The Convergence of Banking and Accounting for Businesses
In Episode 98 of Rebank Podcast, we were joined by Edward Berks, Head of Fintech at Xero, a cloud-based accounting platform, Caroline Plumb, Founder and CEO of Fluidly, a cash flow forecasting tool, and James Haycock, Founder and Managing Director of Adaptive Lab, now Idean, following their recent acquisition by Capgemini.
Here are the key takeaways from that conversation:
Xero's platform, which was originally built as a cloud-based accounting platform, now provides vertical and horizontal extensions and increasingly brings banks and lenders on-board to address the financial services needs of small businesses.
Fluidly believes that cash flow forecasting should be the first step in everything finance related for businesses and didn't see suitable solutions for SMEs (small and medium-sized enterprises) in the market before they launched.
SMEs have a relatively small set of financial requirements: they need to know their immediate cash flow needs, which requires data from bank accounts and good account reconciliation, they need to get paid, which requires good solutions like Stripe, Paypal and GoCardless, they need to make payments, and they need to access capital when needed. Within those four needs, there are a number of challenges.
Cash flow management and forecasting hasn't traditionally been a strong suit of SMEs (thankfully, there are solutions like Fluidly in the market now). One of the biggest challenges for SMEs has traditionally been around accessing capital, the sources of which are limited. Bank financing takes 6-8 weeks on average to close, and many small businesses don't qualify for credit from banks.
50,000 businesses in the UK fail each year as a result of poor cash flow management and the inability to access capital. Digital lenders like iwoca and MarketInvoice are addressing the capital access problem, but banks still control 85-90% of small business lending.
It's surprising that there hasn't been quicker development of interconnected systems and experiences for SMEs. We should already have systems that pull data from multiple sources and automatically present cash flow and management intelligence dashboards containing integrated funding solutions offering smart, real-time invoice finance, cash flow finance, term finance etc. The technology is there. Now, with PSD2/Open Banking, the data pipes are there, too.
Xero is demoing concepts linking banking, accounting and financing, as they should be. As a trusted, cloud-based, tech-forward accounting platform, they're perfectly positioned to do it.
Banks haven't focused on the SME space, because it's not as profitable for them as other customer segments. No amount of political posturing by incumbents or PR about commitment to SMEs changes the economics. Unless banks sort out their tech and cost structures, enabling them to profitably serve the SME segment, they will continue to stay away from the space.
Fluidly leverages access to rich data and transaction histories together with scale algorithms that allow them to deploy very sophisticated models at relatively low cost in the cloud.
According to research conducted by Adaptive Lab, banks lack empathy when it comes to their interactions with SMEs. Bank staff have no experience of what it's like to start and run a business.
Built-for-purpose SME solutions in banking, accounting and payments will increasingly out-compete incumbents in the play for SMEs.
We'll continue to see origination partnerships between banks and SME-focused fintechs, similar to what RBS has done with ezbob and Santander has done with Kabbage. Time will tell who takes the balance sheet risk.
It’s not just origination. There are significant cost-saving opportunities in the digitization of all components of the lending life cycle, from application to decisioning to monitoring to collections.
Smart supply chain finance and invoice finance solutions can have a huge positive impact for SMEs, replacing expensive overdrafts and credit cards with other, cheaper forms of financing. Traditionally, supply chain finance has been complex to set up, but with digital solutions, this could get cheaper.
Importantly, it doesn’t all come down to the supply of credit and other products and services. The demand for financial services is often much lower than it otherwise might be due to a lack of financial sophistication at small businesses. According to Fluidly, research suggests that only 25% of UK SMEs have financially qualified individuals on staff and otherwise rely on accountants, bank managers and other professionals for advice.
Banks should be thinking about how to generate opportunities with SMEs other than just lending to them. The universe of potential value-added services is huge.
PSD2/Open Banking, plus Making Tax Digital in the UK, will change the way SMEs interact with banking. Data availability, open APIs and system integrations will result in bank-like interfaces appearing in other tools businesses use, be they accounting platforms, inventory management platforms or others. Platforms like Xero becoming AISPs under PSD2 enables them to better aggregate SME account information in one place, away from bank interfaces. If platforms like Xero and others were to become PISPs, SMEs may never need to visit their banks' websites/apps again. There’s huge appetite for that among small businesses.
In a post-PSD2 world, businesses will be able to access all the insights and information they need in whatever systems they prefer to spend their time in. There will absolutely be a convergence between banking, accounting and business applications as services get componentized via APIs and surfaced through different experiences.
