​Xero to leverage data for small business lending market

After spending 10 years building a cloud accounting platform, New Zealand's Xero is looking to partner with banks to allow small businesses access to capital and debt.

Speaking at Xerocon South in Brisbane, Xero CEO and co-founder Rod Drury said the issue with small business is that it is such a fragmented sector, and given how small some businesses are, it often becomes too risky for a bank to lend.

"Our view is, if we can partner with large banks and deal with the issues of how to get them lending large pools of money to small business, that would be a very purposeful thing," he said. "If you get a bit more money, you can bring another container of raw materials in, you can bid for a larger project and you can create jobs."

Drury said the idea to head down this path came after Xero realised the potential of its data.

"A few years ago the official small business number in New Zealand was 450,000 and we thought, 'Gee we've got a lot of market share if that's the real number'. We felt like there was a lot more because we could see it in our accounting firms where we had 10 to 20 percent of their customers, and so we started looking at our data and found that there were actually 680,000 trading entities," he said. "So even the most basic of information about small business, no one really knew."

Drury said the first period of cloud accounting from Xero's perspective was taking the data on individual PCs and then building the "boring apps" that users need to perform accounting tasks. He said that at the end of that building process, 10 years on, Xero found itself having processed a trillion dollars worth of data in 2015 alone.

"I think we've done the hardest bit. A lot of the risk is taken out of the business, we've got plenty of capital, we've passed a quarter of a billion annualised revenue, so we're a sustainable business here for the long haul, and we've got that customer base that's really happy and loves us, we've got a great partner channel," he said.

"We can now do the magical stuff around using that data to really drive value and even drive productivity for small business."

Xero is the only cloud accounting firm to offer 100 percent daily bank feeds, Drury said, and within the next nine months, Xero expects to add another 40-plus financial institutions to its feed list. With some 100 financial institutions providing Xero with daily feeds, including 43 regional and industry credit unions, the CEO said small businesses and their accountants are now getting a greater insight into their cash flow.

"Feeds are coming from banks and accountants are looking at what's going on almost continuously," Drury said.

In certain sectors in New Zealand such as farming, Drury said farm owners may find themselves in a million dollars worth of debt, and that in many situations the banks are paying for Xero to monitor cash flow.

According to Drury, in the last 12 months more than 10 million budget transactions were entered through Xero and Figured, which is a cloud-based production tracking, farm budgeting, and forecasting tool that feeds into Xero.

"When the protein feeds come down, the protein prices come down -- that goes through Figured, everyone sees how budgets change, and we're actually keeping people on the farm because banks are comfortable with the fact that they can see what's going on," Drury said.

"We're already proving there's this financial web where you have really clear, almost continuously certified high quality data. With an accountant sitting there working with a bank manager who is already helping people managing their assets, what we want to do is move that traditionally non-bank sector -- getting away from just securitised lending.

Xero is almost through with its two-year migration to Amazon Web Services (AWS), a move Drury is glad the company made.

"If you want to be on the lowest cost to serve and get the best margin, you have to be on one of these platforms," Drury explained. "More importantly, we cleaned up that trillion dollars worth of transactions so we can now start applying machine learning and artificial intelligence to all of that data to do some cool things."

"It's kind of neat for me because while it takes a long time to get that infrastructure and build all that piece, the fun you can have now by applying technologies to that scale is really exciting."

Drury is nonchalant about Xero's achievements, referring to the success of his company as more of a relief rather than a surprise.

"I don't know exactly when, but we always knew that if we did it right it would be like this," he said. "The exciting thing is that we are kind of at the end of the beginning."

He also said that within the next six months, Xero expects to pass 1 million customers.

In the opening keynote at Xerocon South, Trent Innes, managing director for Xero Australia, made a string of announcements that included the unveiling of the company's first lending partner in New Zealand, Fuelled, which is aimed at helping small businesses access capital. From Xero's platform, Fuelled will offer small businesses funding that is secured against unpaid invoices.

"Really our vision is to have a small business platform," Innes said. "Accounting is the core engine of that but it's all the digital connections that sit around the outside of that to help make a small business' life easier."

Disclaimer: Asha Barbaschow travelled to Xerocon South as a guest of Xero.