For the world’s largest enterprises, accounts payable is about much, much more than moving money from Point A to Point B. With globalization and international corporate relationships expanding, compliance is now a chief concern among business money managers — and it’s also a chief obstacle, considering how many different regulations there are surrounding payments and taxes from jurisdiction to jurisdiction.
Compliance and risk mitigation have become key focuses for global B2B payment platform Tipalti. Last week the company rolled out what it said was the market’s first Form W-8 solution — that’s the tax form that certifies a company’s status as a foreign entity and determines how much a company must withhold to the IRS based on the location of the payee.
It’s a complex document with a lot of room for error. So, MPD CEO Karen Webster had a conversation with Tipalti CEO and Cofounder Chen Amit to break down how the solution works and the compliance-related challenges some of the largest, most well-versed enterprises continue to face.
KW: The problem that we wanted to talk to you a bit about today is such a big one: supplier onboarding. It’s really complicated, and you’ve done something that is an attempt to make it a bit easier when a business has to pay a foreign tax. Why is that a big problem?
CA: We’ve known about this challenge for a while, but the new solution really came from pressure from prospective customers. There are several of our customers that consider this a significant issue for them. For some types of businesses, when you transact with a foreign entity, there are tax withholding requirements, and they are different for different types of goods and services in different countries. Plus, you have the global treaties that govern those relationships. It’s a really complicated process. It’s a really, really, highly engaged, friction-rich process, and there is no solution that ties into your payment and onboarding processes to solve for it. The customers that we are engaged with around this visibility suffer a lot.
KW: When you say you integrated this W-8 solution into your platform, it sounds like you’re doing more than just automating the actual completion of the form. Are you actually taking care of making sure that they are compliant and withholding the right amount of taxes and then getting those tax payments expedited to the various taxing authorities?
CA: Yes. We look at the problem from the perspective of the accounts payable team, and we try to take complete ownership of the process. There are many complex flows where you need to obtain information, do interviews and attach a payment to the right code.
Let’s say there is a treaty between the U.S. and Japan. You need to attach the right tax code to the transaction to ensure the right withholding and to express funds to the IRS. We take complete ownership of the whole process. And the payee can have the same project flow they saw before. We update our treaty information regularly; we have the most up-to-date information. We apply the right tax withholding. So, when you tell us to pay $1,000 to an individual in Japan, we know that the treaty requires a withholding of 15 percent, we send $850, we keep $50 for disbursement to the IRS. It’s a really integrated solution.
KW: As cross-border commerce becomes more commonplace, it sounds like accounting and accounts payable, which was already difficult, and supplier onboarding, which was also always difficult, will just become more complicated. But it sounds like you are trying to remove that burden, and it sounds like this isn’t just for small companies that don’t have the bandwidth to do it. It sounds like your clients are major multinationals that just don’t want the headache.
CA: You know, for all the customers who have already signed up for this, they are all major enterprises. The small companies maybe don’t even know to what extent they are exposed. Our customers are all very large. We previously introduced another feature outside of the U.S. for invoice processing, and it caught like wildfire. We believe this is going to be a similar case. The W-8 solution was a major undertaking, but it was important for us because of the caliber of customers we are dealing with. We go to them and describe what Tipalti does, and we touch upon the W-8, and we see customers responding very strongly to these updates.
KW: Obviously, the need for these solutions isn’t just in one segment, but I’m curious as to whether there are particular characteristics to these companies using your solution, other than that they have a lot of complicated supplier relationships. Are there any particular segments that saw a lot of early adoption?
CA: I thought, initially, the W-8 would apply around content — so think Shutterstock or Getty Images. I thought they would be the first — or only — customers. But the customers we’re actually seeing are just larger, more well-versed and informed and invest more heavily in ensuring compliance. I think if there’s anything in common among the customers is that they’re more mature in their lifecycle.
KW: What I think is very interesting is this whole idea of compliance and the want to remove risk from the organization. Particularly big companies are sensitive to compliance and getting risk out of their organization. IT sounds like that is one of the boxes you check with this capability.
CA: Right. One of our customers has 5,000 to 10,000 suppliers and has a very classic, not fancy accounts payable system. They are very concerned with their onboarding and vetting process, with KYC [Know Your Customer], with W-8, with all of that. What was surprising for us is that we were bidding for the classic accounts payable customers. The moment they understood what we are targeting and the moment that they understood we have a very clean solution for the classic AP department, they were all over it in a heartbeat. Maybe that’s what describes a connection between all of these companies. They’re more mature, they’re more experienced with compliance — and the cost of noncompliance — and they just don’t want to deal with it. They want someone responsible and systematic to take ownership of that. And especially larger organizations, which are often a collection of companies they acquire. They need everything streamlined, and we provide that for them.
[bctt tweet="The moment they understood what we are targeting, they were all over it in a heartbeat."]
KW: Remind me what your business model is. How do you make money?
CA: We make money in three ways — well, today, it’s even more than three ways. But one is the transactions-related revenue, which is divided into transaction cost and currency conversion. We allow either our customer or the supplier to decide how they want to get paid, through check or wire or PayPal or prepaid debit card or whatever the case may be. We present different costs for each of the options, and the supplier can select what option they want, and there are different charges. That’s one source of revenue. The other is that, while our customer may be spending $1,000 to a payee in Germany, that person may ask for us to send it in euros, and we will present the cost of converting it to that currency.
Part two of the platform revenue is with all of these processes we described. There is a basic platform revenue through a subscription fee, though it’s not very high. Then, we charge for different processes that we manage for our customers — the W-8 process, in which we charge per form collection. The form is highly involved. Many new customers require KYC on the supplier, so we can charge for KYC. But most of the revenue comes from transactions.
KW: That’s a really interesting model, and an interesting capability that I’m sure will increase performance as more business relationships move offshore, because that’s the nature of business.
One final question: What are you observing when you talk to your clients about B2B payments and innovation? There are very important pain points that you address, but are there other things your customer brings up in conversation that they would like to see solutions to? Is mobile a priority? Or is it simply taking on the basic task of moving money between accounts payable and accounts receivable.
CA: Mobile is just barely discussed, I must say. Some of our customers require the iPhone component that we allow them to imbed. But there are very few. So no, mobile is not in the B2B space. I think in our world, ERP goes so far and covers much of these workflows but then drops the ball. What ERP does is capture the invoice and the approval, but then at that point customers want everything else to be automated for them.