By Jérôme Bryssinck – Head of Government Solutions at Quantexa
The collection of Value Added Tax (VAT) represents an integral contribution to the budget of EU states. However, for national tax agencies, the battle to ensure that individuals and companies pay their fair share remains ongoing. A recent study revealed the enormity of this task, with research showing a gap of £131 billion (€147 billion) between the VAT that should have been paid, and what was actually collected.
There are several reasons for the disparity. Some of these, such as accounting errors, knowledge deficits or differences in interpretation are relatively benign in nature. However, there are also a number of actors who deliberately exploit the regulations around VAT to defraud the system.
Missing Trader Intra Community (MTIC) fraud – also commonly referred to as ‘VAT carousel’ fraud – takes advantage of the EU’s laws around VAT and has blighted the continent for some time now. While its true scale is unknown, most reasonable estimates put its total cost at anywhere from £17 billion (€20 billion) to more than £89 billion (€100 billion) annually. Even though VAT carousel’s do not defraud individuals of their own personal funds – this doesn’t mean that the general public is unaffected. Missing tax revenue means less to spend on important public services like schooling and public health, reducing their effectiveness in delivery. It also increases the tax obligations of honest people.
VAT Carousels: What do they look like? How do they work?
Throughout its existence, the EU has sought to minimise barriers to trade, making inter-state commerce as frictionless as possible. Indeed, today it’s incredibly easy for traders to export to other organisations inside the bloc. Unfortunately, this lack of obstacles hasn’t gone unnoticed by fraudsters either.
VAT Carousel’s take advantage of EU regulations around cross border trade. VAT is waived on intra-community transactions – this means that if an organisation chose to import a good from a company based in another part of an EU, then they would not be obliged to pay VAT.
As such, to create a carousel, criminal groups will begin by establishing a company (referred to hereon out as Company A). Company A will then import goods from a company in the EU (Company B). As Company A has bought goods from another EU based company (Company B), no VAT is paid. Next, Company A will then sell these goods on, this time to an organisation based in the same country (Company C) as Company A. Company C could be completely legitimate, or another company controlled by the fraudsters. As this transaction was conducted within the domestic market, VAT will be included in the sale price of the goods. Company A is then obligated to inform the relevant tax authority that VAT was included in the sale price of the goods. It should then pass the VAT on. However, Company A then disappears, withholding the VAT. The goods will then be passed through several different organisations – with this being done with the intention of obfuscating any investigation, putting a buffer between a company and the goods. In a Carousel, the final company in the chain (Company D) will then re-export the goods to another EU member state – which in many cases will be the original company that exported the goods (Company B). Company D will then reclaim the VAT, while Company B will re-use these same goods in another carousel scheme, hence the name.
Tackling VAT Carousels
VAT carousels can be incredibly difficult to combat. The sheer enormity of cross border trade which takes place in the EU complicates the job of an investigator. With billions of euros in goods and services being exchanged daily, determining what is legitimate from that of nefarious origin is nearly impossible to do with absolute certainty.
Further muddling the matter is the coordination required for effective prevention. Due to the nature of the crime, it’s necessary for different member states to co-operate. However, the data necessary for investigation and prosecution will often be stored in a number of differing and mismatched forms, held by various bodies, distributed across the length and the breadth of the continent.
Luckily, there has been some movement towards more effective methods of tackling the fraud. VAT fraud is one of the EU’s nine priority crime areas, and Europol’s Analysis Project MTIC was established with the sole intention of battling the organised crime groups often responsible for VAT carousel schemes. Furthermore, through implementing the Transactional Network Analysis system – a pan-continental risk analysis system – the EU has made great strides towards modernising and harmonising the VAT system, making it less vulnerable to fraudulent activity. However, more can be done.
Leveraging technology to create better defences
Technological development should enable tax authorities to become more proactive, and as such more effective in their combat of VAT fraud.
To ensure that this prediction comes to fruition, we need to improve our protocols for sharing and analysing data at the continental data. Data must be held in a uniform format, and states should look to create a central database where information can be accessed by any relevant body quickly and easily.
We can then apply data analytics technology to this information to provide wider context behind organisations and the transactions they engage in. For example, technology would be able to alert an investigator to a company with an annual turnover of €100K that was placing an order for €2 million worth of goods, as such an order would be suspicious. Machine learning technology could then be used to generate algorithmic risk models, which would then be deployed to better identify suspect companies. This could’ve formerly taken a human investigator hundreds of hours to compile, and as such, the efficiency of investigations will be far improved.
Member states should also seek to collect VAT receipts in a standard that is machine readable. Not only will this help with the issue of incompatible data formats, it will also help to place tax authorities in a position wherein domestic and external data can be combined to provide context.
The Road Ahead
It can be argued that the EU has historically struggled with fraudulent activity. Criminal actors had become wealthy by exploiting the same rules that have allowed trade to flow freely. To ever truly tackle VAT fraud, we need to see a greater use of technology, allowing for investigations to be undertaken more efficiently. We must also encourage greater cooperation at a pan-European level, as this will prevent cases from going cold when goods are moved out of a country. Only through this thorough approach will we be able to see the bigger picture required to combat fraud.
Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna
Payment processor Mollie reveals the most popular payment methods for Black Friday
Mollie, one of the fastest-growing payment service providers, has revealed insights into the most popular payment methods used this Black Friday. The data, which provides a year-on-year comparison of 2019, shows that payment methods allowing customers to pay flexibly – like ‘pay later’ service Klarna – has more than doubled in 2020. The study spans 101,000 merchants across Europe, primarily from Germany, U.K., France, the Netherlands and Belgium.
Black Friday trends:
- In 2019, Mollie saw a 36% increase in the overall number of transactions on Black Friday versus the previous year. In 2020, this shot up to a growth of 56% on the 2019 numbers, representing a difference of 20%.
- And this year, even in the four days leading up to Black Friday, there was a 58% YoY growth in transactions.
- Use of ‘buy now, pay later’ services on Black Friday (such as Klarna or ClearPay) has more than doubled from 1% of all payments in 2019 to almost 2.5% in 2020.
- Use of mobile payment methods on Black Friday is consistent on the previous year – 0.20% in 2019 to 0.25% in 2020.
“There is a lot of pressure on consumers’ wallets at the moment, which is making people look to payment methods that offer them financial security,” said Ken Serdons, Chief Commercial Officer at Mollie. “It makes sense that fintechs like Klarna, who have performed phenomenally well this year, have been so popular this Black Friday. The increase is in-line with this growing trend towards more flexibility in how consumers pay for goods.”
Beyond Transactions: The Payment Revolution
By Marwan Forzley, CEO of Veem
The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.
As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.
For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.
With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.
A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.
If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.
Putting the user in the driver’s seat
Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.
The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.
For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.
With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.
Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.
Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.
In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.
Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.
Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.
This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.
Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.
Separating the signal from the noise
2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.
As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.
Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.
The UK’s hidden payments crisis: why businesses should rethink their payments strategy
By Edwin Abl, Chief Marketing Officer at Modulr.
As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.
A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.
Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.
The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.
Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.
The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).
These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.
The 5 key steps UK businesses can take to drive payment efficiencies
There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:
1 – Locate hidden payment process inefficiencies
Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.
Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.
For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.
2 – Make payments key to stakeholder experience management
Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.
Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.
Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience
3 – Integrate and automate to support payment innovation
Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.
Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.
Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.
A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.
4 – Bring business leaders together
Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.
5 – Innovate by adding finance and payments to vertical services
Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.
This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.
Moving forward – engaging technology to drive efficiencies
If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.
However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).
By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.
To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.
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