Innovation has been part of the fabric of Scotland's
financial services (FS) scene throughout its long and rich history.
With customer expectations changing, possibly more in the last
decade than ever before, it's just as well.
It's clear that consumers of financial products are showing
increasing willingness to experiment with different providers and
products. That, in turn, is creating ideal conditions for some of
the new technology-focussed businesses in FS to challenge
traditional banking models.
It is, perhaps, no surprise then that Edinburgh, in particular,
has seen a swathe of financial technology (Fintech) companies set
up – evolving out of hubs, such as CodeBase, across the
The sector is fast becoming one of the real growth opportunities
for the Scottish economy – a fact underlined by Scottish
Financial Enterprise's decision to launch a devoted Fintech
Strategy Group. The industry is estimated to take in annual
revenues of Ł20 billion across the UK, employing 135,000
people; a good portion of both is in Edinburgh.
The question of recent times has been whether or not these
companies can pose a serious challenge to the established players
– can they ever be a real threat to high street banks as
lenders, or a source of income for investors?
However, for me, this is the wrong question to ask – for a
number of reasons. What we should really consider is the
increasingly vital part these Marketplace Lenders (MPLs), or
peer-to-peer lenders as they are more commonly known in the UK, are
going to play in the future of financial services.
The exact nature of that position within the market is still
emerging. But, our analysis suggests several predictions.
Firstly, it's fair to say that MPLs' role in innovation
has already been keenly felt – and they are likely to drive
it further in the future. Their services and processes tend to be
speedy and convenient, while they are also exceptionally adept at
spreading their message through new digital channels. Many banks
will seek to replicate the improved user experience offered by MPLs
and their acquisition strategies, which can only be a positive
outcome for customers.
Secondly, there are areas of the market that favour these
attributes of MPLs services and are willing to pay a premium for
them – invoice financing for SMEs and high-risk retail
borrowers, for example. As a result, MPLs are likely to find and
corner market segments which are currently unsatisfied by existing
institutions. They may also offer a low-cost option for certain
investors to gain direct exposure to these asset classes.
Finally, the upshot of both these dynamics could create a real
opportunity for collaboration between banks and MPLs, where they
are not in competition with one another. This is already happening
in the US, and we'd anticipate seeing more of it here.
Banks should evaluate the wide range of options presented by the
emergence of MPLs and consider how they could be used to enhance
their own customer propositions. This could take the form of
providing referrals to customers who lie outwith banks' risk
appetite, investing customer deposits through MPLs or assessing
white label product options.
The emergence of Scotland's Fintech scene presents a number
of opportunities – not only for consumers, but the
established order of financial services too. They would do well to
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