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Industry consolidation

Big news yesterday as MYOB announced they have finally acquired BankLink.

There will be lots of industry banter about what this means. Here are our thoughts.

Why did MYOB buy?

This acquisition makes sense for MYOB. Under their second Private Equity owner, US based Bain capital, they continue to load the business up with debt, which is now over 700m. Bain is now looking to exit out of MYOB and is signaling an IPO.

Bain probably did not foresee how the cloud is so quickly changing the economics of accounting software. Both MYOB and Reckon ‘double dip’ by charging accountants for accountant side software to process the same set of books originated in the small business software the owner has already paid for. In the cloud this goes away with Xero not charging for accountant tools.

MYOB do not report their detailed numbers. Actually neither has Reckon but with our increased market share it’s very likely that their NZ based accountant revenues are under pressure. With so much debt, if revenues are soft then MYOB would be under enormous pressure from its bankers. When we started Xero MYOB claimed 70,000 NZ customers of small business accounting. Xero now has over 70,000 customers in New Zealand on monthly billing so unless the market has doubled Xero is likely number 1 in our home market.

MYOB is also under pressure as its cloud sync model, which moves data between the installed desktop software and the cloud, has now been shipped and seems to be having issues. All these factors are probably accelerating the Bain’s desire to exit.

So if an IPO exit is planned then the MYOB acquisition of BankLink, which presumably carries little debt, makes sense to top up any revenue gaps.

Why did BankLink sell?

So why did BankLink sell after rejecting MYOB for so long? With the cloud accounting industry just taking off why would anyone in the space sell now?

BankLink is an admired New Zealand company. And over the last two decades has been a stable supplier that has earned the trust of the accounting software industry. As Xero entered the market and rapidly innovated, especially linking banks directly to accounting software, BankLink didn’t respond. I don’t know why they didn’t move.

So over the last few years Xero has been catching up on the direct bank connections, partnered with Yodlee to provide access to banks without feeds and integrated feeds into a full accounting system. We have been migrating thousands of Banklink customers to Xero. BankFeeds have simply become a feature.

Accountants have woken up to the change. If they run customers on BankLink, those customers are likely using other software for invoicing, payables and accounting and that customer is at risk of adopting their own software. With cloud accounting smart accountants are providing accounting software to their clients which provides a degree of lock in and the clients are happier.

Xero has also announced it’s working with a number of Banks (like the ASB) on the next generation of banking connectivity.

So the writing was on the wall for BankLink, and it makes sense for the founders to exit the business after 25 years.

What does this mean for Xero?

While we have been moving thousands of Banklink customers, there has been residual loyalty to the Banklink brand as they have provided excellent service for many years. That loyalty does not extend to MYOB so it probably accelerates the transition to Xero.

Paul Pettit, a partner of Wellington based accounting firm Curtis McLean, says MYOB needs to be focusing on its own software. “It’s great to see MYOB taking steps with bank feeds but usability is their real issue. The bank feeds are only the start of the accounting system. The benefit of Xero is that it is just nice to use and has an entire ecosystem of apps around it. With updating an old system it’s a lot harder.”

Active Chartered Accountants director Ben Shaw agrees and says “MYOB has taken too long to embrace the technology behind bank feeds and to recognise the need for making them more client-focused rather than accountant-focused.”

Who are the remaining big players?

  • Last year CCH (owned by European listed company Wolters Kluwer) acquired Christchurch based Acclipse
  • US Owned MYOB now owns BankLink
  • Reckon (ASX) and Xero (NZX/ASX) remain the last locally owned players

Accountants now have to think long and hard about who they invest in as their long term partner. We believe Xero, a listed company with no debt, 100%+ growth, largest ecosystem, $75m in the bank and a history of innovation and operational excellence has become the low risk partner. Considering we only got going 6 years ago it’s been an amazing change.

Who said accounting was dull and boring!

As always welcome your thoughts below.

 

Read more about Company News

 

27 comments

Carl
15 May 2013 #

Well that explains everything,I thought initial offers to buy BankLink were tens of millions so bowing out with $136m was a no-brainer. BankLink was great for its time but is now showing its age. In any case I think $136m is exorbitant just for bank feeds, and like those mentioned in the article, I find it difficult to see how this pricey acquisition will improve MYOB’s biggest issue of buggy software and a woefully dated user experience.

Dianne
15 May 2013 #

Love keeping track and in touch with the progress of the Cloud and the players in the market. I love this article as it really “strips away the flaky paint so we can see the wood underneath”. MYOB isnt buying Banklink because its a “great product” and certainly not for the possible enhancements the acquistion will have on its current products, It’s made a strategic business decision buying Banklink in its present form to take it out of the game.
Question is, what now? Are we going to see more Desk/Cloud (problems) or is there something better, (please be better) in store for those poor accountants who can probably expect to see less of Banklink and more of MYOB in their practices.

Chris
15 May 2013 #

I’m from the US, so I’m not (shockingly) as up to speed on NZ banking practices.

That being said, if I were an entrepreneurial type of person with a background in banking I’d find this a certain kind of exciting.

And for the 150 or so people working for Banklink, it doesn’t take long to notice the cool kids have packed their boxes and have opened new offices.

Lean in, guys.

Gavin
15 May 2013 #

I don’t really like how your article is so one-sided to just brag about your own growth and MYOBs struggles…. I’d prefer for you to keep to two separate.

Blair
15 May 2013 #

From what we are seeing from the technology that is coming out and the interest shown by our clients, the next big thing is going to be (in fact it is now) “Mobility”. What MYOB has to offer misses that target, they can talk about “2nd generation cloud” all they like but at the end of the day it is still desktop software. Reckons offering is similar as it is based on a Citrix platform and therefore not truly mobile.

Smart phones, tablets and whatever other type of mobile device is on the way will be how people interact with there business software going forward, that is where Xero and their add ons have it over the others!

Lauren
15 May 2013 #

Thanks for finding the ‘hole’ in the market and creating Xero! We use it for our business and it saves so much time and money – after reading how tedious MYOB and Banklink are, i’m so glad i’ve never had to experience it! Thanks Team Xero! :)

Harvey Specter
15 May 2013 #

MYOB have acquired two things:

1. bank feed technololgy which they needed (were using but know have control off) and can now provide certainty of supply to its existing customers.

2. 320,000 customers. How many of these were using Banklink for MYOB and how many will leave, I dont know but 320,000 customers should increase revenues.

Cedric Knowles
15 May 2013 #

There was a hint of desperation and scaremongering in the very disingenuous comments of Tim Reed (MYOB CEO) to say business owners have to part with their online banking user name and password to “third parties” for bank feeds – they never have to provide this to their accountant, and only use it to log in via Yodlee for the very few non-partner bank feeds most people use (does anyone else use Paypal – don’t they ask for all your credit card details?!). I believe the real reason MYOB has felt the need to waste their dwindling capital on Banklink is because Banklink is the last bastion of online relationship between accountants and their clients – a lot of traditional accountants don’t seem to like Xero, which I can only presume is because it has removed the mystique of accountancy, whereas MYOB still requires a degree of accounting knowledge to operate effectively – so MYOB needs to shore up its support with accountants. What Xero has created is pull through demand from clients – this has never happened with accounting software in my 26 years of practice – and those clients are certainly not demanding MYOB or QuickBooks. If Xero gets basic job costing and inventory into the medium price plan in the next 12 months, MYOB and QuickBooks can close the stable door on the entire Western world of small-business clients – they will have lost the war as well as all the battles!

Karl
15 May 2013 #

Hahaha. Love your market explanation:)) NOT!

I have never met an accountant who did not like BankLink – they feel its a boutique company and is a real NZ success story. Accountants do have a soft spot for BankLink.

On the other hand i met tonnes of accountants who hate Xero and MYOB alike! Especially they really”appreciate” Xero’s non- existent support.

I think people at Xero need to realise that there are other good companies out there and recognise it rather then taking cheap shots at them. Rod Drury sounds like a hysterical woman with his attacks on competition.

James
15 May 2013 #

Where do you think this will put CCH with their reliance on banklink?

Rod Drury
15 May 2013 #

@Gavin I thought I was restrained

@Harvey agree with point one. Yes they do get bank feeds, though we believe that the framework fro band feeds is changing significantly. I think the 320,000 number is number of individual accounts they pull down, not customers.

BankLink customers still have a choice about what full accounting software they use, so I don’t think they naturally just migrate to the MYOB products.

@Karl, I don’t disagree that accountants have a soft spot for BankLink. I mentioned that. However what we’ve seen is that accountants who provide BankLink as their core accounting service are placing their customers at risk as they move to full accounting independently. Many Xero accountants have worked out that they need to provide the full accounting solution to their customers to lock them in. We’re are moving thousands of them so we know the drivers.

I know that these direct post about other companies aren’t a normal New Zealand style but MYOB is running the line that feeds from Xero are inferior or less secure than BankLink which is simply untrue (as they well know), so we’re happy to shine a bit of light as to our interpretation of what’s happening.

Accounting software is a key investment for accountants and small business which becomes a key platform for doing business. We’re not going to be shy about why we thing Xero is the best partner.

We think it’s interesting and enjoy a rigorous debate so feel free to challenge our view.

Jerry Zhao
16 May 2013 #

Go harder Xero! Kill them all!

Blair McCallum
16 May 2013 #

@Karl, are you trolling or do you have no knowledge of the industry?

Irvin Jaffe
16 May 2013 #

To those in the US, remember that Bain Capital is owned by Mitt Romney.

Also, I don’t know about other US users, but my Xero bank feeds (both commercial and personal) fail frequently and take several MINUTES to run. Compare that with Quickens desktop feeds which take about about 5 seconds.

Don’t get me wrong, as a CPA, I like and use Xero extensively, but still prefer the more complete and extensive desktop products such as Peachtree and Quicken.

Vince
16 May 2013 #

Rod – I know it is really important to you to be bigger than anyone else but your claim to be number one in New Zealand seems to rely on some wonky maths.

You say Xero has around 70,000 NZ customers and MYOB also has around 70,000. So maybe Xero is slightly bigger than MYOB right now. However, add in what seems to be at least 100,000+ businesses who use BankLink and the combined entity will be much bigger than Xero. Much bigger.

Rod Drury
16 May 2013 #

@Vince, your tone is really interesting. It’s my job to ensure we’re number 1. I get paid to do that and our shareholders demand it. Do you think that’s a bad thing?

I said that MYOB said they had 70,000 when we started. As MYOB does not report their numbers it’s hard to know how many they have now, but as we have grown significantly their recurring customers in NZ is likely to have reduced. Are they counting once only sales or customers on maintenance? We just don’t know.

Reckon, even though they are listed, do not report their numbers in a way that allows comparison either.

This is very important as accountants have to place a bet as to where they invest and they are doing it without clear information. So we’d challenge all players to be up front about their real numbers as Xero is bound to as a public company. If they are not being open with their numbers you have to ask.

I concede my wording was loose around number 1. I believe we are bigger than MYOB (NZ) and Banklink individually by revenue but probably not combined.

But you can bet we are planning to be.

Mike Creed
16 May 2013 #

Rod, I liked your comments yesterday regarding the MYOB purchase of Banklink, you were right on the mark. Take us for example, we have recently switched our practice to Xero and transferred a significant number of client accounts from Banklink to Xero. Had we known about the MYOB/Banklink purchase earlier, it would not have altered our decision to switch to Xero, in fact this announcement has reinforced the decision we have made.

Karen Bussing
16 May 2013 #

Keep at it Rod, you’re doing a great job. As both a BAS Agent and a shareholder I’m very, very happy!

Neil
16 May 2013 #

Rod, your article is really interesting.

Banklink was a key piece of software for our practice for many years but you are right in saying that they did not react to the Cloud and got left behind. The purchase of Banklink will no doubt help MYOB attempt to “keep up” with Xero, but bank feeds are only one part of the puzzle.

Of more importance is having the single ledger fully functional. Bank feeds help us get clients to convert to Xero because it makes their job easier. But the real value in the Xero proposition is the single ledger and integration to our “accountant applications”.

We are now entering our second year as a full Xero firm (ie GL, PM/Tax and WP). Last year was difficult with the conversion and adoption of electronic workpapers and the like. Although early stages this year, the results look truly exciting. Annual jobs taking 40% less on average (up to 73% on one job!) due to the single ledger, integrated tax and workpapers (ie Xero!). And I know the integration is going to get tighter.

That is putting a lot of time that we can spend with our clients to truly add value. The Xero platform is now providing us with a true competitve advantage.

Banklink might help MYOB in one key aspect, but from our perspective, they have a long way to go in a lot of other areas!!

James
16 May 2013 #

I’m intrigued that Xero have over 150,000 business customers but only 200,000 users. What is your definition of a user? I would have thought that most businesses would have more than 1? That’s one of the advantages of the architecture. eg. book keeper, employees for entering expenses, financial controller, directors, shareholders etc.

Rod Drury
16 May 2013 #

Hi James, the 200k is way out of date. Probably more like over 400k We try not to use it to much as it’s disconnected from ARPU.

Mark
17 May 2013 #

Hi Rod

I can’t blame you for defending your home turf and I applaud and am a huge fan of everything you have done at Xero, you have changed our business and many many others.

My only note of caution to you would be that this is a very NZ story and as one of your global customers it sounds a little parochial – you are a much bigger player bigger than that, a great success story but more than a NZ business – its OK to maybe act local but remember to think global!

Harry Hoang
17 May 2013 #

I think MYOB can beat XERO in Australia if they can do following thing:

- Be more generous with bookkeeper/accountant: I am MYOB user for 8 years and dealing with thousand customer of MYOB…but what did they do to me in return?

– Charge me subscription for my practice licenses
– Charge me training for my staff & my client
– Charge our customer $600+ per year just to get the updated tax table
– Charge me $3,000 to have a right to write book about MYOB (In Australia, there is only one good book about MYOB which is “MYOB software for Dummies” and yet MYOB is the best software for many years.

- Share some of your profit to us…commission is a good way to get bookkeeper back to MYOB

- Think simple. All MYOB version prio to the MYOB Account Right 2011 are good. They are simple & quick. Accountant/bookkeeper like us don’t mind using that piece of software. What you need to do is just to learn from other competitor like XERO but not copy from them. MYOB has it own strength comparing with XERO so focus on what you are good at.

- Don’t get me wrong to post this comment on this Blog, I am XERO lover, but I would love to see MYOB compete with XERO so we have more choices.

Rod Drury
17 May 2013 #

@Mark the reason NZ is important is that we have deep relationships with the banks here (many Australian owned) and are making very good progress on next generation banking web services. If we can prove these services in a smaller and nimble markets like NZ and AU we hope we can move banking services forward globally.

@Harry competition is great. It drives innovation and better services and keeps all of us hungry. I think our impact on the market has created a sense of urgency for all players.

We’d love to help you with those thousand customers, send us an email.

Leighton Raphael
17 May 2013 #

Wow – hot topic!

Sure, both MYOB and Banklink are two “household” names.

So too was Kodak, before digital photography came along….

Peter Forrest
18 May 2013 #

Earlier this year Sage Introduced bank feeds for their Handiledger programme. They have priced it similar to Banklink. We seriously looked at this as we already use Handiledger and intergrate it with Handitax. We decided to give Xero a go because of cloud computing, mobility, no Mac/PC issues and soon-to-be redundant servers. Some of our clients are resisting, those that need detailed job costing, and sales reporting, but we are confident that Xero is innovative enough to get this nailed within a year or so.

Rob Stewart
20 May 2013 #

What concerns me is that while Xero is doing development on accountant side, in NZ you seem to be sitting on your laurels a bit. Yes you’re doing purchase orders and the like, but where’s the Xero payroll? You were happy enough to buy Paycycle in Aus despite their already being integrated partners, but why is it different here? And my real bug, there’s no development plan in place for handling NZ based foreign currency accounts. We can’t get these either via partner feed or via Yodlee, which is nonsensical. Xero is opening up all over the world but you don’t make it easy for business using your software to do the same.

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