I recently published a CloudU whitepaper looking at the economics of Cloud Computing. In it I pointed out the added value that cloud computing can bring, beyond any cost savings. Case in point: a local bank has introduced a service for SMBs that is better known in medium-sized businesses. Factoring (sometimes called debtor financing, invoice discounting or a number of other names) is a financial transaction whereby a business sells its accounts receivable (invoices) to a third party at a discount in exchange for immediate money with which to finance continued business.

Simple concept, but hugely valuable to businesses – especially those who pay cash for stock, but sell on invoice. Factoring can be the difference between them meeting payroll… and not. Problem is that providers of factoring services need a heap of information in order to pay out on invoices – one of the businesses I’m peripherally involved in uses factoring and I’ve witnessed first hand the epic monthly meetings with the auditors from the factoring company to go through every invoice – categorize, split and calculate.

But it doesn’t need to be this way – in a cloud model, with accounting software connected to factoring agencies, it is possible for the factoring company to obtain a real time feed as to the invoicing status of the business in question. The business could et up racking categories for the customers whose invoices they wish to factor, and the bank could calculate and automatically pay the factored amount – directly, near instantaneously and without the slow, laborious to and fro that happens today.

Having a conversation with Xero CEO Rod Drury, this potential was obvious. As he put it, the key is that with online accounting that includes invoicing;

  • The bank can see the real cash flow and payment patterns from debtors
  • They can see what actions have been taken with each debt
  • The bank and business can work together on outstanding payments

The scenario is clear. A small business signs up for the factoring service. They give their business banker access to their online accounting application which is already set up with the ability to automate the factoring transactions – it can split the invoices and the bank can automatically pay the factored amount the same day the invoice is raised. The potential and possibilities are enormous and obvious. But alas in this example, it would seem that this particular initiative is merely a new name for the same old existing service. It is, if you will, lipstick on a pig.

To really drive value for SMBs from cloud accounting and with services such as factoring, it is reliant on banks realizing that simply coming up with a new name for an existing product offering doesn’t really change anything. I’ve spoken to business bankers within New Zealand banks and offered to set them up within our SaaS accounting applications to give them real time visibility over my businesses – alas they’d rather see accountants reports – 12 months after the fact.

I’ve written before about the need for “banking 2.0”. I dream of a time when banks create their own APIs that would allow (with proper security and authentication) third parties to build awesome products on top of, or integrated with, core banking services. I’m not however overly confident that banks have the appetite, desire or real understanding to realize this potential. And that is a failing that is detrimental to their customers.

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Ben Kepes

Ben Kepes is a technology evangelist, an investor, a commentator and a business adviser. Ben covers the convergence of technology, mobile, ubiquity and agility, all enabled by the Cloud. His areas of interest extend to enterprise software, software integration, financial/accounting software, platforms and infrastructure as well as articulating technology simply for everyday users.

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