Accounting bank – banking on the cloud

Tim Fouracre explores the notion of accounting banks and how they could revolutionise the way we manage our finances in the future

Are you using an accounting bank? Of course not. Accounting banks don’t exist, yet. The concept is fascinating though and real accounting banks are just around the corner. An accounting bank is a phrase I coined to describe the intersection between online banking and cloud accounting software in one product.

The concept of an accounting bank might appear to be a far-fetched contention but consider why online banking and cloud accounting software aren’t combined in one single product right now. The answer, in the first instance, is that it’s not been possible. Technology and regulation are changing that through a cocktail of cloud accounting software (Clear Books, SageOne and Xero), mobile first challenger banks (Atom Bank, Monzo and Revolut), APIs, PSD2, machine learning and MTD.

The challenger banks have made it possible to innovate with banking. In simple terms, most have taken an initial approach of creating a layer on top of existing banking infrastructure. Equipped with a bank account number and sort code and using APIs, the challenger banks are able to do day to day banking activities such as faster payments, BACs and direct debits.

As the challenger banks are a layer on top of banking infrastructure, it’s now possible for them to do interesting things with that layer, like incorporate cloud accounting software functionality. There is actually a wider opportunity here, bigger than just an accounting bank. The challenger bank approach makes it possible to create literally any software product on top of a bank account.

A current objection for anyone changing banks is the fact that it’s not an easy thing to do. You have to go into a branch, fill in numerous forms, send a signed copy of your ID off in the post and then wait a few weeks. This is changing with the challenger banks. With the likes of Monzo and Revolut which have ID verification tools built into their mobile app, you can literally sign up for an account in 5 minutes and have your mastercard in the post the next day.

Assuming an accounting bank is a possibility and the barriers to signing up are minimal, is there any merit in combining accounting and banking in one single product? At the heart of an online bank is the cash ledger of debits and credits recording the real flow of payments in and out. At the heart of cloud accounting software is the cash ledger of debits and credits recording a replica of the flow of payments in and out. There is an overlap in the core underlying data, which first prompted me to consider the concept of an accounting bank.

With the advent of online banking and cloud accounting software over the last decade, small businesses and their accountants have come to expect that bank transactions from Barclays, Metro Bank and Santander will be automatically imported into cloud accounting software like Clear Books, SageOne and Xero.

Supporting the idea for an accounting bank is the user behaviour I have observed from the small businesses using the cloud accounting software I am the founder of, Clear Books. The imported bank statement is increasingly used as the primary source of record keeping. Indeed the bank import tool in Clear Books is the most used feature in the whole application.

Each automatically imported bank transaction simply needs to be explained with a contact, VAT rate and account code category. It’s a huge time saver for whoever is doing the books. Increasingly cloud accounting software also recognises repeat transactions and is able to automate the categorisation of transactions which saves even more time.

There is no debate that online banking and cloud accounting are becoming tightly coupled. If that’s the case then is there any point reinventing the wheel by combining these two services into one accounting bank? Flip that question on its head, why would you use two products from two vendors when you could just use one? One is simpler, quicker and with an accounting bank, the bank account will always reconcile.

Further innovation will come from machine learning. The fact that the accounting bank is the one true source of transaction data across an entire customer base provides a dataset of possibilities. The opportunity to automate transaction categorisation is significant.

Imagine logging into your accounting bank and all the transactions are automatically coded to the correct account code for you. The accounting bank will be able to leverage advances in artificial intelligence to do this. Bookkeeping, as we know it today, could become a largely automated task.

These machine learning productivity gains are why I am an advocate of Making Tax Digital. Yes, on the face of it MTD will require quarterly submissions of data. This is an unwelcome change for many as it means more work for small businesses and accountants, particularly those doing their accounts on spreadsheets, desktop software or using paper records.

My belief is that cajoling UK plc into the digital age with MTD will lead to a step change in growth for the country. If UK plc was digitalised at scale through accounting banks, for example, then the time freed up from rote bookkeeping tasks could be better used by small business owners to grow their businesses and that could have a material impact on GDP.

If this sounds a little too next generation then consider this. According to a recent PWC report, by 2020, Millennials will form 50% of the global workforce. These millennials are the small business owners and next generation accountants who live in the digital age.

An accounting bank won’t be for everyone. It wouldn’t work particularly well for larger organisations who bank with multiple providers. The ideal customer for an accounting bank would likely be a simple micro business with one bank account and one corporate card. The type of small business who is currently using a spreadsheet and hasn’t heard about MTD yet. Or perhaps they have heard, and are worried about, what MTD means for them in terms of additional reporting work and accounting fees.

Cloud accounting software has been with us for nearly a decade and is establishing itself as the technology of choice for small businesses. Challenger banks are disrupting banking. Keep an eye out round the corner for the two coming together and the next wave of innovation in small business software, the accounting bank.

Click to download the ICAEW Chartech accounting bank article as a PDF.

Edit: Tim Fouracre subsequently launched Countingup to build an accounting bank off the back of the ideas in this article.