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Enterprises eye Xero's $300bn small business transactions

Phil Wainewright Profile picture for user pwainewright February 11, 2016
Small business accounting vendor recorded $300 billion in transactions last year. CEO Rod Drury tells Phil Wainewright why that matters to large enterprise

Phil Wainewright interviews Xero CEO Rod Drury at XeroCon London 2016
Phil with Xero's Rod Drury

Xero, the cloud accounting provider for small business that launched ten years ago in New Zealand, is now reaching the kind of global scale that makes it an attractive partner for larger businesses that want to interact with its customers, according to CEO Rod Drury.

Small business SaaS is incredibly interesting to the large enterprise market because it's providing this aggregation point to talk to hundreds of thousands of customers.

For large enterprises, rather than them saying, 'Hey, we're going to start charging people $2 to get a paper statement,' they're actually flipping that around and integrating Xero into their billing platforms. They drive intimacy and more stickiness with their customers, by getting their ERP billing directly into the small business customer's commodity accounting engine.

Aggregation role

Having started out in New Zealand and then Australia, Xero has now built a big presence in the UK and is growing fast in the US too, with more than $300 billion in transactions being recorded on its platform in 2015. But it's in its home market of New Zealand where its market dominance is starting to demonstrate the potency of that aggregation role, with as much as a third of the country's economic activity passing through its customers' payroll, purchasing and invoicing.

New Zealand is fascinating because we have over 25% of all small businesses on the platform and we process a third of New Zealand's GDP. We have more small business customers than any large provider. Telco, bank, energy company, we have more small businesses than any of those.

We can now test what happens with scale. A lot of our management focus is now connecting large enterprise into Xero and also connecting government with Xero.

Drury was in London this week for XeroCon, the vendor's globetrotting event for its accounting industry partners. Our wide-ranging interview also covered Drury's thoughts about the 'Cloud 2' wave of public cloud SaaS - coming in part two. We run through an overview of both talking points in the video below.

Accounting as a beachhead

Xero's ability to act as a mediation layer means that large enterprises can bypass all the supplier portals and self-service web apps they used to have to engineer in order to interact with small business customers and partners, explains Drury .

Accounting we always thought was the beachhead application that the finance of the business lives in everyday. For us, adding those features and services is very natural because it's in their existing workflows.

We build that experience and that capability right inside the platform and basically make it just part of what they do, at a very low marginal cost because we've already got the customer.

The massive difference is that the small business accounting vendors have become the natural aggregation point that makes it cost effective and exciting now for enterprises to connect to small business at scale, which is a major supply chain thing.

He outlined several examples of the businesses that are hooking up with Xero to plug into its customer base.

Direct connection

Fast-growing payment technology provider Stripe and its established rival Paypal are both partners:

We've completely smoothed over the sign-up process and obviously it's a big benefit for our customers. But you know we're actually driving acquisition to a company like Stripe by making the processes better. Our customers don't have to think about, what payment system do I use? They basically just put in their email address.

Warehouse Stationery, New Zealand's largest stationery and office supplies company, has directly connected its invoicing system into Xero.

Our small business customer base is motivated to go and buy things at Warehouse Stationery — buy them online — because the processing of all of those invoices is just magical when those invoices come into Xero.

Some large construction industry suppliers are even starting to insist their customers have to use Xero, he told me.

They're going to take purchase orders electronically and they want to completely digitize all of their businesses.

Well, they don't have to now build ten different invoice engines and all those sort of things. They can work with a vendor like ourselves and we'll do that work with one vendor, and then expose that to all of our customers. Once you get a percentage of the market then they all tend to come into that system as well.

We generally do them on a fairly open basis too, so that if anyone else wants to invent and build software that connects to those standards, we're happy do it, but because we have so many customers this isn't just theory. We actually turn these services on and drive customers to it.

Mediating bank lending

Most interesting of all are Xero's relationships with financial institutions. Having started out simply downloading bank statements, then adding the ability to send payment instructions to the bank, Xero is now becoming a mediator for bank lending in New Zealand and Australia.

Small businesses want access to capital and debt. But for large banks to come into that space it's too fragmented, the deals are too small, it's too risky. Obviously the aggregation, having hundreds of thousands of small businesses in a country makes that appealing.

We're using the technology to reduce the cost of doing individual loan evaluation and all of those things. Even more, there's two-way connectivity in the real-time, on-going picture of daily cash flow — and with an accountant watching that as well — means that you can have the accounts continuously [monitored] which again reduces the likelihood of a default on the loan.

We're making it much easier and reducing risk and therefore increasing margin of the banks doing lending at scale with small business.

Hear more in the video below and read part two of this interview, in which Drury discusses the next generation of cloud and how it hopes to win in the US market against Intuit.

Image credit - screengrab from video courtesy of Xero.
Disclosure - diginomica is a Xero customer. Video produced by Xero.

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