analytics to build greater trust and transparency in the sustainable claims made by finance and business.
- ESG reporting
- Investor confidence
- ESG data
- SME market
Carbon markets and carbon offsetting
Considering the role that each plays in realistically transitioning to a net zero low-carbon economy while exploring the technologies and innovation that could drive further progress.
- Voluntary carbon markets
- Carbon offsetting
Facilitating a net zero economy
Moving beyond finance-as-usual practices. Using innovation and technology to reinvent financial markets and stimulate the change needed to support a healthier planet.
- Investment decisions for net zero
- Circular economy
- Housing
- Insurance
- SME market
Roadmap next steps: Climate Finance
A range of proposed next steps are laid out in the published Roadmap, which specifically identifies 8 actions relating to Climate Finance, and categorises each into one of three phases over the next 10 years. These actions are illustrated in the graphic below. the report also references 25 different stakeholders who can support the implementation of these actions, which are broken down into research projects and innovation calls.
More information about FinTech Scotland’s Research & Innovation Roadmap can be found here, where the full Roadmap can also be downloaded.
Research & Innovation opportunity in Open Finance data
Article written by Julian Wells, Director at Whitecap Consulting
FinTech Scotland recently published its 10 year Research & Innovation Roadmap. Whitecap worked in partnership with the FinTech Scotland team to support the development of this roadmap, and is discussing the key outputs in a series of blogs. This blog focuses on Open Finance data, which is one of the four key strategic priority themes.
In the first blog in this series, we discussed the purpose, value and impact of a Research & Innovation Roadmap. In this blog, we discuss Open Finance data which is a strategic priority itself but also a facilitator of FinTech innovation in wider areas, and an enabler for the three other strategic priority themes in the Roadmap.
The other three themes are Climate Finance, Payments & Transactions, and Financial Regulation, each of which will be the subject of a subsequent blog in this series.
Open Finance data has the potential to significantly change consumers’ and businesses’ engagement with finance, and to deliver better outcomes. It spans the whole suite of financial products and services as we understand them today, including banking, savings, mortgages, pensions, investments, insurance, lending, and payments.
How can Research & Innovation support the development of Open Finance?
To help Open Finance achieve its potential, more leadership, actionable research, and innovation is required. FinTech Scotland’s Research & Innovation Roadmap sets out specific actions to help drive this opportunity ”“ through a collective approach that involves industry, innovators and researchers ”“ to create the future of finance.
Open Finance can create progressive change that will move the UK forward significantly, by moving beyond banking and asking other financial institutions (such as pension providers, asset managers and insurers) to enable customers to share their data with others.
This would open up a wider range of financial products and services to the transformative impact of third-party innovation through trusted data sharing. For consumers and businesses, it offers new ways to understand their finances, receive financial advice, and compare financial product features and prices.
Research and innovation are needed to facilitate the potential of Open Finance data, building economic growth and creating employment opportunities in high value sectors which in turn will make the UK an attractive destination for inward investment.
Furthermore, it will help us better understand, measure, and forecast the considerable impact that Open Finance could have on society and to shape future policy.
In the UK, one of the key enablers of research and innovation in Open Finance is the Smart Data Foundry (formerly The Global Open Finance Centre of Excellence), which has been established in Edinburgh to support the understanding and development of the capabilities of Open Finance. It has a leadership role in enabling the necessary research and innovation, and building confidence in Open Finance across the UK, and can encourage research and innovation by providing a highly secure environment that can host Open Finance data. The Open Finance data priority in FinTech Scotland’s Research & Innovation Roadmap supports and complements The Smart Data Foundry’s agenda.
Priority areas in Open Finance data
When developing the Roadmap, analysis highlighted three industry priorities that will benefit from more focused research and innovation on this topic. They involve shaping the future of:
Everyday personal banking and business banking
- Insights through Open Banking data
- Future banking business models
Long-term savings and investment
- Financial resilience and wellbeing
- Future living & the ageing population
Personal and business insurance
- New data and insights for insurance
- Data privacy
- Data ethics and governance
Roadmap next steps: Open Finance data
A range of proposed next steps are laid out in the published report, which specifically identifies 22 actions relating to Open Finance, and categorises each into one of three phases over the next 10 years. These actions are illustrated in the graphic below. the report also references 23 different stakeholders who can support the implementation of these actions, which are broken down into research projects and innovation calls.
Why is the FinTech Research & Innovation Roadmap so important?
Article written by Julian Wells, Director at Whitecap Consulting
FinTech Scotland, the cluster management body, recently published its 10 year Research & Innovation Roadmap. Whitecap worked in partnership with the FinTech Scotland team to support the development of this roadmap, and in the first in a series of blogs we discuss the fundamentals behind this important document.
FinTech is driving change in one of the most important parts of our economy. It presents a significant disruptive force in financial services, and will shape the future of the digital economy. It has the potential to radically change the way people and businesses engage with money, and to create a new financial system that is more effective and resilient.
FinTech Scotland’s Research & Innovation Roadmap is a 10 year plan which has been developed as an industry-led and action-focused tool to increase the positive impact of FinTech innovation across Scotland and the UK. It creates a framework and an environment to drive greater collaboration, and to build the connections that will enable responsible innovation for the future of finance.
The roadmap builds on foundations that were already established through the FinTech Scotland cluster, and sets out the cross-sectoral strategic priorities that ”“ through collective and collaborative action ”“ will shape the future of financial services, and enable Scotland and the UK to further advance FinTech innovation. It was published on the anniversary of the HM Treasury commissioned Review of Fintech led by Ron Kalifa OBE which set out a number of recommendations, including the opportunity for research and innovation to accelerate the development of cluster excellence.
Why do we need a Research & Innovation Roadmap for FinTech?
The financial services industry contributes £132 billion to the UK economy ”“ almost 7% of total economic output. It is an essential part of the full UK economy that enables prosperous outcomes for businesses and people across the UK. Its significance was highlighted by the Chancellor of the Exchequer in the recent HM Treasury report A new chapter for Financial Services’. Working with others across the economy, his vision is for “an agile and dynamic approach, one which enables those in the financial services industry to evolve and thrive as they embrace the new opportunities of the future.”
Research and innovation play a key role in the vision for the future of financial services in the UK and beyond. However, financial services and FinTech have, compared to other industries, generally not been aligned with the academic research communities. Recent analysis highlighted that research funding into these fields is as low as 3% of total UK funding1 for research and innovation.
In addition, there is a general acknowledgement in financial services, FinTech, and the academic community that current engagement has had a relatively narrow focus. The result is limited exploration of research and innovation, which means an important part of the economy is not fulfilling its full potential.
There is an opportunity to close the gap between the economic productivity of UK financial services and the current scale of UKRI investment in FinTech and financial services R&I. This can be achieved via more strategic and systematic collaboration, which can help develop the necessary FinTech innovation between the range of stakeholders. Importantly, this should be driven by a true desire for effective change, and by an industry-first real-world’ approach to the challenges ahead.
This work also supports the strategic HM Treasury Review of UK Fintech led by Ron Kalifa OBE. It recognises the value of collaboration, and the leadership that is needed to create the right conditions for FinTech to innovate, accelerate and grow.
How will the Roadmap be implemented?
The priority themes form the building blocks of the Roadmap are: Open Finance data, Climate Finance, Payments and transactions, and Financial regulation. In subsequent blogs in this series we will focus on each of these four themes individually.
The roadmap will be led and facilitated by FinTech Scotland. However, wider stakeholder participation is required to implement the R&I actions set out in this Roadmap.
Actions will be progressed through two key types of activity:
Unleashing Innovation: A series of Open Innovation Calls, using technologies and data to develop new and improved financial products and models.
A rollout plan will be developed to implement a programme of innovation calls. This will include developing a sponsorship proposition to maintain the commitment for an industry-led programme.
The initial steps for the Roadmap innovation calls include:
- Work with the Smart Data Foundry to start the implementation of the priority innovation calls identified in the Roadmap.
- Continue the work with industry stakeholders to refine a series of problem statements for each theme, ensuring industry value in the future solutions.
- Market the innovation calls across UK and international FinTech clusters, raising the profile of FinTech innovation in Scotland.
Actionable Research: Research, using technologies and data to create actionable insights that can be applied commercially using FinTech.
FinTech Scotland will engage with academic community in respect of the research topics proposed. FinTech Scotland will also engage with research funding organisations such as UKRI / Innovate UK to ensure this roadmap is fed into future funding calls.
The initial steps for research topic actions include:
- Work with university leaders to generate research briefs that directly respond to the actions identified in the roadmap.
- Establish relevant steering groups demonstrating collaboration across industry and the research community.
- Monitor and review progression (including a KPI scorecard).
Twice a year, the FinTech Scotland Cluster Management Board will measure and review the Roadmap’s progress of the Roadmap. This will be reported publicly to stakeholders in Scotland and the UK.
What will the impact of the Roadmap be?
In this blog we have outlined the requirement and benefits to bringing industry-led approach to research and innovation, but describing the impact the Roadmap can have on the Scottish and UK economy is perhaps the most compelling way to explain why this is such a vital document.
The overarching economic ambition for the Roadmap is to do two things:
- Create up to 30,000 extra jobs in Scotland.
- Increase economic value (GVA) by more than 330% ”“ from £598 million to more than £2 billion ”“ over ten years.
Taking a broader perspective, the impact of the Roadmap will be:
- To tangibly help improve lives for citizens, by tackling inclusion and health- related issues.
- To further develop Scotland as part of the UK in being a global engine room’ for FinTech and a desirable location for international FinTech companies.
- To drive innovation, supported by a world-leading reputation in regulation and compliance.
- To use Scotland’s and the UK’s natural strengths, making them a global enabler of greener’ FinTech.
A blueprint for the future
FinTech Scotland’s Research & Innovation Roadmap outlines actionable research and innovation activities that can help develop economic, environmental, and societal value for Scotland and the UK through FinTech. Successful implementation will require the engagement and co-operation of key stakeholders within the FinTech Scotland cluster, and stakeholders from across the UK and internationally. The Roadmap is the first of its kind in the UK, but the aspiration is that it has created a framework that other countries, regions or indeed FinTech sectors can learn from and adapt.
More information about FinTech Scotland’s Research & Innovation Roadmap can be found here, where the full Roadmap can also be downloaded.