Open Banking and the Finance Stack of the Future

Business finance software: A work in progress

Software for managing business finances is constantly evolving.

Finance software started on mainframe computers in the 1970s. It became more widely available throughout the 1990s and early 2000s when the increasing presence of personal computers gave every finance person access to finance software. The result was to shift accounting from paper into digital formats.

The second wave in the 2010s has been driven by the cloud and the trend for online software. The Xero accounting platform and Expensify’s smartphone apps are two key examples. They made accounting software easier to use and introduced financial software to non-finance employees for the first time.

The third wave which will happen in the 2020s will be driven by open banking. We believe it will lead to a realignment of the finance stack from resource based to user centric.

In this whitepaper we will explain what is driving that third wave and how businesses of all sizes will benefit from it.

The impact of open banking

Open banking makes banking services available by API. New entrants like Railsbank, Stripe, Modulr and Clear Bank are leading the way. Traditional banks today are still dragging their heels in implementing open banking regulations. They are however likely to follow suit driven by competition from these new entrants.

Banking APIs allows banking services to be integrated with other services. A good example for businesses is paying supplier invoices. Rather than approving an invoice in one system and then logging into another system to pay the supplier, both can now be done in the same system with one click. Not only is that easier for the user, it also avoids accidentally paying the supplier too much, not enough or twice (yes we all do it sometimes!)

That makes life easier for finance people, but that in itself would not be revolutionary. The real revolution comes from using that control and ease of use to make finance more self-service for non-finance employees.

Let’s first look at today’s resource based finance stack and its drawbacks.

Downsides of today’s resource based finance stack

Enterprise Resource Planning (ERP) software emerged in the 1970s and has dominated business software ever since. Finance software is a central part of ERP.

An ERP-based finance stack is designed around resources and reports: inventory is managed in inventory management software, cash is managed in the bank account, expenses are managed in the expense management system and the P&L and balance are generated in the accounting system.

Cloud accounting software like Xero, Sage and Quickbooks are very much based on the same resource planning model even if they have dropped the word “resource” from their name. This software is a lot easier to use, but most businesses still won’t let non-finance employees in their accounting system. They contain sensitive information such as everybody’s salaries and non-finance employees don’t have the knowledge or interest to book revenues and costs correctly.

Most finance decisions are made by non-finance employees though. The table below shows the most common examples.

Table 1: finance actions and decisions made by non-finance employees

Because finance software is not designed to be used by non-finance employees, all data related to these decisions and actions is communicated by spreadsheets and emails.

This leads to a number of issues:

• Data is spread out over many systems: This makes it impossible to get an accurate and real-time picture of finances.
• Spreadsheets are used to fill the gaps: This is time consuming for everyone involved and contributes to data being spread out
• Non-finance employees mostly use email: Emails are easy to send but unhelpful when trying to keep track of what the latest situation is
• Processes are slow: As a result, finance processes are slow. On average, it takes businesses 6 – 10 working days at the end of the month to close the books by which point it is already too late to do anything about it

How open banking leads to a user centric finance stack

Expense management software which emerged in the late 2000s was the first time non-finance people used finance software. They have demonstrated that moving away from emails and envelopes full of receipts to a mobile app has real benefits for both the employee and the finance team.

This first generation of expense management software still had problems though. Employees were still out-of-pocket and the finance team often still had to wait for weeks for expenses to be sent to them.

Open banking APIs are now solving this problem. By integrating company cards with expense software, expenses can be made visible as soon as the payment is made, employees can be prompted to provide the receipt immediately and employees are no longer out-of-pocket. More sophisticated controls around what can be spent on the card mean that it is now safe to give company cards to all employees.

Why stop at expenses

Why stop at expenses though. The move of B2B spend onto cards is blurring the lines between expenses and supplier invoices. Most employees will submit a software subscription or online purchase that was paid on card as an expense. Really it is a purchase from a supplier that happens to be made on a card.

And if some supplier invoices are going through the platform, why not all? Open banking APIs can then be used to automatically pay the supplier once the invoice is fully approved.

On the sales side, similar issues exist. Today, sales people negotiate contracts while finance sends and chases customer invoices. The two are mostly separate. Finance may approve quotes or seek the sales person’s help in chasing invoices but that is all done by email. Why not put that whole process from quote to invoice online, give both sales and finance real-time visibility and use banking APIs to charge the customer.

Finally, if sales, expenses and invoices are going through the platform, why not show managers progress against budget in real time? That fosters greater accountability and helps avoid nasty month-end surprises for them.

What this user centric finance stack looks like

We call this a user centric finance stack: finance tools that are designed around the needs of employees, not around resources and reports.

A user centric finance stack has a number of benefits for businesses:

• Data is always in sync: This makes it possible to get an accurate and real-time picture of finances.
• No spreadsheets needed: helping everybody save time and avoiding a further fragmentation of data
• Single tool for non-finance employees: employees like being able to complete tasks from a mobile app whenever they have a minute, but they don’t want to have to learn lots of different apps or guess which app to use for what
• Processes are real-time and fully automated: having data available in real-time and integrating with banking APIs means the days of lengthy month-ends and cumbersome payment runs are numbered. Picture that, no more months ends!

This user centric finance stack combines elements of today’s accounting software, bank accounts, expense management software, invoice management software and PO approval software.

So what does this user centric finance stack look like?

Challenger banks versus financial control specialists

We believe the answer will be different for small businesses versus larger businesses.

For small businesses, challenger banks are likely to capture the majority of the market. Monzo, Tide and others are already offering expense and invoice management software which fits very well with their positioning of making finances easier which they also use in the consumer market.

There is however a cap on the size of businesses they will be able to serve. Larger customers with in-house finance teams have their own finance processes and it is not within the challenger banks’ business model or platform capabilities to customise the system to each one of their customers’ needs.

Traditionally, these larger businesses have been served by ERP system providers. So will they be able to offer a user centric finance stack?

We believe that will be a big ask. We already mentioned that businesses don’t want non-finance users in their accounting system. Also, ERP systems are implemented by system integrators with limited ability to optimise the user experience. As expense management software has shown, if non-finance employees are going to use finance software, the UI needs to be simple and ERP software just wasn’t designed for this.

We therefore believe that for larger businesses, the user centric finance stack will be split in two, tightly integrated components

• The traditional ERP system which finance will still use for the heavy lifting
• A user friendly “financial control” system which non-finance employees will use for all decisions and tasks listed before.

This is similar to what happened in other enterprise software markets before. Customer Relationship Management software was always an integral part of ERP software until Salesforce provided a user-friendly version. CRM software has been separate from ERP software ever since, albeit still tightly integrated. We believe the same will happen for financial control.

Conclusions

Software for managing business finances is constantly evolving and we are at the beginning of a new wave which is triggered by open banking

This new wave promises to make finances user-centric, real-time and fully automated. Challenger banks (for SMEs) and financial control specialists (for larger businesses) will be leading the charge.

This is an exciting time to work in finance! Finance teams will finally be able to move away from processing spreadsheets to being a business partner helping shape the success of the business.

About Yordex

Yordex is a new way for businesses to control their finances; taking the guesswork out of financial decision making by giving fast-growing companies insight and control over their complete spend.

The brainchild of former Worldpay Executives Erik De Kroon and Hardeep Nagi, Yordex’s next generation finance automation software enables organisations to manage all financial data in one place.

Company cards, expenses, invoices and budgets can all be managed through the Yordex smart spend management solution, which easily integrates transactions with accounting systems. Employees can also be issued with a Yordex card for business purchases, enabling controlled spending through fully customisable approval rules.

Backed by Bloc Ventures, Yordex was founded in 2017