Risks and opportunities in digital banking
Kevin Salter examines the emerging fintech landscape and where accountants can fit in amongst challenger banks, Open Banking APIs and accounting software.
Challenger banks and fintech are set to accelerate the way businesses are set up after a period of unprecedented change in company banking behaviour.
Choices when starting a business used to be relatively easy. You wanted to start a business? Make an appointment to see a local bank manager at one of the ‘big four’ high street banks to discuss and open a business bank account, fill in copious forms, and a few weeks later you were ready to go.
You wanted some bookkeeping advice? See an accountant who would provide you with a cash book to record the ins and outs, by cheque or by cash, and a little guidance on how to complete it, balance it and prepare the summaries.
If you wanted some accounting software, there were a couple of choices, but nine out of 10 accountants recommended a particular product according to the software house marketing at the time.
You wanted some tax advice? Too late – the accounting year had finished, and you had only just supplied your backup on a USB stick to the accountant six months after the year-end.
Move forward just a few years...
You want to start a business? You could still follow the steps outlined above. However, in the fast-paced world, you want it tomorrow. Not a problem! Go online and choose a bank services provider. Enter some basic details, upload a selfie and evidence of ID such as a passport page or driving licence. A few minutes later you have a sort code and account number – and a fully functioning bank account in a day or so.
You want some bookkeeping advice? See an accountant who can (hopefully) discuss a range of online accounting products depending on your needs and requirements, provide installation and training, and possibly offer bookkeeping services too to relieve you of the burden. This advice can (and should) extend further to other bolt-on applications to enhance the accounting functionality.
You want some pro-active tax advice? With online accounting systems, as long as they are pretty well up to date, 24/7 access means pro-active tax planning can be provided before the year end – and other potential issues identified – e.g. turnover exceeding the VAT registration threshold.
What has changed?
Cloud technologies have been the catalyst for change, and in the not too distant future, all software will be cloud-based. Accounting software has seen many new entrants into the marketplace, and those developed as cloud products from inception have seen quite marked client gains from other software products which were desktop-based and had to try to move their products to be cloud-based, whilst still maintaining and developing the desktop-based systems.
There are, no doubt, more exciting developments to come in the fintech space. Broadly, this is any company using the internet, mobile devices, software technology or cloud services to connect financial products.
Open banking is a commonly heard phrase and relates to the requirement of banks to share your financial data (with your permission) with other institutions. After all, it is your data. This has led, for example, to the direct bank and credit card transactions feeding straight into the accounting software, much easier ways to apply to borrow money, and the ability to see all your bank accounts in just one provider’s application. This is done through APIs that allow the products to “talk” to each other.
The challenger banks – so-called because they compete with the ‘big four’ high street banks – tend to be online only, with little or no physical street presence. This competition in the marketplace has led to some of the high street banks trying to establish their own presence in this space (and closing them down again after a few months).
The challenger banks take advantage of the fintech and this technology is very much to the fore. From setting up, described above, to the transactions appearing almost instantaneously in the accounting software once the payment or receipt has been processed, the ability to attach receipts to the transaction and the list goes on.
The next stage of development will be even more competition in the accounting space, with these institutions providing basic accounting functionality such as sending sales invoices and a profit and loss account and balance sheet.
The risks and opportunities
In June 2020, the collapse of payment processing service WireCard led to significant disruption to online banking services, and being near the end of a month, could not have been at a worse time for many with salaries not coming in and the inability to withdraw cash. However, it appears no money was lost, and the situation was generally sorted in a few days. But there is always a risk of this happening again?
The financial services compensation scheme exists to protect up to £85,000 of funds in all banks and building societies that are authorised by the Prudential Regulation Authority and the Financial Conduct Authority – but not everyone is registered. It is possible to check those registered at the FSCS website.
An upside of fintech is that products appearing to make managing finances much easier, seamless and often cheaper than at present.