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The internet now plays an increasingly important role in the lives of people around the world in areas such as e-commerce and social media.
Tech

What will 2020 hold for small businesses as world’s digital economy grows?

●    Firms switching from bricks-and-mortar set-up to online focus can target bigger potential markets, but also face many hurdles

●    SMEs should find local partners abroad and be aware of different global tax, privacy, data sharing and payment security rules

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People’s increasing connection with the internet is driving the collection, use and analysis of huge amounts of personal, social and business digital data at ever faster speeds.

The online flow of data, which grew from about 100 gigabytes (GB) per day in 1992 to more than 45,000GB per second in 2017, is expected to hit 150,700GB per second by 2022, the United Nations Conference on Trade and Development’s Digital Economy Report 2019 predicts.
The growth in internet use is particularly noticeable in Asia; just over 10 years ago almost four out of every five people in Southeast Asia had only limited access to the internet, but now the region is home to 360 million users – with 90 per cent of them connected through their mobile phones, according to the e-Conomy SEA 2019 report compiled by Google, Temasek and Bain and Company.

The same report describes Southeast Asia as having a gross merchandise value of US$100 billion – a figure that is tipped to increase to US$300 billion by 2025. 

The main drivers are e-commerce, ride-hailing, online media and online travel — with fintech and financial services as fast-growing segments.

In response, enterprises are shifting from pure bricks-and-mortar operations to a partially or fully digital (and cross-border) set-up. 

Companies can now hire 100 per cent remote staff, accept payments in multiple currencies and sell and ship beyond their countries of registration. Even tax filings and loan applications can be sent and verified online.

While money-making opportunities abound in the digital economy, this “new frontier” may pose a challenge for businesses and legislators.

Digital economy’s challenges and pitfalls

How can it be measured?

The traditional economic metrics used to determine opportunities are becoming outdated, leading to immense discrepancies between numbers and actual conditions. 
For example, World Bank figures show that in 2018 Hong Kong’s trade made up 375.99% of its GDP while Singapore’s trade accounted for 326.19 per cent of its GDP. 
Yet Singapore’s status as a major hub for regional start-ups (and Hong Kong regulators’ efforts to make up for lost time) are not reflected in these numbers. 
Additionally, free online products, platforms and information sources are not factored into GDP; that metric considers only what people paid for in goods and services. 

Ultimately, big government decisions regarding where and how much to invest in technology across sectors are made with incomplete knowledge. Start-ups and established enterprises are filling in the gaps – but there is also a glaring imbalance.

Different jurisdictions and regulatory frameworks

The rules and regulations regarding digitalisation differ among the 21 countries featured in the World Bank’s Digital Business Indicators pilot programme. 

The application of taxation in the digital economy also varies per country and region, and between service providers or small to medium-sized enterprises (SMEs). Service providers can pass on the added expenses to its users, while SMEs will end up paying dearly either way.

In Asia, the Inland Revenue Authority of Singapore proposed in July 2019 the exemption of cryptocurrencies from the country’s 7 per cent Goods and Services Tax (GST) even as it pursues GST on imported digital services from 2020 onwards. 

Malaysia is still on track to implement a 6 per cent digital tax for e-commerce platforms, including foreign providers, starting in January next year.

Indonesia’s pro-taxation policy for SMEs in e-commerce was met with loud opposition and was quickly revoked. It would have involved a 10 per cent value added tax, plus a sales tax on luxury goods that could have gone up to 200 per cent for certain items.
Some European countries such as Italy, Turkey, the Czech Republic, Poland, and Austria are at various stages of the planning, draft, proposal, approval or non-adoption process. France is implementing its own regulations for big tech, and the United Kingdom will impose a 2 per cent levy on major players by April 2020. 

In comparison, digital taxation moves by the European Union (EU) and the Organisation for Economic Co-operation and Development have stalled.

Small businesses operating internationally, or planning to do so in 2020, must know which country or territory is doing what for which issue and the limits or guidelines imposed on players of their size. 

Resurgence of trade protectionism
Superpowers such as the United States and China are closing previously open doors and are embroiled in trade protectionism. Other countries, whose goods have received higher tariffs, such as  the EU, Canada, and Mexico, have retaliated with their own levies on US products.

Most of the trade-war headlines cover the impact on larger companies, but smaller businesses are paying the price as well. 

SMEs reliant on global supply chains, especially on Chinese suppliers, are seeking government exemptions. Last September the Trump administration granted exemptions to “more than 400 types of Chinese products”.
Even so, the trade war has already caused a chain reaction. Businesses now are looking for options elsewhere and paying more to meet pre-protectionism quotas, leading to less profits overall and lower small-business confidence. 
As seen in China, SME employment and consumer spending has dipped in response. Internet and gaming companies have also been hit by both job cuts and new gaming regulations.

Data sharing and privacy
Data privacy concerns are widespread, but are particularly found in consumer-facing industries built almost entirely on private-data collection and usage, such as social media, mobile apps, travel and retail.

The EU’s General Data Protection Regulation (GDPR) is the most strict approach so far. It imposes stringent technical and operational rules on how, and under what conditions, global businesses can access, use, store and secure EU and European Economic Area citizens’ personal data. 

Fines for non-compliance can reach €20 million (US$22.2 million), or “up to 4 per cent of the company’s total worldwide annual turnover from the preceding financial year, whichever is higher”.

Bigger digital-economy players have the resources to adapt to the GDPR, but what about small businesses? The answer: not always. 

The 2019 Small Business Survey, conducted by Geneva-based Proton Technologies, found that millions of small European businesses invested between €1,000 and €50,000 in GDPR compliance.  The survey also showed that these firms are also:

●    Unsure if they meet the law’s guidelines on simply explaining data processing and having a “lawful basis” for using consumer data
●    Not well-versed in data-security concepts such as end-to-end email encryption and cloud storage, and
●    Fearful that small businesses are easier targets for GDPR compliance and fines
Payment security and verification
Every online payment firm has called for identity verification, data acquisition and anonymisation and stringent security and storage measures.

For now, businesses can create their own digital payment platforms in-house – and control the security and verification aspects as well – or use third-party services to facilitate payments. 

Venture capital-backed B2B firms leveraging AI, machine learning and blockchain for finance can also connect smaller enterprises to higher-level applications at flexible pricing levels. 

Many venture capital companies have made hefty investments in AI and fintech, and Chinese fintech firms, in particular, have gone global for their expansion.

Identifying and tapping into opportunities
As tough as the digital economy can be for SMEs, it also creates ample opportunities for scaling or pivoting in 2020.

Strengthen commitment to to digitalisation
Cross-border enterprises can help emphasise how digitalisation gives their clients savings in both expenses and the time spent on documentation and compliance. 

The key is to also pay attention to the current differences in government regulations and industry standards. 

Singapore joined OpenPEPPOL in January 2019 as its first non-European member. Companies and government vendors doing business in that country can now connect to the PEPPOL (Pan-European Procurement On-Line) network and ensure that their e-invoices include considerations for Singaporean tax laws and GST charges. 
Singaporean companies on PEPPOL can also submit compliant documents following the 13 other country-members’ disparate digital procurement systems.

Alternately, smaller businesses going digital in 2020 can review which platforms they could use for every operational task, as well as the annual costs and automation benefits. 

Hong Kong firms, for example are considering switching to cloud-based accounting platforms, while accounting practices want to provide more complex services and use more automation apps.

Connect with local networks to expand
It is important for smaller companies and new digital entrepreneurs to connect with in-market associations and networks to help them grow. 

Industry associations and networks may seem as if they are  added competition, but in reality these are ready-made, supportive communities for recommendations and growth.
Xerocon Brisbane 2019, held in September, is Xero’s annual flagship event for accountants and bookkeepers
Xero’s massive Xerocon and Roadshow events are just one example of using professional links as a marketing and growth tool. These international gatherings provide updates about Xero as a cloud-based platform and enable members of the accounting and bookkeeping community to meet one another and collaborate. 

The digital economy may be built on online platforms and transactions, but for any business the “human-first” approach should always take priority.
Reopen (or keep open) trade borders
Trade protectionism produces many negative long-term effects and seems to favour local enterprises and industries. 

Yet free-trade agreements are a better strategy. Countries can specify their own trading terms and support the flow of goods and services crossing their borders. 

A lack of tariffs and non-tariff barriers means that prices and processes remain reasonable and competitive and, inevitably, consumers and businesses enjoy a wealth of choices.

Set up clear protection practices
It can be tough for resource-lean SMEs to enact their own anti-money laundering (AML) and data protection practices. But it is necessary for them to comply with different nations’ laws and GDPR, to ensure they conform with legal requirements.  

SMEs without sufficient resources can outsource AML and data-protection compliance. For example, New Zealand accountants were required to adapt to new AML measures last year. Full online platforms, service providers and start-ups were already well-positioned to get them up to speed in terms of streamlining paperwork and knowing the legal guidelines.

Go digital to survive
As technology further breaks down barriers to doing business, SMEs now increasingly find themselves securing work outside their countries of registration and earning in different currencies. 

Because they are outside their usual cultural and social environment they may feel overwhelmed when dealing with business concerns and performance overseas.

Yet instead of closing ranks, it is crucial to encourage SMEs to digitalise for their business survival and longevity. 

This shift will equip business owners with oversight, data intelligence and more seamless operations suited for a global business.
 

 

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