Perhaps accountants will look back on this as the Fin Tech era, a gradual, irresistible climate change that ended up reshaping the industry, the profession and accounting itself.
In a glimpse of the tectonic forces soundlessly rearranging the continents of financial services, this month Xero switched on the ability to request a bank loan from within its client accounting app.
At this stage the offer is fairly discreet. It only appears to Xero users with bank accounts with NAB, the first of the big four Australian banks to connect its back-office systems to Xero.
A user can request a quote from the drop-down menu for the NAB bank account. Clicking on the link launches an authorisation screen that gives NAB access to a limited set of financial data from the Xero file, for a limited amount of time.
NAB analyses the data with its internal systems, calculates the risk and then emails the Xero file owner with an offer. To my knowledge this is the first time bank loans have appeared in a client accounting app for small business.
Xero’s Australian MD Chris Ridd confirmed that Xero receives a “small” commission for the process, although it wasn’t clear whether the commission is paid for the lead or an actual loan. Ridd said he didn’t know how much the commission was but that “it wasn’t much”.
Xero is treading carefully here. The company is not shy of a press release but there has been no press or announcement on the company blog.
“This is version one,” Ridd said, indicating that it’s in a testing phase. Xero is considering other variations, Ridd added. These could include:
- a notification sent to the Xero adviser (accountant or bookkeeper) that the business owner has applied for a bank loan.
- a “small” commission paid to the Xero adviser for each loan created through Xero.
- loan offers for loans displayed more prominently within Xero when triggered by upcoming events.
The latter scenario would require Xero to add a forecasting module. A forecast could show you whether the business has enough money in the bank to pay bills and staff. If the company won’t make payroll in a fortnight the business owner or Xero adviser could receive a warning that included an offer for a short-term loan.
“An Industry Trend”
While Xero is the first it’s definitely not alone in this exercise. Other vendors have signalled their intentions and will presumably offer similar services.
MYOB signed a distribution agreement with US online business lender OnDeck in April. OnDeck also has a similar agreement with Intuit (maker of QuickBooks Online) in the US.
Bank loans through accounting programs is “becoming an industry-wide trend”, Trent Innes, Xero Australia’s national sales manager, says.
This is what the accounting software CEOs mean when they talk about accounting software as a small business platform. The accounting software and its data is the engine for all sorts of applications, some of which even the vendors won’t have imagined.
This is new territory. Xero will be testing how its partners and customers react to in-app loans before deciding on the final implementation. The move raises questions about how much access business owners are willing to give non-financial advisers to their sensitive accounting files; whether business owners will appreciate and endorse the convenience of a fast quote; and most importantly for accountants and bookkeepers, who owns the customer.
At Xerocon Australia, just a couple of months ago, Xero executives had different opinions on how it would work. Consider this extract from an interview with Xero’s chief product officer Angus Norton just two months ago.
Norton: We (will) do (in-app loans) in a way that’s very non-confrontational to our banking partners. It’s about giving our banking partners a hug. We’re not in the loans business. We don’t want to be. We are in the business of helping our banks help our customers.
Some of our competitors are quite schizophrenic there, especially Quicken (Intuit). You’ve got Quicken Loans in the US [Intuit sold this business in 2002], MYOB investing in micro-financing in APAC. We’re like, no way, let’s let the banks do that. What we want to do is the opposite.
Digital First: But this is still a new revenue stream for Xero, right? You will still be taking a clip of any loans through Xero?
Norton: No, that’s not something that we’ve … added or discussed. If we provide a really great service that helps customers then we’re going to get more customers on the platform. They will want to come to us versus someone else. We’re not in the loans business or clipping the ticket on the loan.
Digital First: What about accountants who get a loan for their client through Xero? There are some accountants who do get a kickback from the financial institution.
Norton: I would say banks drive that.
Xero has ruled out investing in loan providers, whether peer-to-peer, microfinance or joint venture, and is taking the moral high ground over MYOB and Intuit. The reality is that while Xero is preaching an open platform the list of providers will be determined by those who have the capability to connect to Xero’s platform.
Once Xero has finished its testing it needs to inform partners and customers how the process will work and who gets paid what. It won’t be enough to say, “it’s in the terms and conditions”.
What does this mean for you?
For accountants and bookkeepers: The accounting program becomes even more important as the gateway to financial services. Accountants firstly need to be aware of the direction that Xero and others are taking.
If you offer business loans this could be a threat to your revenue. There is so much disruption in the lending space from peer-to-peer and microfinance lenders that the days of large kickbacks from business loans are probably numbered anyway.
If accounting-software vendors do decide to pay accountants a commission it is likely to be far less than a broker’s standard fee. The vendors will rely on scale to make money from loans and other financial services. That doesn’t work when it has to share large commissions with individual firms.
Commissions have the potential to cause conflict among advisers. One business owner could have a financial adviser, bookkeeper and accountant on their Xero file. Who gets the commission?
Xero changed its partner accreditation program to end a spate of subscription-flipping by accountants taking over control of client files from bookkeepers. Adding cash commissions will inevitably stir the pot.
For business owners: Healthy businesses will have faster and easier access to funds. Struggling businesses that would normally “adjust” their books before seeing the bank manager will not run the risk of revealing too much.
There is very little detail about how this works from the bank’s perspective but it’s likely that a declined loan application would be a red flag in future requests.
For Xero: One word – revenue. Eventually Xero will receive a commission for loans from a percentage of its 250,000 business customers in Australia. New Zealand, which also has a modern banking system, will follow. The UK is still struggling to implement bank feeds; UBS and Lloyds still can’t provide them. Banks with a strong technical edge may get there but it’s unlikely to be soon.
The US’ deregulated banking scene, still stuck on cheques/checks, is a basket case. The fintech startup world is a more likely source of loans for US small business.
If Xero decides to pass on some or all commissions to financial advisers it can still improve its balance sheet. The fees software companies pay for bank feeds are in the millions of dollars, Drury has said.
A NAB representative told me last year that the bank expected the millions it generated from bank feeds to eventually reverse. Waiving feeds fees in return for leads for loans sounds like a likely outcome.
For banks: Banks should be able to drastically cut down on their marketing and processing costs by automating loan approvals. Xero’s attempt to certify sections of client data (bank feeds, Xero-to-Xero invoices, receipts directly entered by large retailers) will reduce lender risk.
Xero says it isn’t playing favourites but the reality is that in the Australian market NAB is in a prime position.
The issue is in connecting a bank’s back office analytics and loan processing services to an external program. The systems that run banks are incredibly complex and making any change is extremely costly.
“We have spent millions of dollars behind our firewalls to connect to Xero,” Adam Bennett, executive general manager, digital and direct banking at National Australia Bank, told the audience at Xerocon in August.
Any IT project at a bank takes a long time to approve, a long time to execute and a long time to test. Some banks may face a major IT upgrade before their systems are even able to connect to the modern APIs of Xero and its rivals.
The centralisation of financial services in accounting apps represents a shift in power. Loans are the first step. As Xero has already revealed, insurance will soon follow. Given that all this is happening in the accounting program, business owners are likely to ask their accountant or bookkeeper what they should do.
This could be a good and a bad thing. For savvy players the extra communication represents an opportunity to sell more services (importantly, the real profit won’t come from small commissions on the products).
Firms that don’t know how to turn the extra support calls into sales could end up in trouble as the cost of servicing clients rises.
The coming continental crunch looks like it will favour the accountant over the financial adviser or broker. Just remember that when continents collide, earthquakes occur on both sides.