Intuit is, without doubt, the 800-pound gorilla in the small and mid-sized business accounting space. The company owns the lion's share of the market in the U.S. and internationally it is also a strong player. While it has competitors (legacy vendors Sage in the UK, MYOB in Australasia and new entrant Xero in some markets), the fact of the matter is if you were to ask any accountant or bookkeeper in the U.S. what is their software of choice, the odds are that Intuit will be the answer.
That dominant position has historically actually been a problem for Intuit. The company has, until recently, been late to the party when it comes to the cloud. Not only was its QuickBooks Online cloud product very much a second-bit player to the QuickBooks desktop version but, perhaps more importantly, it really wanted to own the entire pie itself. While other vendors are eager to build vibrant ecosystems of third-party solution providers that integrate into their product, the traditional model has been to deliver the entire stack from one place.
The reasons for this desire are obvious -- by allowing third parties to offer different parts of the total solution, a vendor gives up potential revenue. This is perhaps one of the biggest reasons that a move to the cloud is toxic for existing vendors -- it has a tendency to be somewhat toxic to existent revenue streams.
So if you're a vendor like Intuit, with an ambitious competitor committed to knocking you off your perch in your home market, how do you resolve the seemingly exclusive desires to build a vibrant ecosystem while still not severely denting your bottom-line? Well, what you do is expand your franchise and find peripheral revenue opportunities to make up for any income your ecosystem extracts from you.
At the QuickBooks Connect conference, we saw some interesting moves from Intuit to resolve these tensions. (Disclosure: Intuit covered my travel and expenses to attend the event and Intuit -- along with most of its competitors -- has been a consulting client in the past.)
Firstly, Intuit is a company that is finally deadly serious about building an ecosystem. I spent a few hours roaming the expo hall and two things struck me. Firstly, I was amazed that seemingly half of the exhibitors were either New Zealand or Australian companies or were founded by people from that region. Credit has to go to Xero (a company based in New Zealand) for creating massive growth in the number and variety of SMB focused solutions. The other thing that struck me is that each and every one of those exhibitors, while generally also playing in the Xero ecosystem, see Intuit as their primary route to market in the U.S.
Intuit seems to be (finally) listening to what people (myself included) have been telling it for years -- that it needs to build a true ecosystem. Its head of the entire developer ecosystem, Avi Golan, is an ex-Google executive who understands the need to embrace and encourage third parties. At Connect, Intuit held a hackathon (which I was asked to judge) at which a large number of developers competed to build an SMB-focused solution that leveraged the QuickBooks platform. The company has also committed funding to help its ecosystem partners to reach the market -- not only will Intuit help them source customers from its own network (via its Apps marketplace and the release of an intelligent application recommendation platform) but the company is also giving ISV partners funding to begin their marketing work.
So, with the start of a good ecosystem in place, there's that minor problem of revenue fall; what's a company like Intuit to do?
This is where a second announcement that was made at the event becomes fascinating. Intuit could potentially be moving into becoming a small business funder at scale. In doing so they could well turn their $1 billion mountain of cash into a rapidly circulating revenue generator. So what is it that Intuit is doing?
The company already had partnerships with funding organizations. Companies like Fundbox can integrate in with QuickBooks in order to give business owners the ability to convert outstanding invoices into cash. That's interesting, but still only a one-dimensional play.
An announcement alongside OnDeck changes the situation dramatically. QuickBooks Financing Line of Credit is a new service that aims to allow businesses to access loans at a much lower rate than they can traditionally.
What the product does is create a two-way integration between QuickBooks and the funding parties. This enables a deep understanding of not only the revenue, expenditure, debtor days and other business metrics that any integration partner can see, but also a deep understanding of the dynamics and metrics around the loan arrangement. Not only the need to borrow money, but patterns around repayment can be captured, analyzed and acted upon by the solution.
OnDeck is actually managing the loan process, but this is a deep integration -- there is a $100 million fund here and Intuit isn't just the source of the data, but rather an active partner in this model.
“This new product is all about empowering small businesses to leverage the power of their own data so that they can take advantage of better financing options,” said Dan Wernikoff, executive vice president and general manager of Intuit’s Small Business Group. “Small businesses rely on financing to power their growth, to invest in new employees, new equipment, and new opportunities. We’re excited to continue working with OnDeck to fuel more small business success.”
Lower rates, faster funding, a painless application process and flexibility around structure are all potential results of this partnership. But more important than that is what this could mean for Intuit. That $1 billion pile of cash that Intuit is sitting upon could, in theory, be utilized for this financing business. Accounting vendors have perhaps the best insight into individual businesses' particular situation, and that data is a goldmine for a lender.
The old adage in banking is that risk equates to value. Intuit is one party that is uniquely positioned to assess the risk to a high degree of accuracy. That ability can be directly converted into massive value. I spent a few minutes talking to Wernikoff about this launch and he, as an ex-banker, was quick to see the massive opportunities that this new area introduces.
But funding is only one part of this puzzle -- any financial transaction involving risk can fall under this definition. How about in-app insurance? It's all eminently possible by harnessing the customer data that Intuit already has, matching that with models and algorithms, and offering customers products and services within the application. Already $200 million in financing has been delivered via the QuickBooks Financing platform. When you bear in mind that the existing platform is something of a one-way street (lenders can see financial data for businesses, but the lending metrics can't readily feedback into the accounting solution), the extra potential of this deeper integration looks enticing.
So potentially we could see an Intuit that not only delivers small business software, but that also generates a large part of its revenue from financial services themselves. Given the relative margins that software vendors and banks make, that's an exciting prospect that should make Intuit shareholders look forward to the days ahead.
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