The R&D Tax Aspects of Financial Technology Services

By Charles R Goulding, Sean Brophy, and Adam Starsiak

Financial service companies have encountered a new climate demanding active responses to market changes following the Great Recession. This has prompted a push towards modernization of systems and adoption of more agile principles of business. In addition, a new cadre of technology based financial companies has emerged.  These tech-based financial services compose the fintech industry and are hoping to disrupt existing financial industry players.

The Research & Development Tax Credit

Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

• New or improved products, processes, or software
• Technological in nature
• Elimination of uncertainty
• Process of experimentation

Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent. As of this writing, both the Senate Committee on Finance and the House Committee on Ways and Means have recommended extension of the R&D tax credit.

FinTech - The Transition to Digital Finance

        The financial industry suffered a near-collapse following the events of the 2007 Great Recession.  The end result was an industry faced with a few key challenges.  While the government demanded increased capital requirements and greater consumer protection, the market demanded a need for modern technological upgrades in order to meet the standards of an increasingly digital and online economy.  Compounding these challenges was the fact that it all had to be done at a low cost.
Searching for a solution, the industry turned to emerging technology companies to provide the products and services necessary to meet the demands of the post-recession world.  One particular industry segment commonly referred to as fintech (financial technology services) has answered the call.

What FinTech Companies Do

        Fintech companies provide a range of products and services necessary to both front and back ends of financial operations. Many services are powered by cloud computing, while others are technological solutions to industry problems involving security, risk management, compliance and marketing to customers/clients.
 

FinTech Companies and Products

Azimo - London, U.K. - provides users with a money transfer service that allows them to use mobile applications to transfer money to accounts of cash collection locations, as well as home delivery and mobile wallets. Azimo last received $10 million in Series A funding in March 2014.

BNY Mellon - New York City - The Bank of New York Mellon has its own FinTech investments - working to create integrated, efficient, and modern banking systems like Digital Pulse - a Big Data analytics platform.  BNYMellon hopes to streamline and improve its services and technology base through its own fintech lab investments.

Capital One Labs - New York City - uses Design Thinking to build new products and experiences for Capital One customers through new technologies and services. Among Capital One Labs' projects is Spark Pay, an integrated mobile transaction, inventory tracking, and deal offering system for small businesses.  

CurrencyFair - Dublin, Ireland - is an international money transfer service that seeks the best exchange rates for users whom transfer money through their system. With this, users save money through lowered transfer fees associated with traditional wire services. CurrencyFair has received $4.8 Million in funding over 7 rounds of investment.  

Digital Reasoning - New York City - specializes in cognitive computing. They build software (such as their flagship product SyntheSys) that understands human communication, gathers as much of it as it can, and provides analysis on it through visualization. Essentially, Digital Reasoning is a Big Data Service company that provides its systems to clients for the use of conducting analysis and monitoring risks and trends.  Digital Reasoning has received $24 million in Series C funding during 2014.  

Enigma - New York City - is a Big Data and analytics company that offers clients access and analysis of their accumulated mass of public records data. Enigma is committed to connecting their data to people for processing and analysis.  Enigma had received $4.5 million in Series A investment funding in January 2014.

Funding Circle - San Francisco, California and London, U.K. - is an online lending marketplace for small business owners. Funding Circle was founded in 2010 and has since lent $600 million to small businesses. It expects to lend $600 million globally in 2014. Funding Circle had gained $65 million in Series C funding as of July 2014.  

Kasisto - New York City - makes intelligent virtual assistants for mobile devices and tablets for clients.  Kasisto's virtual assistants create a more personal and intuitive platform for customer service and support while providing a central point for a company's external and internal mobile applications. Customers use assistants created by Kasisto to conduct transactions as well as manage and view account information, while users within the company use the assistants for support and productivity tasks.

Lending Club - San Francisco, California -  is a peer-lending service that hopes to bring a more efficient, transparent and customer-friendly alternative to traditional banking. Lending Club is exclusively online and hopes to leverage efficient technology to control costs while further distancing itself from traditional banks.  Lending Club had obtained $24.5 million in Series C funding in April 2010.

Prosper Funding LLC - San Francisco, California - is a peer-to-peer lending marketplace. Users choose a loan amount and propose and post a loan listing. Investors then choose any loans that meet criteria and invest in them. Borrowers make monthly payments while investors get a portion of these payments. Prosper had received $70 million in Series C funding in May 2014 and has recently surpassed $2 billion in loans with over 156,000 borrowers and 78,100 investors.

Pymetrics -New York City - specializes in using scientific techniques used in Neuroscience to conduct analysis on data to create a next-generation job marketplace. Pymetrics also specializes in creating games to train employees and conducts assessments for career analysis, improving recruiting efforts. These games develop characteristic profiles for people that can be used to understand an employee's and a company's own strengths.

RevolutionCredit - Irvine, California - is a consumer engagement firm that provides free financial education to consumers while providing Big Data services to financial companies. Financial companies can then use of this behavioral credit data to make credit-giving and lending decisions.  Revolution Credit had received $1.8 million in Angel funding and $10 million in Venture funding.

TransferWise - London, UK - is an online international money transfer service that aims to be more transparent, less expensive, and provide quicker money transfer services. Users upload money that they wish to transfer and TransferWise systems makes the transfer by locating compatible users in the opposite directions to create efficient market exchanges, after which the money is then transferred to the intended account. Investment firm Sequoia Capital has recently invested $50 million into TransferWise - a strong statement given Sequoia's culture of long term investments.     

SoFi - San Fransisco, California - is a marketplace lender and the largest provider of student loan refinancing. SoFi rounds out its loan programs by providing career services and entrepreneur programs to its users. SoFi had received $80 million in Series C funding in April 2014.

Wells Fargo Labs - New York City - is Wells Fargo's fintech lab which aids in developing internal technologies and assists in cultivating investments in tech startups. One project currently underway involves deploying mobile banking applications to create faster and easier mobile banking for its customers.

Expected Growth of FinTech

        Fintech is a fast growing industry, particularly in New York City. A recent report by Accenture, PLC. , a leader publisher in the fintech Industry, has shown that New York City is the city with the greatest local gains in recent years and has the greatest potential for growth in the next 4 years. If the previous years’ trends are any prediction of future industry growth, NYC is poised for success.  The recent Accenture report demonstrated that the five year normalized growth rate for the fintech industry through 2013 was over 500%.  With this, the industry in New York is expected to grow to as large as $600-$800 million by 2018.  Moreover, the larger U.S. fintech industry could reach $4.7 billion by 2018.

Conclusion

        With the changing economic and technological climate, financial services and the technologies that run them will continue evolving to meet newer and faster-changing demands. The agility required in the financial markets of the future will require new innovations in technology and systems. The research and development necessary to create these technologies and systems produces opportunities for the R&D Tax Credit.

Article Citation List