Unlocking Small Business Data Drives Big Returns in Working Capital

Given the judicious posture of venture capital in 2022, when $100 million goes into a FinTech there’s strong a business case. Like a platform for companies innovating ways to securely connect and share the data of small and medium businesses (SMBs), and all it will yield.

Think of Plaid — sort of — but for SMBs. Codat CEO and Co-Founder Peter Lord told PYMNTS’ Karen Webster that he hears the comparison a lot. No shock then that Plaid is a participant in London-based Codat’s cap table as the company bridges isolated SMBs to the vast connected economy.

“We help [financial SaaS companies] who in turn serve SMBs, build better, more integrated products that solve problems,” Lord said. “The fundamental problem is the lack of connectivity. That’s the biggest barrier to small business growth and product productivity.”

Noting that the average SMB is using up to 100 different programs and tools to run and manage their business, he told Webster, “If those systems don’t speak to one another, the result is that business owners have to spend hours each week manually rekeying or uploading data from one system, having downloaded it from another, just to get a clear picture of how their business is performing or to make a payment. That’s a huge challenge and blocker.”

Lack of connectivity between systems also prevents SMBs from accessing financing in a tight credit market, as telling a story with disheveled data doesn’t fill lenders with confidence.

“Even today,” he said, “a large portion of financial services are still relying on static, out-of-date data to make credit decisions. That can lead to a large number of creditworthy businesses being excluded from accessing the finance that they deserve and need in order to grow.”

Codat’s universal API is the ticket, he feels, and investors clearly agree there’s untapped value — perhaps major untapped value — in the various systems of SMBs everywhere.

See also: Codat Lands $100M to Innovate Business Data Collection

Consented Access Driving Innovation

Going into the solution itself, begin with the fact that few (sometimes none) of the various software tools SMBs typically rely on were built for the digital connected economy.

It’s one reason Codat is dubbing its universal API for SMB data “the internet for small business data.”

“What we’re essentially doing is allowing small businesses to leverage the data that they have within software applications,” he said.

“Predominantly that’s accounting software like their QuickBooks, Xero or NetSuite, their eCommerce solutions, their point-of-sale and whatever systems they use for payments if they sell on the marketplace, these types of systems.”

With “consented access to be able to share and be in control of what data and how they share it with a nominated third party in,” in this case lenders, “instead of being put into an arbitrary bucket based on abbreviated, out-of-date to data, a small business can be assessed for who they are on their merits and their business today, rather than six months ago.”

Vital, yes, but a touchy subject. Founded in Europe, Codat is well-versed in data privacy regulations that are stringent throughout the European Union (EU), but not so much the U.S.

He said “It’s a top priority to get those sorts of things right. We’re founded in Europe and taking a steer from open banking, which has really progressed some of the thinking around consented data sharing. It’s very nice to see the awareness of consumers and indeed SMBs in regard to their data, who they’re sharing it with, how it can be used and also the value it can provide.”

What’s almost as vital is making sure that SMBs see a solid business purpose for connecting and sharing data with lenders and others catering to the needs of this stratum of businesses.

Lord told Webster “a lot of care has to be taken to make sure that there’s a mutual exchange of value for SMBs. In most instances, we are seeing SMBs have a very strong desire to connect and share their data. Often integrations are a hugely requested feature for some of the clients that we work with, because the benefits in terms of time saved and access to products can be so huge. An SMB owner doesn’t want to be rekeying information between the systems.”

By plugging into a platform, software does what it’s supposed to do for SMBs: let business owners focus on products, services and customer experience.

“That’s the type of value where we’re looking to unlock,” he said.

See also: Deluxe, Codat Team Up to Improve Accounting

Surfacing Strategic Insights

As to where demand is greatest for SMB data and how it can help innovators create new and better products for them, Lord recited a litany of use cases now clamoring for these insights.

Codat has clients in small business lending, insurance, payments, corporate cards, point-of-sale systems, e-commerce — “these are all sectors that we serve,” he said.

“Where we’ve seen greater adoption more recently would be vertical SaaS, [and] companies that are building the business operating system for a particular vertical or niche. We’ve got platforms that serve vets, nurseries, breweries as examples. Our technology helps those operating systems plug into some of the other more horizontal plays.”

Then there’s things like carbon accounting — again, very Euro-centric for SMBs in 2022, but headed to North America — an intensely data-driven task beyond the grasp of most SMBs now.

Change is coming, however. Asked why VCs (along with Plaid and Spotify) see SMB data sharing as worthy of a $100 million investment in a runaway inflationary economy, Lord pointed to astronomical number of SMBs and the potential for making their data usable.

“SMBs make up 99% of all companies. Obviously a huge [total addressable market] and a worthy cause,” he said. “Then that’s combined, for Codat, always with a focus on strong unit economics and running a healthy, sustainable business with large enterprise clients is, I think, what has enabled investors to put together the round that we’ve just announced.”

As to challenges Codat faces in equipping its clients to move out into a universe of SMBs with creative and valuable API integrations, he’s less concerned than a U.S. counterpart might be.

Noting Europe’s more developed open banking landscape, he said “consumers are now incredibly comfortable with the value of connecting their bank accounts, as an example. We see that filter down into SMBs to authorize access to their Shopify, their QuickBooks, their PayPal accounts with the other services that they use to better their overall product experience.”

Likening what Codat will do with its cash infusion to the smartphone-powered connected experiences we’ve grown accustomed to, from ridesharing to restaurant reservations and payments, he said it’s moving beyond automating basic tasks to surfacing strategic insights.

As Codat enables access to anonymized data beyond eCommerce and payments, “we can start to help our clients triangulate the data in those systems and be able to actually offer SMBs insight about their business that they might not have had themselves,” he said.

“That only becomes possible when you’re connecting to many different systems, and the standardization layer that we provide is critical to doing that at scale and being able to generate very actionable insights.”