“The old world will burn in the fires of industry. The forests will fall. A new order will rise. We will drive the machine of war with the sword and the spear and the iron fist”

JR Tolkien, The Two Towers, Lord of the Rings

Scotland’s Finance is enjoying a renaissance, a digital economy, should then history dictate tomorrow’s Fintech? In re-imagining Edinburgh versus London, the Two Towers, can Scotland compete as a viable alternative hub on grounds other than simply cost? In this Part 2, of the article, we explore the UK hub economy as it exists, versus regional ecosystems outside of London and the role education has to play? This then is no history lesson..

Old paradigms, new challenges

Our focus for Fintech naturally gravitates towards Edinburgh and its historical ties with London (the City’)? London and Edinburgh make a fine pair, Tolkien’s Minas Morgul and Orthanc, his Two Towers’. Indeed Edinburgh has served its London master well as an affordable outsourcing location and profited from it. In Part 1 we highlighted the operational leverage of outsourcing jobs from London to Edinburgh.

Whilst cheap has always been attractive; lower paid roles can become quickly commoditised. The first indication of the danger was global-sourcing to the likes of India. Here executives were exploring new lower cost locations. Just as our industry was coming to terms with globalisation it got hit by the Great Financial Crisis. The sense of being at the brink’ changed the long term strategies of many boards and many roles have been targeted by Digitalisation sooner. If you hear agile working’ at work then buckle up.

Unsurprisingly decision-makers and executives tend to be a little shy when it comes to their own synthesis. That will come later. The near-term problem is when those attractively valued skills become superfluous to automation. Fewer roles become a negative feedback leading to emigration, fewer graduate roles, resulting in brain drain, making the country less attractive to investment.

The fintech opportunity

Is then Fintech threat or opportunity? It is a question I am sure that my friend Professor Chris Sier asked himself when he became a champion for the Northern PowerHouse’ and establishment of its Fintech hub (Fintech North’). The reality is that over the last 50 years the UK has moved from manufacturing to a service-based economy and with it the North of England lost its economic leverage in the investment and political apparatus within UK Plc.

Meanwhile Scotland (specifically Edinburgh) benefitted from that industry rotation just as the North, Birmingham and other parts of Scotland suffered. Why? Today UK Plc, unlike say Germany, operates a single hub economy that has gravitated wealth and investment around London, the South of England and Edinburgh. London, itself as a global city, a metropolis of both finance, commerce and politics. It enjoys the multiplier effect that stems from such agglomeration, greater GDP per capita and tax receipts, just as other parts of the UK suffer flat or falling GDP, wage disinflation and stagnant productivity.

Technology then can be THE great enabler, a means to rebalance the economic hot spots of the UK. However it is vulnerable to policy error, inward and external investment naturally gravitating towards London, as new Technology companies seek to target Finance firms from Old Street across to Finsbury Square and into the heart of EC2 and Threadneedle. In doing so they set up shop close by.

Dickens or Tolkien?

The sheer gravity of London cannot be underestimated and it leaves the other centres vying for the scraps. How then should Edinburgh and Scotland respond? Coordination. Either Scotland (Edinburgh) seeks to pursue Dickens’ tale of two cities’, competing directly and openly with London, or are we left in a somewhat Tolkien-esque the Two Towers’ scenario, un-separable and subservient? Do we continue to operate as a satellite of the UK capital or increasingly compete for innovation and inward and external investment? This is the key question I pose to Fintech Scotland, under the stewardship of my friend and ex colleague Stephen Ingledew.

After all, Edinburgh (as the de facto main financial centre of Scotland) has effectively defined itself as much by its relationship to the City of London as it has through its own trading status. This link has been further reinforced as US banks set up front office operations in London and back office in Scotland, extending the tendrils between the two. Yet that relationship looks far less secure in a digitalised world for two reasons.

Firstly traditional Finance is in long-run demise and disintermediation, with it relationships between firms are changing from partner to competitor, as the value chain compresses. In the race for operational supremacy, insourcing becomes outsourcing in a capital lite’ world as employees are unceremoniously morphed into the Gig economy. You just need to count full time employees (FTE) v contractor heads in any of today’s big Finance firms to smell the coffee.

Secondly the requirement for affordable moderately skilled administrative staff, as an outsource centre for London, will become less attractive. Workforces in traditional roles will reduce simply as an effect of Digitalisation. We need only examine the realities of the once Scottish Insurance and Banking leviathans; now ostensibly under the control of firms South of the border or overseas. Workforces are rarely preserved on grounds of nostalgia or political intervention. Competitiveness, tax breaks, public-private partnership and or some other economic or political incentives are needed.

London, “the precious”?

By JB Beckett. In re-imagining Scotland’s new vibrant digital economy, should the history of today’s Finance dictate tomorrow’s Fintech (Financial Technology) map of Scotland? Is Scotland’s Finance and its Fintech tied to London or somehow distinct? Yes or no. In this first of a 2-part article, we explore the dichotomy of enjoying and suffering being a satellite to a hub economy, as Edinburgh is to London. This then is no history lesson..

Historical ties

In the UK when we talk Finance, two cities are quickly mentioned. London and Edinburgh. As most know, Edinburgh’s illustrious financial services history dates back centuries, to the establishment of The Bank of Scotland in 1695 to support the growth of Scottish business, RBS in 1696, the banks placed Scotland on the financial map of the UK despite competition from London. They later bank-rolled the City of London. It saw the introduction of paper money in Scotland; it opened up the opportunity for trade south of the border and the renaissance of a geometric-Anglo city for the modern Georgian world: the Edinburgh New Town.

However should our focus for Fintech revolve around solely Edinburgh and its historical ties with London (the City’)? Standing as the two key financial centres of UK Finance, London and Edinburgh make a fine pair, what Tolkien might have named Minas Morgul and Orthanc, his Two Towers’. Unassailable in their power share. However as Dickens wrote in a Tale of Two Cities’, the opportunity is also a threat:

“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way””in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.”

Scotland’s financial sector

“Through the centuries,” said Graeme Jones, Chief Executive of Scottish Financial Enterprise, to a reporter “our financial scene has played a huge part in the fabric and prosperity of Scotland as a whole”. He’s right of course, the addition to banking, the increase of international trade during the 1700s led to marine insurance. Then a growing demand for life insurance during the Napoleonic Wars: families of soldiers paying premiums in anticipation of the worst. Scottish Widows was established in 1815 to service those war widows and remains today in name (albeit a subsidiary of Lloyd’s Bank).

Meanwhile Scotland’s rich tapestry in asset management can trace roots back to Robert Fleming and the first ever investment trust in 1873. In Dundee, Robert saw the massive profits being made by the owners of Dundee’s jute industry and realised they needed to invest it somewhere. It was a model that would be copied across the rest of the UK. Then with every new development in Scottish financial services, so grew the legal profession, the accountancy and Actuarial profession, academic institutions, mathematics, economics, in Edinburgh.

“It’s clear to see,” says Graeme, “that the origins of the Scottish financial services industry aren’t predated anywhere in the UK. As we started to export and import, our home-grown economy started to grow.” Edinburgh thus stands aloft proudly on its heritage; even if millennials today might as easily interpret heritage as old’. Don’t forget that Amazon was only created in 1994 yet millennials cannot remember BA (Before Amazon) and that Jeff Bezos has a balance sheet larger than the entire Scottish Finance industry in totality.

Scotland, using experience to prepare the future

Today, Scotland’s Finance employs around 100,000 people directly and a similar amount again in support services. Scotland’s financial services sector is a vast economy compared to the size of its total populous. In a post-industrial, post-manufacturing age it is one of the country’s biggest sectors, generating around £8 billion for the home economy per annum.

Consequently Scotland is becoming an attractive base for the Fintech entrepreneurs and Edinburgh (the UK’s largest financial hub outside of London) lies at the heart of it all.

Unreservedly, Edinburgh has prospered both through Retail Banking, Insurance, Life Assurance, Wealth Management, Fund Management and Asset servicing on behalf of UK and global institutions. While Edinburgh’s own financial exchange (the smoker’) is long gone; Scottish-based employees have continued to provide expertise in securities servicing, investment accounting, performance measurement, trustee and depositary services and treasury services since London’s Big Bang’ in 86 and before.

Post 2009, Edinburgh has again helped mitigate the recessional pressures across the rest of Scotland for the better part of a decade. That and devolution being a defining feature versus the North of England. Yes, Edinburgh has enjoyed a long history in Finance and its links with the City remain as strong ever since the Scottish Banks capitalised and founded the Bank of England. Scotland’s Economic and Actuarial sciences have been the very DNA of Finance ever since.

However the role of Edinburgh is not assured simply by history, the brand names that still occupy it or by virtue of attractive postcards on Princes Street. Edinburgh is a fantastic city to work in, often wet but full of fresh air that someone in Shoreditch could only dream as they knock elbows for space, tabbing through green space images on social media as they sip their tenner’s worth of artisan flat white.

Scotland, a fintech capital

As effectively ground zero’, then, after 200 years of shaping the modern (old) Anglo-Saxon finance industry, Scotland’s commutation to Financial-Technology (fintech’) or Finance 2.0 asks probing questions about our collective will to transform. It is about new skills but also a new persona of what Scotland’s Finance will look like, how it will be shared and shaped by Fintech. This has far reaching social, economic and political questions that reach deep into our collective psyche, ambitions, collegiate working practices, start-up investment, regional disparities and culture.

How does Scotland become a true global Fintech centre to rival London, Berlin, New York or the Bay area? As Dylan sang times are a changing’. Once the actuaries of Edinburgh and Glasgow held court for the industry, but those days are fading fast. The mutual giants demutualised then quickly became owned by non Scottish conglomerates. As the older actuaries retire they leave behind over 70% of members of the Institute and Faculty of Actuaries under the age of 40 and over 50% of members being non qualified students. Actuaries are already somewhat redundant in terms of predictive modelling but eek sufficient living from changes in longevity rates, cash flow matching and quasi investment analysis. They face an uncertain future as adaptive intelligence and self-learning synthesises, assimilates and optimises 200 years of Actuarial rules in the blink of an eye.

Moreover, in excess of 35,000 people work in Edinburgh’s financial and insurance quarter while more than 90% of all Scottish fund managers (like Baillie Gifford) are based in the city region. Many firms represented host asset servicing teams, client management but fairly minimal front office except for home-grown firms like Baillie Gifford, Scottish Value Management and Kames. The city is home to Europe’s second largest asset fund manager, Standard Life Aberdeen, as well as retail and challenger banks, platforms, Actuarial consultancies and ethical finance providers. In many cases the majority of the staff can be typified as support function or middle Office’ just as the majority of Glasgow’s workforce might be described as back office’ or more politely operational support’.

An urgent need to change gear

All of these roles will be reduced in some way, as companies shift CapEx from people to technology. Even without Brexit, in 10 years we only see 10% of those current roles left in their current form. Some will disappear, others change. Those decisions will be made in London, Paris or New York not Edinburgh. If that’s true then the productivity enjoyed by Edinburgh from London today will deteriorate.

That leaves a hole in the Scottish economy that Fintech must aim to fill. Only slightly less gloomy, a 2017 report by the Centre of Financial Regulation and Innovation by Strathclyde Business School in Glasgow revealed that Scotland could, in a worst-case scenario, lose over 14,063 jobs (14%) in its financial services sector over a 10-year period, the worst-case prediction seeing a loss of £597m in taxable salaries. Conversely in a best-case scenario, investing in Fintech could inversely “lead to the creation of an additional 14,959 jobs in the Scottish banking industry” adding £1.1bn back to Scotland’s taxable income. The report’s co-author, Daniel Broby, told the Herald Scotland that the two outcomes call for a streamlined and coordinated’ approach for the development and adoption of Fintech.