‘It’s not just about a QuickBooks integration — you have to look at the business problem’: Codat’s Peter Lord

If we were only talking about the benefits of open finance a couple of years ago, we’re already seeing open finance take root today. Firms like Plaid and Codat are showing the power of integrating customer financial data across firms and into apps. New use cases are popping up all the time.

Today’s guest is Peter Lord, CEO of Codat. Codat zeroes in on small business financial data. That’s a very different problem to solve than, say, aggregating consumer data. Pete joins me on the podcast to talk about the challenges of wrangling SMB financial data. We also chat about how and where he decides to provide value-added services on top of the data he’s sharing versus just providing the raw data. Pete shares his feedback on the evolution of use cases for SMB financial data he’s seen over the past 5 years of running Codat.

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The following excerpts have been edited for clarity.

Intro

I'm Pete Lord, CEO of Codat. Codat is a universal API for business data. We provide the integration layer for companies building the best-in-class products for small and medium-sized businesses.

Similarities to Plaid

It's a comparison we get a lot, especially since they joined our cap table in our recent series C investment. There are lots of similarities, but also, there are lots of differences. Firstly, open banking has kickstarted the push into open finance and open data. But it's almost exclusively focused on consumers and consumer use cases. And this has been excellent for us as individuals, but SMBs need a solution and a framework that works for them.

For us, it's much more about open data and open accounting, because SMBs are fundamentally different than consumers. If you just take categorization of bank transactions as an example, my Monzo account can help me understand my groceries versus my holiday spend. But for an SMB, when you're categorizing their transactions, you need to be looking at their profit and loss. That's fundamentally a big difference to a company like Plaid -- our focus is on SMB.

The challenge of financial data aggregation around SMBs

And when it comes to the kind of the challenge that we're solving, a firm like Plaid has thousands of connections to bank accounts. Codat has dozens of connections to the software system used by SMBs. So an order of magnitude less, but the complexity of small business data is just so much greater. We standardize to a data model with hundreds of fields from a small businesses: top line, profit and loss, and balance sheet, right through all the customers, suppliers, invoices, and payments, down to the line items on those invoices and journal entries. And so the complexity of the problem that we're solving for is just so much greater.

Complexity around SMBs and lending

SMB data is siloed across a bunch of different systems and this lack of connectivity, this is what leaves the SMB owners without access to the software products and the financial services that they deserve. There's also an adoption challenge, as well. For some sectors, integrations have very quickly become table stakes. And companies compete on not just the breadth but also the quality of their integrations.

You can see this, for example, with some of the modern corporate card solutions. Even in my personal Instagram feed, I'm being pushed ads for how companies like Pleo have the best in class connection to accounting software systems like Xero. And that's awesome, the value is clear, and it's a competitive edge to have high quality connectivity. But in other integrations in other sectors, new integration adoption is much slower.

Value for lenders and borrowers

So I started focused on the lending space, because that was the lens that I saw the need for Codat through -- there's tremendous value both for the lenders and the SMB borrowers. The value for a lender has been to really confidently understand in real time who you're lending money to. The SMB borrower is able to share data extremely efficiently, very quickly, and get an instant decision. Despite that, we estimate that still less than 1% of loans are being underwritten using consented real time data through integrations in that way. And so, there's just a long way to go in order to get the adoption that SMBs need.

Layering intelligence on top of data

For example, we have a product named Assess, that acts as a layer of intelligence on top of the raw data that comes from integrations from our integrations. That's important because the value of the data is actually also often its own worst enemy. There's simply so much of it, that for some lenders, it can be overwhelming. So our Assess product includes metrics, categorization, cross referencing things and machine learning to surface and highlight the insights in the data. And that means lenders can adopt this type of technology faster. It's ultimately SMBs who are going to benefit from that.

We are just over five years old, and we spent the first three or four years of our life building purely the infrastructure layer for integrations, our core products, our accounting API, our commerce API, and our banking API, providing the raw data in a standard form. So the pitch there is, why build and maintain many integrations, when you can come to Codat, build once and have the same coverage? We wanted to make sure that we get that right first and resisted for as long as possible client requests to help them get more value out of the data, to build on top of it.

But at the end of the day, those requests reached a critical mass where in order to help accelerate the adoption of the industry as a whole, we had to pay attention to what our clients were asking for. And having seen the volume of data that we have, we're in a really good position to be able to provide that -- we have built up the trust and confidence in our clients.

SMBs aren't the same: the SMB growth curve

Another big difference between consumers and SMBs is that SMBs are all so different. We support clients from the smallest startups and in the early weeks of their company formation, right through to some of the largest organizations in the world. 

And young companies that are going on that journey, they typically start by selling into SMBs in a particular location of a particular size and a particular vertical, and then they sell a particular product proposition to solve their needs. And as you expand any of these dimensions, it introduces more complexity for their integration needs. So you either need to add new integrations, to cover the software that those type of SMBs use. Or you need to add more functionality to an existing integration to cater for for those SMBs needs.

It's not just about integrations

So to bring that to life a little bit, some of our clients start with the micro end of SMB, and then they go up market, to maybe a mid market size client. Some of them start out in the US and then expand internationally. We have clients who initially built a point of sale system that are then expanding into lending or from expenses into bill pay. And all of these evolutions, and reaching different types of SMBs expanding their target market, it makes it harder to manage a roadmap. It makes it harder to be a product manager for integrations, because the maintenance burden is increasing and requires more specialist experience. And it's more work at the end of the day.

So lots of our clients might come to us and say that what we need is a QuickBooks integration, for example. But really, it's about looking at the business problem and the problem that sits behind that. It's not just a QuickBooks integration: it's a question of how do I seamlessly automate accounts payable to and from QuickBooks. And so one of the things that we've been doing in addition to building those kind of one to many type standardized integration products I described is to build dedicated products that have the best in class functionality for solving that particular business problem. So a product for expenses solves the problem of synchronizing corporate card data to accounting platforms, as an example.

Looking back over 5 years

When I think back to when Codat first started out, fintech was 'unbundling'. I don't know if you remember those screenshots that used to go around of bank websites with arrows out from the homepage to the specific fintechs that were providing that service and that service alone. We made our business around enabling both banks, but also the fintechs, around those sorts of diagrams to provide integrations that had scale.

And I think now what we're starting to see more and more is those fintechs around the periphery, looking to offer more and more value for their SMBs outside of their original product. Rebundling is what we're talking about here. So lots of companies are adding lending into their their offering -- the Shopify Capitals. We see billpay as a functionality being added to lots of companies -- Ramp announced this very recently. B2B payments are being added to other apps. So the reason this is exciting for me, and I think is an important change for Codat, is because this is only possible because of key infrastructure components, like us, that make it easier and faster to launch these types of products.

Knowing where to build and where not

We want to be an infrastructure provider. And we see our value as almost closer to a network. So we like to lean heavily on partners who build on top of our API to kind of close that gap in terms of the functionality that's been created. If we can just provide the infrastructure layer, that that makes us very happy.

We say internally, it's not like we've got a shortage of good ideas. All the ideas are excellent, and provide a lot of value to clients and really move the needle. It's about where are we going to place our chips and what do we want to do really, really well.

Saying no

As an infrastructure provider, the amount of innovation that we see across our clients is really interesting. And the team takes pride in finding new ways that Codat can be used. It's something that I find fun and motivates me as well, because we are continually surprised by how Codat is being used by our clients. So as an example, we've got a number of carbon accounting clients. We support vertical SaaS platforms that serve breweries, vets, nurseries, hairdressers -- we've even got one for graveyards.

So there's all these new ways that Codat can be used. And as much fun as it is, our time and focus should really be best spent on use cases that we've already proven out and repeating that with more customers. So that trade off of doubling down on things we know work really well, and then continuing to push the boundaries of how our product can be used and opening up new TAM -- that's one of the consistent trade offs that we have to make.

Market changes 

Our clients have got one thing in common: they've all got SMB customers. And so their consistent conversation is what's the impact on SMBs and how can Codat help? So think about what SMBs need in this type of market -- they need access to the right amount of financing at rates that are fair. They're time sensitive, so they need it when they need it. And so our question at Codat is how do we best enable our clients in the lending space in particular to deliver this?

There are a number of ways that we can help. We can give them real time insights on their existing customers in their portfolio today. How is cashflow changing? And how can they proactively support the customer already with additional financing?

Now, one thing that our customers are seeing is that the cash buffer of their customers is decreasing. It went higher than it was pre COVID, with government intervention that we saw around the world and it has been steadily dropping. The situation is going to get worse. And then if our clients are expanding their their book and taking on new business, then we can help them have an up to date view of that SMB in real time. And that's really important in this type of environment, because things can change really quickly.

We can also help them have the confidence that the business that they're talking to is who they claim to be, that it's legitimate. Something that we saw in the midst of COVID, where we helped a number of the government schemes and some large banks respond to that, helping them to determine eligibility for those types of loans is that there's a lot of metadata in the systems that we're connecting to that is really helpful to fight fraud. What one of the banks that we worked with noticed is that lots of the companies who were connecting their accounting software had only purchased it in the last few days. And they've been back populating data. And as you know, those sorts of schemes were rife with fraud. It's this kind of next level, next layer down of data that can be used to fight that in a really automated way.