Xero Limited to allow payments inside the software

Source: Xero half-year results presentation

Xero Limited (ASX: XRO) is the leading cloud accounting provider in Australia. It has scored a fundamental victory today by getting National Australia Bank Ltd (ASX: NAB) to allow payments to be made from inside the accounting software, according to the AFR.

Banks have been the facilitator for payments for a very long time, but Paypal and others have really changed the landscape. This deal is likely to be the first where a bank allows payments to be done inside a cloud accounting package.

It will mean that NAB customers can pay an invoice inside Xero by just clicking a button, instead of leaving the Xero ecosystem and having to enter all the invoice information.

Xero’s Australia Managing Director, Trent Innes said “I think we will look back one day and say ‘I can’t believe we used to take payment information from our desktop and import it manually into banking software’.”

“Ultimately it comes down to customers being able to work in their channel of choice, and we should be removing the friction to make it as easy as possible to go about their daily business”.

NAB is also benefiting somewhat from the deal. The bank will get access to customer working capital levels held by Xero. Executive general manager of digital and innovation NAB, Jonathan Davey, said “We are taking some of the data that currently only exists in Xero and providing a dashboard in our current banking channel”.

Some NAB shareholders may be wondering why the bank would do this, as it may devalue the relationship between the business client and the bank. Mr Davey said “If the NAB customer is operating in the Xero ecosystem and we can provide value to that customer by making it easier for them, I can’t see why you wouldn’t do that”.

Foolish takeaway

I think this sounds like a great move for Xero as it will further embed its subscribers into the software and create more loyalty. There is no option to do this in the other accounting packages. Xero is all about saving time and this will make things even easier.

I think this could turn out to be a bold move for NAB as it relinquishes control of the payment function, which is the only thing that a lot of sole trader business customers use a bank’s online function for. However, NAB has shown it’s often the first one to work with high-tech businesses like Xero and REA Group Limited (ASX: REA).

At the current prices I think Xero is a buy, but I’m unconvinced that the big banks are worth a buy at the moment due to how indebted households currently are.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of National Australia Bank Limited and Xero. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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