Ep. 158. Insights Perfect storm for change and digitisation
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Audio Length: 		00:38:04	
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JB:	Welcome to Fintech Insider Insights. My name’s Jason Bates, and today, we bring you a very special Insights show, focusing on small and medium sized businesses. It’s obviously a massively important sector for the UK, small businesses accounted for 99.3% of all private sector businesses at the start of 2016. Total employment in these businesses was 15.7 million, that’s 60% of all private sector employment in the UK, and the combined annual turnover of SMEs was £1.8 trillion, that’s trillion with a T, 47% of all private sector turnover. That’s-, that’s just massive, and as I was mentioning to a client last week, when I’m out talking to groups, someone inevitably comes up to you after the discussion, to whisper that they’re working on a small business solution, account, bank, it seems to be that crazy hot topic at the moment, that everyone’s whispering in small circles about. So, SMEs, hot or not? To dive in to all of this and more, I am joined by some very special guests, to help me unpick all of the changes to small businesses, accounting and banking, and what’s going to happen, basically, over the next few years. So, I’m very pleased to welcome Edward Berks, from Xero.
EB:	Hello there.
JB:	How are you doing?
EB:	I’m really well, thanks for having me.
JB:	It’s a pleasure! Clare Sheehan, from the HMRC.
CS:	Hi there.
JB:	How are you?
CS:	Delighted to be here, thank you.
JB:	Excellent. Is everyone delighted?
[Agreement]
JB:	[Laughter]. And Mags Laidlaw, Accountant and Partner at Mazars.
ML:	Hi.
JB:	How are you?
ML:	I’m great, thank you.
JB:	Excellent. And Charlie Wood, Capco/Fintech Representative. I’m not sure what that means, but-, are you a representative of fintech?
CW:	I’ve got two hats on, can’t you see?
JB:	Ah! There you go. So, I guess diving in to it, like, Ed, are small businesses going to pootle along, just as they’ve always done, or are there any changes that are really going to affect them in the next few years?
EB:	So, lots of change coming, I think. Lots of talk on-, on this show, about PSD2. We’ve seen changes like auto-enrolment, that have been a real challenge, actually, for small businesses, and, of course, Making Tax Digital, which Clare will be able to talk more about. But, from April 2019, VAT registered businesses, about half of them, in the first instance, will need to submit records digitally, via API, and keep records in an appropriate digital bookkeeping platform.
JB:	So, I’ve run businesses across my career, from two to 60 people. I know that-, that fear of getting towards the end of the year, and suddenly having a massive amount of bookkeeping to do, to put that-, that tax in. What’s-, what’s pushing tax digital? What’s behind the driver for this?
CS:	So, I guess at its absolute heart, the whole point of Making Tax Digital is to make it easier for businesses to get their tax right, and the story that you’ve just said, about your experience, is amplified across many small businesses. That, actually, it’s a really big source of stress, dealing with tax, it’s something that most small businesses are not thinking about on a day to day basis, and when they come to do it, particularly their income tax returns, at the end of the year, in fact, after the end of the year, they’ve got a box of receipts, or a bag of receipts, and they have to try and make sense of it, and actually, it’s inevitable that mistakes creep in when that happens. But those mistakes cost the Exchequer, cost the country, across all of the mistakes, across, not just businesses, over £9 billion a year. So, in terms of the driver to act, it’s a pretty compelling one.
JB:	And I guess there’s-, there’s benefit to the small business, in terms of cutting that down into smaller chunks-,
CS:	Absolutely.
JB:	So that, actually, I-, I take on less than a year’s worth of accounts, and just do it smaller.
CS:	Absolutely, and that’s what we were aiming for. Actually, if people keep their records as they’re going along, and they do that digitally, come the end of the year, if they’ve been sending updates to HMRC on a regular basis, the end of year activity is actually really straightforward. But there’s a whole range of benefits that come from keeping better records as you go along, and actually, what we’re seeing, more and more, is that a lot of software is actually being developed independently of Making Tax Digital, and the tax bit is just an add on. Actually, it’s just the sort of thing that makes good business sense.
JB:	Which I guess brings us on to the accountant’s view, because I guess my-, my experience has been, that call to the accountant to say, “Hey, like, I need to get my books sorted. How do I send you these formats in .csv files, and trial balances, and everything in between?  This is going to really change those relationships, I guess?
ML:	Yes, absolutely, I think for all different sizes of clients, things are going to change. So, for very small clients, there’s lots of solutions out there for them, in terms of making their accounts digital, and filing, and then, through to fairly large clients, again, where that digitalisation process will perhaps be a bit more demanding on them, but certainly, from our point of view, the priority at the moment is to educate our clients around Making Tax Digital. That’s the first thing to do. And lots of them are aware of it already, but I think we’ve got to hold their hand through the process, and then also to support them, and ensure that when they do take the first steps, in the first quarterly submissions to HMRC, that they feel comfortable with that. And I think Clare’s right, there will be benefits to clients, to submitting quarterly, on a digital basis, because that ability to look at the information that you’ve submitted, and to make choices around the different quarter ends, and things that you might want to do in the business, from a strategic point of view. So, for example, buy capital equipment, pay bonuses, you know, things that you may want to do, but previously, you may have left them to the yearend, you’re going to be more aware of the information that you’ve got. So, I think it’s a good thing, and I think our clients are, I wouldn’t say looking forward to it, but they’re certainly, you know, they’re up for it. It’s something that they want to do.
JB:	Do you think it fundamentally changes the accountant’s job, or the relationship with their client, when, you know, it isn’t that once a year thing, for very small clients, but suddenly turns into something more frequent?
ML:	Yeah, I mean, I think a great thing for accountants, actually, because that interaction with your clients, on a more regular basis, I think is good, it’s great for your client, and for the accountant, as well, and I think you will be able to advise better, because you’re not leaving it to the yearend, and sometimes after the yearend, and then trying to make decisions retrospectively, which can be-, can be difficult. So, yeah, I think-, I think it will be a good thing, in terms of the relationship.
JB:	So, how’s the HMRC, sort of, implementing this, educating people? Because I guess, as a small business-, small businessperson, on one side, I can see that Making Tax Digital is great, because I can get all of those documents in, I can run my business with Xero, and there’s likely to be some kind of integration. I guess on the negative, I don’t get that 18 months to pay corporation tax, or whatever it is, and the flexibility of moving money around my business. Are you seeing positives and negatives, with-, with businesses?
CS:	Yeah, so, certainly we’re seeing positive and negative reactions. It’s an important point though, payment dates aren’t changing, so people will still be able to pay at the same point as they always did, although there’ll be flexibility to pay in-year, and spread the cost, if people want to. But, yeah, I mean, the scale of the implementation challenge, I don’t think we underestimate it, and on the one end of the spectrum, you’ve got people who are already very digital, who are just like, “Yeah, this is no big deal, this is just, you know, an obvious next step.” At the other end of the spectrum, there’s people who find the concept of digital really quite challenging and intimidating, and there’s clearly an important role for us to play in supporting those customers to make the change. I mean, in actual fact, we’ve already started implementing, which I think is not necessarily that widely known outside of the smaller circles, who are more closely involved, but we’ve actually started piloting the changes for income tax, earlier this year. That’s in a controlled period right now, but we’ll be opening it out shortly, so that more people can join, and that’s a really important part of it, for us, so that we can actually bring people in slowly, on a voluntary basis, and we can learn from their experiences, we can test our customer support model, we can work with accountants, to help make sure that we’ve got the right support in place for them. But the big thing looming on the horizon, of course, is mandation for VAT, from April ’19. It’s worth just clarifying, though, that it’s only actually going to be mandated for those who are above the VAT threshold, so that’s just been frozen in the budget at £85,000. So, only those businesses will be required to keep digital records, and send their-, their VAT returns, if you like, through Making Tax Digital. And actually, a very big chunk of the VAT population is smaller businesses, who are below the VAT threshold. They’ll have the choice to join voluntarily. Personally, I would hope that many of them would do that, because, kind of, why wouldn’t they, once you see how easy it is, particularly new businesses. Because, actually, it doesn’t really make sense to join an old system, when there’s a newer and an easier way of doing it, but, as we come out and start to do those pilots, that’s when you’ll start to see more of it happening, and that there’ll be more communications around it. However, as important as what we’re doing will be what the accountancy sector are doing, so, as Mags says, they’re starting to prepare their clients for it, what the software developers are doing, to support their customers to transition, and what some of the trade representative bodies are doing, to, kind of, do more tailored stuff. So, we see this as a partnership. It’s not something we can do alone, and it’s not something we should do alone.
JB:	And Ed, is that something that you’re seeing just in the UK? Or do you think this is part of a-, of a broader trend across the world? Are you seeing it in any other jurisdictions, in your work at Xero?
EB:	Yes, so, I mean, I think both from a taxation perspective and a banking perspective, there are similar initiatives to those that we’re seeing in the UK that are clearly being driven in Asia, where we have a very big presence, and, actually, I was in the US last week, and-, and there’s more going on in this space than I think I’d realised. I think what’s a real opportunity, from, kind of, an Open Banking perspective, is that Making Tax Digital, as the name would suggest, is a big catalyst for getting a lot of data, that otherwise lives in paper form, digitised. We, kind of, talk about-, there’s an iceberg where the filing bit is actually pretty simple, filing some structured data, via an API, that’s, kind of, pretty simple, but actually digitising all of the processes prior to that, all of the bookkeeping, is-, is going to require some change, but, actually, from an Open Banking perspective, then presents opportunity to better understand, digitally, the finances of those small businesses, and, of course, offer products and services to those businesses, in a much more informed, targeted and tailored fashion. So, I think the two dovetail really well.
JB:	And I guess that brings us on to fintechs, Charlie, because this sounds like it’s a technologist’s dream. Suddenly, we’ve got Open Banking APIs, suddenly we’ve got tax APIs, we’ve got accounting platforms in between-,
CW:	It’s all the APIs we’ve ever wanted.
JB:	This is just like a playground!
CW:	[Laughter] every time I hear something something, digital something something, I always think of three major things. One, web technologies, which, obviously I can get overexcited about very quickly. Two, operating models, on both sides of the fence. So, one of the interesting things about Making Tax Digital is, I kind of think, “Well, okay, this actually means that,” like you were saying, “You can save £9 billion in costs,” because no longer do you need hordes of people reaming through lots of physical documents. You can have machines starting to crunch through digitised documents. That, for me, is great, because that breeds efficiency. And then the last one is amortising spikey stuff. Like, if everybody has to submit stuff at the end of the year, just like if everybody turns on their kettle after Coronation Street, or everybody hits my API service exactly after a concert to order an Uber, or whatever, then you suddenly have to work out, “How do I make sure I’ve got enough bodies to be able to handle all of those requests?” So, I’m sure you guys probably struggled at the end of the year to be like, “Great, we’ve got some order of 7 million people just in London filing their tax returns. Super.” And now you can, kind of, stretch that out over the year, and have, actually, a dedicated team that’s smaller, that runs more continuously. And that is exactly the same in the technology world. We face the same problems. How do I make my platform, my technology, be able to accept and request the same thing? And how do you amortise that and make it more scalable? And that is the magic word that falls out the back of all of this, is scale. As soon as it gets to small numbers of humans, lots of automated processes, and, like you said, just having Making Tax Digital, if that was backing off into an office of 400 people, yeah, the interface is there, but it’s the processes behind it that need to get automated, and when they do, scale just becomes almost immeasurable out the back. You get-, you get to unlock all of that potential.
JB:	So, I guess the ideal world, you know, from a fintech’s perspective, or even from a Xero perspective, David Brear, one of my co-founders, 11FS, talks about hardly ever really going to be bank app or the bank website, because for the business, he runs it on Xero. So, and I guess with Open Banking APIs, and Making Tax Digital, arguably, I might not go to my bank, or not go to the HMRC gateway, because I can do everything from-, from a single place. Do you see that in Xero’s future?
EB:	You know, it’s-, it’s an interesting typification, I’ve heard David, kind of, make that representation. As we, again, just think about all this data being available, there are two, really, really important datasets from a financial services perspective. If I want to understand my financial health, as a small business, I actually need the dataset that’s held in my accounting platform, because that gives me great insight on the state of my business, and a forward-looking view, and I need my bank account data. And so we’re working really closely, actually, with the banks, and if you think about the kind of journeys that small businesses need to make, you take making a payment, for example, that’s a journey that very much begins in an accounting environment, I might want to reimburse an employee for expenses, or make payroll, or settle an invoice, it starts in the accounting environment, but actually, has to include the bank.
JB:	Mm.
EB:	And even under Open Banking, as a PISP, yes, we can-, you can drive through single transactions, and actually, kind of, cut the bank out of the loop, but that’s not really, I think, the way that we are best to operate. And so, all of the engagements that we have with the banks, very much, are recognising, as I say, the start of the journey in an accounting environment, but actually, authentication and execution of payments, for example, bank side. And, similarly, accessing capital, if I want to understand what form I should best access capital in, and get the timing of that right, I need both datasets. And, of course, it’s the banks, by and large, who have the capital, right? So, again, I think there’s a lot of talk of disintermediation, something they don’t really subscribe to. I think we’re working really, really closely with the banks, because I think, in order to address the needs of small businesses, 90% of whom bank with the big 5 banks in the UK, actually, it’s really, really important that the banks are very much in the loop.
JB:	And, I guess, taking that disintermediation theme, and that disruption, that’s something that could very easily be pointed at accounting, and saying, “Well, great, if I’ve got Charlie’s machine learning and AI algorithms, and I’ve got tax APIs and accounting software, do I actually need accountants, in the end, in order to do this for me? Or do I just press a button and see the report? You know, how do you see that playing out?
ML:	Yeah, it’s interesting, because lots of new businesses that are setting up now, which we talked about earlier, so, new start businesses, hopefully, start right away in the environment we’re talking about. So, in terms of their accounting software package, and anything that links to that, so the apps that they use that link to Xero, they’re already there. So, the type of advice-, and, again, that’s great, from our point view, because historically, a lot of the work that we did was looking back, it was historical work.
JB:	Mm.
ML:	Whereas now, with the-, with the software that’s available, and the apps that are available, and then, when we take it a step further, to MTD, it will be really good, to be able to advise your clients looking forward, as opposed to looking back, and then when you link in the banking and funding side of things to that, it’s a much more exciting place to be, being able to advise on that basis, rather than looking back all the time, which historically-,
JB:	So, it’s about higher value services-,
ML:	Yeah.
JB:	And being that, sort of, CFO, rather than submit a tax return for them.
ML:	Yeah, so, if you look at SMBs at the moment, if you look at that type of business, they’re not going to have an in-house Finance Director, a lot of them. Some of them might not even have a Financial Controller in house, in the future, and I think the-, this, sort of, interim FD, the virtual FD role that we play at the moment, for some of our clients, but actually, we could play that much more going forward. And then you’re looking at the strategic direction of the business, and also advice around, you know, the employee side of things. Advice around funding. Advice around structure. So, yes, which is, from our point of view, you know, more exciting, in terms of advice for the client.
[Advert break]
JB:	Well, I guess we’ve seen changes in the business model. To Charlie’s point, I used to buy QuickBooks, and have that running, or Sage, or something. Xero’s very much a Software as a Service. Do you see digital, Making Tax Digital, Open Banking APIs, as changing the fundamental business model around professional services for business?
ML:	Yes, and if you look at the-, our clients, now, what they’re looking for, even compared to what they were looking for five years ago, and ten years ago, it’s-, you know, it’s completely different. And we’re lucky, in that respect, because the work we do with Xero, if we are looking, for example, just to give a recent example, if you have a specific industry niche that you want to support, from an accounting perspective and tax perspective, you know, we can speak to Xero, we can find out what apps are being developed to support that niche. And that is really valuable to our clients, because you’re able to give them a full, end to end solution, as opposed to, you know, part of a solution. So, yeah, I see it fundamentally changing, the way we work. 
CW:	(? 18.33) I get, all the time, people telling me, “Oh, you’re inventing a new Skynet that’s going to destroy everything and take all the jobs,” and I always think, “No, there’s no evidence that that’s ever happened. Technology always seems to drive us further forward. And this is literally a classic example, of where technology is driving the humans up the value chain.
ML:	Yes, yes.
CW:	No longer are you having to deal with nine hours a day, filing stuff away. You can do the higher-level thinking of, “Well, actually, what’s the strategic direction you should be going in?”
ML:	Sure. Yes.
CW:	I love that kind of thing.
ML:	Yes, yes, and great for the client [laughter].
CS:	It’s great to hear those sorts of conversations happening, as well, because I think, in the early stages of Making Tax Digital, there was a lot of mistrust about it, in the accountancy profession, that we were somehow trying to cut the accountants out of the-, out of the loop. And that’s never been what we were trying to do. We’ve always been trying to make it easier to get your tax right, but recognising the fact that the role of accountants in that is going to remain essential, and having the flexibility to use accountants is really important. And it’s really interesting, now, to see how business models are changing, and how people are seeing the opportunity to actually do things differently, and to add that higher value that you’re talking about.
ML:	In terms of our clients, they want to get things right. You know, they want to get their VAT right, they want to get their tax right. So, you know, if there is something that’s picked up further down the line, where some mistake has been made, it’s because, you know, it’s a genuine mistake. Whereas, if we’re doing it on a quarterly basis, and we’re checking what’s been done, and it’s being submitted quarterly, then they’re going to feel more in control, because it’s, like, a-, it’s a check, isn’t it? You know, “Oh, yes, it’s gone in, it’s submitted,” so they’re going to feel more comfortable with that. And I think that’s a big part of it, is building confidence with our clients, and building that, you know, sort of comfortable feeling for them, that it’s okay, and everything’s going to be good, and we’ll support them through that, and HMRC will support them through that, and Xero, as well, so, yes.
EB:	I mean, so, actually, talking of-, of mistakes, 90% of all of our customers have an accountant that they work with, and that’s because accountants add huge amount of value, and Mags has talked about vertical advice, and financial services advice, and all those things, but, actually, accounting’s hard, right? And so, I think, if those businesses could easily and predictably do it themselves then, you know, probably more would. A really great example of that is coding, and so, if you’ve ever submitted expenses, and you’re asked to determine whether a particular expense-,
JB:	Charlie actually-, Charlie actually thought you were talking about computer coding there. He got all excited.
[Laughter]
EB:	He got all excited-, okay, no, not that kind of coding, unfortunately-,
[Laughter]
ML:	I knew what kind of coding [laughter].
EB:	But, you know, you expect somebody who is busy looking to go and write contracts, or they’re running a business, they’re an architect or something, and they have to, kind of, classify their spend. Is it, like, travel and subsistence? Or is it stationery? Is it research? And there are 3 million mistakes made around the world every month in that coding. And so we’ve-, we’ve produced some neat software to help our accountants deal with that, but that’s just really, really unproductive. And so there are absolutely great opportunities to use artificial intelligence and machine learning, you know, wouldn’t it be great, frankly, if we can take all the point of sale data that’s available on those type of expenditures, and infer what the coding should be? And so, we’re talking about moving to this idea of “codeless accounting”, where, frankly, we don’t want small businesses bogged down in what these codes are. And so, absolutely, I think-, I’m not sure the machines are going to take over the world any time soon, but is-, is there an application for that AI and machine learning? Absolutely. But it’s all about streamlining the-, you know, kind of the more mundane, lower-value work, and then enabling advisory, as Mags said.
JB:	So, when we talk to clients at 11FS, we often talk to them about APIs enabling end to end journeys, delivered by a number of partners on a particular platform. So, this all sounds a bit nicey nicey to me. That everyone’s going to do very well, and everyone’s going to keep their job, and do high-value services, and deliver, and that everyone’s going to stay where they are. Surely, what we’ve seen in digital environments, in digital disruptions, are that some players do a hell of a lot better than others, and that we see-, we see new players, or particular platforms, on the ascendancy. Where do we think that heads? Is that accurate? Do we think we’re going to have a class of player?
CW:	Ah, that’s a really good question, isn’t it? Does digital revolution always lead to a more prosperous society? I would say yes. Is it immediate? Sometimes no. It depends how quick this revolution is going to take, right? If it takes a lifetime, then hopefully it’s enough time for people to be able to change, maybe, their working habits, or maybe even their skillsets. If it happens in the space of a week, or you have a load of people that are doing the work that is now being automated, they out of a job, and that is obviously a bad way to manage that situation. And when it comes to-, when you’ve got all the APIs, do they integrate nicely, I don’t think I’ve ever had an API integrate so easily [laughter].
[Laughter]
EB:	I thought they all just worked. Seamlessly.
CW:	Most of them do!
EB:	Okay, good.
CW:	Some of them don’t. Unfortunately, 1995 is still lingering around in the background for some of us [laughter].
JB:	What about you guys? Like, are we going to have disruption in the industry, in the SME world?
ML:	I mean, I think from our point of view, in the accountancy profession, like, you can see, in terms of people coming in to the profession now, the skills are different-,
JB:	Mm.
ML:	To what they were, five years ago and ten years ago, and what we’re looking for, and what they’re looking for, as well, in terms of the role that our students, if you like, when they come in, to begin with, the role that they’re looking for is completely different. So, from that point of view, I think more bespoke, tailored training, we’ll see, in terms of our graduates coming into the profession, whereas previously, we may have brought in a block of students, and then they would all have been trained the same way, to do the same thing, and to go out and audit. And I think we’ll see, maybe a reduction in numbers coming in to the profession, but maybe just going in to different places in the profession, just a different-, a different skillset.
EB:	So, what do your more mature members think about the change there? Because obviously you’ve got these young graduates, who are all excited about, “Yeah! I want to be right on the forefront of doing some high-level applications,” but what about the people who have been around in the industry for a bit longer? How do they feel about the change?
ML:	Yeah, more of a challenge, I think, for people who’ve been in the profession longer, but I certainly know now, when you’re able to show the benefits, and show the efficiencies, so, for example, when we work closely with Xero, and clients that we’re taking on, quite quickly, we can show how much more efficient it is, and how we can free up that time to do something different. It’s back to the same thing, that you’re able to free up the time, and I think, if you can actually, because we’re accountants, at the end of the day, so we like numbers. So, if you can actually show them the numbers, then they’re ecstatic, and it’s like, “Well, great, you’ve shown me how much more efficient it is, and therefore what am I going to spend my time on now?” And, you know, these are well-trained, well-qualified people, so they are able to-, you know, they are able to transfer their skills, to do other things, you’ve just got to show them the way, I think.
JB:	But I guess there’s also going to be a, kind of, fallout in fees, because the, you know, few thousand pounds that I might pay an accountant every year, if, suddenly, there’s a nice platform that brings this together, and easier tax and accounting, then I assume there are going to be-, there’s going to be price pressures, and that people will come along, in order to offer the same kind of services for a lot less money.
ML:	Yeah.
CW:	But then the point you’re making is that if you can make them more efficient, then feasibly, you could service more clients at once. So, I can keep my day rate, I’m just splitting it, and now I’m actually, if anything, protecting myself from hedging, as well.
ML:	Yeah, so being ahead of the game, and becoming more efficient, more quickly, is important, and also, I think, you know, if you take that-, that SMB business, who can do more themselves, which is great, that they’re able to do that, but if you can then sit down with them, quarterly, to discuss their business, from a, you know, a knowledge point of view, where you know the market, you know-, you know what’s in the market, in terms of potential acquisition opportunities, or joint ventures, or things they might want to be involved in. So, if you’re able to look across a national network, as we would be, or an international network, so, for example, we work with Xero in Asia, we work with them in Australia, if you’re able to do that for clients, because people look globally now, then hopefully, you’re advising your client on a national level, and then on a global level. So, I think-, I just think it’s a complete change from where we are just now.
EB:	So, we’ve spent a lot of time surveying our accountancy partners, so, we have 30,000 accounting firms we work with, globally, 6,500 in the UK, so, and that’s a real range of firms. And in the last two years, in an accountancy office, which I won’t name the company, I’ve seen people manually transposing bank account data off a paper statement into Xero, which is-, which is kind of bizarre, because we clearly provide tools to do that. So, you know, at one end, you get firms that are still really pretty antiquated in the way that they work, through to some firms who are really, really getting very slick on their digitisation, and where firms are embracing vertical apps, where they’re using financial services, and other application services from our ecosystem, the billings that they enjoy with their customers can be four or five times x the basic compliance tax billings-,
JB:	Yeah.
EB:	And so we know, kind of, empirically, that going on the journey is a really, really productive, profitable journey to go on for accountants.
JB:	Wow. So, there you go, accountancy, a-, an industry in flux, I guess. I guess I’m interested to go back to the HMRC and the tax APIs, because I guess as-, as someone who’s had experience in small business, it just seems like a dark art. I can think of, you know, of APIs that are transparent, and clean, because it’s really easy to make a particular thing happen, and get data back. Yet, when it comes down to, “Is my mobile phone in my name or the company’s name, and therefore can I claim that back off of corporation tax, and how does all this work?” that seems a long way back-, a long way away from a super clean set of APIs to do tax. How do APIs, and I guess the simplification of tax, work? Is there any work to-, to make this easier?
CS:	So, I think that’s where the digitisation is so important, because you’re right, all the APIs are really doing is passing data back and forth, because that’s what APIs do. Actually, the real work, a lot of the real work, is in the software, and it’s how the software is being built, and Ed was talking about some of the stuff they’re doing to make coding easier, and so, actually, when you come to record an expense, and you’re just like, “What on earth is this for?” actually, there’s something there that helps you get that right straight away. We’re also looking at what we can build in, in terms of validation rules. So, we have a whole series of things that we apply within HMRC, we’re looking at how we can actually start to share them more with the software industry, to help them build some of that in upfront, so, actually, by the time things get to us, they’re already right, rather than us trying to put them forward-, put them right afterwards. But you’re right, I mean, I think the-, I can’t imagine a world in any time soon where we’re not always going to be looking at tax simplification. There is an Office of Tax Simplification with whom we work very closely, but I think we need to be realistic about-, about the extent to which, in the-, certainly in the near future, we’re going to end up with a-, an entirely simple tax system. And I think that’s where technology is so helpful, because it actually masks a lot of that complexity for businesses, and makes it much more straightforward for them to do what they need to do.
CW:	Well, yeah, I’d love to see a bit of, sort of, machine learning around that, kind of, rules, automatic validation type thing, and when you start to get enough digitised returns over a few years, it would be interesting to run some artificial intelligence on that and say, “Hey, look, actually, 90% of the time when someone files in a mobile phone, it’s mostly miscategorised, and it should be in this category. Is that what you actually meant?” And basically have it as a black box, running over the top of-, of your data. That would be pretty interesting to see.
CS:	Yeah, I’d be pretty interested in that, too.
[Laughter]
EB:	So, that stuff’s kind of real, that’s beginning to happen, of course as vendors operate in the Cloud, across millions of customers over time, and we’re over a million customers already, that dataset is a dataset nobody has ever had access to before, and nobody has ever been able to mine and learn from, in the way that we can today. So, again, that machine learning opportunity is very much current rather than future.
JB:	So, in that post-PSD2 world, post-Making Tax Digital, are there a new set of players that we’re going to see? Are we going to see the ecosystem expanding, with fintechs that do a variety of things for small businesses?
EB:	So, there’s clearly been a huge amount of fintech activity, particularly in London, already, and, you know, this show is-, is tracking that, and I think that Open Banking just catalyses that. What’s kind of interesting, I think, is the buying dynamics for those services around SMBs, and we’ve been tracking some of the developments in marketplaces, for example, and in retail, where I think they make a great deal of sense, right? If I’m given better tools to track my personal expenses, and financial affairs, I think that’s a great development. Again, small businesses are really busy, typically, being architects, being dentists, you know, running hair salons and coffee shops, and all the things that they do. And so, I think there’s still this really, really central role for accountants, particularly, and actually, potentially banks, interestingly enough, where there’s a relationship with a bank account manager, or a relationship manager, to be bringing forward the right solutions and services at the right time. And so I think there’s, you know, maybe it’s a bit like the-, the Apple app store, right? There’s, you know, tens and tens of thousands of applications, but a very small number of them actually get a lot of take up, and I think you’ll see the same thing in the-, in the finserve space, particularly, whereas there are lots and lots of firms that are starting up, but actually, I think it’s quite a small number of them that will really get the scale that they need, particularly in SMB, and I think that will come from really close engagement with banks, and recognising the importance of accountants.
JB:	I was at the Nesta Open Up Challenge event just recently, where they’ve got 20 teams, sort of, fighting it out for a £1 million prize, and equally, at the same time, we’ve got RBS putting up, is it £860 million to-, to fund other banks and providers? There seems to be a lot of money, I guess, moving in to, both from a government perspective, and a banking perspective, small business services. Would you say that’s accurate?
EB:	Yeah, I’d not heard the Nesta competition, kind of, analogised to the RBS parting with that money in quite the same way before-,
JB:	[Laughter].
EB:	But, I guess the-, I guess the net result’s the same. And so, yeah, you know, certainly, our experience, based on engagement with banks right now, and particularly after ring fencing, of course, the execs worried about small businesses now live in quite different entities in the big banks than they did previously. There’s huge focus on how they engage SMBs, I think it’s been said that SMB has perhaps been the poor relation-,
JB:	Yes.
EB:	In banking, particularly, but yeah, we’re seeing an awful lot of really bright people, thinking really, really hard, about how they engage SMBs, and we touched on disintermediation, I think that’s a very real threat, unless banks are able to really get their act together in terms of experience, and serving up the right kind of services, and, again, recognising the way that SMBs engage with these services, and buy.
JB:	So, I guess to round this up, to bring it together, what are the big challenges to the ecosystem? Like, where are the big changes going to occur in the next -, the next couple of years?
ML:	I think from an accountancy perspective, like, our clients, I think, we’re just going to see a wave of change within our client base, and I think it’s going to happen really quickly. I think with GDPR  and MTD, I think we’re just going to see lots of activity, and I think, possibly similar to auto-enrolment, we’ll see it happen, you know, suddenly the penny will drop, and we’ll just see lots of SMBs really starting to look at what they do, and looking for support from-, from all of us, actually, in terms of how they-, how they embrace it, and that’s going to be really good an exciting, over the next-, the next period.
CS:	I guess for-, for some, MTD is going to be a massive catalyst, to get them on to the digital journey, particularly those who are really not in that space at the moment. But for others, it’s just going with the grain of what they’re already doing, so I think for-, for some people, it’s a big part of that-, that revolution, and for other people, it’s just a by-product of it.
CW:	So, for me, when you see a marketplace that has a consumer group who are underserved, corporates are pretty well-served, retail is getting better served, they started that journey a few years ago, but when you see a consumer base that’s undeserved, in this case SMBs, and then you surround that marketplace in an ecosystem of more digital services, like Making Tax Digital, like what Xero offers, such that you can put something in that marketplace, with a very, very low overhead, so you’re talking very, very small numbers of staff, in order to make it work, scalable, again, I’m thinking web technologies here. When you start to get that opportunity, immediately, you’re going to get startups and, in this space, it’s obviously going to be fintechs, but technology startups are going to be able to embrace that, and actually make a difference. You don’t have to be a 1,000-person organisation, to actually serve that underserved market. 
EB:	Yeah, and I think a couple of changes, again. I guess I hark back to how and when do I access services, if I’m a small business, and, you know, the more there are to choose from, the more complex that gets. We definitely see, actually, our accounting community, and the relationship management community at banks, very much wanting tools that allow them to intervene by exception. And actually, I was with a bank yesterday, and they were talking about some of their management practices, that involve account reviews on a periodic basis, but it’s-, it’s pretty manual. You have to go in, look at key metrics, pull out data, and then determine whether you should engage-, engage a client. Again, there’s no reason that, with the right data, those opportunities to intervene and engage shouldn’t be surfaced up. So, if I’m running a small business, what I want is my accountant actually coming to me and telling me that I’m likely to have a cashflow pinch in two months’ time, and actually already being able to offer great insight on, actually, what form I should be accessing capital. Right? I probably don’t want to have to think about that stuff, and again, across thousands, or hundreds of thousands of clients, if I’m a large accounting firm, or if I’m a bank, I think that transformation is, again, absolutely coming, and will just mean that we’re better catering to small businesses.
ML:	Yeah.
JB:	Well, thank you. Thanks, all, so much for joining us today. Where can people find out more about you?
EB:	@EdBerks on Twitter, or find me at Xero.com. 
JB:	Excellent. Mags?
ML:	Margaret Laidlaw, Head of SME at Mazars, and I’ll be at (? 37.12) by Mazars.co.uk.
JB:	Perfect.
CS:	I’m feeling rather like the faceless bureaucrat now, but, I guess the main place to find out more about the stuff we’re doing is on gov.uk. As we come out of our control period on the pilot, there’ll be a lot more information there about it, and obviously we’re on Twitter @HMRCGovUK.
CW:	As the digital architect here, I feel like the least digital. I’m not on Twitter. I have a mechanical watch, it’s a disaster, but I am on LinkedIn! So, Charles Wood, or Charles.wood@capco.com, and Capco.com, I guess, has all of our stuff on it.
JB:	And as for me, you can find me @JasonBates on Twitter, reach out, if you’ve got any comments on what we’ve discussed this week, and thanks for listening. This has been Fintech Insider Insights. To get in touch, find us on Facebook or Twitter, @FintechInsiders. We’ll bring you lots more insights soon. Until next time, see you soon.
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