Can you explain the concept of new open banking technology, and how it works with Xero?
The UK Competition and Markets Authority mandates that the nine biggest UK banks must stand up APIs to access to regulated third parties in order to access on behalf of customers who have given their consent, either bank transaction data, or to initiate bank payments.
A great example of accessing bank transaction data is what we call a bank feed, so that if I want to understand my financial position from inside Xero, I can do so without actually having to go and login to my bank, I just pull those bank feeds through Xero. Beyond that, payments is another big area but that is broadly what open banking is about.
How can accountants take advantage of this change in order to help small businesses?
The most obvious area is that we will be leveraging open banking, alongside a new Xero bank feeds API, to broaden the range of banks with whom we have bank feeds in place. So this ability to bring bank transaction data is in place today with Barclays, HSBC, Santander, and Royal Bank of Scotland – four of the big five banks – and one of our partners provides a feed into Lloyds. Most notably for accounting partners, we will be adding a direct bank feed with Lloyds, which allows us to extend what we call beautiful feeds. That allows us to set up a bank feed online without paper forms, across what they call the rest of the CMA nine, the nine biggest banks in the UK. Over time, we will take advantage of that. And that’s the area of open banking that I think will initially bring the most value to our accounting partners and to our customers.
What happens next?
There is a world beyond open banking, so predominantly in the short-term, it impacts the nine biggest banks in the UK. There are already other banks getting on board so that will grow, and beyond open banking there are a bunch of challenger banks, or neo banks, and there are of course banks which are not in the UK.
They have Xero customers who are crying out for bank feeds, so we also have unveiled something called the Xero Bank Feeds API, and that’s to address exactly that type of issue, whether that’s the banks, or payment service providers, or application providers that need to have a bank feed. We have just announced our first partnerships with our first six.
They include three really high-profile London-based banks: Revolut, Tide and Starling. Also TransferWise, who are probably best known as a foreign exchange and cross-border payment player, and importantly ABSA Bank, who are one of South Africa’s four big banking groups. They are leading the way in the South African market with bank feeds.
With so many new technology players coming onto the scene, how can accountants keep abreast of all this change to give clients the right advice?
There is a lot to keep track of, clearly. We have 700 partners in our ecosystem, and that is growing all the time. We work really hard to make that accessible. For example, we have playbooks, which might be focused on something like cashflow. They bring together advice, guidance and highlights particular partners; whether they are application partners for cashflow forecasting, or lending partners to help plug cashflow gaps.
We are making these really accessible by packaging them up and educating our accounting partners. We have those playbooks not only in cashflow but in areas like retail and professional services, and we are growing the provision of that all the time. We announced at Xerocon that as well as having those playbooks we are running courses. An accounting firm that may want to play more heavily in professional services, for example, can have their team trained. They are able to come to Milton Keynes to the new training centre we have just opened really get up to speed, not only in the accounting aspects of that and the applications that are available, but what are the ins and outs of doing business in professional services, or in retail, for example.
The other area where we and our partners are adding value are with the likes of Iwoca and MarketInvoice in the lending space are building account management teams focused on accountants. If you do want to find out more about that alternative lending, and in fact many of our application partners have account management teams also, there are people you can contact. They’ll walk you through the proposition, help you get up to speed, maybe help you to get your first customers on board.
What are the challenges that accountants are telling you they currently face?
It is very difficult to generalise about such a huge population. There are somewhere between 18,000 and 20,000 accounting firms in the UK. Some of them are very large, sophisticated national and international firms, and others are one-person bookkeepers. The challenges they face can be very different. We do take the time to survey accountants, and there are things coming out clearly right now. Making Tax Digital is a big topic, and how best to prepare for that.
We’ve unveiled at Xerocon new technical capabilities to support Making Tax Digital, as well as a lot of programmes and education to really help our accountants get ready for that change. We also announced the acquisition of a business called Instafile. That will allow us to become much more of a one-stop shop for our accounting partners, so they can address the full range of tax with their clients. Beyond that, there are firms thinking about how they can drive more advisory engagement. How can they help in areas like marketing, and financial management? We are seeing lots of engagement with our ecosystem partners. Similarly, we run roadshow events where we get out into the towns across the country and try and take those messages and solutions to our accounting partners.
Is it fair to say this advisory role is becoming increasingly important for accountants?
There are two vectors of change and evolution that I would observe in the accounting channel. One is to just take advantage of the best technologies to become as efficient as possible. So it’s not every accounting firm that wants to provide advisory services. Some are going to be doing tax or bookkeeping, but do a really amazing job of it. We have a lot of solutions from the likes of Hubdoc, etc, that make bookkeeping much more efficient.
There are also a growing proportion of our accounting partners who are looking to find more ways to bring value to their clients and to build deeper relationships with their clients, and it is those firms for whom advisory is becoming more important.
That is where we do see feedback from some of the partners exhibiting at Xerocon, such as our fintech partners, that the appetite increases year-on-year in the accounting community to learn about lending, learn about payments, learn about cashflow, and maybe questions in those areas weren’t being asked so frequently just a couple of years ago.
How can open banking make lending easier for small businesses?
Lending is not an activity explicitly addressed under open banking, which is about access to data and making payments. However, as part of any lending cycle, if one approaches a lender for credit or capital, the process they need to run is to look at your credit worthiness.
They run credit checks, but what they might also want is access to your bank statements to understand what’s going on in the business and get that insight into your financial health.
That is a specific area in which open banking does help, because of this ability to access bank data. I think you’ll see a lot of lenders and credit providers registering under open banking, so they can streamline that whole credit checking process.
What innovations and new technology can we expect to see coming onto the scene in the next five years?
One is that today, small businesses spend time broadly in one of three places, if we think about their digital activities: they need to go to their banks, their accounting platform, and their business application. These are all too easily quite silo-ed. We’re already making huge strides there, so everything we’ve talked about is integration enabled by APIs, between Xero and banks, using open banking, and we’ve talked about the 700+ partners that we have in our ecosystem. I think we will begin to see more convergence.
Banks are beginning to talk about cashflow, and basic accounting capabilities. Royal Bank of Scotland have unveiled a new business bank account called Mettle, aimed at small businesses, with cashflow and some invoicing capabilities that one might otherwise have taken from a bookkeeping platform.
I can see times when business application providers will begin to take advantage of things like open banking payments. If you are scheduling staff in your application, why not run payroll from there, and actually pay your people out of that application.
Another really specific area is that the financing of supply chains between businesses is still pretty clunky, and there are some interesting fintechs that are looking to disrupt and digitise the way that those supply chains work and the way that participants get paid.