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.

 Actionable Research: Research, using technologies and data to create actionable insights that can be applied commercially using FinTech.

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

More information about FinTech Scotland’s Research & Innovation Roadmap can be found here, where the full Roadmap can also be downloaded.

FinTech research and Innovation ”“ the future of finance

This month we published our FinTech Research and Innovation Roadmap. We know more research and innovation in financial services and fintech will set us on a course to shape the future of finance.

It’s been in the works over recent months, and it’s allowed us an opportunity to hear industry, consumer academic, and innovators views on what the future of finance and fintech could be. Leading the way!

It’s a genuine privilege to hear the ambition and determination across the fintech and finance industry for a future that means less friction in financial services, enables more inclusion using technology and data, and drives climate change enabling greener investments.

The tone from all was clear, fintech will drive better financial outcomes for people, businesses, our society, and the environment. The desire for change and energy for innovation and collaboration is truly inspiring.

The report gives us a framework for focused collaboration. It identifies 4 priority themes and outlines the primary actions that will enable us all to learn, advance, and most importantly, build the right collaborations to drive and lead future fintech innovation. It was published during the first anniversary of the Kalifa review of UK Fintech where more R&D was a specific recommendation.

The first of those priority themes in Open Finance Data ”“ already an area of strength in Scotland! FinTech businesses such as DirectID, Visible Capital, Inbest, AirFunders, and One Bank all use Open Finance Data in their businesses. This experience along with the investment in the Global Open Finance Centre of Excellence, now known as the Smart Data Foundry sets us on a course to explore how Open Finance Data can change the way we do finance in the UK and across the world.

Climate Finance is another key priority ”“ a growing area of strength and focus for Scotland. FinTech businesses such as Snugg, Coastr, Pulse, Iceni Earth, Trade in Space, and Space Intelligence are all focused on using data and technology to help people and businesses make the changes needed to achieve change in the interests of the planet. These businesses are enabling a different future. The same can be said for the research community in Scotland with centres such as The Centre for Sustainable Developmentand the Edinburgh Climate Change Institute leading research and providing deeper and focused insights on climate impact. From this place of understanding more will change.

Payments and transactions’, as well as Financial Regulation’ complete the 4 priority themes. Again, both assets for Scotland, where the depth of fintech innovation, skills and expertise stand Scotland’s FinTech Cluster in great stead. More on both these themes in the coming weeks and months.

For now, we’re gearing up for UK FinTech next week. There’s a host of events in plan where we’ll have an opportunity to share the wonderful work happening across FinTech Scotland.

I’m signing off with a note of thanks and a special note of thanks to everyone who contributed to the FinTech Research and Innovation Roadmap.

The Roadmap is a true demonstration of Scotland’s FinTech Cluster at its best. It highlights the breadth of contribution to the cluster that allows us to learn, collaborate and inspire each other for development and growth. It shows how our commitment to action for positive change, and it is ambitious, challenging us to think ten years ahead so we can lead the future of finance.

I’m looking forward to seeing this advance and working with the inspiring leaders, innovators, entrepreneurs, and educators as we build and teach the future!

Thank you

Nicola

Existing insurers and disruptors are utilizing Artificial Intelligence to create new business models

We can see that Artificial Intelligence (AI) is transforming many parts of our lives, but do we know where this journey is taking us? Insurers need some certainty on what their future will looks like. Some new insurers are trying new business models enthusiastically and then changing direction sharply, like a speedboat swerving to avoid a collision. The larger insurers, however, are like large cruise ships; they need to be able to see far ahead before they plot their course, and they don’t want to keep changing direction.

This research tried to identify the viable AI driven business models to help give some clarity. Some traditional insurers are just trying to be more effective with AI, while others reinvent themselves to fully utilize the new capabilities available. Tech-savvy companies from outside the sector like Tesla, are entering and disrupting it. Would these diverging paths continue, or would they converge in the future towards one, ideal, business model? This research focused on one example of a traditional insurer and one new tech-savvy disruptor and evaluated whether their models are converging.

AI is changing the insurance value chain, as illustrated in figure 1. Most new insurers, like Tesla, offer fully automated simple services. The traditional insurers offer some of their simpler services in this way. The more complex services are supported with AI, but a human makes the final decision. An example of this are audits for fraud, where the AI identifies unusual patters and cases for an expert to evaluate.

There are signs of convergence between the models of traditional and new insurers. First, there is convergence in technologies, such as the use of chatbots utilizing AI. Second, there is a convergence in processes, for example, the interaction with the consumer. Third, there is convergence in the strategy on costs and pricing.

However, there are two areas where there seems to be a limit on convergence, which seems to suggest the business models of the incumbent and the disruptor will remain distinct. These are: (1) evaluating risk and (2) the cost of attracting the user and profitability.

Despite some convergence, certain differences are likely to remain even after this transitionary period. This is because the two models have distinct competitive advantages. Traditional insurers no longer monopolize the capability of providing insurance, but they still have the existing user base and utilize it to evaluate risk. Technology-savvy companies that now offer insurance, have their own forms of engagement with their consumers, use different methods to evaluate risk due to their access to real time data, and do not prioritize generating revenue but instead utilize insurance to increase their user base, overcome barriers, and reduce the overall cost of their products and services.

Therefore, when insurers are thinking about how to utilize AI and plot their course through the turbulent, unpredictable times ahead, they should stay true to what they are. This is their comparative advantage.

Dr Alex Zarifis is a lecturer at the University of Nicosia in Cyprus.

This article is adapted from his paper, “Evaluating the New AI and Data Driven Insurance Business Models for Incumbents and Disruptors: Is there Convergence?” available from https://doi.org/10.52825/bis.v1i.58.

The future of automation for UK asset managers

The last 18 months have been amongst the most disruptive that the financial services industry has ever experienced, forcing many sectors to reconsider business models.

Asset managers in particular have undergone a substantial transition as video conferencing has replaced client-facing interactions. To better understand how these firms have responded to market disruption, we surveyed 100 Heads of Operations across UK asset management firms to learn about their operational challenges, automation objectives and plans for regulatory compliance in 2022.

From this study, three lessons stood out for their relevance to the wider fintech industry:

1. Operational challenges and tech improvements are company-specific

We asked asset managers what does and doesn’t present a challenge to their daily operational processes.

While the availability of automated systems and adequately skilled staff were highlighted by two-thirds of respondents as the most significant challenge, firms also pointed to many others including the functionality of manual resources, process complexity and a changing regulatory burden.

Although nearly 8 in 10 acknowledge that the capabilities of current systems are hindering operational growth, firms have identified a range of priorities to improve these systems from seamless data flow, AI-assisted dashboards and dynamic data management through to enhanced risk management and talent acquisition.

The variety of responses tells us that no two firms face the same operational challenges and, consequently, that technology infrastructure improvements for 2022 will be equally varied in their application to the asset management industry.

2. Manual reconciliations continue to challenge asset managers

Reconciliation is an essential process for keeping accounts and financial records accurate. In recent years, more firms have been automating reconciliation procedures to eliminate risk of error and improve accuracy.

Despite this, our survey reveals that:

• 60% of asset managers worry that manual reconciliations are the greatest risk to their organisation
• 75% say that the number and volume of manual processes is an immediate operational challenge
• Only 7% say that manual processes present no challenge to their firm

Data preparation was also highlighted amongst the most time-consuming tasks for businesses, which further highlights how the complexity of data management continues to grow year on year. This is consistent with our work across other sectors, where we find that manual processing is really the core issue underlying poor reconciliation disciplines.

With half of UK asset management firms allocating budgets between £0.5 and £10m to address manual inefficiencies, we can expect automation to become more deeply embedded in the industry throughout this year.

3. Regulation is accelerating the trend towards automation

Although manual processing has been steadily declining for years in favour of automation, our findings show that a growing regulatory burden is definitely a factor in this transition.

Just 2% of asset management firms in the UK have no plans to invest in automation to achieve regulatory compliance. For the majority that did, top focus areas include operational resilience, prudential regulation, MiFID II and CASS. A further 7 in 10 felt that automation will be instrumental in achieving compliance with the IFPR regulation, which came into effect on 1^st Jan 2022.

These findings tell us that UK firms are actively pursuing automation as a convenient and cost-effective way to fortify against regulatory breaches. Nevertheless, with 42% still pointing to new or changing requirements as the biggest threat to their company, such solutions need to be flexible as requirements continue to grow in scope and complexity.

What does this mean for software providers?

The results of our survey clearly demonstrate that automation in finance will become ubiquitous in the medium to long-term. However, the variety of responses and priorities outlined also shows that firms do not want an off-the-shelf solution; instead, they want a reconciliation platform which:

• Is configurable to specific operational needs
• Eliminates manual intervention through end-to-end automation
• Is purpose-built around specific regulatory requirements
• Is flexible to accommodate for multiple iterations of regulations

Of course, these are welcome findings at AutoRek, where we have spent over two decades working with financial firms to build bespoke solutions for unique reconciliation, operational and regulatory requirements.

In the short-term, it is clear that asset managers recognise how automated reconciliation disciplines do and will continue to form the cornerstone of an effective business model in today’s post-pandemic environment. It will be interesting to see how this plays out across the wider financial industry over the next 12 months.

Photo by George Morina from Pexels

An end of year “Thank You” message from our CEO

As we come to the end of 2021 and look forward to 2022, we’re reflecting on the year and are hugely proud of what’s been happening across Scotland’s FinTech Cluster. Despite the continuing challenges from the COVID-19 pandemic we’ve seen fintech SME Growth, both in number of businesses and in terms of scale, we’ve seen record levels of investment in Scottish fintech SME’s, a true testament to the calibre of the businesses and leaders who continue to inspire us day on day.

The past twelve months have also seen more international growth with up to 50% of Scotland’s fintech SME’s building plans for international trade and more global businesses locating to Scotland as they establish a UK base.

We’ve also had the Kalifa review of UK fintech acknowledge the established progress of Scotland’s FinTech Cluster, and we’re looking forward to supporting the implementation of the Scottish Technology Ecosystem Review led by Mark Logan and building a plan to enable Scotland’s future digital economy.

The FinTech Scotland festival provided us all with an opportunity to meet again face to face and if we needed it, it reinforced the energy, optimism, diversity of contribution and breadth of collaboration that contribute to our fintech successes. A highlight for all of us in the FinTech Scotland team were the hybrid and in person events, kicking off with the DIGIT FinTech summit and ending with the Times and Futurescot event where we welcomed the UK regional fintech clusters to Scotland in the Accelerating UK FinTech conference.

During 2021 we have seen a growth in climate fintech, with new fintech SME’s starting to develop businesses to help address the impact of climate change and support the journey to net-zero, as well as established fintech SME’s expanding their existing capabilities to tackle this important issue. I have no doubt we’ll see more of this in 2022 and we’re looking forward to doing more to stimulate and accelerate climate fintech in Scotland.

With the establishment of the Scotland fintech SME advisory Board we have a clear plan on fintech SME priorities for 2022, and it is a privilege to work with these dedicated leaders who have come together aligned behind the vision of economic, social, and sustainable growth across the FinTech Scotland Cluster.

Looking forward to 2022 we’re focused on supporting fintech SME’s to scale and grow, strengthening international connections, building more impactful fintech collaborations and deliberately driving more fintech Research and Innovation (R&I) in Scotland and across the UK. We plan to launch the FinTech Scotland R&I roadmap early in 2022. It’s a plan that pulls together industry R&I priorities as we ask ourselves, what should finance look like in 10 years-time, and it provides us with a framework to lead the answers to that important question.

In drawing to a close, I’d like to say thank you to everyone that’s supported the FinTech Scotland Cluster across 2021. I’m continually reminded of the privilege it is, to know you and work with you in our collective efforts to lead and achieve our ambitions for fintech in Scotland. I’d also like to say a special word of thanks to the brilliant team at FinTech Scotland. I see their energy, commitment and drive everyday and it’s a pleasure to work them.

My final note is to wish you all a happy and healthy 2022 and we’ll look forward to seeing you all next year as we continue to build on our plans and drive the FinTech Scotland Cluster.

82% of 50s market would not take robo-adviser financial advice

New research from Visible Capital on the over 50s market shows that 82% would not take financial advice from a robo-adviser and 88% would not be willing to give details of their finances to a robo-adviser to enable them to give a better personalised service.

The results come from new research carried out amongst UK adults with an age range from 50 upwards, with the bulk of the respondents aged 60 to 80. 38% said they currently access financial advice through an adviser or accountant.

This aversion to pure digital advice was amongst a cohort of whom over 60% said they had been relying on technology more during the pandemic period and are comfortable with technology and have clearly adapted well to navigating the huge range of interactions and services which have gone online during COVID19.

Among the group, 84% were using online services for general banking, 52% for insurance, 44% savings and investments, 64% for payments and transfers and their 55% were managing their credit cards digitally. Yet only 15% of respondents used online services for advice.

A fifth (20%) of respondents said they trusted technology less coming out of the pandemic; perhaps some of their digital encounters have been frustrating and only borne of necessity.

Ross Laurie, CEO Visible Capital, comments:

“This should be interesting reading for financial advisers being a wealth cohort of which 64% said they felt reasonably well off’, which for the majority of advice firms will sit squarely within their core client group.

The results of our survey show that age 50+ savers and investors are no strangers to using digital services, which has been accelerated by the pandemic and is likely to grow in the post pandemic world. But, as yet, they have not taken advantage of online financial advice. Our survey results show that trust is a major factor here. Utilising the tools and services with which this group are already familiar ”“ online banking, investing, saving, etc, ”“ advice firms can offer this day-to-day technology with the kind of personal, trusted human advice which many of them already value.

Advisers have a real opportunity to step into the hybrid advice space and claim it as their own.”

Scotland Fintech festival! We loved it and can’t wait for next year!

We recently concluded the FinTech Scotland festival ending a wonderful four weeks where we got to celebrate fintech innovation in Scotland, across the UK and around the world!

With 60 events covering a broad range of interesting topics, discussions, and views for the future there was plenty to talk about and more to excite us for the next 12 months ahead.

We started in Edinburgh and ended in Glasgow taking a trip around the world via Australia, America, Europe, Dundee, Stirling and London!

Among my favourites were the face to face events, where the buzz and energy in the room confirmed there’s much going on in FinTech innovation in Scotland, and that we all were excited to be out and about reconnecting face to face, enjoying new conversations and sparking new ideas.

Digit’s FinTech Summit kicked everything off in true Digit style. It was great to see Visible Capital, LendingCrowd, Amiqus, Sustainably, ShareIn, Zumo, Nude, Exizent and Love Electric, all Scottish home grown fintech talents, building and scaling businesses, and developing the future of finance.

Other one of my favourite events was a truly brilliant and informative discussion on the meeting of Space Data and FinTech! Thank you, the University of Strathclyde, Trade in Space, Go-to-Market for sharing your insights, experience and expertise on how Space Data gives us an exciting prospect for more fintech innovation!

FinTech innovators never fail to inspire me, it was an privilege to share an event that saw Know-it, Doqit, Biscuit Tin, PolyDigi and Gigged.ai talk about their businesses, innovations and aspirations for the future.

We connected around the world, sharing experiences of Open Banking innovation with FinTech Australia and hearing directly from a range of European regulators on their experiences of fintech.

Our own regulator the FCA hosted a record number of events covering topics from crypto, Innovation, Sustainable finance and RegTech!

We rounded the festival off in Glasgow with the Times Scotland and Canongate event and an opportunity to discuss accelerating fintech across the UK! Another event that reminded me of the value of connection, the true potential for UK fintech innovation and role that Scotland plays in influencing that story and setting direction.

Thank you for joining us, being part of our story and helping us to shape the future.