Fiona Henderson

With more than 140 companies, the Scottish fintech sector has been a great success story. Scotland has previously been voted the best place in Europe to start a tech business, so it’s not surprising the spotlight is on fintech as a key means of promoting economic growth.

Fintech Scotland published its Research & Innovation Roadmap in 2022, a bold strategy setting out key priorities aimed at growing the sector to create an additional 20,000 jobs and increase its economic value from £598 million to £2 billion by 2031.

Standing in the way of success is the decline of investment activity over the past 12-18 months, prompted by high inflation, rising interest rates, the geo-political landscape and a drop in company valuations. Both investors and large financial institutions focused on existing portfolios, with any new investment prioritised on fintechs with a track record and swift revenue growth.

According to KPMG, fintech funding across the EMEA (Europe, the Middle East and Africa) region fell from $27.3bn across 963 deals in the second half of 2022 to $11.2bn covering 702 deals in the first half of last year. FRP Advisory’s July 2023 report outlined how this decline in investment was having a mixed impact on Scottish fintechs, with 36 per cent of firms saying funding was harder to come by over the past year, but 44 per cent claiming the opposite.

While the M&A (mergers and acquisitions) market remains slow, there are reasons to be optimistic about the investment landscape in 2024. Scotland and the rest of the UK sector has been an outlier in the EMEA region, attracting the majority of its fintech funding over the first six months of last year. This accounted for half of the region’s ten largest deals, including the $3.1bn buyout of data insights firm Wood Mackenzie by Veritas Capital.

The divestiture of the Edinburgh-headquartered firm is further evidence of Scotland’s credentials as a key player on the global fintech stage. With current market challenges very likely to continue into 2024, lower valuations of companies and assets may encourage M&A activity and other investment deals through private equity and challenger firms for companies that are fundamentally strong businesses.

The investment outlook is particularly positive for the payments, insurtech, and wealthtech-focused sub-sectors. Within this tight market, fintechs keen to secure growth investment will need to put an increased focus on operational efficiency, sustainable cash flows and profitability. Companies that can leverage generative AI, particularly in cybersecurity, insurtech and wealthtech, are also likely to prove a more attractive prospect to investors.

Several UK fintech startups have combined crowdfunding finance with traditional sources, such as venture capital and private equity. This, along with the offer of equity-based funding, is an alternative option for early stage Scottish fintechs which require investment to scale their business. However, the UK SME funding gap remains a reported £22bn.

Ongoing innovation will continue to drive Scottish fintech forward and help them weather the current market conditions.

Fiona Henderson is a partner in the banking team at law firm CMS