#BeyondFintech Episode 1: Are technology platforms the new banks?

By Sophie GUIBAUD, Chief Growth Officer at OpenPayd ✨ BAAS & Embedded Finance

As part of the #beyondfintech series, we invite guests from some of the most forward thinking brands, who are living and breathing embedded finance in their day to day, to join us for a chat. We dig into their vision for the future, and how they see businesses and consumers interacting with financial services over the next 5 to 10 years and beyond.

In the Ep.1 of #beyondfintech series hosted by the Fintech & Payments Club on Clubhouse, I was able to speak to Ben Johnson, Director of Financial Partnerships at Xero. 

With my fellow moderators – Darren Franks, CEO at TalentintheCloud International, and Olivia Segsworth, SDR at Truelayer – we had a wide ranging discussion about how Xero and other technology platforms are using embedded finance to serve their customers.

It was so interesting to hear how Ben sees Xero interacting with financial services in the future and what this means for the future of banking. If you weren’t able to join us, here are the main topics we covered and the key learnings I took from our conversation.

Not the new banks (for now at least)

Technology platforms like Xero are not planning to become the new banks. They see themselves as business platforms that offer an ecosystem of services with financial propositions embedded within them.

One of the main reasons for this is an understanding that banking is hard. For a start, it’s a heavily regulated industry that involves a lot of risk and compliance. Also, building banking infrastructure is difficult and not something that technology platforms will attempt lightly. 

At the same time though, there are examples where platforms are dipping their toe into this area. Google Plex, which is set to integrate a checking account into the Google Pay app, and Shopify Balance, which will offer account services to business users, are two examples.

It will be really interesting to see how comfortable banks are about partnering with these technology platforms to facilitate these services. The rise of bank APIs demonstrates that some financial institutions are already comfortable but letting go of the customer experience in this way may feel too daunting for others.

But banking is being unbundled

The various different elements we have referred to collectively as ‘banking’ for many years now are being unbundled at a staggering pace. It’s now much more helpful to consider banking in terms of three separate layers, covering the customer experience upfront, the API-enabled data pipes in the middle and the bank infrastructure at the back end. 

Using this framework, you can see how companies like Xero, Shopify, Google and Apple own the customer facing layer. They are therefore well placed to embed finance into this experience, so that banking comes to the place where the customer spends time. 

New challenger banks are also competing in this space through features that really appeal to customers with specific needs. The growth of this sector has been enabled by friendly regulations in the UK and Europe but these companies have also progressed by offering slick and easy onboarding that some traditional banks are now starting to catch up with. 

We will have to wait and see how these challenger banks progress and whether they decide to take on the really hard bits of banking, such as insured deposits, investments, infrastructure, licenses and the extra compliance this all requires.

Embedded finance partnerships matter 

For Xero, the financial services it seeks to embed into the platform can broadly be categorised into three areas, based on what their customers need to do. 

The first question a user might ask is “how much cash does the business have?” and this is where bank APIs are most important. The second question is “How can the business make payments and get paid?”, which is where services such as Stripe, GoCardless and Transferwise come into play. The final question is “how can the business access working capital when it’s needed?” and this is where Xero is working with banks and lenders to help businesses access the credit they need.

As mentioned, Xero doesn’t intend to become a bank or build a payment network anytime soon, which is why partnerships are important. A partnership makes sense if they want to offer a service but realise they don’t have or don’t want to have a core capability in that area.

Build or buy based on core capabilities

Deciding on whether to build, buy or partner with others when it comes to adding services to your customer experience should be dictated by what you see as your core capabilities. If a service is core to the engineering of your product and one where you need end-to-end ownership, it should be built. 

In the case of Xero, this often relates to building the accounting ledger in the background, as this is the really tough bit that matters most. The focus within the team is on being customer and design led so that, even for a boring area of business like accounting, the problems can be solved in a beautiful and seamless way. This is why they’ve brought a lot of designers in house and why these employees spend a lot of time with customers.

On the other hand, buying a service to embed is an accelerated way of bringing something into your experience that your customers want. Xero’s recent acquisition of Planday is a case in point. Some of the most complex issues a business has to deal with are those related to employee management and Xero wants to offer services that solve these problems. Even though it already has a payroll product, Planday helps to build on its employee management capabilities.

Payments are crucial for business customers

Payments are so core to what Xero does because invoicing and point of sale are so important to business customers. This is why they have an engineering roadmap that is focused on invoicing and payments. 

They have also seen the importance of partnerships when offering payment services within the experience. Bank feeds are one of Xero’s most important unique selling points and have been for some time. As a result of this feature, bank reconciliation is quick and easy in Xero. 

As mentioned, this focus on payments does not mean Xero is about to become a payment provider anytime soon. It has seen the extraordinary progress of Stripe over the last decade in achieving this but realises how complex this journey has been. For this reason, the Xero strategy is to aggressively seek out and work with payment partners who are API-led.

Data will power SME finance in future

Technology platforms, who are the custodians of vast amounts of customer data within their ecosystem of services, can use this data to help businesses access services they have struggled to access in the past.

The best example of where this can make a real difference in the immediate term is working with banks and lenders to improve credit lines to small businesses. This process will differ from lender to lender, with the most straightforward implementation allowing users to prefill application forms with their accounting data. At the more advanced end, lenders like Waddle and Iwoca are using debtor ledgers and customer portfolios to change their underwriting models. 

In the case of Waddle, which Xero acquired to expand its lender partnerships, this is already enabling them to test with NatWest how they can get rapid cash to UK SMEs. In the future, payment data from high density customers might also be used to develop debtor scores that can be ingested by an API and would transform credit decisions for businesses.

AI, AML and KYC innovations are possible

Xero is already using machine learning to help customers reconcile bank transactions by learning how users do it and automating the process. This AI-enabled process will improve over time along with other areas of the customer experience.

One important area is Anti Money Laundering (AML) and Know Your Customer (KYC) checks. Xero does not require these checks for users but, if a customer interacts with a regulated financial institution via an embedded service, they are required. In this way, the Xero platform is essentially embedding the AML and KYC checks into its experience.

How can this process be made as frictionless as possible? One solution might be based on how a regulated service that is embedded in a regulated platform should not require the same checks to be performed twice. As such, compliance confirmation could be ported across from one to the other. 

For now, the focus is on providers partnering with providers who share a similar goal of frictionless onboarding. However, if a technology platform could build a KYC service in one place, users would not need to upload documents multiple times and the customer experience would be enhanced even more. 

Want to follow more discussions like those?

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