Digital finance roadmap highlights hot topics in fintech

At its heart, fintech is the application of technology to financial services and products, but that definition doesn’t give much away. Fortunately, there are other tools that we can lean on to discover more about what digital finance has to offer. And one of the most fruitful is road mapping, which – taking FinTech Scotland’s 2022 to 2031 projection as a recent example – shines a thoughtful light on the future of digital finance. So what are the big takeaways?

First up, themes. At a high level, the fintech sector can be broken down into four key innovation areas:

1. Open finance data
2. Climate finance
3. Payments and transactions
4. Financial regulation

And to discover more, it’s worth diving into each one and exploring some of the success stories so far. Starting with ‘open finance data’, this includes the work of organizations such as the Smart Data Foundry that’s on a mission to ‘unlock the positive power of financial data to improve people’s lives’. Giving customers the ability to move their banking data easily and securely from product to product, opens the door to greater competition in the financial market, and gives fintech ideas improved prospects for growth. Data can serve up a wide range of insights. Financial information provides a measure of well-being and resilience, for example, and making indicators available to stakeholders (in a safe and secure manner) means that help can be provided sooner, if needed, and initiatives adjusted if they fail to deliver.

Transformers

Making it more straightforward for fintech firms to integrate multiple data streams helps companies such as Nude – a Scottish start-up that raised more than GBP 3.5 million on equity crowdfunding site Seedrs. The company’s fintech app helps aspiring homeowners save money faster and more efficiently, by giving users better visibility of their finances and adding clever behavioral science to the experience. Car rental fintech Coastr is integrating vehicle telematics, and other smart features – such automated driver license lookup, powered through an API – to its digital platform. Again, the firm is looking to disrupt a traditional business sector – vehicle rental in this case, rather than house buying – through the application of well-integrated, customer-friendly services.

Doing things differently is critical to the success of climate finance too – another of the primary themes in the fintech space. Done right, fintech has strong prospects for enabling carbon markets and carbon offsetting activities that will be necessary to price a more sustainable business landscape. Auditing and verification will be crucial too – for example, using satellite data to evaluate industrial activity; one of a number of innovations at play in green finance. There’s also the circular economy to consider, and fintech can make a positive impression here too through apps that keep goods out of landfill.

In terms of where fintech is today, much of the attention is on payments and transactions, which includes digital currencies, embedded payments (for a seamless experience), and the security necessary to steward the transmission of money to its intended recipients. Over a third of Scotland’s more than 190 fintech firms are engaged in transforming payments and transactions. And globally, payments dominate fintech investment – as observed by accounting giants such as KMPG, which has been following the sector closely through its ‘Pulse of Fintech’ series of reports.

Digital highlights

Stars of the tech world such as Google and Apple are now very much part of digital finance, bringing huge numbers of users with them. Banking regulations have evolved and allowed the sector to open up. And interest, of course, is huge in exploring concepts such blockchain and digital ledgers – codified tools for securing a list of records. The cryptocurrency scene has its fans and skeptics in equal number, but it remains an important area to watch, albeit from a safe distance. It’s also interesting to note the rise of virtual money in the digital domain – in-game currency, which is proving rewarding for digital creatives and operators. Some game developers are reportedly employing economists to advise and better understand the ramifications of tweaks made inside the respective virtual worlds.

Last, but not least, on our headline tour of fintech is regulation, which might sound like a dry topic, but is vital to the longevity of the sector. It requires a ruleset that on the one hand brings confidence to investors, necessary to finance the growth of ideas, but without constraining the fresh thinking needed for fintech to be truly impactful. Innovations here include the UK Financial Conduct Authority’s (FCA) regulatory ‘sandbox’ that – crucially for the fintech sector – ‘allows firms to test innovative propositions in the market with real consumers’. In 2022, which marks the scheme’s seventh year of running, the FCA moved to an open model that accepts applications all year round.

In the region of 200 companies have used the framework to test a huge range of fintech-powered services. Projects include a semi-automated citizens advice tool for managing debt problems, innovative insurance for rebooking disrupted travel, a secure online register for cataloging assets, behavioral assessment enabled through AI and facial recognition, blockchain tracking of humanitarian finance, apps for quickly canceling unwanted subscriptions, and much more. To keep everything under control, firms that are accepted (around 1 in 3 applications make it through to testing, looking through the cohort stats) have a case manager, who both provides support and enables oversight of the pilot. “Sandbox tests are expected to have a clear objective and a clear positive impact on consumers,” writes the FCA. “They are typically conducted on a small scale, for a limited duration, [and] with a limited number of consumers.”