The rise of RegTech is not by chance: There is an undeniable link between regulatory changes and technological innovation, and that link has a profound impact on FinTech and the financial services market. As the risk of noncompliance evolves and grows for corporates, many turn to technology to ensure adherence to complex regulatory demands.
Europe is an epicenter for both regulatory shifts and FinTech innovation. Take the market's VAT legislation, for example. Complex tax law has been linked to the rise in eInvoicing in B2B commerce, according to Julie Park, managing director of VAT and customs duty at The VAT Consultancy.
“One of the things that is very interesting for me, as a VAT specialist, is seeing how the use of eInvoicing is becoming much more common in Europe and Asia Pacific – and is becoming mandatory in a few locations,” she recently told PYMNTS.
She pointed to Latin America, which enacted some of the world's first eInvoicing mandates for the purposes of tax rule enforcement.
“The rest of the world, quite frankly, laughed at those systems, and said it was impossible to deal with, and way over the top in terms of what was needed,” said Park. “Fast-forward five years, and we’re now in the position that businesses realize they need to use eInvoicing platforms against the backdrop of tax authorities – certainly in Europe – recognizing those systems in Latin America were actually a really smart way of managing tax fraud and making sure the right amount of tax is paid by all businesses in the supply chain.”
Tax fraud is a massive threat of corporates. Reports in Bloomberg last year said Amazon and eBay are facing criticism for their inability to remove sellers from their platform that have been found guilty of VAT fraud or error in the EU. The publication said VAT fraud costs the EU $1.9 billion every year.
VAT regulations are behind the latest updates to procure-to-pay company Direct Commerce, which offers a range of services for B2B suppliers and buyers to facilitate business. The upgrades, which The VAT Consultancy advised upon, ensures the eInvoices that suppliers issue are VAT-compliant and include the necessary data for each EU member state based on its particular VAT rules.
Park noted that VAT compliance is “critical” for B2B suppliers, as well as an automated system that ensures compliance significantly reduces risk for businesses throughout the supply chain. It can be a challenge, however, for companies that are used to paper invoices to make the shift to eInvoicing technology.
“This is about ensuring the eInvoicing platform produces VAT-compliant documentation,” explained Park. “That's critical, from the supplier's perspective, because they need to have awareness of what the invoice needs to look like, having produced paper invoices historically.
“It's important that the system is user-friendly and designed from a VAT perspective,” she continued. “Some suppliers haven't had an electronic platform before, and there is a degree of nervousness that they have lost control of a really important document they historically would have been responsible for.”
But the risk of noncompliance affects suppliers and buyers alike, from penalties and fines to companies missing out on VAT credit.
Leela Gill, VP of operations at Direct Commerce, told PYMNTS that this is behind much of the technology evolution in B2B trade and procure-to-pay.
“There is a real push in the global market to move to electronic invoicing,” she said. “We're also seeing a real need for Fortune 1000 companies to have a global platform and global footprint.”
That global expansion exposes companies to even more regulatory risks, however. In Europe alone, other legislative efforts – particularly around data – are also impacting the procure-to-pay space, and driving innovation of P2P technologies, too.
“Regarding data analytics and security, from our perspective, that is a must-have,” said Gill. “You must have secure ways to transfer data through encryption. You must have data analytics for products and reports. Security is at the forefront of everyone’s mind. It’s the way the industry is going – you have to have that in your product offering these days.”
That trend is echoed in the regulatory landscape, too, with data protection a cornerstone of GDPR – another legislation that heightens companies’ risk of non-compliance. Research released last year by consultancy, tax and audit company RSM found that 92 percent of companies in Europe are not prepared for GDPR – and 28 percent are entirely unaware of the regulations, which come into effect this May.
As companies digitize operations and operate on electronic portals to manage supplier and customer, payment and other sensitive data, adherence to data protection regulations will be of paramount importance.
The procure-to-pay space is also closely linked to the alternative finance market, as financing products like supply chain finance and dynamic discounting integrate into procure-to-pay platforms like Direct Commerce’s. Gill explained that the company is collaborating with lenders to enhance this piece of its product offering, while dynamic discounting – which sees suppliers requesting early payment for a discount – is one way to combat late payments.
The European Commission's Late Payment Directive is another piece of regulation intertwined with the procure-to-pay space and the FinTech that enhances it. Data released in 2016 from Atradius found that 90 percent of businesses across Western Europe are affected by late payments.
“Dynamic discounting is a tool that facilitates early payment,” Gill said, adding that trade finance solutions are also aligned with the emergence of accounts payable technologies. “It is a very up-and-coming product line, and we’re seeing a lot of demand for it. A lot of global companies are taking advantage of dynamic discounting and supply chain financing to give them a rapid return on investment with the accounts payable automation tools they’re implementing.”