The deal puts the Edinburgh fintech in touching distance of almost one million business banking customers, not counting an estimated one million additional firms “run under the radar” through personal accounts.
On top of that, it gifted the firm what chief executive Molyneux likes to call its “superpowers”; specifically what FreeAgent can do that no other accounting system can because of its internal access as part of the bank. With this in mind, Molyneux is out to re-write the rule book of accounting support for the UK’s microbusinesses.
“A lot of people were a bit surprised – and some quite shocked – when we announced the acquisition,” he says. “But that’s an enormous number of customers to be right in front of. The more people we can get using FreeAgent, the more impact we have as a business.”
Speaking candidly about the takeover, he admits an initial wariness on his side. However, he stresses that the bank understood from the outset that “if they ended up stomping all over FreeAgent with their size ten boots, with governance and compliance and conduct risk, there would be nothing left by the end of the day”.
He also sees the software firm as maintaining “a very high level of operational independence”, and there’s no doubt in Molyneux’s mind that the relationship is a healthy two-way street. In a time of phenomenally rapid change in banking – and with technology-driven challenger banks snapping up an increasingly impressive market share – he highlights the need for innovation at stalwarts such as RBS, which remains 62 per cent taxpayer-owned.
It is presumably an indication of the bank’s confidence in FreeAgent’s potential that the takeover marked its first major acquisition since the financial crisis.
“Nowadays you come up against people like Starling, Monzo and Tide who are explicitly in the business banking space, reinventing what it means to be a business bank. Then you’ve got Barclays, Lloyds, RBS/NatWest trying to figure out what they’re going to do about that,” he says.
“The real danger is that they’ll just become irrelevant over the next ten years and there’ll be billions of pounds of value – and not to mention taxpayers’ money in the case of RBS – that will just be poured down the drain.
“It’s still early days but you look at account opening rates that some of these new players have and it’s not going to be long before they’re up at the same rate as the big banks and then it will probably be too late to do anything about it.”
The irony is not lost on Molyneux that innovation funding for some of these relative newcomers, such as Starling and Tide, comes from the £775m RBS Alternative Remedies Package, set up as part of the conditions attached to the bank’s government bailout, which “RBS now has to fund its response to”.
Molyneux established FreeAgent in 2007 with co-founders Olly Headey and Roan Lavery, specifically targeting a pain point for small businesses. The mission was personal. After a decade in the air as an RAF fast-jet pilot, Molyneux set up shop in 2003 as a defence technology consultant in the southeast of England, where he ran into difficulties keeping to tax deadlines.
This led to the creation of FreeAgent, cloud-based software-as-a-service accounting software. He led the business to a stock exchange float, raising £10.7m from its initial public offering on London’s Alternative Investment Market in 2016.
Its target base is sole traders and microbusinesses – those with fewer than ten employees – and their accountants. “Whenever anyone thinks about accounting all they think of is the painful stuff. Everyone thinks: ‘I’ll just get my accountant to do it.’ They effectively abdicate responsibility for one of the most important parts of running a business. It’s pretty scary if you think how fragile a lot of those businesses must be and they’ve got no way of responding to what’s going on because they’ve got no idea what’s going on.
“Our customers aren’t really like businesses, they’re more like consumers. They are people who are struggling and hate this stuff. If you can make it fun – and a surprising number of customers tell us it’s fun, which is kind of scary – then you’ve actually made something very positive. It’s easy to make a game fun, it’s very hard to make accounting fun – and we like a challenge!”
FreeAgent currently has more than 90,000 active users and is “well on its way” to the 100,000 milestone. It also partners increasingly with accountancy firms, now working with more than 1,000 practices – “a decent chunk” of a market in “different stages of technical maturity”, as Molyneux puts it
“Some accountants are really keen on our technology and how it can help their clients better, and some are more sceptical, sort of understandably, that we’re going to take their livelihoods away.”
This is, however, not the intention. FreeAgent’s goal is to relieve the burden of accountants having to chase their clients for information, thereby freeing up time for providing other, value-added services.
Having been in the driving seat through the firm’s various incarnations – starting up, securing investment, floating on Aim and joining RBS – Molyneux appreciates that different ownership models affect priorities, but he feels that major decisions have always been made in the context of meeting the same vision.
Namely, “helping businesses be more successful by putting them in control of their finances”. He also feels “there have been far more things that have been freed up to us since the acquisition, mostly through having extra money, than there are constraints”.
This includes an influx of staff, with headcount increasing by around 50 per cent to more than 220 in the past year, as well as turbocharged product development and access to mounds of new data.
FreeAgent’s growth strategy is based around the convergence of accounting, banking and financial services, which Molyneux says is already under way. It is masterminding how to draw data from different strands across these sectors into one space to give microbusinesses the most current and comprehensive financial overview.
“We’re not actually being steered by the bank,” he says. “Maybe we’re kidding ourselves, but we like to think that we’re almost helping steer the bank to that more converged future because they know it needs to get done, they know something has to change but they don’t really know what to do, so they have to listen to our ideas.”
In June, using Open Banking principles, FreeAgent became the first accounting software company in the UK to link banking data from the so-called “CMA9” lenders to provide business customers with a fast, secure flow of real-time transaction information into their accounts. The legislation is intended to help customers access their data in a more streamlined way, and holds huge potential for FreeAgent’s future offering.
Molyneux says: “We’re really ambitious about building on from Open Banking and this idea of convergence. We’re thinking about going beyond just the transaction data to include things like future payments, standing orders and direct debits. If you’ve got the picture of what’s going on in the accounting system you know what’s going out and which invoices are due to be paid.”
FreeAgent is currently working with a third-party insurance provider to build an insurance offering directly into its software, allowing freelancers and small businesses to keep on top of their insurance needs as contributing factors change, such as turnover or equipment use, which would enhance its user service.
The UK government’s Making Tax Digital regulation – which came into force in April – has driven growth over the last six months but not to the degree which FreeAgent had expected, with many small businesses missing the initial deadline. Molyneux anticipates he will see the benefit of latecomers getting on board over the course of this year instead.
His mission remains the same. “There’s so many good reasons for people to digitise, it’s just a question of getting them over the line in the most helpful way,” he says. “The good thing about software is you can write it once and then if you save someone five minutes a week that’s great. But if you save one million people five minutes a week that’s obviously much better. We measure growth as a business in terms of how many people we can help.”