Loans and insurance are two topics business owners don’t readily associate with their accounting software. That’s all about to change for US businesses – and their accountants – in the next 12 months. QuickBooks Online is stepping up for a bigger role that will see it expand beyond the general ledger, Intuit revealed this week.
Intuit’s annual user conference in San Jose ran this week to a crowd of 4,000 accountants, bookkeepers and small business owners. The message is focused on their Firm of the Future concept, an initiative to help accountants modernise their business models, pricing and technology.
One announcement which didn’t receive as much attention was its investment in lending. This is primarily through a partnership with OnDeck, a startup lender that uses QuickBooks file data to price quotes and send them out automatically.
Intuit differs from Xero’s approach in that it wants to lend money itself. It has put in US$100 million of its own money but this could grow. The company has US$1 billion sitting in the bank which is earning just 0.25 percent interest.
Not only is Intuit lending money but a senior executive said it could provide other financial services such as insurance. Intuit already offers a range of merchant services, but integrating them into the country’s most popular accounting software would give it three killer advantages over future rivals in financial services.
Intuit can see all a business’ transactions, like the banks. Unlike the banks, it knows exactly how those transactions are coded. This gives it a phenomenal ability to price risk. The second advantage is that Intuit can correlate behaviour in its app with the likeliness of repaying a loan.
For example, a business owner who logs in once a week is statistically very likely to pay their loan. But a business owner who logs in every day is less likely – their business is probably living day to day. Other correlations include how many users are accessing the company file and how often they do it.
The third advantage is that it can push offers to business owners through QuickBooks software when they need a loan most. Can’t pay your staff next week? Grab a short-term loan now.
I had a chat to Dan Wernikoff, head of the QuickBooks division, about Intuit’s plans.
You can listen to the full interview below or read the edited transcript.
Sholto: If Intuit has both sides of the equation – the money (i.e. Intuit loaning its own capital) and the predictive behavioural stuff – you could approve instant loans within QuickBooks Online. You could say, you’re not going to make payroll next week…
Dan: That’s probably the most fascinating thing. You know there’s a predictive model on the repayment of the loan. And there’s a propensity model that predicts whether or not you are going to need a loan.
Seasonal businesses are really obvious examples. When they start to ramp up you can get a sense of whether they are ramping up off a bigger base than the prior year. Then they’re going to need more cash. And you really want to give them as much time to get cash as possible because the more urgent your cash need is, the higher the APR (annual percentage rate, or interest rate) typically is.
So we’re trying to figure out how we get them the loan before they actually need it. Then when they decide they want the loan, we want to get them a lower rate than you can get today based on the data and records that they have on Quickbooks, not just their FICO (credit rating) score.
So there’s these interesting components that are all throughout and we want to see what happens in the end. Did they repay the loan? Because the whole score gets rebuilt. You continually rebuild so that it gets tuned and we just make better decisions about loans.
Sholto: As a former banker, is there any way that anyone else could compete with a company that could see all their accounting information and all the loan information?
Dan: You see all the payments companies – Square is doing the same thing. Paypal is doing it through their payment service. What they’re really looking at is just one side of the equation, the payments received. They’re not really understanding the outflow, they don’t see the vendor payments, they don’t see how good you are at paying bills on time. They don’t have access to this data.
Ironically, the only other participant who could do this are the banks. Banks though aren’t motivated to change their underwriting system. Their underwriting systems are 20 or 30 years old. I was in a bank, you have a loan committee, they’re typically tuned to do higher-sized loans with less frequency because those are more profitable than doing the small loans that have a lot of processing costs.
It’s funny, people are moving carts of papers around in the basement of the bank. And that’s expensive to do when it’s a $25,000 to $50,000 loan. They probably have as rich a set of data as we have, but they don’t have the income side, they don’t have the AR (accounts receivable) side but they have a really good set of data.
Sholto: But won’t an accounting software company always have an edge even over the banks because all the data is categorised against the general ledger? You know which expenses are marketing and which ones are just having a party or whatever.
Dan: That’s right and again the key is we don’t use this data. The customer decides, I will use this data to get a better loan. So they’re still in control. We continue to tune our predictive model so that we can get them a better rate and the whole goal here is get their APR down.
I really want to get the APR under 10 percent. That’s a total game changer. I mean most small businesses are paying 20+ percent when they get lending today. So getting it down to this 10 percent range is the dream, and to get a billion dollars of money out the door. I want to get as much money out at the lowest rate possible.
Sholto: It feels like accounting software companies are moving into a king-maker position or a winning position in terms of lending, if they just have better data than anyone else, right?
Dan: Yeah, I think that’s right. Well, better data at a very low cost of acquisition. I started in the payments group in 2003 in Quickbooks. It was a $1 million business. That’s how much revenue we had. By the time I left to join the Quickbooks side about five years later, it was a $300 million business.
The main thing there was, people at that time were using a physical dumb terminal sitting next to Quickbooks. And you’re like, Hey Quickbooks is a terminal and it’s free. You already own it, so let’s get rid of the $300 upfront cost.
The second thing was no cost of acquisition. We didn’t need a sales team on the street so we could get the customer at zero dollar cost of acquisition. That’s what grew that business.
Lending is kind of the same thing. The advantage of banks is the branch but the new branch is software. You’re sitting in your software all day long so we don’t need that big infrastructure and then we’re sitting on the same data and the ability to do something that banks can’t really do which is think and play with the underwriting of loans.
Sholto: And what about insurance or any financial products? You said Quickbooks is already into the lending, will you do others?
Dan: We’re in the lending, I absolutely think we will do others.
Sholto: Really, wow!
Dan: I mean, at the end of the day there’s only a couple of things that small businesses truly need. They have employees, they need to accept payments. They are required by law to have insurance. And then they need to get funding. And that’s the core of what they do.
Everything on top of that is helping you be more successful versus what’s required. And so those are the types of products that we should figure out ways to help them get a better deal.
Sholto: So, when will we see in-app insurance or in-app loans?
Dan: Yeah, that I can’t say. But in-app loans, we’re kind of doing that.
Sholto: The button is in the app and you press that button and it sends information?
Dan: It sends the information after the partner is fully integrated and it comes right back to them. (ED: Today loans are initiated through QuickBooks’ apps marketplace. Intuit plans to add a button to the QuickBooks Online interface to initiate the loan request process.)
Sholto: So Intuit Tax Online, how’s it going? Do you have plans to turn it into a global tax engine for other countries?
Dan: You know it’s interesting, we may. But I think that would be pretty metered, that would be something that we go in really thinking about it. One of the challenges we have in other countries is that it’s more important to the accounting professionals that we integrate with whoever the clear market leader is in that country than it is to us to disrupt that.
It feels like the first thing is winning with Quickbooks Online and with Quickbooks Online for Accountants. And then over time if we do those two things extremely well then we have the right to complete the workflow all the way through the tax filing. In the US though obviously, it’s a big push for us. I mean that feels like because we are the leader in tax prep software, it’s a natural to do the end-to-end workflow.
Sholto: And the US is the hardest nut to crack. I mean no one else has such an insane system.
Dan: Yeah, that’s right. I always joke – you can see when a company who’s entering the payroll’s space when they start to do development in Ohio because Ohio is probably more complex than any other country in the world, literally.
So Ohio will take people a year and a half to actually develop to. So it’s funny you can always predict it – you can watch when we have a competitor and they enter in the US payroll space. You can see the order that they go in (state by state). And now they are doing it in Ohio because I haven’t heard anything from those guys for a long time.
Sholto: You’re like, suck it.
Dan: Yeah. And enjoy Pennsylvania after that too. I mean it gets pretty tough.
You know I think that’s what’s great about this business. These are really hard problems. It’s hard to automate it from a software perspective.
Imagine what a business does otherwise. They have to pay someone a lot of money to do that service or they have to do it manually and they have lots of errors in there, and they end up with lots of fines.
Sholto: Doesn’t that mean that Intuit is incentivised to promote the existing tax system than a simplified one because it’s effectively a defensive barrier and also its value proposition?
Dan: Maybe but I actually don’t think we need to that at this point. In the US I think there’s enough that we’re doing as an ecosystem that complexity in tax filing is not something that we are proactively promoting, we’re just like everybody else. We don’t want things to be complex both personally and for small businesses.
I think probably the most defensible part of our ecosystem at this point is just our relationship with accountants. And the fact that accountants build their businesses around Quickbooks and they trust us and they have worked with us for a long time. We don’t need that complexity in the tax system.
Sholto: Sage was here in August and made a big announcement about this partnership with Salesforce. Do you see that as a threat to your business? I mean that’s kind of a bit of above your market.
Dan: Yeah, I think it’s a bit above. I think it was interesting, to be honest. If I were at Sage, that feels like a smart thing to do. I don’t think that their heritage is going after the micro-businesses and serving them really well.
I don’t think that starting from scratch they would be able to build a platform that would make them competitive for years. And so I think they found someone who helps them on both sides. So they’ll go after that higher end businesses and leverage a great platform that Salesforce already has. So I thought that was pretty smart.
I think it’s a different target customer than us. You know I don’t think small businesses are necessarily engaging that heavily with Salesforce specifically the core of our small businesses that we have. Yeah, I thought that was interesting.
Sholto: Me too.
Dan: We’ll see how it goes. One thing I’ve learned over years and years is two large companies doing a partnership always feels and sounds great at first. It gets pretty complex pretty quickly. All it takes is one person adjusting a priority or a person moving or changing. They’re very difficult to maintain.
Sholto: Interesting. And are you seeing much competition from Xero in the US?
Dan: I’m not seeing a lot of competition but I expect that to always heat up. I have a lot of respect for them. I think Rod (Drury, Xero CEO) is a great guy. I think Russell (Fujioka, US president, Xero) is a good guy.
I think they started by really trying to go after desktop customers and Quickbooks and that kind of makes a lot of sense when you think about it at a high level and then you realise just how difficult it is to break that pattern. We’re having difficulty moving our desktop customers to our online product. And we try to make that as seamless as possible.
I think that’s something that they realised pretty quickly. It’s different than what they originally thought. Now they’re going after smaller, more emerging new businesses.
Also I think they came in is thinking about accountants as a channel more than a partner which is a mistake. I mean, we try to give accountants options. We want them to do what they feel most comfortable. If they want to wrap Quickbooks into their accounting practice service we’ll help them do that. If they want us to sell it to their customers so they stay as a trusted advisor and don’t have any ulterior motive in how they’re billing their client, then we’ll do that.
There’s some people who are into value pricing, there are some people who aren’t. There’s some people who want to market up. There are some people who don’t. We really think about what they want versus what’s the model that we’re trying to push. And I think they ran into that. It cuts down the market size when you have one thing that you’re selling two ways.
Sholto: True. What do you think are the biggest hurdles to automating the bookkeeping side of things?
Dan: To me it’s the third party app integration. Primarily I mean bank feeds are huge. And banks, we all have different relationships with our data. We as consumers, we feel like the consumers as small businesses should own their data. Banks have always honored that idea.
As you start to see all of the partners that are scraping banks (i.e. using automated software to copy transactions from online banking portals), you can see that it’s a huge burden on the banks’ systems.
We are now getting to the point where this has to be more formal than the scraping relationship, and how clean your bank data comes back in – it’s a huge input into your accounting into the ledger.
Getting that right is probably our top priority. The other thing is we have this relationships with anybody that creates something that ultimately ends up in a transaction. So you know your T-Sheets timesheet turns into a transaction. When Square passes a point-of-sale transaction you know that ultimately turns into something in Quickbooks.
The more we can get all that to be just automated, the less a small business has to think about. The dream would be that a small business runs their business and just behind the scenes, we’re accumulating this ledger and now the accountant is in there and they can be cleaning things out without the small business even knowing that they’re cleaning it up.
Ultimately all that data can be leveraged in the small business’s pockets so that they can get better deals on things. You know, they have purchasing power. They can get the right loan. They have the ability to get insurance, all these different things. So that is the dream.
Sholto: What is the timeframe for achieving that? Say, accounts payable automation?
Dan: I don’t know if we will ever fully achieve it. Right now we have about 140,000 app connections, and that’s not including bank feeds. About a quarter of our base is maintaining their bank feeds on a regular basis.
We want to get to a place where anybody who wants to connect these things we’ll connect them and automate the process. So probably like 75 percent of the base will want to be connected. We’re multiple years away from getting them into a place where they don’t have to touch anything.
But the progress is huge. Last year (at QuickBooks Connect) we had 300 apps. And now we’re 1,400, that is just huge and the challenge flips. It becomes less about the number of apps and more about making those integrations perfect.
Sholto: My experience is it’s not 80:20 of apps that make money. It’s something like 5:95 which are profitable.
Dan: It’s always like that on these app stores. The reality is it’s always 5 percent of the apps that have the overwhelming amount of usage. And so the key for us is to find I think if we have the right 25 apps beautifully connected, that’s the spot where you hit the 75 percent automation.
Sholto: Just on that bookkeeping automation, what kind of threat that someone like InDinero pose? They are doing their own software for small business and they control everything. Do you see that as becoming an issue for Intuit?
Dan: I don’t know why they would be that big. Why would you think of them being a big issue?
Sholto: I just know that there’s that one and a couple of others that are VC funded. Their idea is to be that bookkeeping automation piece. InDinero stands out because it’s not using Intuit or Xero or whatever, it’s just doing its own software and combining all the apps together and selling it as a service.
Dan: You know I think the biggest issue is still – and it sounds like a stock answer but it really isn’t – I think the biggest issue is that with small businesses, it’s hard to change their behaviour. We’re closer to anybody else in being able to influence it because it’s not just our brand but also the accountants that are part of our ecosystem.
If I have a customer who’s been using Quickbooks Online for two years and they’ve never connected a bank feed, it’s actually really hard to get them to connect a bank feed. Because they’ve already built their whole workflow around however they do their work.
A lot of them will take the bank statements and it’s what they like to do on a Saturday. It’s crazy. So I worry more about that then I do other alternatives.
I think a lot of alternatives that come in have a very grand vision around this. But they’re skipping a couple of steps. The first step is solving a simple problem really well. The second is making sure that it’s a multi-site problem not just small business but it’s accountants and small business. And then you’ve got to solve an accountant’s problem really well.
Then you have to make the program extremely connected with developers. Over time you have a lot of things to play with. And now I want to change the behaviour of every customer out there which is super hard.
I’ve visited so many small businesses and I’m always amazed when you get there, how many things they do that make no sense but it works for them. And so they’re comfortable with it and getting them to break that pattern is the hardest thing.
Sholto: Fantastic, thanks a lot for your time Dan.
Disclosure: Intuit paid for my plane ticket and accommodation to attend QuickBooks Connect.