Businesses are investing in financial technology for the future

Climate change, geopolitical uncertainty, and rising financial stress are just a few of the major risks confronting the global economy, according to Brookings. To successfully navigate these and other challenges, finance and tax departments need to be nimble.

Leading up to the Hanover study, many businesses were particularly concerned about economic uncertainty, the lingering effects of the pandemic, and the supply chain.

In the 12 months prior to the Hanover study, inflation, recession concerns, and economic disruption had a major or moderate effect on the finance and tax teams of 45% of the global businesses surveyed.

They’re not alone. According to a separate survey conducted by Avalara and Reuters Events between December 16, 2022, and January 26, 2023, 62% of European businesses surveyed expected recessionary effects to worsen, as did 52% of North American businesses.

The worst-case scenario hasn’t materialized — yet. Many economists predicted a mild recession in 2022, only to push it back to 2023 and then kick it further out. But if the U.S. is experiencing an “‘Energizer Bunny’ economy,” as former Treasury Secretary Lawrence Summers said in October, many businesses believe the positive trend can only last so long. 

The Hanover survey responses suggest that accounting, tax, and finance teams are preparing for the effects of recession to worsen. And the economy isn’t their only concern. 

The ongoing COVID-19 pandemic is still impacting businesses on both sides of the Atlantic, according to the Hanover study. The pandemic has had a major effect on 31% of respondents and a moderate effect on 30% of respondents. Only 11% of the finance/tax teams surveyed said the pandemic had no effect in the past 12 months.

Globally, the pandemic is affecting the finance/tax teams of large companies more than those at small and midsize companies. Of the enterprise businesses surveyed, 68% are significantly likely to have been impacted by the ongoing pandemic in the past 12 months. Just 52% of small and midsized businesses said the same.

North American businesses seem to be feeling the negative effects of the pandemic more than their European counterparts, as the chart below shows. 

European companies are more stressed by supply chain troubles than businesses in North America, according to the Hanover study. However, as shown above, kinked supply chains are impacting businesses in North America too. 

This fact should surprise no one. Supply chain issues can crop up at any time, for a host of reasons. The stay-at-home policies implemented by many countries during the height of the pandemic led to factory closures and empty shelves. The Ever Given container ship created a supply chain bottleneck when it wedged itself into the Suez Canal for six days in March 2021. Heavy container ships are unable to get through the Panama Canal because an ongoing, severe drought has caused low water levels. If it’s not one thing it’s another.

Faced with economic uncertainty, supply chain challenges, and lingering doubts about the pandemic, many of the accounting, tax, and finance teams surveyed are increasing their focus on budgeting, forecasting, and tax compliance activities and deprioritizing growth.

Fifty percent of all finance/tax teams surveyed said “improving budgeting and forecasting” was a main priority over the last 12 months, while 57% said it will be a main priority in the next 12 months. Getting more granular, two-thirds of small and midsize businesses and half of enterprises surveyed listed budgeting and forecasting as a top priority for the next 12 months. 

Risk management is outpacing growth as an area of interest for the finance and tax teams surveyed. While “enabling growth” was a main priority for 37% of the finance/tax teams over the last 12 months, just 33% cited “enabling growth” as a main priority for the coming year. Meanwhile, 39% of respondents cited “risk management” as a top priority for finance/tax teams in the past 12 months, and 42% called it a priority for the next 12 months.

If emphasis on tax compliance is just inching upwards overall, as the above chart shows, there are pronounced geographic differences: In the next 12 months, 41% of North American businesses are prioritizing transactional tax management and compliance, as compared to 14% of European companies. 

The financial technology or fintech industry provides a variety of financial services to a broad range of customers via the cloud and other technology. Many of us use fintech in our day-to-day lives without a second thought, connecting to our financial institutions via our phones and reimbursing friends through Venmo or similar apps. Likewise, a growing number of businesses are using fintech to streamline one or more financial services, such as accounting, payment processing, or tax compliance. 

For example, the fintech sector is helping to revolutionize the accounting profession through real-time financial analysis, which gives accountants access to the most up-to-date information. Fintech companies like Amazon (Amazon Pay), Apple (Apple Card), and PayPal (one of the first fintech companies) are streamlining payment processing services. And Avalara is helping businesses worldwide reduce the burden and cost of tax compliance.

Many of the businesses surveyed are choosing to invest in financial technology and automation to cope with external pressures and achieve internal goals. 

Indeed, 75% of the organizations surveyed are investing in new technology, while 50% are increasing their use of automation. The larger the business, the more likely it is to invest in new financial technology: 85% of enterprise organizations are doing so, compared to 64% of small and midsize companies.

Furthermore, the study found that finance and tax teams tend to automate some routine tasks more than others. 

Activities related to payroll are most likely to be automated today: Of the businesses surveyed, 26% handle payroll entirely or mostly manually, while 41% mostly or entirely automate payroll. Another 33% use an even mix of both manual and automated processes. 

Exemption certificate management and audit management tend to be the least automated processes, for now. According to the Hanover study, 53% of businesses handle exemption certificates manually, while only 13% automate exemption certificate management. Likewise, 59% of businesses rely on all manual or mostly manual processes for managing audits; a mere 10% automate audit management processes.

That’s starting to change. Hanover found that 31% of surveyed businesses are initiating automation for managing audits. 

Automation could help finance/tax teams handle the most time-consuming responsibilities, such as tax management (21% of respondents) and internal audit/SOX compliance (20% of respondents). And indeed, tax challenges and audits are among the top reasons why finance professionals are investing in technology. A whopping 72% of businesses surveyed by Avalara and Potentiate in 2021 had been audited in the previous five years. Common causes of negative audit findings included failure to register in states where the business had a tax obligation (nexus) and missing exemption certificates.

North American businesses are more likely to automate certain essential functions than European businesses, as the chart below shows. The reason for this difference could be because North American businesses are more familiar with the intricacies of sales tax nexus and exemption certificate management than their European counterparts — even those doing business in the U.S. 

Automating certain tasks doesn’t seem to affect hiring, at least for finance and tax teams. Overall, 67% of finance/tax teams have an approved budget for hiring and staffing, and only 26% of companies surveyed say they’re executing tasks with less people.

Yet businesses are using technology to improve efficiency. The right tools can help them do more, more effectively, with less. 

Of the companies surveyed, 71% are investing in more tools and solutions to close overall efficiency gaps, while 69% are automating and optimizing processes specifically related to tax management.

The size of the organization matters, however. More enterprise organizations (80%) and their finance/tax departments (77%) are investing in financial technology tools and solutions than small and midsized companies (59%) or their finance/tax teams (58%). 

Can automation and financial technology help businesses overcome some of the external and internal challenges they face? The Hanover study suggests that it can:

• 74% of finance/tax departments rate themselves efficient in producing financial statements, and 38% of companies automate these tasks
• 69% of finance/tax departments rate themselves efficient in managing payroll, and 41% of companies automate these tasks
• 68% of finance/tax departments rate themselves efficient in managing receivables and payables, and 36% of companies automate these tasks 
• 49% of organizations rate themselves as efficient in managing exemption certificates, and 53% manage exemption certificates manually

Hanover encourages organizations to invest in new financial technology solutions in response to their most pressing challenges: The pandemic for North American organizations and supply chain disruptions for European organizations when the survey was conducted. Hanover also encourages North American organizations to automate exemption certificate management and other manual tasks. 

Want to know more? Get the State of finance market trends report.

Minor updates have been made to this post, which originally published in November 2023.