Most of us are aware that in the past 2 decades, e-commerce has grown at an exponential rate and created giants like Amazon, Alibaba,
eBay and many others around the world. A wide range of statistics can be easily referenced to further show the potential for
e-commerce businesses to grow at an ever-increasing rate, yet the fact remains that this is indeed a huge business opportunity
for entrepreneurs around the world.
Of course, many of us around the world have realized this opportunity that exists and business models like drop-shipping, e-shops, Amazon FBA, etc. have emerged and become popular rather quickly. In recent times, drop-shipping has gained popularity massively in Asia but to start with an example, typically a drop-shipper used to be a tech-savvy businessperson in London or Berlin who realized during a vacation to South Korea that leather shoes crafted there are absolutely fantastic and yet much cheaper than even an average quality and moderately priced pair in Europe. Immediately it clicked that this is indeed a business opportunity. A few months down the line, after some hard bargaining and negotiations, an agreement to export these products to Europe is finally reached. And now comes the next stage, selling to the end consumer!
After much research, the conclusion seems to be that it would be best to begin by selling over Amazon as a pan-European FBA (Fulfilled by Amazon) seller since unlike other e-commerce giants, Amazon takes care of warehousing, logistics (even same day delivery – Prime) and has of course grown its Amazon brand to echo trust and credibility in the minds of its rather large consumer base across Europe. Amazon has also strategically created a variety of different warehouse hubs across Europe and officially operates 5 different marketplaces in U.K., Germany, France, Italy & Spain, which means that customers based close to these countries can also access the Amazon website nearest to them, order a product and have it delivered to, for example, Austria from Germany.
The best part is that Amazon deals with the entire logistics chain for the seller! This allows sellers to focus on their core business, marketing & advertising activities on Amazon, etc. Though, let us not be naive – there are indeed many micro-decisions and tasks involved with shipping, product labeling, customer support requirements by Amazon, business management, etc. which need to be streamlined before a seller can begin to solely focus and learn boosting visibility of the products to maximize sales on as I like to call it – The Amazon Universe!
To fully understand The Amazon Universe it is important to highlight some of the major challenges associated with running a cross-border drop-shipping / Amazon FBA business first. It is important to understand these before we explore solutions – so do not get discouraged and keep reading! As it often happens, every challenge provides a new business opportunity and there are many e-commerce / Amazon consultants across the world today who promise to make successful ‘5’ if not ‘6’ figure sellers out of anyone who takes their courses or uses their account management services, etc. While there are a lot of hacks out there, few of these service providers are well worth it and if you are able to establish a good cost-margin ratio, even after buying some of these services, you could generate excellent profits and grow your e-commerce business across other markets and channels like Shopify, Etsy, etc. In essence, multi-channel selling across markets is the dream!
However, none of these Amazon experts and consultants have been able to solve a major challenge which has restricted such drop-shipping businesses & Amazon sellers from growing to their full potential – high accounting costs and bureaucratic reporting requirements in Europe. In an attempt to provide a solution, many third-party software and technology products have been invented to collect VAT-related data and provide accurate information which can in turn be transmitted to the relevant authorities. Even Amazon has tried to create VAT calculation, accounting & reporting tools. Unfortunately, the truth is that none of these solutions are fully compliant, and to ensure smooth operation of an Amazon account and the business itself, any seller whether based inside or outside the EU (but selling in the EU of course) has to rely on human talent. The solution is using an external service provider for accounting and reporting purposes. This is not necessarily a bad thing since it allows the seller to maintain focus on the core business and outsource a set of administrative tasks to external experts. However, this creates a new challenge – since this involves manual work, as sales volumes rise, so do the book-keeping and reporting requirements and as a result time per manhour needed for this purpose. The end result is growing costs with growing volumes, which at some point can indeed be quite a lot, even eating into the business itself.
For sellers based outside Europe, in major hubs like South Korea, the U.S. and CIS countries like Ukraine, there are even more challenges since they cannot even sell over Amazon’s European marketplaces through their domestic companies and at times they need to find a VAT guarantor to be able to register as a VAT payer before being accepted as a pan-European Amazon FBA seller and most companies are either unwilling to act as guarantors since they would be penalized in case of any issues on part of the non-EU based seller or simply end up charging a hefty fee to act as guarantors. In a number of countries like India, South Korea or Ukraine, governments pursue protectionist policies because of which even though fintech solutions like Payoneer (official payment partner for Amazon), etc. are available, they are unfortunately restrictive and lose a large part of their utility as better banking alternatives. This further creates challenges – for example, in India, sellers cannot maintain foreign exchange reserves in their Payoneer accounts beyond a certain time-limit which makes it challenging for businesses to pay suppliers or even issue refunds at times if a product is returned without losing money on forex conversions. Also, local Payoneer users in India cannot receive payment cards even for their business accounts which makes it harder for sellers to conduct a variety of transactions imperative to running a global business smoothly. And last but not the least, as soon as sellers cross a certain transaction volume, they are required to supply a variety of additional documents which slows down business activities due to bureaucracy, which is even true for South Korean sellers. In Ukraine the situation is worse, where aspiring Ukrainian sellers cannot even sell on Amazon marketplaces in Europe from a Ukraine-based company.
There are even more micro-challenges in accessing suitable banking solutions which sellers face but these mentioned above are the biggest ones which really can make or break ambitions of becoming a truly global e-commerce seller.
A partial solution and yet more challenges
The solution clearly seems to be to have an outpost – another company based in Europe which can benefit from easier VAT registration, accessing the European version of fintech solutions like Payoneer. Yet again, this is not as easy as it seems, even for many people based inside the EU since incorporating a company in most European countries comes with more bureaucracy, rather large startup capital requirements, need for local director or employees, and the list goes on. For non-EU sellers, in addition to the above, this is compounded by the need to provide Power of Attorneys (PoA), be physically present in the respective country where they would like to open a company during the establishment process and sometimes even an obligation to physically have an annual board meeting in that country. Also, even though a seller based outside the EU might establish a company in the U.K. or Germany to be listed as a seller on the Amazon U.K. / Amazon Germany marketplace, they often cannot do so because they are no more considered distant sellers and find it difficult to get a VAT number unless they actually cross the minimum sales threshold of £70,000 to be registered as a VAT payer.
Clearly, this already pushes small or medium sized sellers away because they lack resources to be able to comply with all these requirements and simultaneously run their business, while paving the way only for larger companies to grow and that too after crossing all these hurdles. One might even say, it seems the game is rigged, if not necessarily by design then by default.
Enter Estonian e-Residency + 1Office
For those of you who may not be aware, Estonia is a rather small EU nation with 1.3 million people right next to Finland. Geographically, it is larger than Denmark, Switzerland or even the Netherlands. So you can imagine that in a large country, the small population is quite sparsely distributed and there are islands where maybe only 15 people live! This created a challenge, yet an opportunity for the government to provide public services to all citizens which led to an e-governance revolution in Estonia in late 90s. Fast forward to 2019, today Estonia has one of the most advanced e-governance platforms in the world with over 5’000 e-services which citizens can access at the click of a button ranging from e-police, e-law to e-health, e-prescription and of course even e-tax and e-business registry. In fact, it is the only country in the world where people can even vote over the internet. Tech in general really has been Estonia’s forte – Skype is an Estonian invention too.
In 2014, a few visionaries in the public and private sector got together and wondered that if Estonian citizens and residents could so easily access public services electronically from anywhere in the world then why could they not extend at least a section of these e-services to foreign businesses operating in Estonia to access the EU single market. This gave birth to the Estonian e-Residency program in late 2014, through which the government issues a digital-identity card, using which an e-resident who can be a national of any foreign country, can access close 1’500 e-services to establish and manage their business entirely online – digitally sign documents & contracts, conduct board decisions, declare taxes in Estonia, access virtual accounting services – all at the click of a button from anywhere in the world. Furthermore, unlike other countries Estonian does not mandate companies to have a local director or any local employees and even has one of the most business-friendly tax systems in the world – Estonian companies do not pay any tax on reinvested profits or undistributed income, which in essence implies no corporate tax. This was specifically done to encourage small and medium companies to grow as efficiently & quickly as possible. The best part is that digitalizing everything reduced the administrative load for the public and even the private sector by a huge margin, which meant that everything could be offered at a fraction of the cost compared to most other countries, making the Estonian and EU-business environment more accessible to entrepreneurs around the world.
But coming back to the matter at hand – how does this help drop-shippers and Amazon sellers wanting to sell in Europe? Well, the first advantage is clearly the time & money cost. To be successful and provide easy company establishment and management services like virtual accounting, virtual office, etc. the government decided to create a highly collaborative public-private partnership (PPP) model. This is where a service provider like 1Office comes in, which was in fact one of the private-sector contributors during the creation of the e-Residency program itself. For e-commerce sellers, 1Office understood the challenges listed above, and created the first ‘one-stop-shop’ solution where a seller who would like to start selling on Amazon Europe ope (starting with Amazon U.K. or Amazon Germany) from anywhere in the world can access the following:
- E-Residency Application and Establishment of company together with virtual office & contact person services – Sellers can easily apply for e-Residency via 1Office. Once they receive their e-Residency digital ID-card, 1Office automatically processes the registration of the company in Estonia and also provides a virtual office address and even a contact person service, which is needed in case any documents need to be received on behalf of the founder(s) of the company.
- Business banking with Payoneer – For me, this is one of the biggest advantages especially from the perspective of a seller based outside the EU. Firstly, because Payoneer is the official payment partner for Amazon and the process to get paid is quite seamless. Secondly, any seller can access the full spectrum of features which Payoneer provides since it is no more an Indian or South Korean seller using Payoneer but technically speaking – their Estonian company which has access to the Payoneer account. This means access to multiple currency wallets to receive revenues and store currency in EUR, USD, GBP, AUD, CNY, CAD, MXN or JPY. Payoneer even provides mass payout solutions for large volume transactions and an international payment card for the business account which provides sellers a variety of options to withdraw funds or pay third parties. The best part is that everything happens online and because of a partnership with 1Office, even the accounting process is user-friendly! Lastly, Payoneer even has special offers for 1Office customers which are an added bonus on top of everything else. This model has also major benefits in managing money too. The value of western currencies like USD, EUR, etc. fluctuate a lot and generally appreciate in comparison to Eastern currencies like INR, CNY, KRW, etc. so being able to maintain forex reserves in wallets with Payoneer can indeed be a huge long-term advantage. Besides this, if the Estonian tax system applies to your business, then you can always reinvest these funds into your business, buying more inventory, sales & marketing on Amazon, etc. without any tax-related outflows and this can indeed create a compounding effect for the business itself too. And of course, just the simple fact that everything can be managed online saves time and as a result, money!
- VAT registrations and Virtual Accounting – Learning from the challenges listed above and since 1Office actually has offices in 6 countries in Europe, including the U.K., sellers get a U.K. or German VAT number rather easily to begin selling on Amazon U.K. or Amazon Germany as pan-European FBA sellers, since their Estonian company is considered a distant seller. The biggest advantage though is that all book-keeping, accounting, etc. is also taken care of by 1Office for a fraction of the cost compared to many other service providers. The cherry on the cake – this accounting cost is fixed and does not increase as volumes rise since the process is automated using in-house solutions created by 1Office!
- Amazon account creation or conversion for existing sellers – To make it easier for first-time sellers, 1Office also helps open the Amazon U.K. or Amazon Germany account once the Estonian company has been created and registered as a U.K. VAT or German VAT payer, respectively. In case of existing Amazon sellers, 1Office also helps convert the account and register the Estonian company under the same account sellers have been using to sell in Europe. This avoids any challenges existing sellers might face when choosing to use this ‘one-stop-solution’ and this also takes away the hassle or worry for existing sellers of creating a new account and transferring their inventory, re-building the brand on Amazon marketplaces, etc.
To top this all off, 1Office has even included the cost of applying for the e-Residency card for first time e-residents, truly creating a streamlined solution where sellers do not need to complete multiple processes to start selling! In the near future, we also plan to offer sellers multi-channel solutions to sell in other EU marketplaces together with additional consulting services to even grow their e-commerce business using proven sales and marketing techniques.
For more details, please visit 1office.co/amazon or write to firstname.lastname@example.org.