Tech CEO with Ed Molyneux, FreeAgent: ‘The convergence of banking and accounting is on its way’

Tech CEO with Ed Molyneux, FreeAgent: 'The convergence of banking and accounting is on its way'

Ed Molyneux, CEO of FreeAgent, talks to Accountancy Age about the opportunities being driven by Open Banking, technology adoption in the accounting sector and MTD

What does FreeAgent do that makes it different to other software providers?

FreeAgent is exclusively focussed on the smaller end of the SME market – micro-businesses, with fewer than 10 employees. The majority of our customers are self-employed, or single-person limited companies. There is no limit to the size of business you can use FreeAgent for, and we do have some large businesses: but typically, it is more the single-person companies. Ten-12 years ago when we first founded FreeAgent, you typically got big software providers offering an entry-level version of their product which was like their standard version with all the interesting features removed. That was your starter pack, and we were starting from the proposition that what our customer needs is not less functionality, but different functionality.

For these smaller businesses, one of the things that we do is tax forecasting and tax filing which is fully integrated. We thought that was very powerful, as one of the things that we struggled with, operating businesses of that size, was knowing what your tax bill was going to be next January – especially in your first year of operation. One of the things that people like about FreeAgent, is that it helps them really get a handle on the tax position.

As far as we can tell, we have one of the highest customer satisfaction ratings for accounting software in the UK. People feel as though it is something that is built for them, rather than a generic package that they have to make work somehow.

Who are your main competitors?

Typically, the biggest challenge is more spreadsheets and paper and inertia,  because people will struggle along with an old spreadsheet that their accountant gave them years ago. It’s better the devil you know – they don’t realise they could save themselves a lot of time and be much more in control. We find that much more of a challenge for us than competing head-to-head or getting people to migrate from other software packages.

How does FreeAgent work with accountants?

Accountants have a choice of what they are going to offer or recommend to clients, and so we are really clear that we are absolutely not for their clients who are 30-employee manufacturing businesses, but a very large number of florists, web designers, and aromatherapists, who do make up such a big chunk of UK businesses. I think our message does resonate with accountants well.

Are some accountants fearful that software like yours will cut them out of the process?

We talk a lot about this to accountants, and it is a really important point. What we say is what is it that they are being cut out of, and is it something they actually want to be in, because one of the things that software nowadays is very good at is getting the business owner themselves to do the bookkeeping, because you’ve got direct data feeds from the bank, and you build invoicing tools and they automatically make the ledger entries in the background, even preparing VAT returns.

Most accountants nowadays, for simpler businesses at least, are pretty comfortable with that.  What that leaves behind is actually the interesting stuff: talking to business owners, helping them succeed, talking about tax planning and changing business structures and how you could do better next year. There’s an opportunity to grow that market. It increases the market for advisory services and that is healthy for the profession.

Is that how technology is changing the role of the accountant?

There are lots of things that make up the role of the accountant. You’ve got bookkeeping, then accounting reporting, and then business advisory. If the bottom layers are being most affected by technology, the top layers are still some way away from that, because they are much more about human interaction.

If you are automating some of the profession, there is a natural shrinkage there, but the opportunity is larger because you’ve got more people who have some numbers to talk about, compared to the position 10 years ago where you couldn’t help people, because they had no idea what was going on in their business.

Did you see an increase in uptake following MTD?

We certainly have, although I suppose at the back end of last year, the interest was really from accountants trying to get ahead of the game. But there is no mandate to actually file until you have finished your first VAT period, and then you have another month. By November, we will be able to take stock, and see who has actually got to grips with this and who hasn’t.

Technology brings benefits, but how can business owners avoid burnout in an always-on culture?

It is a double-edged sword, as with everything. You’re on the beach or something, and you’ve got your phone in your pocket. If it goes off, or you see a text message, you really can’t help yourself. A lot of the value of having time off is to be able to create distance from work. It would be hypocritical of me to say that’s how I approach it, but there is a level of discipline required to be able to ignore things or switch off.

I think the flexibility is worth that price in a way, because it gives people the flexibility to work almost from wherever they are. Sometimes, when a client wants a chat, you probably need to be available, but if you’re returning to work after having had children, or you want to work remotely, or whatever, there are opportunities now because of technology which just wouldn’t have been available even five years ago. That’s a bigger benefit, and then we all have to manage the downsides of that as well as we can.

How has it impacted on accountants specifically?

There are some accountants that do still work in quite old-fashioned ways, and the data is there but they won’t look at it until January or whatever, but there is definitely a forward-looking and proactive part of the accountancy profession who absolutely embrace all of these opportunities to put together a kind of service for the client which is streets ahead of what you used to be able to do.

Does the rise in new software and other products spell the end for compliance-only practices?

That might be sort of true, for very simple businesses at some point. The software can take care of it. It starts at the simple end, like a lot of times that technology disrupts industries.

If you can write it down in a piece of tax legislation you can probably write it in software, but it is a bit of a diminishing returns thing, because it’s worth us modelling small business income tax and payroll and VAT in our system, because there are millions and millions of businesses who are simple enough for that to be good enough for them, but I think when you start to look at other situations, you wouldn’t be able to justify the investment because there are only 12 people in the country for whom that particular set of circumstances applies.

There is always going to be that human element where it isn’t worth trying to automate, even if you could.

Are you preparing for whenever HMRC releases MTD for income tax?

Yes. What we do see is that nothing is firm in that timeline. HMRC have acknowledged that there needs to be a bit of a bedding in period for VAT, and nothing is going to happen before 2020-2021. They’d have to be announcing things now if they wanted to make 20-21 viable. But there is a lot of work going on behind the scenes.

It becomes a political question rather than a technical question. If the MTD for VAT rollout is seen to be modestly successful, then it becomes a lot easier to say 2022 for some simpler businesses for income tax. If it’s a real nightmare, then that’s much more difficult. Technically, those capabilities are already well underway.

Will it be more complicated for income tax, since so many errors are made?

What we think is that there are so many people nowadays who fall within the three-line accounts category, and it doesn’t get much simpler than that in terms of producing an MTD return.

You might have other things like other sources of income that have obviously got to be taken into account, but the self-employment situation itself is very straightforward and very amenable to automation. There is a large body of customers who, if they are doing things digitally, will almost not notice that their software is reporting quarterly and then there is a bit of a catch-up at the end of the year. They won’t be interacting with the tax return at all.

Are accountants ahead or behind when it comes to technology adoption?

I think behind, and there are a lot of very good reasons for that. The role of the accountant in helping customers make software choices is really important. Accountants do take that seriously, understandably, and because things are changing so fast, there is a lot riding on your recommendation to a client.

Accountants are probably helpfully sceptical about how much software can do, they have probably seen that software in the past made all sorts of wild claims that were unfounded, and so that experience and the sense of responsibility to their clients makes things happen more slowly than in other industries.

It is much more client-driven than accountant-driven. The clients now, especially in our part of the market, are much more like your everyday consumer. In every other part of their life, they are ordering taxis on Uber, ordering stuff on Amazon on their phones – so the demand for that equivalent experience with their accounting service is the same. They expect to be able to do everything on their mobile.

What trends are we likely to see in the next 5+ years?

We continue to see growing adoption of digital tools, and MTD for VAT has really got the ball rolling, but with the introduction of MTD for income tax a little further down the line, and then beyond that for corporation tax, it will really create a ubiquity of digital tools available, and most accounting software providers are investing accordingly.

We are part of the Royal Bank of Scotland group now. One of the opportunities we see is greater integration between banking and accounting. It is a data problem, the idea of having to get your bank statements into your accounting system somewhere. A lot of those problems are being solved by Open Banking, so the convergence of accounting and banking is on its way.

We have our tax model, so we can forecast what your VAT bill is going to be, and we also have access to your business current account data, so we have an alerting system called Insights. One of the Insights we show is that if you’ve got a VAT bill which is due next week but you haven’t got enough money in your current account to pay it, then we flag that up to customers and they can either chase a few invoices to bring some money in, or delay some bills or something, or you can apply on the spot for an extension to your overdraft, for example.

The idea that within the accounting system you could have these kinds of highly customised, data-driven propositions is something that most banks are excited about, the challenger banks are excited about, and we are building at the moment, to allow customers to get access to products you just couldn’t get access to before. It can help self-employed people get mortgages, which is a big deal because it’s very hard to do, but if the bank has got a view of how healthy your business is which is effectively in real time, they can be a lot more comfortable about offering you a decent price on the mortgage.

Those are just some initial examples of the kinds of things that we see as being possible when you mash everything together around the accounting system, as a very powerful way of helping customers. These are things you couldn’t really build before, because you’d be pulling in data from 12 different places and trying to work out what was going on in the business. Nowadays, everything is connected, and if it’s not now, it will be soon. It will make a lot of positive difference to people’s financial lives.

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