How Xero NAB Payments Could Fix a Billion-Dollar Problem
January 10, 2020
In software, some updates are bigger than others. Xero NAB Payments, released in the last month of 2019, is a sleeper. But it could have a profound impact on a billion-dollar problem facing businesses around the world; invoice fraud.
Xero NAB Payments works as follows:
When paying bills in Xero, you no longer need to download a batch payment file and upload it to your online banking portal.
Instead, Xero NAB Payments sends your payment instructions from Xero directly to the bank. Then you approve the payments on the bank’s mobile app.
The payment is recorded automatically in Xero and is ready to reconcile.
Today this feature is only available in Australia, and only with NAB Bank. You can send payment instructions of up to $40,000, depending on your daily limit with NAB.
The feature is branded Xero NAB Payments, although the add-on in your plan is called "Bill Payments (NAB Accounts)". The naming convention suggests that other banks will provide similar integrations. In the meantime, Xero is very keen that Australian readers call the feature "Xero NAB Payments". Given
Transferwise is not a major bank that provides primary banking services to millions of business customers. It is a service for sending and converting money between two currencies/countries.
Transferwise is a clearing house. It moves payments between two accounts held by (one or) two financial institutions. You need to have a bank account to receive the money.
Xero charges a small fee to use Bill Payments. Transferwise charges a fee to send money between accounts, but NAB doesn’t. Presumably this is because NAB is receiving the instructions as if it were the batch payment file.
Xero charges a similar way for Transferwise and NAB; select a payment tier to suit the number of bills you pay each month. See the image on the right for Xero NAB Payments pricing, terms and conditions, pulled from the Xero NAB integrations page.
Xero NAB Payments pricing with NAB Bank. Click to expand[/caption]
How does a bill payment service prevent invoice fraud? And why else is Xero calling it a “game changer”?
Here are three reasons.
1. Single contacts list – with verified details
Think about a customer account record in your accounting software. It shows the names of contacts for that company, postal and street address, lists of purchases, invoices received and outstanding, and payments made.
If you’re using your online bank portal to make single payments to suppliers, their account details are kept in a separate database operated by the bank. If you’re doing batch payments through your accounting software, you need to update changes to bank accounts in two locations.
Neither database – the bank’s or Xero’s – validates that the bank account details you have entered correspond to the name (or identification number) of the business.
This has created one of the greatest opportunities for defrauding small and large businesses, invoice fraud. The most popular form of invoice fraud, “business email compromise”, cost US$1 billion a year in the USA alone, according to the FBI’s Internet Crimes Complaint Center 2018 report.
Cybersecurity experts refer to BEC as the primary vehicle for invoice fraud. Defences against cybersecurity in most SMEs range from non-existent to the cheapest solution possible.
It’s usually fairly simple for a hacker to find a way into a business’ poorly protected network. A router with outdated firmware, an old server operating system, or a gullible employee clicking on dodgy email links. A hacker can then alter an invoice so that payments travel to a bank account controlled by the hacker.
Many business owners have received the dreaded phone call from a supplier chasing payment for an invoice they thought was paid weeks or months earlier. By that time the hacker and the invoice payment are long gone.
Now accounting software is emerging as the payment gateway for all business transactions. It bypasses the need to go to an online banking portal, with the bank playing a reduced role as an approval platform operated through the bank’s smartphone app.
This is not just convenient, it is also much more secure.
A bookkeeper can now set up all outstanding bills and lodge them for payment through the accounting software. They no longer need access to the online banking portal to approve payments; the business owner or manager can do this on their mobile phone.
Shifting bank account details to online accounting software opens up the possibility of interesting network effects.
Xero is already validating the street and postal addresses of businesses using national postal databases and other third-party services against the official business identifier (the ABN or ACN in Australia).
It is a logical step to tie the bank account details to that business identifier.
This is effectively already happening in Australia with the PayID standard. A business can link bank account details to a company email address, phone number, their Australian Business Number (ABN) or Australian Company Number (ACN).
When a customer pays the invoice they don’t need to type in any routing or account numbers, just the email address or company identifier.
In other countries, online accounting software could provide the verification layer for bank account details.
If a customer receives a request to change bank account details for a seller, has every other Xero user selling to that customer also updated those bank details in the past month?
This would effectively spell the end of invoice fraud. That is really big news.
In fact, businesses are already happy to pay for greater security around payments. Services such as EFTSure use a crowdsourced database to verify bank account details; this is exactly what Xero could create here.
2. Properly programmable payments
Aside from reducing fraud, accounting software companies can innovate in payments much faster than the banks can.
For example, businesses often have scheduled payments for rent, wages and other recurring payments in your online banking portal.
If you miss a scheduled payment because of insufficient funds – a very common issue for small business juggling cashflow – there’s no “run now” or “try again” button on that scheduled payment.
Similarly, if a particular supplier doesn’t require payment one cycle, there’s no pause button either. You have to manually change the date to the next payment window.
Banks have been slow to invest in their online banking portals and the user experience lags well behind online accounting software. From conversations with current and former banking executives, the reason for this is that it’s extremely expensive and risky to make even small changes.
A bank runs on a hodgepodge of mainframe systems, legacy databases and customised software. Making any change requires months of testing to make sure a component in the chain doesn’t break.
And because of the degree of risk involved, it is also hugely expensive. Building APIs (software connections) to innovative mobile or web interfaces is far harder when a bug could expose billions of dollars to fraud or theft.
Once a bank has added secure APIs to its internal systems, it can create better user experiences. The reality is that the accounting software companies are always going to move faster, because they have less liability.
I’m looking forward to better user interfaces, more programmable options – just a better all-round experience when it comes to payments.
Update: I just saw this at the bottom of the NAB-Xero integration screen under the heading "Coming Soon". Looks like the banks will be able to innovate faster once they have APIs in place...
Know when payments arrive when you set up notifications in the NAB app. Then, easily match payments to invoices you’ve already set up in Xero. This new seamless connection will make it easier to see which invoices are outstanding and give you a clearer view of your financial position.
3. Better data in your accounting software
It always comes back to the data. Now payments originate in the accounting software, and approval status transmitted via API, your accounting software is another step closer to becoming a real-time record of your bank balance.
I’m not sure whether it will be real time given the checks that banks need to make internally, but the direction is clear. You make a batch payment in Xero, approve the invoices on the bank’s mobile app, Xero auto-updates the bill as paid and it’s ready for reconciliation.
Better visibility: Get notified of the status of your payments as they update in NAB, and know that your suppliers have been paid on time. You’ll get a digital record of all your payments in Xero, rather than having to manually go back and mark bills as paid.
Xero isn't the first to do bill payments. We’ve seen earlier concepts with M-Powered Payments in MYOB, and Zoho Books already has a similar integration with ICICI Bank in India. But Xero's move will pressure other accounting software companies to follow suit.
Xero NAB Payments outside Australia
How soon will Xero roll out Bill Payments to the rest of the world?
Xero isn’t saying much, which suggests that Transferwise and NAB are proofs of concept to stir other banks into action. The company line is that Xero “intends to explore opportunities to deliver a bill payment solution in each of our key markets in the future”. An "intent to explore". Doesn't exactly sound like there are banks lining up to spend the tens of millions of dollars to update and connect their systems to Xero’s Bill Payments API.
And that's understable. Giving up bill payments cedes part of the payment experience from the bank to the accounting software. That means less opportunity to market the bank’s services, shunts the bank to a transactional role, and otherwise loosens its “ownership” of the customer.
Eventually, however, banks will have no choice. They will have to spend the millions on building APIs, both for internal efficiencies and new customer experiences.
It’s just far more convenient. And no force is greater in creating habits, in business or at home, than convenience.
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