How Can We Benefit From Mandated E-Invoicing?

By Mark Stephens, the CEO of Blackstar Capital

Electronic invoicing is at a tipping point. On the one hand, only a small minority of invoices that are sent globally are e-invoices. It is estimated that 75% of the world invoices are still transacted on paper, and those that rely on email instead experience similar inefficiencies. On the other, a recent trend of B2G mandates from governments around the world could potentially serve as a catalyst for a new wave of public and private sector e-invoicing adoption.

In India, for example, the Central Board of Indirect Taxes and Customs has regulated that e-invoicing will be mandatorily adopted by all companies with a turnover exceeding INR 500 crore. The decision follows many countries in Latin America, most notably Brazil and Mexico, where electronic invoices have been mandated as the only acceptable standard for all significant public and private commercial transactions.

In Latin America, these systems are largely being used as a tool to improve the government’s fiscal control and recapture lost tax revenue from economies with high rates of cash transactions. Brazil, Chile and Mexico have all adopted a ‘clearance model,’ where before invoices are sent, they are cleared by a government portal. Documents are therefore tax-compliant in real-time, reducing delays and fines, while significantly reducing tax leakage. India’s model is broadly similar to this, and the EU is also looking towards adopting something similar to the clearance model.

In 2019, all VAT-registered businesses in Italy started issuing invoices electronically using the country’s online exchange system. The decision in Italy, like many others, was again driven by tax efficiency. While these mandated government decisions can help achieve this, experts say the benefits of e-invoicing actually go well beyond this and it is time the arguments for mandating e-invoicing include the benefits for small, medium and global businesses too. The EU has been clear: mandated e-invoicing has the potential to not only save government processing costs, but also provide the stimulus for private sector adoption that can drive the environmental, cost, and efficiency benefits.

For businesses, the potential benefits are huge. Companies on average able to save between 50-70% of processing costs and 65% of invoice processing time. E-invoicing reduces errors, fraud and human intervention. A Wax Digital study found about 25% of time handling paper invoices is spent on resolving problems related to data entry and processing. As there are roughly 16 billion B2B invoices processed each year in Europe alone, Deutsche Bank projected that full adoption could lead to an annual saving of at least €260 billion. Organisations already using e-invoicing have been motivated to do so because of this huge cost efficiency aspect.

Mark Stephens

In the most recent Spring Statement, the Chancellor of the Exchequer described late payments as a ‘scourge’ and according to Siemens Financial Services, SMEs in the UK are missing out on over £250bn of working capital cash flow due to late payments. Xero found that businesses which use online tools get paid 33% faster than those which use paper invoices. Faster approval cycles result in better cash flow, which can be passed down the supply chain in cost and time savings. Finally, a mandated move from paper to paperless could have a huge impact on the global carbon footprint.

In addition to the impact that the reduction of late payments can have on the working capital of businesses globally, e-invoicing can provide a more efficient avenue for the funding of invoices.  Invoice financing is not new, but the level of transparency and depth of data accessible via modern e-invoicing platforms enable direct access for financiers to provide faster, efficient, de-risked, and innovative funding solutions in relation to the financing of such invoices. There is a growing belief that this will have a fundamental, evolutionary impact on the invoice financing space.

Public sector mandated e-invoicing therefore can be expected to drive private sector e-invoicing adoption and provide the gateway for the digitisation of many business processes. The blueprint for adoption was Denmark’s pioneering 2005 legislation that allowed vendors to submit invoices online, free of charge, using a SaaS service. The Danish were focused on the economic benefits of e-invoicing and decided the best way to influence behaviour would be to keep the barriers to entry as low as possible. By offering a free and open service, Denmark was able to voluntarily achieve the long-term commercial adoption of B2B e-invoicing in the private sector after mandating public sector B2G e-invoicing.

Now with the challenges of Covid-19, global governments will be more focused than ever on cost efficiencies and the need to guarantee tax revenues. Mandating e-invoicing, however, can also have huge knock-on benefits for the wider B2B business market. With a higher adoption rate across the private sector, mandating e-invoicing will provide huge cost and efficiency savings for businesses at a time when public and private finances are under significant pressure.