‘We’re not losing enough money’ – QuickBooks on Smart Money


QuickBooks is using its balance sheet to test small business lending based on its ability to analyze and predict SMB accounts. The results are interesting.

Chris Reeve quickbooks
Chris Reeve, MD Gascoynes

Day 2 of QuickBooks Connect was an interesting melange of messaging. The company attempted to address both professional accountants and end users in the same keynote.

At first, I wasn’t sure if they were going to pull it off because the way you address professionals is different to the manner in which you talk to end users. Partway through, QuickBooks showed a video where we saw Chris Reeve, managing director of Gascoynes a firm based in the market town of Bury St Edmonds, talking both practice and client issues. That squared the proverbial circle in a neat way that ended up doing the job.

They also showed a number of end-user vignettes, some of which were amusing, pointing up what many self-employed and SMB’s already know: they know they have to be compliant for regulatory purposes but detest the work involved.

QuickBooks has done a remarkable job in making the end user’s life as simple as possible but it’s not done yet. The integration with Taxfiler means in theory that end users can move straight to MTD (Making Tax Digital), the UK government’s attempt to bring everyone onto an electronic file and pay system that is due to kick in in earnest in 2020. However, that’s not the way the profession sees it.

A profession at odds with itself

In an interesting thread on LinkedIn, sparked by a question from accounting industry practice expert Mark Lee, some commenters said that anyone who thinks that integration of this kind will do away with tax preparers is doing those same customers a dis-service.

For his part, Reeve told me that he sees it as an opportunity.

As a profession, we tend to be reactive rather than proactive but including a facility that shows clients a good indication of what their liability will be in advance of the year-end is a good thing. We can then plan outcomes. That’s a value add to me.

As if to ram home the message, Sasan Goodarzi, EVP Small Business Intuit demonstrated a voice-enabled query engine that works on mobile devices that told the user the likely tax liability at a point in time. That is a very cool use of technology.

QuickBooks opens the corporate wallet

But it was afterward, in a wide-ranging discussion with Goodarzi that I discovered an interesting factoid about the company’s Smart Money initiative. The idea behind this is to smooth out access to capital, a topic that grates for most small business. According to Goodarzi, the company is able to approve 70% of the applications it receives. That is twice the number the mainstream banks expect to approve. What’s more, the default rate is so low that he declared:

We’re not losing enough money.

If that sounds weird, we tossed around a few figures and it turns out that when QuickBooks applies its own capital to small business lending, the default rate is far below what I understand the norm to be at three percent.

Goodarzi was quick to point out that Intuit doesn’t want to be a bank because of the regulatory hurdles but is piloting this scheme while the major lenders in the U.S. like BoA , Citi and Merrill Lynch get their act together. Here’s how he describes the situation:

We have all the data on our customers. The banks don’t so in many cases, it is hard for them to carry out a risk assessment. We’d love to partner with them because then they will see what we can. It should open the door to much needed small business lending.

This sounds similar to something Twinfield did for ING Bank customers in the Netherlands a number of years ago and, one assumes, will allow RBS/FreeAgent customers a similar opportunity. Unlike the RBS/FreeAgent setup which is currently free to RBS customers, QuickBooks hopes that bank deals will open up a fresh revenue stream from customers.

This business model has yet to be fully tested in the UK but I can see how that will work. So where does all this go?

QuickBooks to win the UK market?

If you’d asked me five years ago whether QuickBooks was going to become a serious contender in the UK market then I would have said an emphatic ‘no.’ Despite its brand value, QuickBooks’ presence was always low key. However, in the last few years, the company has made huge strides and I now believe QuickBooks will dominate the UK market inside three years. How do I arrive at that conclusion?

The trick QuickBooks pulled off and which has eluded just about every other vendor in this space, was to take the best of existing technology it uses in products like the U.S. TurboTax for expense recording and codification, existing dumps from some banks, and then build QBOnline from the ground up as a cloud service. This was possible because while the development costs for a solution of this kind are not entirely trivial, the company already had a massive installed base that it could keep happy while it got its cloud feet wet and had technology and infrastructure it could scale up and out. That’s incredibly important because as all cloud developers know, the early stages of building are capital intensive.

The balance sheet impact is limited because resources were already being poured into development and, in any event, the associated costs could easily be mopped up in the context of a planned result. It also helps that despite all the investment and acquisitions the company undertakes, it held $478 million in cash at the end of the latest quarter. Yes, it has a ton of debt, both long and short term, but with near zero interest rates and a flattering market cap of $42 billion, it doesn’t have too many worries ahead of it.

That’s the benefit of Intuit’s scale when building an SMB solution. To put this into perspective, at the end of the last quarter, Intuit recorded a 51% increase in the year over year number of subscribers to its service. That represents an addition of 956,000 customers in a year. The revenue rise in dollar terms was 39%.

Competition won’t stand still

None of this comes cheap. Intuit does not break out regional numbers sufficiently to make a value judgment but the year over year increase in total marketing spend was only 15.8% at $469 million in the quarter. While it does not have as strong a relationship with the professional institutes in the UK as others like Xero and Sage, Intuit can and does put a ton of money into advertising and TV spots, which, the company claims, produce a good return on investment.

Taking those growth figures together, a reported 160,000 UK paying customers at the last count growing at roughly 60%, and it’s not hard to see the company mopping up half a million customers by 2021. Can Xero keep pace? I don’t quite see it. In its last half year report, Xero recorded 253,000 subscribers, comfortably ahead of QuickBooks and revenue growth of 49-61%. And you can be sure that Xero won’t be standing still. Check our assessment from Xero’s London event.

But QuickBooks is making huge strides in product across features that customers not only want but which are useful. The focused use of voice-enabled intelligence on a mobile device is much better executed than I thought. The easy to understand figures should encourage use. The fact that QuickBooks will natively include receipt handling takes one more problem away that currently has to be undertaken (at a cost) by the likes of ReceiptBank. Add in QuickBooks marketing muscle and the fact that it’s talking openly about access to small business funding and you see a picture emerging of a vendor that is ticking off many more of the painful end-user boxes than would have been the case just two years ago.

There is one more wrinkle to this. Modern cloud accounting systems are there to make the SMB and micro business person’s life easy and all those in the market do a decent job of that. But Chris Reeve points out that not all clients want much more than to know what their tax bill is going to be and, they want that calculation done for them at the lowest cost. That puts pressure on the firm to be as efficient as possible. In turn that requires a degree of hand-holding so that professionals can offload part of the burden back to the client. Anything the system does to make that easy is welcome.

But on the other hand, the next generation of business people and professionals are much more likely to behave like a polymath leading to changes in direction during the course of their lives. That means the need for ongoing and proactive advice is likely to increase as a part of what professionals offer. So again, having features inside a solution and at the practice level that enable creative thinking will be key to success.

Of course I could be wrong but we shall see.

Image credit - via Gascoynes

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