B2B Payments

The Middle Market's Expense Management Conundrum

Expense management technology is now a saturated market, particularly for the small business space – which is notoriously difficult to serve, because they are too small for large, enterprise-grade solutions, but too large for consumer-specialized tools.

There is another market segment, however, that similarly struggles to secure this Goldilocks effect, with products that aren't too small and aren't too large: the middle market.

According to Xavier Deleval, managing director at expense management technology firm MobileXpense, addressing the mid-market is particularly challenging because these companies need a level of sophistication to their technologies, but don't have the capacity to handle the development and deployment of proprietary systems.

"The overriding challenge is that a mid-sized company has similar requirements, but spread over lower volume, compared to a larger organization," Deleval recently told PYMNTS.

There are two key focuses for mid-market expense management tools, he said: infrastructure and regulatory compliance.

"Both are challenges, as the mid-market will see higher costs per individual unit," the executive explained. "Just think about a standardizing and cutting-edge IT system, and the resources needed to run it."

Perhaps one of the biggest challenges for this space is that the exact definition of the middle market isn't exactly clear.

"It is really who you ask," said BC Krishna, CEO and founder of MineralTree, in a previous webinar with PYMNTS' Karen Webster. "Some observers will define the market as $10 million in the top line to $1 billion. There are others who will state that the definition of mid-market can hinge on the segment of business that is being discussed."

What is clear, though, is that demand for T&E technologies is on the rise. According to recent data from travel and expense management software firm Certify, analysis of 2017 data showed a 4 percent decline in the number of corporates using a manual expense management system compared to the year before. But while only 20 percent of large enterprise companies are using a manual tool, that figure increases as the size of the company declines, with 64 percent of small companies relying on manual solutions, Certify said.

That means it can be difficult to gauge exactly where a mid-market company stands in its own digital transformation.

“It might be easy to think larger companies are better able to make the investments in software automation over their smaller counterparts,” the Certify report, released last February, stated. “However, many automated solutions today are available on a per-user or per-report fee, making even the most sophisticated technology affordable for the smallest of companies.”

But for the middle market, it might not make economic sense to charge on a per-user or per-report basis, and it's left a gap in availability of solutions for this industry.

As corporates of all sizes continue on their digital transformation journey, Deleval noted that payments innovation has become an instrumental piece of the puzzle in addressing mid-market expense management.

"Let me state upfront that those developments facilitate expense management and make it much more transparent for all businesses," he said. "We are more than welcoming them."

Deleval noted that MobileXpense is working to collaborate with other FinTechs and payments companies, with a focus on capturing payment data from electronic transactions in real time. "This will lead to the end of the paper receipt, and we expect that electronic receipts [will] soon become the standard for all business transactions."

To paint a picture of how far the expense management digital transformation has come, Deleval pointed to optical character recognition (OCR).

"We will soon look at OCR technology as we now look at the fax: a brilliant product, but with limited perspective," he said. "As the fax disappeared with email, OCR will soon give room for a fully electronic data exchange."

Enhanced technology is far from the only factor innovators must keep in mind when targeting the middle market, however. Regulation is a massive component, Deleval said – and with mid-market firms operating and traveling across various markets, the regulatory environment shifts from place to place.

"Your need for local skills and competence will be much the same as for larger enterprises," the executive stated. "For T&E, this is all about complying to avoid charges and finding opportunities to save money."

For the mid-market, T&E compliance is largely about taxes: "VAT, corporate income tax and also personal income taxes," Deleval explained. "Tax authorities consider overpayment of allowances and unjustified reimbursement of expenses as 'benefit in kinds,' subject to income taxation and Social Security contributions. Penalties would then be due by the company, but also by individual employees. This is a risk professional companies cannot afford to take."

In addition to avoiding consequences of noncompliance, this is an area that presents significant opportunity for companies to save money.

"Proper VAT accounting and compliance allows companies to recover VAT on a large part of their travel expenses, but that money is often left on the table," said Deleval. This is low-hanging fruit that can be easier to grasp than obtaining a 15 percent discount through supplier contract negotiations, he added.

The maze of regulations across jurisdictions and industries means that mid-level firms cannot ignore the importance of compliance – and neither can their technology providers. Investors appear confident in MobileXpense's opportunity to address the market: The firm announced $24 million in venture capital earlier this month, led by Fortino Capital through its new Digital Growth Fund.



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