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Xero’s Keri Gohman: ’70 percent of small businesses are using cloud technology’

Keri Gohman is president of Xero Americas, the leading cloud-based accounting platform outside the U.S. She and her team are tasked with expanding the platform’s footprint into the Americas. On this week’s Tearsheet podcast, we spend some time talking about the financial web, a term she uses to describe the technology ecosystem forming around SMBs that includes interconnected banking, accounting, and advice.

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Below are highlights, edited for clarity, from the episode.

The impact of tech on accounting
Accounting is a really interesting space. For years, technology was lacking for small businesses and you can see that in where investments were being made in the past. They were primarily made in bringing new financial technologies to consumers. We’ve seen a massive change over the past 10 years. VC investment in small business financial technology in 2010 was around $600 million. In its peak at 2015, that number was around $6 billion.

Banks also have underinvested in small businesses. Having run small business at Capital One, I can tell you that most of the investment goes toward large commercial firms or consumers, where you have volume.

Our expectations as consumers are also changing. I expect my world to connect. When I’m on Google Maps, I expect to be able to access ratings and reviews, Uber, and everything else. Small business owners now expect technologies to work differently. About five years ago, only 20 percent of small business owners were using cloud technologies. Now, it’s 70 percent. Our problem today is that there’s almost too much choice.

Intuit’s and Quickbooks’ influence in the market
Quickbooks was around during the days where you bought a physical CD from a store and inserted it in your computer. Their business, as much as they’re starting to incorporate technology, is still predominantly on the desktop.

Xero started about ten years ago and was born in the cloud. We started with this idea of how to take advantage of modern technology in the cloud and put the pieces of an SMB owner’s financial life together. How do we help a business owner work seamlessly with her accountant? How do we make sure that banking data is going directly into the accounting system, reducing the manual work for a small business? How do we integrate all the apps a small business owner uses to run his business, like Shopify for ecommerce business.

We started out from the beginning with this idea of an open ecosystem and integration and that’s how we’re different from Quickbooks.

Integrating the online world with the offline
Technology is an enabler and lets us, humans, spend time on When we think about the online, offline paradox, we look at how technology plays alongside humans. There’s no better place than that comes together for us than with the small business owner and the accountant.

Most small business owners are passionate about their businesses. They didn’t start their businesses because they wanted to spend time on accounting or financial management. We’ve taken advantage of technology so that business owners don’t have to spend time doing account reconciliation and management. All of that manual entry moves to the back end for the business owner and frees them up to do what only they can do for their business.

Same thing with accountants. We’ve recently seen that accountants started out doing manual bookkeeping and manual entry. We’ve taken that work off the accountant. We’ve automated all of that. The data from multiple bank accounts or ecommerce platforms comes into our app and accountants can now spend more time on higher level activities, like advisory.

Accountants that can act as a virtual CFO typically see twice the amount of revenue per employee and can handle 3x the number of clients. Technology is impacting what they do and enabling them to be more efficient and effective at what they’re doing.

 

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Is PayPal the U.S. answer to Alipay?

The U.S. may not have an exact answer to Alibaba Group’s Alipay, China’s dominant third-party online payment platform, but PayPal is certainly starting to look like it.

Both provide online payment capabilities to merchants and consumers. Both are using data from their existing customers to offer consumer credit and small business loan options. Now, PayPal is catching up to Alipay in that it’s starting to get into consumer-to-business mobile payments and working to become more than the yellow button on your business’ website, as Amit Mathradas, general manager of small business at PayPal, puts it. It wants its products, partners and consumer and merchant clients to come together in a more comprehensive way.

“PayPal is growing with the merchant and taking a lot of direct input and feedback from our businesses,” Mathradas said. “We’re working hand in hand to help develop solutions so they can focus on running their business while we handle the fintech.”

So far this year, PayPal has announced that customers will soon be able to buy things at physical shops with their PayPal balances through Android Pay, that it will extend a pay-with-Venmo option to PayPal accepting merchants by the end of the year and closed a huge deal with TIO that will bring 10,000 billers into the PayPal network. Last week, it revealed its latest offering, PayPal Business in a Box, in partnership with e-commerce platform WooCommerce and accounting software company Xero.

That’s a lot of new data to be working with on top of what PayPal already has: 16 million merchant and 203 million consumer accounts. And with all these new agreements bringing even more customers into the network, PayPal can, like Alipay (now officially Ant Financial) use the customer data from those transactions to give consumers and merchants access to other financial services that look a lot like typical core banking products.

“The transaction volume you take part in using your PayPal account helps qualifying you towards our Working Capital product,” which offers small business loans backed by WebBank, Mathradas said.

PayPal Working Capital has provided $3 billion in loans and cash advances to 115,000 businesses since its 2013 launch.

Mathradas said while PayPal’s merchants had long considered it an important payments partner, they had been asking for things like access to cash and consumer credit to help drive increase in online store conversion. When merchants sign up for Business in a Box, they’re automatically registered for a PayPal business account that integrates into its WooCommerce store and Xero account with application programming interfaces.

There are 28 million small businesses in the U.S. that account for 54 percent of all of U.S. sales, according to the 2016 U.S. Small Business Profile by the SBA Office of Advocacy, and Xero has those in its sights.

“We’re going to change the game for small businesses because they make our economy go round and round, said Herman Man, Xero’s head of product for the Americas. “When it comes to their ability to monitor financial performance, real time is crucial to their survival.”

Mathradas declined to comment on PayPal’s threat to traditional banks.

“The one thing we do offer is an end to end solution. We can serve merchants or consumers that want be paid online, at a trade store, at a store, that need working capital, that need credit. One-stop shop is what separates us from anyone else out there. We’re going to continue using these assets to grow.”

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Wells Fargo: Banks need to create data exchange standards

Wells Fargo is trying to establish itself as the leader of a movement to give banks’ customers control over their data and how it’s used.

The first step, according to Brett Pitts, head of digital for Wells Fargo Virtual Channels, is to come up with cross-industry standards for moving data to different parties.

“This will be successful if more banks, more aggregators, more fintech firms wind up signing into these kinds of agreements, and figure out an open standard way of passing data and keeping customers at the center of discussions,” Pitts said of its data-exchange agreement with data aggregator Finicity, announced earlier this week. “Ultimately, this isn’t going to work if its just Wells Fargo, Intuit and Finicity doing it.”

The agreement allows Wells Fargo to share its customer data with Finicity using application programming interfaces. The bank made similar agreements with Intuit, which owns QuickBooks, TurboTax and Mint, in February and with Xero last summer. This week’s agreement is different in that it allows Wells to move data to third-party fintech apps that work with Finicity, whereas the agreements with Intuit and Xero allow them to use customer data on their own financial applications.

Right now the most common way of accessing customer data is through a method called screen scraping: customers log into the third party site or app with their bank credentials and that company “scrapes” the information to be able to log in as the customer to retrieve account data as necessary.

“Screen scraping is the anti-pattern we want to stop,” said Pam Dingle, principal technical architect at Ping Identity, a maker of identity management software. “By sharing their passwords, customers are allowing the third parties to be them – transfer money, take out loans, literally do everything the customer can do. These passwords are stored in a format which allows them to be used, so a breach at the third party is a breach of the bank account.”

Intuit also established a data sharing agreement with JPMorgan Chase in January; in February Silicon Valley Bank and Xero made a similar move. Wells’ arrangement with Finicity is the third such agreement, but Pitts indicated the bank doesn’t plan to stop there.

“We have lots of these kinds of conversations in the pipeline right now,” Pitts said. “Early on it’s important for Wells that we show leadership, that this is possible, that we build momentum through these kinds of agreements and they’re used as a catalyst for creating an industry standard ways of doing things. We’re hoping this can constitute a sort of tipping point.”

When Wells Fargo announced its agreement with Xero it framed it as one that takes a stand against the more common practice of screen scraping. Its progress in establishing more agreements with more data companies has “felt a little bit slower than what we would have liked” because of the variety of business models among various aggregators, Pitts said.

Now Wells is hoping over time its campaign to end screen scraping becomes better understood and more easily replicable by others, by making sure its different arrangements can have have as many common elements as possible on the technology side, Pitts said.

“The strategy is to really provide quality access and quality data for consumers financial records,” said Finicity CEO Steve Smith, “to digitize and speed up the existing process thats been out there for a long time and enable speed, security and convenience of financial records.”

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Behind closed ledgers: an inside perspective on the Wells Fargo / Xero integration

If you want to win small business banking, you have to address cash flow: 60% of small businesses in the US face cash flow problems on a monthly basis, according to a 2012 whitepaper by Barlow Research Associates.

Cash flow is a major problem, not just for incumbents and their frantic SMB customers, but for the American economy at large. According to an SBA report, SMBs really are the backbone of the American workforce: they employ 49% of the US population (that’s 120 million people), create 64% of net new jobs in the US, and account for 43% of US payroll dollars.

Wells Fargo has been taking steps to help small businesses get a grip on their finances.  To do so, the bank, which has 3 million small business clients and provides more loans to SMBs than any other bank in America, established the Wells Fargo Works for Small Businesses resource portal in 2014.

Barlow’s whitepaper showed that one of the main problems keeping SMBs in perpetual cash flow pandemonium is a lack of integration between banking services and accounting. Enter Xero, an accounting software and online booking company, whose new data-sharing integration with Wells Fargo should provide a simple integrated solution to joint customers of the firms.

Standardization brought them together

The US banking system is leaning more heavily on banking APIs – a set of routine definitions, protocols, and tools for building software and applications. Both startups and incumbents benefit greatly from them, using these software hooks to create holistic experiences to meet their customers’ needs. Unsurprisingly, financial companies of all sizes have begun to put aside their differences to aggressively pursue API standardization.

“Its about how we create a world where data and details can transfer more securely and more seamlessly,” says James Maiocco, General Manager of Xero.

Together, banks and fintech startups are trying to develop a balance between giving customers control over their data, while remaining within the boundaries of security, privacy, and regulatory frameworks. It was at several different conferences about banking APIs that Wells Fargo and Xero started flirting with the idea of an API-driven integration.

Moving Fast

The conversation about creating an integration for joint Wells Fargo and Xero customers started several quarters ago. However, the actual development of the integration only took six months from start to finish.

Each company had an executive sponsor – Maiocco for Xero and Brett Pitts, Head of Digital for Wells Fargo Virtual Channels – as well as respective technology and business teams that had to work through the terms. Ultimately, the negotiations were dependent upon “a small handful of people on both sides of the table,” says Maiocco. He credits API standards as enabling such small teams to pull off such a big deal:

That’s the beauty of standards. You’re not building something custom for an individual organization, you’re actually gravitating around a standard that can be used by everybody. It doesn’t require large teams, it just requires an agreement around the standards and the commercial relationships of both parties.

Marketing the integration to their client base

Even if their joint customers aren’t all caught up with both firms’ press releases (as Maiocco notes, small business owners are the busiest people on the planet), Xero will make them aware of this new integration by messaging about the service at login, as well as engaging in a certain amount of more traditional outbound marketing activities. Though he couldn’t speak to Wells Fargo’s practices, he assumes that they too will be focused on informing their customers of the integration through customized, personalized channels.

Neither Wells Fargo nor Xero are disclosing the exact number of how many joint customers they share, but Maiocco told Tradestreaming that Wells Fargo represents a double-digit percentage of their customer base in the US. Ultimately, customers have to actively choose to apply the integration.

Miraculously, everybody wins

In theory, it’s a chain reaction of good. The Wells Fargo/Xero integration enables customers to stop circling the cashflow whirlpool and start succeeding in business, potentially resulting in more revenue, jobs, and security. Wells Fargo wins, because it means less risks, less businesses defaulting on loans. Xero wins, because the SMBs continue to grow with them.

For Maiocco, one of the biggest winners are those unsung heroes, the accountants. Many small businesses with 25 employees or less outsource their bookkeeping. From experience servicing accountants, Xero learned that a lot of their time is spent doing rote tasks that could really be done with machine automation. With this new integration between Wells Fargo and Xero, accountants could save up to 2 to 4 hours per joint customer, depending on transaction volume.

This is not only significant for the SMB customers, who typically pay their accountants hundreds of dollars per hour, but for the accounts themselves, who can stop doing manual data entry and focus on higher added value services for their clients. Maiocco suspects that Xero’s accountant base will push more clients to Wells Fargo as a result of this integration.

“The average SMB  bookkeeper and accountant will have somewhere between 50-100 small businesses that they manage,” he said. “If you can save 2 to 4 hours per business per month, that’s a lot of time saved.”

Photo credit: ansik via VisualHunt.com / CC BY