Kim Hau, Senior Proposition Manager for ONESOURCE Indirect Tax, Thomson Reuters explains what emerging technologies actually mean and how will they help today’s organisations to interact with tax regimes around the world.
Tax regimes, legislation, and government systems are evolving. The shift towards real-time interaction will not slow down anytime soon and this is impacting the tax departments of businesses around the world. As emerging trends change, the way government systems are deployed and the technology they use will impact upon tax legislations around the world. Multinational organisations need to keep pace and embrace technology while ensuring they still comply at the speed of business.
If businesses aren’t familiar with the acronyms RPA, AI or even heard the term Blockchain then they need to learn about them, fast. They are no longer phrases from a futuristic text but actual developments in today’s technology and businesses.
1. Robotic Process Automation (RPA) is, essentially, software robots that mimic human tasks across applications in a non-invasive way. If a process can be documented for someone else to follow especially if it’s a potentially error-prone process, high-risk or manually intensive, or done so frequently that it’s just not a good use of time, then it’s a good fit for RPA. Companies will find that some of their tax processes will fit this bill and free up resource to work on more important tasks.
2. Machine Learning and Artificial Intelligence (ML/AI) are two concepts often related and used interchangeably. Machine learning generally describes algorithms used by machines to teach themselves. Artificial Intelligence is used more broadly to describe the ways in which machines can perform tasks intelligently. Simply put it’s about taking a big population of data, learning patterns about that data, and then revising and training algorithms automatically to get better over time. Machine learning doesn’t have to be as sophisticated as self-driving cars. Think about how Amazon, Google, and Facebook use machine learning algorithms to improve recommendations, suggestions, and news feeds. Some of those capabilities are being applied to finance and tax today, particularly in areas where accurately categorising, grouping, or classifying large volumes of data frequently is part of the process. Ingesting data from a dozen different ERP systems and getting it lined up for tax compliance and reporting is an obvious place where it can make a difference to business.
3. Blockchain has been integrating into the business world far sooner than many predicted and as such there is a growing belief that it will radically change the way in which value is exchanged and how items are tracked and traded. Banking, insurance, voting, land registries, real estate, and stock trading are all examples of areas and industries where Blockchain is likely to impact.
While much of the publicity around Bitcoin is related to hackers and the cryptocurrency bubble, much of the real Blockchain activity seen so far is centered on the distributed ledger itself and the ways in which it’s going to disrupt middle men, or intermediaries, by connecting the transacting parties directly. From a positive point of view it is believed that Blockchain will speed up transactions and reduce cost while reducing fraud and increasing transparency.
At its core, Blockchain’s a distributed ledger that records transactions — and many of those transactions will be taxable events which is why it matters to tax. The details around Blockchain are complicated but suffice to say there’s a reason so many governments and industries are actively experimenting with Blockchain projects.
From a tax point of view, it’s likely that Blockchain will impact the tax department via governments and tax authorities pursuing digital strategies around e-government and that technology used by tax to stay compliant will have to adapt to this evolution.
With these developments in mind multinational companies should focus on incorporating technology trends that will assist in managing tax requirements rather than just putting out fires when the next major tax initiative comes along.
HMRC’s Making Tax Digital (MTD) is the perfect opportunity for businesses to be proactive and developing processes that are nimble enough to adjust to change. Tax should focus on what it can control, like the preparedness of systems and the scalability of processes, in order to adapt to the next change. Today, keeping pace with specific rate changes and regulatory modifications is largely a function of tax technology platforms. With HMRC’s October deadline there’s never been a more obvious time to implement solutions that enable and empower tax departments.
Robo-advice has become one of the more popular and prominent financial technology innovations of the last few years, and it’s easy to see why. However, Lester Petch, CEO at FinchTech, reckons there’s cause for concern, and below talks Finance Monthly through five reasons robo-advice may not turn out to be all it’s promised without confronting some hard-hitting issues.
In theory these platforms offer expanded access to financial advice and fill a widening RDR gap, at a lower cost and with superior ease of use. Citigroup estimates that assets managed by robo-advisors could reach a collective value of $5 trillion over the course of the next decade - and that is certainly something to aim for.
Excitement and optimism should always be tempered with pragmatism however, and practically speaking, there are reasons to be concerned. Many available and in build platforms promise innovation, efficiency, and accuracy, but have some major potential hurdles to overcome.
- Build cost and overspending on customer acquisition
Robo-advice start-ups are often unknown quantities, and must therefore build from scratch. Many rely on digital and social marketing campaigns, alongside referrals, o generate revenue. The problem is that these campaigns are often expensive - sometimes hideously so. Nutmeg, for example, posted a pre-tax loss of £9 million in the last fiscal year, even as marketing and staff costs hit £10.8 million.
It’s not altogether surprising that when cost of acquisition (CAC) for clients exceeds overall lifetime value (LTV), firms lose money. The assumption is that these expensive omni-channel campaigns will of course be successful, and eventually skew the CAC to LTV ratio back in the company’s favour. This is however a precarious position for any business to find itself in, even one with fantastic technology. Deep pockets are required.
In some cases the aim might perhaps be for the business to accumulate enough assets under management to enable a sale or exit, however this is also a risky strategy. Recent 2016 research by SCM Direct, a UK wealth manager, suggested most UK robo-advisers “will go bust before acquiring the sizeable assets under management to ensure their sustainability”.
- No real performance history
Sophisticated software is no substitute for experience. Many robo-advice platforms haven’t weathered any serious economic storms. Many have little performance history at all and rely on back testing. How much can you trust in a technology that has never been truly tested in the heat of battle, or weathered an event such as a recession or cataclysmic sell off?
- Limited suitability
Robo-advice platforms may be at risk of not always accurately assessing risk tolerance – which can cause serious problems in an economic downturn. Recent research from FinaMetrica found that 21.2% of the firm’s 100,000 customers incorrectly estimated their true risk tolerance by a significant margin, when using a psychometric risk test. Platforms could be vulnerable to recommend investments that are beyond or below the client’s capacity for risk, especially in the event that the markets exhibit extreme volatility.
- Reliance on algorithms
In an age of sophisticated and improving technology, reliance on this tech has led some to treat algorithms with an almost mystical reverence. Many are truly impressive, but can clients truly understand them? No algorithm is perfect, and many are unproven and untested in reality. They’re theoretically created to take human error or preference out of the equation, but human error can be a factor in their design and development. Could a mistake lead to catastrophic consequences for clients and do they know what they are buying into?
- Lack of differentiation
For all the talk of the market’s innovation and creativity, it’s often hard to tell one robo-advisor from another. The major differences tend to be cosmetic, a technological bell here, a branding whistle there, and little differentiating focus on the client’s needs and priorities.
Those robo-advice platforms that enter the market in the near future with more niche or specialised offerings aimed at specific market segments such as cultural groups or different age brackets, are more likely to gain traction, as well as potentially spend less on client acquisition
In conclusion, robo-advisors will need to overcome these problems and more to achieve long-term viability. This isn’t to say that the technology isn’t exciting, the need isn’t there or that it doesn’t have huge potential. The right platforms could potentially redefine the market, and digital investment management is a step in the right direction. If digital investment management platforms can iron out the kinks and focus on what works for their own business model, and more importantly their customers, there is a bright future ahead of them.
Just eight of the publicly listed companies cite the technology in recent annual reports.
Despite robotics and automation being at the forefront of many business conversations over the last 12 months, research announced by Redwood Software suggests that companies are not yet willing to reveal their plans.
Of the listed organisations, eight of them mention robotics in their most recent annual report, with just two including detailed references to both robotics and artificial intelligence (AI). Only insurance company Aviva, and support services company, Capita, outline automation to be a focus for them, despite many others also implementing the technologies across their business.
As large organisations look to streamline complex processes and develop a technology-driven enterprise model to keep up with more agile start-ups, robotics have the ability to assist them, improving both productivity and efficiency of operations. Neil Kinson, chief of staff at Redwood Software commented: “We know there are a lot of high-level organisations and brands across a variety of industries that are doing some sort of work with robotics and automation, so it’s surprising to not see this reflected in their annual reports. However, with business competition continuing to rise, everyone is working to gain the strategic upper hand and not give too much away.”
“Every business is undergoing some form of digital transformation, and many are using robotics as a means of achieving success when doing so. The problem, however, is that as the business case for automation continues to grow, the desire for organisations to establish themselves as innovators in robotics will only become more prominent. As companies seek to increase value by strategically streamlining core operations, we’re bound to see competing services and a variety of offers. ”
Both robotics and automation have been at their technological tipping point for the last few years, and are estimated to have contributed to around 10 per cent of GDP per capita growth in OECD countries between 1993 and 2016.
(Source: Redwood Software)
For our March Executive Insight section we also reached out to Sam Ferguson, who has more than 20 years’ experience leading business services companies operating in the technology and business process outsourcing sector. As CEO of EDM Group, Sam has direct responsibility for driving forward the company’s unique end-to-end outsourcing solutions to enable customers to improve operational efficiency, enhance customer service and reduce regulatory risk through digital transformation. Sam has more than doubled the value of the EDM business through a strategic acquisition strategy and organic growth that has strengthened EDM’s value proposition in its core vertical markets, across the UK and the US. Here he tells us more about the company’s ethics, achievements and aspirations for the future.
What are the company’s top three priorities towards its clients? What makes EDM different?
There seems to be a trend in the market currently, where procurement seeks out the lowest cost option, rather than looking for the value that a partner or service can bring. Our approach is different because we demonstrate how we can apply smart technology to business processes to create real business transformation significantly enhancing operational efficiency. A few examples of this are: the PRISM platform we developed for the mortgage industry, which reduces the time taken to carry out an initial valuation on a property from weeks to just seconds; and our digital pay-out solution which allows our automotive clients a car finance decision in ten minutes as opposed to days. Building on our heritage in document management, we are now building smart technology solutions based on artificial intelligence (AI) and robotics.
EDM Group is an advocate for ‘paperfreedom’ – how is the company transforming global businesses through digitisation?
Customers typically interact with a business via multiple forms - by letter, paper mail, email or perhaps via a website. Our Digital Mailroom technology transforms communications from these multiple channels into a standard digital format, so it can be routed, managed and shared by the right people. A paper document on a desk for example, cannot be read by a number of people at one time, it can get lost or misplaced and you have to wait for it to be copied and ‘shared’. If a paper document is digitised as soon as it enters a Digital Mailroom, it can be accessed by multiple people updating the systems simultaneously. So, we reduce inefficient processes based on people sharing information in serial, rather than parallel. While we see the use of paper documents receding by as much as 20% a year, we still manage 40 million pieces of paper a month on behalf of clients, so while paper is not disappearing, by digitising it we can manage it better.
Why is digitisation beneficial for companies?
Overall, the benefits for organisations are numerous: companies can free up critical resources to focus on core activity that adds value and delivers excellent customer service and an overall better customer experience. Integrated and innovative technology solutions that streamline processes and lower operating costs can give our customers a real competitive edge. Most importantly, our customers trust us with their critical data, so security and compliance are very high on their agenda.
EDM is in the process of building smart technology solutions based on AI and robotics – can you give some examples?
'Gone-away' and 'Return to Sender' letters are a good example of this. Customers often write to their bank informing them of a change of address, but typically organisations store customer data in silos by product. So when new product information or other correspondence is sent out, it goes to the old address. With robotics, you can 'train' your system to look for other instances of a change in a customer record and automatically update them all at the same time. Robotics can also intelligently look for the 'sources' of data that organisations provide, such as the DVLA, and match that to make sure customer data is accurate. The benefits are huge efficiency and cost savings and a much improved customer experience.
What have been your biggest accomplishments as CEO of EDM?
When I took over EDM in 2006, the business was not growing, but we have worked hard to build a global company that we can now be proud of, with 1,400 people and an annual turnover of £70 million plus. I’m proud of the technology that we develop and the technologies we apply to solve business problems. Our customers trust us to maintain a resilient business that can offer the best quality services, premises and people.
What further goals do you have?
We will continue to build on and develop what we have already started. We are taking our PRISM technology to the US mortgage lending market and will use our new financial year that starts on April 1st as the kick-off point for re-energising and continuing to drive EDM Group as a fast-growth business. I’m genuinely excited by the ability of our technology to disrupt markets for the good of everyone in the supply chain, including customers, and to stamp out inefficiencies in business processes that still rely on paper.
