Challenger banks have begun adopting the concept of embedded tax help. Some experts think this is a product that traditional banks could and should offer.
Software providers such as April and Column Tax partner with companies to integrate tax preparation and filing into their apps — sometimes for free — and make the experience smoother by pre-filling fields with customer data and customizing the flow to a user's situation.
The demand for embedded tax help from financial services providers is clear. A March report from J.D. Power, which surveyed 4,000 retail bank customers, found that 48% plan to complete their taxes themselves using software — or in rarer cases, without it — compared with 35% who will recruit a service or preparer to do the job for them. About three-fourths of respondents reported having some sort of worries about their taxes.
"There remains a wide-open space for both more fintech firms and traditional incumbents to offer services that could bring advantages to customers and their financial institutions," wrote Jennifer White, senior director of banking and payments intelligence at J.D. Power, in the report. "If a bank, especially one that has their customers' trust already, can help a customer make better tax decisions and ultimately get a better return, that customer will likely be far more inclined to stay in-house when using that return."
Square, the company behind the popular mobile payment app Cash App,
Tax decisions are closely intertwined with other spending, saving and wealth management tactics, which means banks are in a prime position to help customers complete their taxes with embedded software. For now, the help that banks extend to their customers typically comes in the form of web content and advice, such as Wells Fargo's Tax Center or articles that Bank of America publishes on its Better Money Habits site. The
Being able to show how challenger banks use Column Tax's technology "has been really helpful for some of the traditional financial institutions as they think about the next digital products they can offer," said Gavin Nachbar, co-founder and CEO of tax software company Column Tax.
April and Column Tax are among the startups capitalizing on the idea that taxes are part of a person’s financial life and banks are most suited to help with tax preparation and filing.
Leaders at these embedded tax filing companies point out that they use their integrations with neobanks and other services to prefill customer information and tailor their questionnaires to that person's unique situation. They typically integrate via software development kit or application programming interfaces. Both April and Column Tax have also built in mechanisms to ensure when end customers do pay, the cost will be transparent and without upsells.
In all cases, the clients can decide whether to offer it to their end users for free, for a fee or as part of a bundled service. For instance, RoarMoney account-holders at MoneyLion pay no extra charge to file their taxes through Column Tax, although the account does carry a monthly maintenance fee of $1.
"We don't collect payment in Column Tax. There is literally no way [for end users] to pay us," said Nachbar. "It builds trust with our partners and users."
April has integrated with Stripe and lets its clients either charge end users through its platform or process the payments themselves.
"A flat fee structure is one thing we insist upon," said Ben Borodach, co-founder and CEO of April. "Upselling doesn't exist."
Both companies will also share the information they have collected on taxpayers with their clients, so clients can cross-sell or promote other products, but only if the taxpayer consents.
There are limitations to these tax help services. April is primarily focused on federal filing, but state filing will come next year. It can't handle foreign income or complex business structures. Column Tax says there are some circumstances where it can't file, such as in Puerto Rico and some cases of foreign earned income.
White, of J.D. Power, believes that banks can help not only with preparation, but the lead-up to tax season, including decisions people make throughout the year to optimize their situation and the ability to better predict what they will owe. She says that banks can dispense tax advice and advertise their services most effectively when the messaging takes place both in person and in digital channels; when it is personalized (meaning, for instance, that financially vulnerable and financially healthy customers get targeted messages) and when it is delivered steadily throughout the year.
"All that guidance outside of actual tax preparation is something many customers are not getting in abundance," she said in an interview. "The biggest tax worry is not being able to predict whether they will owe more than planned or if they are not getting the refund they planned for."
While fintechs prosper when they focus on one or two things they can execute very well, "Banks have higher trust levels," she said.
Ronen Assia, managing partner at Team8 Fintech, the subset of venture company Team8 that co-founds fintechs (including April, which spun out of Team8 in 2021), expects to see more interest and more taxtech offerings baked into traditional banks in the next two to three tax seasons.
"Fintechs are technology- and product-led organizations, whereas incumbents are mostly about operational and compliance issues or challenges," said Assia. "From conversations I've had with C-level executives in incumbents, they get it, but it's a matter of being able to convince the bank this is something we should be dealing with."
He sees the taxes and financial institutions as a natural fit.
"We have to look at taxes as something that is alive within your day-to-day financial interactions and not siloed," said Assia. "A person's prime banking partner has good visibility into their entire or a big portion of their financial well-being."
