While the debate on whether or not we’re entering a recession might still be intense, the fact is economic growth is slowing and interest rates are rising. These conditions create a challenging operating environment for businesses and can significantly impact their growth prospects. The ‘emerging’ market of embedded finance presents an attractive opportunity for additional revenue streams. Payments opened this market, but there is much more to discover.
Embedded finance might not be the right solution for every company. However, it has proven to be incredibly well suited for platforms. In the recent years, many ecommerce providers have started embedding payment solutions into their offering. At the same time, emerging and established payment service providers have expanded their offering to include value-added services. In many cases, those embedded services are ultimately enabled and supported by established businesses with extensive subject matter expertise.
Embedded finance also adds value for the customer. Businesses are increasingly relying on their platforms and payment service providers to remove challenges associated with operating and scaling businesses globally. They are looking for a fully integrated set of services that enables quick market access and allows focus on the core activities.
One of those services is indirect tax compliance. The shift from traditional to online commerce introduced serious challenges to governments that typically rely on indirect taxes to fund a significant part of their budget. It became increasingly difficult to ensure tax compliance, particularly on remote sellers operating across state or country borders. Governments have responded with new regulations to address these challenges. However, these laws have imposed a considerable burden on businesses and marketplaces, primarily through increased costs and reduced opportunities for market expansion. This presents an opportunity for ‘embedded tax’ solutions.
At each ecommerce checkout transaction, consumers and businesses converge to facilitate a sale. At this point, all relevant merchant, product, and customer information is available to accurately calculate the required tax amount. Embedding existing tax solutions at this point would be the first step and a common path to introducing new solutions to the market - making existing processes more efficient by integrating different offerings to amplify the joint value proposition. However, this would only provide a partial solution, as many challenges with tax compliance would remain unresolved. For a comprehensive solution, payment service providers and tax software companies would need to fully integrate. By bringing together payment capabilities and the technology and experience with managing the intricacies of tax compliance, they can collect tax at the point of sale and shift the indirect tax liability from merchants to experienced service providers.
The regulatory framework is in place, the technology is available; the only question is: Who will be the first to disrupt the entire industry?
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