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New entrants emerging says survey

Scotland ‘well-placed’ to nurture fintech sector

PwcScotland is well-placed to benefit from the growing “fintech” sector as more banks and insurers invest in technology to improve efficiency and meet the demands of regulators.

This is a key finding of the latest CBI/PwC Financial Services Survey which noted a slowdown in business volumes in the last three months.

However, it identified a “significant opportunity” for Scotland to shape a new sector in fintech which is attracting new entrants.

Overall business volumes rose at their slowest pace in two years, following nearly two years of robust expansion. But building societies & finance houses and life insurance business volumes continued to grow at a healthy pace, the latter for a fifth consecutive quarter.

Financial services firms expect growth to tick up in the next three months, but to remain below the strong growth seen earlier in the year.

Optimism about the overall business situation was stable, after more than two and half years of continuous improvement.

Strong competition seems to have had a knock-on effect on income growth for financial services firms, bearing down on fees & commissions as well as net interest, investment and trading income. But with average costs under control, profitability grew at a healthy pace, albeit somewhat slower than in recent quarters.

Fraser Wilson, financial services partner, PwC in Scotland, said: “Emerging macro-economic factors in recent months, from global stock market turmoil to the economic slowdown in China, appear to have tempered previous levels of optimism. As a result the industry, both in Scotland and across the UK, is being more cautious on its short-term growth prospects.

“And with interest rates likely to remain at historically low levels, growth for UK banks remains challenging as we head into 2016.

“We’re seeing an increasing focus on technology investment as banks and insurers across Scotland deal with the demands for greater efficiency and ongoing regulatory compliance. With technology becoming an increasingly disruptive force, FinTech is emerging as a significant opportunity, although some risks prevail with many in the industry still unclear as to how it will impact their business model.

“As we have seen in the past, Scotland is well placed to benefit from new market entrants. With growing evidence of an increased FinTech presence, Scotland not only has the opportunity to help shape this market but to nurture new industry leaders as they emerge.”

Numbers employed dropped slightly on the previous quarter, but remained higher than was seen at the beginning of the year. With profit growth tipped to slow further, firms do not envisage any increase in headcount over the coming three months, but will continue to spend more on training.

Firms plan to scale back investment in most other areas, including marketing, land and buildings (where investment intentions are at their lowest since March 2009) and vehicles, plant & machinery, but will continue to grow robustly in information technology.

The principal reasons financial services firms gave for any further investment were the need to increase efficiency and speed, followed by statutory legislation and regulation, the latter being a survey record high. Meanwhile, concern that a shortage of finance and labour could constrain investment rose to highs last seen during the financial crisis.

A record two thirds of firms believe that competition is likely to come from new entrants to the sector, and the rise of Financial Technology (or FinTech – software providing financial services) could have an impact on firms’ profitability. Life insurance firms see it as an opportunity, but other sectors remain uncertain of its impact, or even view it as a threat to their profits.

Rain Newton-Smith, CBI Director of Economics, said: “The winds of volatility blowing through global markets have left a clear mark on the financial services sector, impacting business volumes and investment intentions, particularly in investment management and securities trading.

“Nevertheless, building societies’ business volumes have rebounded, and with financial sector costs under control, profitability is in good shape. At the same time, investment in IT is set to increase as firms aim to improve efficiency.

“Slower growth in China and other emerging markets has had a knock-on impact on confidence in the world economy, with the Federal Reserve holding off raising interest rates in the United States.

“It’s interesting to see that the sector is waking up to the impact of FinTech. Firms will need to look carefully at their operations and put strategies in place in order to profit from or protect against the impact of new technologies.”

Key findings:

·        25% of financial services firms said that business volumes were up, while 21% said they were down, giving a balance of +4% – the slowest rate of growth since September 2013 (-10%)

·        Looking ahead, 24% of firms expect business volumes to increase, while 8% said they will fall, giving a balance of +16%

·        28% of financial services firms said they felt more optimistic about the overall business situation compared with three months ago, while 26% said they felt less optimistic, giving a balance of +2% – the lowest rate of growth since September 2012 (-12%).

Incomes, costs, profits:

·        Overall profitability grew at a healthy pace, with 46% of firms reporting that profits had increased and 17% saying they fell, giving a rounded balance of +30%

·        Income from fees, commissions and premiums continued to decline at the same rate as in the previous quarter (a balance of -20%), disappointing expectations for a return to growth (+28%). Growth is expected to resume next quarter (+13%)

·        Growth in income from net interest, investment and trading income moderated (+13%), although to a lesser extent than expected (+6%). Growth is expected to slow further next quarter (+4%)

·        Overall operating costs continued to grow (+20%), but growth weakened from the last quarter (+47%). Cost growth is expected to slow further next quarter (+15%).


·        29% of financial services firms said they had increased employment, while 24% said that it had decreased, bringing the overall rounded balance down to +6% from +13% last quarter

·        Numbers employed are expected to be flat next quarter (0%), although building societies & finance houses expect a strong rise in headcount

·        Training expenditure was broadly flat (+2%), but a stronger increase is anticipated over the next quarter (+24%).

The next 12 months:

In the year ahead, financial services firms expect to scale back investment across the board, with the exception of Information Technology:

·        IT (+48%)

·        Marketing (-6%)

·        Vehicles, plant & machinery (-15%)

·        Land and buildings (-45%)

The main reasons for authorising investment are cited as:

·        To increase efficiency/speed (cited by 84% of respondents)

·        Statutory legislation & regulation (72%) – a survey record high

·        For replacement (72%) – highest since June 2009 (77%)

The main factors likely to limit capital authorisations are cited as:

·        Uncertainty about demand or business prospects (cited by 59% of respondents)

·        Inadequate net return (59%)

·        Shortage of finance (39%)

·        Shortage of labour including managerial & supervisor staff (38%)

The main factors likely to constrain business over the next year are:

·        Level of demand (cited by 77% of respondents)

·        Competition (72%)

·        64% of firms see competition coming from new entrants – a survey record high

·        The growth of FinTech could have an important impact on profitability. Life insurance firms tend to view it as an opportunity (+19% of these firms view it primarily as an opportunity versus those viewing it primarily as a threat), but it is viewed as a threat by some, particularly those involved in investment management (-16%) and securities trading (-21%).

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