Open Banking: an interview with Xero

Following this discussion on how Open Banking impacts accountants by Xero’s Banking, Fintech, and Ecosystem director, Edward Berks.

Accountancy Age caught up with Mr Berks to talk more about Open Banking and the future of accounting technology.

1. What is your role at Xero?

Xero are best known as offering beautiful accounting software for small businesses. As we have 1.2 million customers according to our last published members list, we are the clear UK market leader in our space. Really key to our go-to-market is working with accountants. Accountants are important because small businesses are more successful when they can engage with the services of an accountant or adviser, and 90% of all our small business customers are engaged with accountants.

I lead the part of Xero which engages with all other strategic partners in banks, fintechs, and application partner ecosystems. We provide the beautiful digital joined up business vision, which is difficult for small business to achieve.

In my first two years at Xero I led the part of our business that deals with accountants, leading accountant managers and partner consultants. This meant I had the opportunity to spend a huge amount of time with accountants and understand what they want from us in terms of technology, education, advice, and guidance. In my new role, I still spend a lot of time working with accountants, understanding what they want regarding financial services, and which applications and verticals they want to focus on. Xero also lead focus groups looking at a topics such as banking, lending, farming, where we bring in our accountants and make sure we have a great understanding of their needs, which very much informs my part of the business.

2. What is Open Banking?

Open Banking is an initiative driven by the Competition Markets Authority and is, in its broadest sense, driving more competition in financial services among the UK’s biggest nine banks. The Open Banking Implementation Entity group is delivering Open Banking and they have a mandate from Competition Markets Authority and HM Treasury. They defined, in order to improve financial services and competition, a set of standards to make it easier for retail customers to move bank accounts, get data shared, with their permission, from their bank accounts, and make payments more streamlined. It’s really about driving competition.

3. How will Open Banking impact the accountancy industry?

In two ways. Certainly, insofar that accountants are servicing both individuals and companies. Their customers will have changing expectations of the way that they can access financial services and the advice that accountants should provide on things like accessing capital and streamlining payments in a business. One consequence is that accountants need to rapidly become more knowledgeable about what Open Banking is providing. We are already seeing accountants being asked more questions like ‘what banks should I go to’ ‘which payment service should I use’ and ‘should I be accessing capital from a lender like Iwoca or from my bank’. I think this is a fantastic opportunity because I think it broadens the way in which accountants can add value to their customers.

Iwoca are indicative of a raft of new technology business that have the chance to capitalise on growth off the back of Open Banking.

4. What challenges do accountants face due to Open Banking in the future?

Open Banking is part of a broader wave of digitisation including initiatives like Making Tax Digital and mass migration to the cloud. It is now all about the experience this creates. Managers can be kept informed about finances from their mobiles. There’s lots of these drivers for changes and we see some fantastic firms that are really embracing cloud technology, they are informed about things like payment services and the best sources of capital for their business, and they’re able to leverage new technology to provide richer services for their customers.

They are able to provide compliance and tax services, often at the lower price point because they are delivering it more efficiently, and then they’re able to provide richer advisory services in all these adjacent areas, and ultimately they then drive up their businesses. The challenge comes to those firms that either can’t or won’t embrace some of the change. There are somewhere between 18,000 and 22,000 accounting firms in the UK, and my sense is that a lot of firms that have existed providing paper-based services won’t make it through this wave of change.

5. Xero is first system in world to integrate banking and small business accounting. How did Xero do this, and what will they do in the future to carry on with this?

Open Banking will achieve some of the things we have been working hard on for ten years. We always talk about the needs of small businesses, in banking terms, as being quite simple. They need to understand their cash position at any point, be able to get paid quickly and easily so that collecting cash is easy, make payments quickly, and be able to access capital when they need it. The issue of how businesses can access capital is a political hot potato. Prior to Open Banking we have been working on the topic of understanding your cash position.

We have bank feeds in place, the first one with HSBC was in place 10 years ago, with all the major banks which brings transactional data from a bank account into Xero, giving you have good, current, accurate visibility from your bank account balance. You have a much better view of your all-round cash position. We have done this in a series of custom projects with the banks and those bank feeds will now be much easier to roll out.

Similarly regarding payments, I have been working for a long time with Stripe and PayPal, we unveiled a great new relationship with Worldpay last year, and this is all about the way small businesses get paid. Open Banking should transform that space as we have been investing in digital processes with those providers for small businesses. In Australia we have just unveiled an integration with National Australia Bank where one can initiate a payment from inside Xero. That means if I want to make payroll, rather than logging in to a separate bank account and transferring details, I can log in from inside Xero, and that greatly streamlines, in a secure manner, just how easy it is to make payments. We are rolling that out ahead of Open Banking, but Open Banking will streamline that activity.

A lot of what Open Banking will deliver is what we have been piloting for a long time, but Open Banking will to an extent democratise capabilities, and certainly capitalise the deployment of these great financial services experiences.

6. In what ways will Open Banking shake up the accounting industry?

What any business wants is a great view of its cash flow and yet its quite a small subset of the overall accounting industry that can deliver great forecasting. It’s especially hard for small businesses because they have to do it in excel so it’s time-consuming. With Open Banking, we have partners like Fluidly, Futrli and Float (they all have to begin with ‘F’!), which are offering digital, simple, cash-flow forecasting in conjunction with accountants. That’s really exciting because it means more high-value services for accountants to deliver. The net result is a higher number of growing businesses and less business failures. At the point you know you have a cash flow issue and need to access working capital, closer working relationships with banks and businesses like Iwoca give really simple ways to access the capital quickly in ways that previously weren’t available. Open Banking is part of a digital change that can greatly improve that situation.

7. Can you expand on the benefits of Open Banking, specifically for accountants?

Cashflow forecasting is one, as is small businesses being paid and collecting cash more effectively. As more suppliers take advantage of the payment capabilities under Open Banking, we already know that businesses leveraging payments get paid 50% faster and again there’s a theme of accountants being more engaged in financial services and adding value with their clients.

Regarding the decision for credit, think about how decisions are made all-too-often today. You may have a broker involved, and that broker may ask you to fill in lots of forms and may need access to bank statements. Then, based on a conversation with you as the business owner or the accountant, the broker will make some kind of credit assessment in a very manual process. Fast forward to where the likes of Iwoca are able, with the client’s permission, to digitally access the data in Xero. What they are building is the machine learning capabilities that will enable them to access bank account data and real-time accounting data securely.

This provides that forward-looking perspective on the business. You’ve got a balanced view, visibility on the asset base, visibility on the trajectory of the business, and we know that the decision process is being streamlined so those lending decisions can be made in seconds, leveraging machine learning. This changes the speed in which small businesses can access capital. The overhead of all of that manual effort to make a decision is taken out of the equation, so that should drive more competitive lending costs for small businesses and more accurate assessment of risk, which is transformational given how hard it can be for small businesses to access capital.

8. Under Open Banking, PISPs will allow the initiation and execution of payments without the need to log on to an online business bank account. How does this work?

If you take an ecommerce experience like Amazon in a consumer content, you will buy some blue trainers, and when you check out you will typically be offering a Paypal account or most likely a credit or debit card. The payment is then settled via your card issuer. What Open Banking enables is the option, when checking out, to pay from your bank and you would be invited to provide your bank details.

You are never providing your bank log-in details to Amazon and you are equally never providing your Amazon log in details to your bank. You are taking advantage of a technology called OAuth which is a bit like what you might use if you are accessing a site using your Facebook credentials and that enables the payment to be settled directly from your bank account.

This enables secure access to digital services, meaning you can bypass your card issuer. On the plus side, that ought to mean costs levied by the card issuer are taken out of the equation, but it may mean good pricing for consumers or more margin for retailers. Equally you may be sacrificing certain protections you get from your card issuer today. There is lots being written around how PISP services will impact some of those consumer scenarios. In a business environment, it will be useful to be able to settle payments from your bank account from inside your accounting application, which would be aided by PISP.

9. What can we expect to see in terms of wider developments in fintech, and how will they impact the accounting industry?

If one wants to get a sense for how financial services for businesses evolve, a great place to go is the retail space. If you think about the way you see financial services, lots of people are now using challenger banks like Monzo and Starling and these firms are raising the bar in terms of the richness of the digital experience. Those expectations transform what we come to expect in our business banking.

I think small business owners increasingly expect to be able to access business services on their mobile. So we certainly are thinking about ways they can serve up insights via a mobile device, and cash flow is a great example, getting updates on your financial position on your mobile. You want to be notified when there are issues, or when you need to take action, rather than going through spreadsheets to find what you need to do. The business owner experience is increasingly mobile.

For accountants, keeping track of 300 clients at once, for example, is hard but Xero is currently investing in a platform called Xero HQ, which is a dashboard across your client base, in conjunction with application partners. Futurely, for instance, could detect cash flow challenges for a given client and the way Futurely notifies the client of that is via the Xero dashboard. If an accountant is working across a portfolio she can go into Xero HQ and be notified of anything that has not been done. This is absolutely enabled by technology, which is an exciting evolution for accountants who are all to often having to do paper records to keep track of their clients.

From a machine learning perspective, an awful lot of bookkeeping is about taking data which probably begins life in a computer and ends up as a paper receipt and has to be transposed back to an accounting platform where it has to be coded in the right way, There is massive scope for streamlining bookkeeping and to that end we are working with sales systems, and great partners like Auto Entry and Receipt Bank who are taking the pain out of scanning those documents, using techniques like auto coding. Auto-coding is streamlining that front-end bookkeeping for accountants.