FSI Member Spotlight Episode #19 – Phil Low

FSI Member Spotlight Episode #19: Challenges of small business financial services and how universal API offers a solution

In a recent FSI Member Spotlight, Praxent met with Phil Low, Head of Partnerships at Codat, a SaaS and financial service provider using their universal API to build connected products for business customers.

Codat provides real-time connectivity to enable software providers and financial institutions to build integrated products for their small business customers.

In this episode host Tim Hamilton, CEO & Founder of Praxent, talks with Low about the challenges of small business financial services and how universal API offers a solution.

Tim Hamilton – Tell us a bit about what Codat does, the problem it solves, and for whom?

Phil Low – Codat, simply put is the universal API for business data. So, we’ll go into detail later, no doubt. But at its simplest, we build on top of all the major data sources that SMBs use to store their financial data, their accounting packages, their e-commerce platforms, their payment sources. Bring that all together to allow a single point of data exchange between SMB financial service providers, lenders, insurers, fintechs, banks, our clients, and their customers, SMBs. And why is it important? At its simplest, financial services, historically, just doesn’t work for SMBs. Banks focus on consumers because there’s loads of them, and they focus on enterprises because the margins are great. And so we are doing our damnedest to try and solve that problem, in part by lowering the cost to serve, and making the ability to exchange information more efficient and lower the cost of that service.

Tim Hamilton – You all did a bit of research to really take a look at the challenges that small businesses face in their credit journey, some of the challenges that they experience when they’re applying for credit. Tell us a bit about those issues.

Phil Low – There’s a number of statistics that stand out. I think one of my most striking favourite statistics is that around about 35% of SMB lending applications are unmet. What we mean by unmet is that an SMB that, by any traditional metric, should be eligible for a loan, for a line of credit, simply isn’t able to get that far, either because their ability to consent access to data is poor and time-consuming, and by extension, the lender’s ability to understand that SMB is impacted and therefore they can’t take what wouldn’t be a risk but is perceived by poor operational efficiencies as a risk, that’s one. And then, generally speaking, a lot of that’s informed by the amount of time it takes for SMBs to do this today. So typically it takes between three to five weeks to apply for a line of credit. And we’re talking about small, modest sums in many cases. And part of what we’re here to do is to lower that speed or increase that speed, sorry, lower that timeframe for that to be possible. So, yeah, a number of statistics that you could dig into, but those are the ones that stand out to me.

Tim Hamilton – What stood out to me in your perspective, the Codat perspective, was that whereas in consumer banking, the bank account really serves as a central data source, for commercial or small business lending it’s really in the general ledger or the accounting system, the point of sale system, for example. Tell us a bit about the challenges of getting to that data historically and how you guys provide a solution.

Phil Low – So you’re exactly right. The data make up, if you like, of an SMB is fairly broad. If you think about the terms we hear in that space: receivables, payables, P and L, balance sheet, those are not concepts, at least at a complex level, that exists with the consumer’s financial profile, but they are concepts that are required in a number of credit application use cases and beyond.

And so that information is difficult, not just for the lender to understand, but for the business themselves to understand. You obviously have accounting teams of businesses, even small businesses. So if you think about the journey that a business goes on when they are applying for a line of credit, the number of people involved in that journey on the business side, that may not themselves understand those financials, that get to a juncture where the lender requires this information.

A lot of people are involved in that process. So even without the Codat in place, it’s very difficult to know where it is to find the right information and to submit the right information. So what we allow to happen is to take all of these different sources that the majority of SMBs use, we do the heavy lifting of mapping to the APIs made available by those platforms, and our core IP really is our standardized data model, which is an incredibly complicated thing to get right. What that means in effect, is that rather than going through a manual form-fill exercise, that the SMB might themselves not fully understand, the person submitting for that line of credit may not know a lot of this information, it may be managed by a third party accountant, and then once that arrives on the bank side, it’s nonstandard. Instead of all of that, the SMB can go through the process. And then at the appropriate moment is given the option to select, for example, their QuickBooks account, to log-in, to have the relevant information shared automatically with the lender, which then arrives in a standard format with the lender and is then coupled together with the solutions the lender might use, off-the-shelf custom-built loan origination systems, for example, in order to streamline that entire process.

So as you can tell, I’m fairly passionate about it, but that’s a bit of it anyway.

Tim Hamilton – Having seen a bunch of different charts of accounts for product businesses, service businesses in different industries, I can only imagine just how difficult it was to get that core data model right. I thought I’d double click on that, and that really seems to be one of the most challenging aspects of this, in addition to getting at the data in the first place.

Phil Low – Absolutely. We worked with a number of, I mentioned earlier: origination systems, we worked with a number of partners in this space, and one of the key requirements, as we started digging into this in more detail, was to be able to spread this information out. Traditionally, some of those partners will do that manually, will do that by some degree of automation on their side, but without being confident that you can accurately classify a line item on the ledger, spreading becomes very difficult, unless you’ve got a bunch of people involved. And so what we spent the last six months in particular, building out, is a categorization framework that sits really underneath the way in which we categorize accounts within our products. Now, this is somewhere where we can go into the weeds and get lost very quickly, but really being able to acknowledge not just the first and second, but the third layer of detail around how every business will have custom classifications for items in that ledger, being able to primarily provide a framework within our data model for that information to neatly sit, and then as thousands of SMB data sets plaster our product on a daily basis, being able to inform a machine-learn algorithm that begins to predict what should go there is very exciting because that’s a level of detail that simply wasn’t previously available.

Tim Hamilton – Oh, my God. And there’s a whole world of use cases that occurred to me. I want to get to those use cases here in just a minute. But before we do, tell us about the founding story.

Phil Low – Of course. It’s a fairly straightforward one. So as you can tell, from my exotic accent, we’re a London business and three founders are also British. And they were working in an invoice finance business and various parts of the business, some in the commercial side, some in the product side, and they found themselves faced with a very traditional problem, which is that they needed to obtain information that was secondary to their product requirements, but primary to the service they offered. And so went out, in this case, I’m talking about receivables, and so they then went out and looked, “how can we stop wasting 30, 40% of our road map building integrations into all of these accounting packages? Surely there’s a service provider out there that does this?” And they found a business that had been doing this for a few years, fairly legacy business, not really a software business, very expensive as well, but didn’t do all the things that we’ve just spoken about and then thought, “hang on a second, that might be an idea, there might be a business here.” And again, it’s not simply about the lending use case, the receivables use case. That’s where this began. But we very much view ourselves as not a vertically integrated solution, as a horizontal solution, regardless of use case, we are that nexus of information between our customer, the SMB service provider, and the SMB themselves.

So that’s how they came to create Codat. And that was now four and a half years ago. We’re now at about 220 people. So it’s been going fairly well since then.

Tim Hamilton – Tell us, Phil, more about those use cases. Paint a picture for us. Give us maybe a couple of examples of what you can do with Codat.

Phil Low – So there’s a number of ways you can slice this. So I think our most prevalent client base certainly is lenders, whether it’s asset backed lenders, whether it’s receivables lenders, for the simple reason that the requirement for data sharing is fairly complex. And so we’re solving a real problem right there. The need that the parties have is fairly pronounced. If someone is in the process of applying for a line of credit, they need some money and so anything we can do to make that process more streamlined is going to be useful to everybody. But over the years, we’ve really started finding other use cases that are particularly compelling. So there is some more broad customer retention analytics use cases where the ability for an SMB to share access to their accounting package with their bank such that the bank can take that data and reflect it back to the SMB for a cash flow forecast, perhaps, or for some more overarching analytics that the business might want to see in their bank account, in the digital banking portal. And that’s becoming more and more popular. Reconciliation use cases are also getting very, very prevalent. So when we say reconciliation, should stress Codat has bi-directional integrations where that’s possible.

So we’re not just enabling information to go from the SME’s data repository to a third-party service, we’re allowing data to go back as well. And so in particular with point of sale providers, so Zettle is a good example, Clover, your American audience could be more familiar with those guys. Being able to allow any merchant using Zettle or Clover to be able to seamlessly reconcile that payment data back into the accounting package is invaluable because SMBs will continue to treat the accounting or bookkeeping software or ELPs actually as the hub of their financial data.

So we need to make sure that that information can move seamlessly around. And then there’s expense management use cases similar to what I just described, reconciling from expense management platforms back into accounting packages is also hugely important, working with a number of really cool clients there. And then the kind of vanilla stuff, like account opening; data needs to be exchanged for that. And because, like I previously said, we regard ourselves as horizontal, not vertically integrated, you can use us for any number of use cases. The SMB provides consent to their data, it’s their data, but if they do that with a bank, that bank it provides the SME with better onboarding experience, better credit monitoring experiences, better analytics experiences, reconciliation use cases, I mean, you name it, it’s being able to move that data around the applications, the SMB uses.

Tim Hamilton – And what’s the implementation journey like?

Phil Low – Relatively simple, at least for our part. So we’re an API first business, and we’ll always remain an API first business. We’ve made it easy for our clients to stand up, Codat instances Self Service and there is a white label front-end where you can toggle fonts and add your logo. But obviously, the more digitally nascent or mature businesses will be using our APIs raw, if you like, so embedding that journey into their custom front-end and then taking that data and pumping it into wherever it needs to go, whether again that’s custom solutions or not, but you can sign up with Codat in a matter of minutes, maybe half an hour, an hour, just to get up and running properly. But it’s all right there and we have a team internally standing by to advise our clients on how to best do the end to end value and the entire journey of the SMEs data and the use case. But we also have a very healthy list of partners, professional services outfits, GSIs who are experts at helping the SMB or the SMB service provider, in this case, conceive of the overarching journey they want to build and then actually build it out because there’s a lot more to it. But our bit: API first, nice and easy.

Tim Hamilton – In preparing for the conversation, Phil, we got into the differences and similarities of consumer versus commercial banking, and I’d like to go into that a little bit with you. Tell us a bit about some of those challenges specifically that relate to commercial or small business banking?

Phil Low – Of course, I think the general piece, as we discussed earlier is the inherent complexity of an SME’s affairs. And then again, to be realistic and understand why banks have historically been ignorant of SMEs’ needs – SME margins may not necessarily be fantastic. And so what you have is an organization, an SME, that wants to be treated fairly like an enterprise, but has margins, at times, more akin to those of a consumer. So that reality means that everyone’s sort of a bit stuck. And unless you have a solution like Codat, and our partners, who are sat there trying to lower that cost to serve, increase efficiencies, it’s difficult to proceed. So yeah, I mean our low margin point is very relevant. We spoke about some of the specifics around that complicated fabric, updating roam taxes, paying wages, dividends, different share structures, if you’re multiple regions, you’re probably using different accounting packages that don’t speak to each other, different accounting practices, let alone. You’ve probably got one expense management suite in Europe and another one in North America. You’ve probably got four or five point of sale systems based on the region you’re in, you might be using different e-commerce platforms. And not only is it very complicated to manage those, generally, if you have no ability to be confident that the data will pass back and forth between those platforms seamlessly, you spend a huge amount of your time doing manual data reconciliation.

I mean, some of the statistics we’ve seen, I think this was a McKinsey report said that between 75 and 80% of an SME’s operational time is spent manually reconciling financial data in order for the services they use to function. So we again, are trying to lower not just the cost to serve, for the service provider of the SME, but the internal cost of operating for the SME themselves. And that’s a team effort. But the infrastructure we provide is critical for that being successful.

Tim Hamilton – The thing that you said to me that really made an impact was the margins are akin to consumer banking margins, but the expectations of a small business client is akin to an enterprise client. So there really is that mismatch and my takeaway is that Codat offers financial services companies a way to reduce the cost to serve, serve them more efficiently, unlock new self-service avenues by unlocking access to that business data that was previously obscured.

Let’s talk a bit, Phil, about the future of small business, digital banking. What do you see ahead of us?

Phil Low – So with all of these things there’s a lot of different ways of answering that question. I think for me, the biggest trend is consolidation of service. I don’t necessarily mean consolidation of businesses that may happen, but I mean, the SMBs are increasingly inclined to want to see a single place in order to achieve a wider range of their business needs. We spoke about this the other day, there’s another good report, I forget which consultancy ran it, that today above 50 employees give or take an SME using 40 plus applications to run their business. And that’s a fairly broad definition of application. It’s not just the obvious things like bookkeeping, accounting, ELP, it’s payments, it’s digital banking, it’s expense management, it’s payroll. 

It’s all of those tax platforms, I mean you name it. And all of those services are a necessary evil for the SMB to have. And so one response is for the traditional banks to try and layer on value add services within what they do. Whether that’s a traditional bank introducing a new dashboard, perhaps, for their SMBs, whether that is a neobank, a Revolute, for example, presenting a sort of soup wrap experience where you can do all sorts of things within a product. Or the other side, when the SMB doesn’t actually end up using one provider for many things, they continue to use subject matter experts, but with a greater level of confidence that the data infrastructure required between those subject matter experts is robust and present. So again, using examples we talked about earlier, payroll is a great expense management solution. But it’s only as good as its ability to allow reconciliation back into the hub of your existence, your accounting package. Many a payments provider, a great payment provider, only as good as its ability to know who you need to pay, how much, and then to make sure that once that’s happened, all the relevant systems know that’s taken place – you don’t want to pay people twice or forget to pay people. So I think, again, coming full circle, consolidation of service, whether it’s on the behind the scenes infrastructure level or front of house, I think is for me the most immediate threat.

Tim Hamilton – You mentioned data ownership a minute ago, Phil, I’d love to double click into that under the heading of trends that we’re seeing within digital banking and small business, where do you see the issue of data ownership landing? And also, let’s talk a bit about the regulatory framework that maybe does or does not yet exist as it pertains to the data that you are unlocking that was historically stored or locked up in these general ledger accounting systems.

Phil Low – Of course. So I’ll answer it back to front. So I think primarily there really isn’t much regulation today around the accounting data space there’s a fair bit about open banking, about transaction data from bank accounts, but not really accounting. Codat prides itself on treating that data very, very carefully and taking that privacy very seriously. And it is a matter of time until the regulation comes in place. And that’s a good thing as far as we’re all concerned. And I think what that means is that this other shift, your first question, becomes more robust and more ingrained in financial services and beyond, which is that the only owner of the data we’re talking about here should be and is the SMB themselves. What we’re trying to do here is help give the tooling to the SMB to be able to have greater sense of ownership of that data, understand what’s happening with it, understand that there are places they can put that data and also revoke consent once they’ve done that. And it’s really changing up the traditional approach where if we stick with the lending example, your lenders will look over their shoulders to an Equifax and Experian and rely on this slightly sort of dark arts approach to understanding somebody. This is what we’re hoping to change. And regulation is key to that.

Tim Hamilton – Another trend we touched on, obviously was a streamlined customer journey for businesses seeking credit. And we also talked a bit about historically unbanked or underbanked businesses. Can you touch on those?

Phil Low – Yeah, I mean, I think there’s a segway almost to the NPL here because we’re talking about secured versus unsecured credit and I think the same principle isn’t a million miles from unbanked businesses. I think from the perspective of the SMB themselves, their access to tech platforms, like a QuickBooks, has never been greater. Subsequently, their ability to share information that lives within those, has never been easier, and finally, the ability for the service provider themselves to have the means to rapidly ingest and assess that information has also never been easier. So I think we are increasing the journey for traditional businesses to be able to apply for credit and also opening up the door for lenders to consider businesses in different ways. So we have businesses like Pipe, Ramp, Main Street, neo-lenders who are considering an entirely different type of data, in some cases e-commerce data, perhaps, to consider whether they are willing to take risk against a business that in a traditional paradigm might not have been deemed as eligible. So I think that’s one of the key trends here too.

Tim Hamilton – It is an exciting time to be in the world of commercial financial services, Phil, thank you very much. In summary, what is the number one thing people should know about Codat?

Phil Low – Simple, Codat is the universal API to business data, which is a tough thing to get right. But we’re pretty good at it.

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