Fintechs create tech that lets banks offer tax prep help

As Americans rush to file their taxes by April 18, some fintechs are offering banks tax-prep technology they can extend to customers going forward.

Embedded tax service fintechs such as April and Column Tax point out that they and their financial institution partners can nudge customers into making better financial — and tax-savvy — decisions year-round.

They’re not alone. A raft of fintechs are gearing up to offer embedded tax services to financial institutions of all stripes. A report from Deloitte and Team8, a venture company based in New York City and Tel Aviv, argues the time is ripe for such a movement. The tax code has become more complex over time. Growing segments of individuals face non-standard tax situations, such as gig workers and cryptocurrency investors. The availability of open application programming interfaces, data aggregators and open banking initiatives make embedded tax services more feasible, says the report.

Banks could gain a competitive advantage and improve customer retention by offering taxes as part of a one-stop-shop for financial services, said Ronen Assia, managing partner of Team8. As an added benefit, banks would get their hands on more data to better understand their customers and capture their refunds as well.

Today, challenger banks such as Chime and Current tout tax refunds that come up to five days early. Traditional banks advertise discounts on tax preparation software. That is largely the extent of help consumers can expect from their banks when it comes to preparing and filing taxes or collecting refunds.

“The traditional mindset is keeping taxes siloed,” Assia said. “But I’m willing to bet in four to five years from now, this is table stakes.”

Why are banks not further along in enabling this technology? When surveying a variety of financial institutions, “The number one thing we heard is, ‘we think this is super hard to build which is why we haven’t done it ourselves,’” said Ben Borodach, cofounder and CEO of tax solutions company April, which was created by Team8. “The second thing we heard is, ‘tax [prep] is this missing piece in the puzzle. If I had it in an intelligent way, I believe it would reduce my churn, increase my lifetime value to my customers.’”

Borodach spun April out of Team8 in the summer of 2021. It can be embedded through a software development kit into a financial institution’s mobile app or serve as a standalone application where data from the institution is passed through on the back end. The experience will vary based on the nature of integration, but users may see an invitation online to get help filing their taxes and perhaps to authorize their bank to prefill forms using the data it has on hand. April will also use this data to customize the questions it asks when guiding users through tax preparation.

At other times of year, users may see nudges or notifications to optimize their tax withholding, offset capital gains by harvesting a loss, or contribute more to a retirement account.

“We are hoping to drive this idea of a CPA in your pocket and that tax is a 365-day-a-year activity,” said Borodach.

So far, April is working with Propel, a company that builds technology designed for low-income Americans, to offer tax services to its members. Propel is behind Providers, an app and debit account for recipients of government benefits such as SNAP. Borodach hopes to be working with a dozen more financial services providers by the end of this year.

Column Tax takes a similar approach. It is building APIs and SDKs so its financial partners can offer tax filing directly in their apps and websites. When partners share information with the user’s consent, Column Tax can prefill forms and build custom questionnaires.

The company, which is just over a year old, is running a pilot with its first customer now. It is targeting challenger banks and companies that center on financial wellness or deal with independent contractors initially, but expects to also work with more traditional banks.

Like April, the company sees itself as a partner that makes recommendations year-round, perhaps in the form of alerts or monthly summaries, rather than only swooping in at tax season.

“We are building a connection between the filing experience and the rest of your financial life,” said Gavin Nachbar, the cofounder and CEO of Column Tax. “We can help you think about the withholdings on your paycheck, investment and savings.”

The financial partner will decide whether to make the product free or attach a cost. Nachbar points out that an advantage of Column Tax is there is no upsell midway through the process. Instead, it will filter out a user whose situation is too complex upfront. (For instance, the software is not equipped to process certain tax documents.)

There have been other attempts to integrate taxes and banking.

Block, then known as Square, acquired Credit Karma’s tax business in November 2020 to bring free tax preparation to its Cash App customers.

“We saw a pretty obvious opportunity in acquiring Credit Karma,” said Jack Dorsey, CEO of Square in a fourth-quarter earnings call in 2020. “Our road map consists of making sure that we’re focused on the most critical needs for our customers…. Tax is obviously a big part of that.”

Challenger banks for small business owners and freelancers are likelier than consumer-facing banks to incorporate some tax-planning tools. Abound, a company that provides an API for self-employment tax calculation, quarterly tax payments, and more, works with small-business digital bank Lance and several other financial institutions, including one of the ten largest banks in the U.S. It helps small-business owners and self-employed users automatically detect taxable income, calculate and set aside taxes into a dedicated withholding account, and submit quarterly estimated tax payments.

Spruce is a challenger bank that H&R Block launched in January, but it doesn’t offer tax-related benefits beyond early access to refunds.

Despite all these new efforts, Assia doesn’t foresee the legacy tax-prep players fading away, even if banks can take on many use cases with the help of fintechs.

“The legacy players like Intuit have a meaningful advantage in dealing with the very complicated stuff,” he said.