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Beyond the balance sheet

What you need to know about bank feeds & accounting software systems

Ercan Demiralay 02/7/2014 5 minute read

Ercan Demiralay FCCA explains the 3rd party provider that links your accounting software to your bank account.

The benefits of accounting software systems are numerous. No more hours spent meticulously managing each item that leaves the shelf or dreading the panic that sets in when the bank’s monthly statement doesn’t match the total at the bottom of your balance sheet. Online accounting now enables businesses to reconcile their financial statements with their bank account figures in real time.

However, if it seems too good to be true... it often is. Online accounting operates through the cloud and a complicated chain of command, in which it can take up to three companies working simultaneously behind the scenes to ensure your bank and accounting transactions are working in harmony.

In other words, it may rely on a third party for the bank feeds that link your business banking with your accounting software. We explore what this third party does, how it works, the potential risks, and the options available to you.

Professional help to find you the right accounting software

The ominous “third party”: what it is, who runs it, and how it works

The way the process works can be seen in the below diagram. The obvious scenario is where the accounting software provider and bank talk to each other to integrate your bank statements. However, this is not the case. Even though accounting software providers can reconcile your business bank information with your accounting statements, the software company itself has no access to your account, and in most cases, doesn’t even have a relationship with your bank.

This is where a third party provider comes in. The third party sets up what is called a “bank feed,” working as the middleman by “feeding” data from your bank account information to your accounting software.

How online accounting software integrates with your business bank account

While there is a myriad of accounting software companies (ClearBooks, Sage and Xero to name a few), there is really only one prominent third party provider: Yodlee. This is an American company that services millions of individuals and hundreds of financial companies. It works by storing your bank account’s log-in information in its secured servers.

When the accounting software requests your bank statement, Yodlee effectively acts as you and logs into your bank account through a read only format. This means they can't make any alterations. They then take a screenshot of your statements and send your data to the accounting software to match up the transactions. Afterwards, Yodlee keeps your account information stored so that whenever you want to view your accounting and business bank information side by side, you can see it almost instantaneously. 

So is it secure?

We know what you’re thinking. The two things you’re never supposed to let out of your sight are your passport and your bank account information due to the threat of fraud. Yodlee needs your business bank account log-in stored in its cloud servers. This is essential for its co-ordination between the accounting software and your bank. Luckily, Yodlee has so far proven to be very safe. Throughout years of operation and amidst the millions of accounts it handles, there have been no security breaches.

The read only format it utilises means Yodlee is only sending your accounting software technological pictures. So if a hacker were to break into Yodlee’s online data storage, they would only see a series of financial statement screenshots. At no point could they break into your account and wire out money—they are essentially no better off than a thief with a picture of an ATM card and no PIN. Also, it’s not like we don’t use 3rd party providers already.

A good example is PayPal, which allows payments and transfers between bank accounts and online vendors, auction sites, and other commercial entities. The scale of use of these 3rd party providers gives you an idea that this is far from being a risky new concept - PayPal has 148.4m registered user accounts according to Statista.com, while Yodlee claims to service over 50 million consumers and 700 financial companies.   

But...

There is an important security threat you need to understand. If someone was to hack Yodlee’s data cloud - as no one has done to date - and had extensive criminal help, they could begin the process of identity fraud. PayPal is equally susceptible to identity theft. In a typical transaction, PayPal stores the customer and merchant’s bank account or credit card information, and completes the transaction for them.

So if PayPal was to suffer a colossal hack, millions of people would have their credit card information compromised. PayPal, nonetheless, is still heralded as one of the safest options in online transactions. 

security threat

You can also rest assured that Yodlee conducts reviews to ensure the security of its systems. The company does this by hosting hackathons - where it tests its servers against the best online hackers to shore up any loopholes in its data storage - and it’s regulated by multiple online bank and safety boards in the United States. In short, although there is a security risk, the kind of effort necessary to infiltrate Yodlee would compromise some of world's most trusted institutions.

Your options for using online accounting software

Yodlee works with the majority of large banks nationwide. This means that if your accounting software uses Yodlee, which almost all do, you will be able to continually access and reconcile your company accounting with your business banking. If you are still not comfortable with how Yodlee works, there is another way to obtain a bank feed. HSBC provides its UK customers who use Xero’s online accounting software with its own bank feeds, cutting out the need for a third party provider. 

The problem is, Yodlee is simply much farther ahead in this market. HSBC takes several weeks to establish a direct bank feed, and when it does, it doesn’t compile specific screenshots of customer bank accounts like Yodlee. Instead, HSBC delivers you a wealth of information, causing you to sort through and personally micro-manage much of your own accounting. While this is a significant upgrade to managing everything on your own, HSBC lacks the convenience of the immediate responses Yodlee delivers in tandem with your accounting software. 

online accounting software

The final choice

Yodlee is currently a key component and partner to online accounting software. It has made its name in delivering a quick, convenient, and secure service so you can monitor performance and ensure your books are balanced. More and more banks are considering working on setting up direct bank feeds; while this is a step in the right direction, it could take years for them to match Yodlee’s service. In the meantime here are some points for you to consider in relation to accounting software:

  • Are you comfortable handing out your online bank account information, as many services like PayPal now use?
  • Have you checked if your accounting software is partnered with a third party provider like Yodlee?
  • Is your business bank account compatible for a Yodlee bank feed?
  • If you are concerned about third party providers, consider contacting HSBC to learn about their direct bank feed alternative

 

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The content of this post is up to date and relevant as at 02/07/2014.

Please be aware that information provided by this blog is subject to regular legal and regulatory change. We recommend that you do not take any information held within our website or guides (eBooks) as a definitive guide to the law on the relevant matter being discussed. We suggest your course of action should be to seek legal or professional advice where necessary rather than relying on the content supplied by the author(s) of this blog.

 

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