Will Waddle Wind Up Wedged into Xero? A Chat with Xero’s Steve Vamos

Accounting Software


One of Xero’s biggest moves this year was its acquisition of invoice-funding service Waddle. Xero bundled its previous acquisition, receipt processing and document-fetching tool HubDoc, within a Xero subscription. It also incorporated some of its technology into Xero itself.

What does Xero want with Waddle? (Apart from awesome alliteration.) The bigger picture is that Xero can now start offering lending products within Xero itself, just like Intuit does with QuickBooks. This would push Xero away from “just” an accounting tool and towards its goal of becoming a “small business platform”. And if Xero is making money on lending, like Intuit does, then it pushes it into competition with its partnering banks.

I had a 15-minute chat with Xero CEO Steve Vamos about where to now with Waddle in the wake of Xero On Air, the online replacement for Xerocon Australia.

We also briefly touched on Xero’s renewed interest in its practice tools – see a separate interview with Xero’s product chiefs including chief product officer Anna Curzon. This is big news; there are a lot of ways to improve practice workflow, as you can see with startups such as Karbon and FYIDocs. If Xero devotes a lot of attention to improving its free practice software it could convince more accountants to convert more client files to Xero in other markets.

NB: There was quite a bit of hedging on Vamos’ part. I’ve added my interpretations of his answers up top. You can read the transcript afterwards and let me know whether I’m on the mark or not (post your thoughts on LinkedIn for a broader discussion and just tag me).

Will Xero integrate Waddle into its accounting software like Intuit did with QuickBooks Capital?

Vamos didn’t give a yes/no answer. He said Xero bought Waddle to make the lending experience seamless. Well, it’s hard to get more seamless than QuickBooks Capital, yet Vamos then added, “I don’t see (Waddle) going into the Xero offering as a focus for us”.

Vamos also said Xero will remain an open platform and allow other lenders to connect, as well as Waddle (Intuit does the same with QuickBooks).

For those who don’t know QB Capital, Intuit launched it in 2017 and has moved towards providing more banking services since.

It sounds like Xero could use Waddle almost like an integration interface for connecting lenders to Xero, with a clip of the ticket on the way through.

I asked for clarification on how Waddle will work, especially with NAB which spent millions upgrading its banking platforms to integrate with Xero’s API. This is why Xero has an exclusive relationship with NAB and offers integrated payments (Xero NAB Payments) and a lending integration to Xero for unsecured loans to small businesses (NAB QuickBiz loans). Here’s an overview of Xero’s relationship with NAB.

Xero’s comms team followed up with the below:
“Invoice finance products from traditional players are generally targeted to the larger end of SMB into corporate due to the overhead in assessing and managing these products for their customers. Waddle will play a part in bringing the invoice functionality down to smaller customers who have to date, not been able to get this type of product. Waddle is an open platform, like Xero, where any invoice finance product provider can plug in their customers. This would include NAB should they be interested in this type of product.”

Maybe it will end up looking like Intuit’s Capital Marketplace which offers term loans, lines of credit, invoice financing and government (Small Business Administration) loans.

Note that these third party lenders are at a disadvantage compared to QuickBooks Capital. See the asterisk: “Offers aren’t preapproved. Application is required. Rates and terms are determined by financing partners subject to credit review and approval.”

By comparison, QuickBooks’s own solution offers a pre-approved loan at a rate calculated by the borrower’s ability to pay, which itself is determined by Big Data analysis of multiple factors in the entire accounting file and user behaviour. Third-party lenders get access to a subset of the financial data.

Update: In the second story from Xero on Air, Anna Curzon said that Xero will make lending offers within Xero Blue to users who can’t make payroll. In other words, this could look a lot like QuickBooks Capital.

Will Xero vertically integrate other financial services into the accounting software?

Vamos: “(Connecting) workflows with money flows in a business platform for small business… is an opportunity that we and others will capitalise on. … We have a different profile and a different focus, but I’d be surprised if our competitors didn’t pursue the same opportunity. ”

That’s a big yes. Investors seem pretty happy with what Intuit is doing. Bank data is valuable; categorised, historical accounting data is even more valuable. Whoever has the most data, wins. Lower interest rates, lower premiums etc. at a lower risk.

This is a slow-moving shift in Xero’s strategy. Several years ago the signal was that Xero would stay out of the banks’ business in exchange for access to customers. Now that Xero has the customers, it’s hard to resist that new market. The customers want it…

Will Xero make practice software globally?

Vamos: “Accountants and bookkeepers are really important to us and (so is) making their workflows more efficient… It’s just a fundamental priority for us.”

This is a big yes for Australia, and an interesting trend to watch globally. Xero acquired tax prep software Instafile in the UK and tucked it into Xero Tax. Is it really going to build or buy tax software in every country? That’s a tall order. But it looks like Xero is committing to developing practice software for small firms on a global scale.

Steve Vamos, CEO, Xero

Xero has talked about investing in practice software development for a long time but had little to show for it. Especially next to the investment ploughed into Xero Blue. The assumption was that   Xero Practice Manager (XPM) didn’t get much love because it was effectively a free product (for accountants).

Intuit’s push into bookkeeping services with Intuit Bookkeeping Live – a sort of Uber for bookkeepers – has given Xero an opportunity to position itself as a safer bet for the profession. (Assuming Xero doesn’t follow suit. Indications are that it won’t, at least not in the near future.)

Quality practice software, deeply integrated into the business accounting software, is another strong differentiator.

The practice software strategy increases the likelihood that a firm will move all its clients from desktop accounting software to Xero and keep them there for longer. Or, in SaaS terms, lower acquisition cost and longer customer lifetime value.

So – that’s my take. Have a read of the transcript below and tell me your thoughts on LinkedIn (this is me).

The interview has been edited for length and clarity.

Will Xero Make Lending Offers within its Accounting Software?

Digital First: Let’s start with Waddle. You’ve seen QuickBooks Capital, the way it’s embedded in QuickBooks Online and it prompts you to borrow money if you can’t make payroll, and you’re already pre-approved for a certain amount. Is that the long term vision, to integrate Waddle into Xero? Or are you going to keep it separate?

Vamos: There are two elements to this. Let’s start with the big picture which is, why are we doing this? We’re doing it because once you have small businesses on the Xero platform and using more and more apps and doing more and more business in the cloud, you have more context and you have more data.
That then makes it really interesting to connect the workflows in the platform with money flows, right? So we have an opportunity – as we have with invoices and payables and making payments – to make that experience seamless.

In the case of lending, connecting a customer’s data with the lender’s criteria and making that frictionless, that is going to improve the flow of capital to small business. And that’s really the appeal.
I mean, we really believe that we’re here to help small business. And this is a way we can go beyond the reporting and the compliance side, and now we are getting into the area of managing cash flow and capital.

In Waddle we have acquired a company that has the potential to operate across multiple accounting platforms and multiple lenders. Our view is that we want to be an open platform. So we very much want to connect as many providers into our platform as possible. And we’ll leverage Waddle to do that.

The Waddle business itself is going to continue to operate and serve others as the opportunity arises. But from a Xero perspective, we’re going to work really closely with them to make sure we’ve got really nice integrations as we go forward.

Digital First: I understand the desire to remove friction and integration but you can still do that without owning the lender. You already offer payments, yet you haven’t bought a payments provider like, say, Intuit has. So why the decision to own a payment that lender?

Vamos: When we considered whether to build, partner and buy, the best path that we identified was Waddle on a whole range of fronts. It’s not like the world is pumping with similar solutions right now. Because we are still early in the journey, we’re still bringing more and more small businesses onto the Xero platform, we will evolve and do more and more integrations.

This whole area of invoice finance for small business is a category that is very challenged until you start to do what we hope to do, which is to take the friction out of the process by connecting the accounting platform to the lender. Let’s call it a new opportunity to build a category that has struggled because of the fragmentation in data and data flows.

Digital First: But you already have a partner option with NAB. NAB went and spent a whole lot of money updating their platforms and can extract the data from Xero and so on. Isn’t Xero now a competitor to NAB and the banks in lending?

Vamos: We don’t see this as competing with our partners. There’s a number of angles to this. We welcome the whole idea of Xero as an open platform. That’s something about us that we can count on as being not only important, but a differentiator in the long term. As a global scale player, we want to be trusted and insightful. And that means, in my view, you’ve got to be more open.

So there are over 200 banks and financial services providers connected to the Xero platform, we’re going to keep the API’s open, and we’ll look at other ways that we can continue to make that an attractive proposition for them and for our customers.

So it’s not like this is the only way you can access lending on the Xero platform. This is one element to an offering that we think has an opportunity to really add value to our customers. An acquisition of an organization that has innovated in the space, has demonstrated it can connect with partners in the UK and Australia, and has a vision for where they want to take this. It made a lot of sense for us as the best pathway to get where we wanted to go.

Selling Other Financial Services within the Xero Interface

Digital First: Three months ago I spoke to a hedge fund that has invested strongly in Xero, and they said that they thought Intuit had a better plan because of its vertical integration model where they do the lending, and so on. Then a couple months later, Xero buys Waddle. Is this Xero’s roadmap, that Xero will then look to add other types of financial services, such as other types of lending or move into say, insurance? Because you have the data, you have a privileged position in the market.

Vamos: I’d say over the next three years into the next 10, the opportunity to connect workflows with money flows in a business platform for small business, is an opportunity that we and others will capitalise on because of the benefit it brings to those small business customers.

So whether others have got a better way to get there or get there faster than we do, time will tell. We have a different profile and a different focus, but I’d be surprised if our competitors didn’t pursue the same opportunity.

Digital First: So I guess the option is you can focus on being an open platform and be attractive to the banks who want access to online accounting software to help them make their lending decisions. Or you can partner with the banks and buy your own financial services apps, which is what you’re doing. Is that a fair comment?

Vamos: Well, I think “build, partner, acquire” is the dimensions of everything that we do. And we should be picking the approach that suits the application best. So yeah, all those things are and always will be considerations.

I think the question that’s an interesting one is always the question of being a platform. The question of what does that mean for partners will come up from time to time. It’s like when we acquired HubDoc. What did that mean for Receipt Bank? I welcome Receipt Bank and I welcome all our other app ecosystem partners.

When you look at what we will do to acquire, it will not scale nearly to the same extent as our app ecosystem. And so we have to be true to that. We have to act in a transparent way about how those partners continue to get access to Xero through Xero APIs, and they will judge us based on our actions, not on what we say.

We are very conscious that we want (our partners) to trust us. And so we’ve got to be clear about what we’re doing and why, and share that. And our app ecosystem partners don’t have their world limited to Xero either. So we understand that we’re all here to serve small business, and no one company is going to do that exclusively.

Digital First: So this is another comment from that same hedge fund – why did you raise several hundred million and keep the cash in the bank for so long? Rather than making acquisitions or spending in some way to increase the value of the company. I was wondering, are we going to see an increase in the pace of acquisitions now? Or would you consider putting, say 100 million of that money into lending like Intuit did with QuickBooks Capital?

Vamos: Firstly, I would really emphasize that the facility that Waddle has for direct lending is an R&D facility. It’s critical for them to be able to really drive and develop their offering. I don’t see that going into the Xero offering as a focus for us. We are much more of the view that we benefit by being open and having multiple partners connecting with our customers. I want to be clear about that.

In terms of M&A – look, last year we talked about the fact that we had major milestones with HubDoc and Instafile, both being integrated into our core offering. Over the last 12 months, we’ve built a strategy and M&A capability in the business. We’re active in looking at both organic and inorganic opportunities to extend our business through those growth opportunities, and we’ll see what happens.

I think the whole process is one that is done based on quality, rather than based on speed. That’s more important than how fast we make them. And the conversations I’ve had with our shareholders is that they value that approach.

Does Xero Intend to Build Practice Software for a Global Audience?

Digital First: Let’s talk about the practice side of things. From conversations with (chief product officer) Anna Curzon, it’s clear there was a decision at some point to put much more focus and investment in building out the size of that team. It felt very light on for quite a long time. What was the thinking behind that? And is Xero then committing to building practice software on a global scale for all markets? Where do you see the limits of that? Because practice software obviously gets pretty complex for larger firms.

Vamos: Well, one thing that is true about Xero is we are committed to the accounting and bookkeeping profession and partners as a core element of our strategy. I would just say, the build up to what we announced Xero, it wasn’t (done just) yesterday, right? It’s been done for quite some time. And it came out of the ongoing development and maturing of Xero as a company where we do strategy in a very thorough way now. And we’ve been lining up our investments with those areas that are important to us.

Accountants and bookkeepers are really important to us and (so is) making their workflows more efficient, and making it easier for them to do what they do with Xero subscribers on the platform. It’s just a fundamental priority for us. So I’m pleased with the progress we’re making and obviously keen to see the response as we roll more of these enhancements out.

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