Is it time to move to a bank for your accounting software?
As banks move into the world of fintech, Richard Sergeant looks at how new banks are moving into the accounting sphere, and what that means for accounting services.
Banks have started to make their way into the world of fintech, and more recently, have been attempting more seriously to integrate banking with accounting services.
Digital bank Starling seems to be leading the pack with a range of new bank features – loans, overdrafts, and a soon-to-be-released range of paid-for business tools, including the ability to file for MTD.
But it still remains to be seen whether these recent accounting options from new banks will be able to go toe-to-toe with the incumbents like Xero and QBO.
Bank and accounting ledger convergence
The ability to bring accounting and banking data to one place is a valuable capability from the perspective of an accountant. However, many vendors are not convinced that clients are able to see the distinction.
According to Countingup COO Andrew Garvey, “Thinking about the ‘bank’ and the ‘accounting ledger’ is becoming outdated from a client's perspective. Businesses will choose a financial platform that enables them to make and receive payments, handle bookkeeping and tax, and produce the reporting they need. The convergence of banking and accounting into one financial tool is inevitable.”
Banking as a Service
The rise of technology platforms offering Banking as a Service (BaaS) effectively means licensed banks integrate their digital banking services directly into the products of other non-bank businesses. As a result, the short cuts to developing these services further and more broadly is accelerated.
For Ivo Weevers, chief product and design officer at Asto UK (part of Banco Santander), the rapid development means that the broad range of services becomes key for businesses. “Integration is the old way of looking at this. Banking-as-a-Service is where the world is moving [towards]. No one cares about accounts and payments. They are a nuisance. People care about new benefits that are unleashed because BaaS sits behind it.”
Small businesses and the self-employed are the core market for these products – as they will freely admit. However, in terms of functionality, is the lure of these additional services enough for accountants to promote more widely to their client base?
The functionality question
On the whole, most of the functionality on offer is fairly straightforward compared to standard cloud offerings explains Andrey Perrett, cloud accounting associate partner at TC Group. “Across the board, they still seem quite basic at the moment. Although Starling’s offering looks interesting, it seems to be good for sole traders but not bigger businesses. The lack of basic accounts reporting and manipulation will be a limit for some”.
With the focus on expense management and categorisation, sending invoices, making payments and debit cards, plans have recently been unveiled for common reporting functions. Countingup, as Garvey explains, intends to add “balance sheet and trial balance to the reports section of our Accountant Hub very shortly. MTD VAT filing and adding journals won't be far behind”. And there are similar plans for rival Coconut and digital bank Starling.
Although this might provide encouragement for the direction of future reporting, getting the reporting right is not always easy. If these are going to be true replacements for some of the accounting ledgers, they will need to be fully functional and accurate.
The MTD fit
Hudson Business Advice’s Della Hudson highlights some of the basics around MTD. “The idea of being able to do a VAT return from a bank statement has been around for a while. However, VAT claims are dependent on VAT invoices, so these still need to be checked manually. Not all transactions go through the business bank account, so there is still additional handling required”. Although you would expect much of their target market to be below the VAT threshold, the signal of being ‘MTD Ready’ is actually more important as the future rounds of digitalisation of tax become clear.
“MTD for income tax is a little more promising for these services”, Hudson continues, “ although key areas of development need to be able to handle simplified expenses and home office claims. And the effectiveness of automatic coding needs improving – although Starling has recently added more cost codes which will help. On the plus side, they're a good start for collecting 90% of business expenses, so I'd like to see them expanded further.”
On balance, it would seem there is still some way to go before they pose a threat to the big cloud beast like Xero, Sage and FreeAgent, but is that the right way to view them?
The threat to existing software providers
According to Counting Clouds managing director Caroline Harridence, “To date, I have found that the attraction for businesses is cost-saving over options like Xero, rather than the functionality. However, if we have a new alternative with better functionality that is attractively priced, then I think we will see accountants moving clients over.”
However, many like Della Hudson do not see an imminent threat. “Are they going to trouble existing accounting software? Only at the very small end, so I doubt whether Xero or QBO will feel threatened”.