AI and the reboot of Scottish finance

Don't stick your head in the sand, the prime minister has told us. But don't lose sleep over it either.

His message, in a speech on Thursday, is that artificial intelligence (AI) is coming, ready or not. It brings some scary threats, including - at a stretch - human extinction, but somewhat greater possibilities for misinformation, fraud, scams, the derailing of democracy and terrorist deployment of chemical weapons.

It also offers more positive prospects, from drug discovery to the classroom to automating dull and repetitive tasks. Every day, a new use is found - today, it's by Airbnb, in its quest to hunt down party animals.

For most people, if they've stopped to consider AI at all, the most immediate threat and opportunity is in the workplace.

Many jobs could be replaced by AI, including professional and well-paid white collar jobs. Think of all the lawyers who would be out of work if AI could be trusted to draw up and check contracts.

But we're being encouraged to think of it as a workplace co-pilot, allowing us to add output and value to work, increasing productivity, and taking over the duller chores.

Past experience of new technologies teaches us that some jobs disappear, but new ones are opened up, and usually more of them.

That's the positive approach to AI being taken by Scotland's finance sector. At the same time that the prime minister' speech was preparing the ground for next week's UK-hosted AI safety summit, Scotland's money people were preparing for their annual awards dinner at which they are launching an ambitious strategy for growth.

Fifteen years after its big banks crashed and seemed a threat to the whole finance sector, in Scotland it now has nearly 140,000 jobs, and represents nearly a tenth of output from the Scottish economy.

While Royal Bank of Scotland and Halifax Bank of Scotland no longer boost the Edinburgh economy with their headquarters dynamic, the big numbers can be found in Barclays, choosing Glasgow as one of its three global hubs, and international giants JP Morgan, Morgan Stanley, BNP Paribas look to Scots for back office functions, fraud prevention, tech support and innovation.

The aim of trade body Scottish Financial Enterprise (SFE) is to grow the sector in Scotland from £14.3bn of added value in 2021 to between £17bn and £21bn within only five years.

A further aim is to double the amount of Assets Under Management, from £500bn to £1trillion, despite that figure going backwards in recent years, as companies have merged. These are the financial assets entrusted to Scottish fund managers by mainly institutional investors such as pension funds. The strategy is to build on strengths, and one of them is asset management.

Another is in energy, and funding renewable power. This is growing at a staggering rate around the world. A report for City UK and BNP Paribas found that the green finance market grew from $5bn (£4.1bn) in 2012 to $541bn (£445bn) in 2021, with lots more growth to come.

Others are vying for this business. The message with this strategy is not just that there are opportunities, but that there is a threat of being left behind. Others move fast. Edinburgh was recently rated fifth in the world for its human assets in the finance sector, but has slipped rapidly to number 16.

Such league tables seem to count for a lot in the flow of international investment. In this year's Global Financial Centres Index (GFCI), Glasgow was at number 45 and Edinburgh at 27. The aim is to get Glasgow into the top 30 and Edinburgh into the top 20.

Emerging economies have fast-growing financial centres. The GFCI doesn't include either Glasgow or Edinburgh in the top 15 "most desirable places to live and work" or in the 15 centres most likely to grow in significance - a list headed by Seoul, Singapore and Kigali in Rwanda.

It is to America that Scottish Financial Enterprise looks for inspiration. Instead of the high costs of New York, asset management has grown in Boston, while Atlanta has become the US hub for payments technology. Chicago and Seattle also offer clusters of expertise.

The aim is to make Edinburgh and Glasgow - with their lower cost base than big financial centres such as London, and an adaptable pool of finance-savvy recruits - a Scottish hub for financing the transition to green energy, from the turbines through the cabling to the battery-powered products.

Behind that part of the strategy is proximity to the opportunity from ScotWind, the vast project to build out offshore windfarms around Scotland. This is where a lot of money is about to spent. But success in issuing green bonds, for instance, would have to aim to be a European or global hub, pushing Edinburgh up from number 14 in the GFCI league table of 86 green finance centres.

The other message, including one to governments, is that the energy sector is going through a transition from oil and gas which will be painful for some. So by contrast, if national policy can give the finance sector a helping hand, it can grow without the painful stuff.

And faced with the glacial pace of productivity improvements across the British economy, finance is one sector where productivity is already strong, and has potential to grow rapidly.

That is where AI plays its part. Scottish universities are a crucial part of this strategy, providing both the research expertise and the graduates to make the strategy happen. They have been important to more than 200 fintech companies being set up in Scotland. Some succeed by being bought over.

Embark is one example, bought by Lloyds Banking Group to provide the software platform for the fund managers in its Scottish Widows division. Started in Dundee, it has grown under the strength of an owner with deep pockets, so that it now employs 200 people in Britain, with its biggest office still on Tayside.

It's high risk, though. Some don't make it. Money Dashboard is one that impressed when I visited some years back. It was incubated in Edinburgh's TechCube hub, and grew to have five million people using its app to see where their outgoings were going, in simple colourful charts.

But it hasn't stacked up as a financial venture. Others offer something similar. It couldn't find an industry buyer, and the apps are being closed down next week.

Such university and fintech firms have been working with SFE as well as the trade bodies representing the financial sector in London and at a UK level. Their joint strategy is an intention to plant a Saltire flag in turf where it can leverage existing strengths with the new technology's capabilities; in climate finance, open banking data, payments and financial regulation.

It seems that such a focus can work. Since the financial technology trade body, Fintech Scotland, set out its strategy last year, picking areas of strength for more rapid growth, there has been a 19% growth in payments tech activity and a 13% growth in the niche software to handle regulation.

Fifteen years after that notorious bank crash, and a slump in public confidence in banks and business more widely, this new technology gives the industry a new opportunity. It is seeking now to reintroduce itself as one answer to Scotland's economic problems, and portray its future as a potential force for good and for growth.