Gina Clarke - Forbes
With the banks’ monopoly over customer account information having been overturned by PSD2 and Open Banking, it was expected that 2018 would be a revolutionary year for banking - but the innovations didn’t flood the market as expected. This year however, innovative FinTech companies are coming onto the scene to change payment processing for B2B transactions in Europe. I spoke to UK-based payment processing company Modulr about their latest partnership with Sage and where they see things going in the future.
Cloud-based accounting, and the future of banking for SMEs
Over the last five years, increasing numbers of financial services have moved to a cloud-based model according to Myles Stephenson, Modulr’s CEO and Deputy Chair of the Emerging Payments Association. The key points that have emerged over the last year are how staff are being equipped to use a broader application of accounting systems, which can be essential for small businesses who often work with less staff in their finance department. User experience is also being improved upon, and over the past years UX progress means that users who previously had no experience of accounting software can now find solutions that suit their skills.
While most firms will have heard of accounting behemoth Sage (nearly 60% of SMEs in the UK are Sage customers), it has announced a new partnership with Modulr to continue to diversify within the sector. Stephenson believes there is still a level of confusion surrounding PSD2, and wants to promote a better understanding of the landscape for SME owners in order to help them benefit from the advantages available to them if they start using emerging payment services such as e-money.
He said: "The big breakthrough over the last 5-years is how these cloud-based platforms will facilitate the easy integration of multiple applications to deliver functionality aligned with the core accounting function – for example, digital and paperless receipts, importing bank data and enabling government programmes such as Making Tax Digital. The next stage of the “big breakthrough” will perhaps be a perfect storm, as the cloud enablement of accounting converges with the API enablement of payment providers and the opening of the banking market to non-bank financial institutions (such as Electronic Money Institutions and Payment Institutions)."
Why are these partnerships so important?
According to Stephenson, Sage has identified that there are ways in which current payment processing procedures could be improved on, and it wants to be the catalyst for changing the way the sector operates. This will go on to affect not only users of the software, but accountants too. Stephenson said: "For SMEs, Sage has seen the need to simplify payments processes and eliminate costly, error-prone and time-consuming manual processes. For accountants, Sage has identified the opportunity to provide accountants with delegated service access, allowing the accounting practice to seamlessly control and manage payments processing on behalf of their entire client base. The solution, known as Sage Salary and Supplier Payments, powered by Modulr, provides these services to SMEs and their accountants, allowing them to securely manage and process payments directly from within the Sage Accounts and Payroll products."
The development means that there will be minimal further training required for companies to be able to roll out the use of the new service, as well as other advantages.
Coupled with the rapidly changing regulatory landscape it means that business owners and decision makers have been left somewhat in the dark about what the reforms mean for them in practice, and there are currently an estimated 3.4 million SMEs still to benefit from such innovative solutions. Sage and Modulr are looking to inform companies about how the new regulations make it possible for cloud-based software to offer services that would traditionally have been carried out solely by banking institutions.
Education is key
Stephenson believes the key to making FinTech innovations more user-friendly is by educating the end user. The innovation in tech is being powered by regulatory changes, but SMEs need to be aware of the alternatives that are now available in order to be able to benefit from them. Stephenson adds: "Fintechs are driving huge changes through technological innovation underpinned by regulatory change, but for SMEs to capitalise on the benefits they have to be aware of the alternatives available. There’s a huge opportunity – a requirement, you might say - to ensure SMEs understand the growing capabilities non-bank payment providers offer to make running a small business much easier."
Certainly, there is an opportunity for SMEs to capitalize on these changes in order to improve how their companies operate, but there needs to be a clearer understanding of what non-bank payment operators can do for companies in order for the gap to be properly bridged. For accountants, the changes mean that they can manage payment processing on behalf of their clients thanks to delegated service access. The key for these services is that they streamline the process for companies who use them, meaning they save on fees, time, and potentially on user-errors too.
Digital schemes well underway
The move towards digital accounting is already well underway, with schemes such as Making Tax Digital encouraging people to move their accounting away from traditional paper-heavy methods. The founders of the company hope that Modulr will change the shape of payment processing in a similar way that AWS has changed the way systems are hosted on the web.
For Stephenson, he believes that when it comes to FinTech vs traditional banking, it should be the former that leads the way. He said, "The convergence of significant technological progress, adoption of these new technologies, and the unprecedented level of regulatory change means that transformation is the only way forward.
A huge amount of regulatory change, in particular, is levelling the playing field for alternative payment and lending solutions beyond the traditional banks: the Alternative Remedies Package for the RBS state aid; the Competition & Market Authority’s review and subsequent remedies for the SME banking market; UK and EU regulations such as PSD2, the force behind API and Open Banking access.
This rapidly changing environment will provide SMEs significantly more choice of innovative solutions that align and integrate seamlessly with other services they use. One thing is guaranteed – change will happen."