The payments industry is on the cusp of a revolution.
Thanks to the Federal Reserve’s new instant payments initiative FedNow, transactions will soon be faster, more secure and more cost-effective than ever before. This initiative promises to benefit consumers, small businesses and banks of all sizes. As such, given its potential to completely overhaul the way we make payments in the years to come, many opportunities, as well as challenges, are likely to arise.
Say hello to the tax man
The IRS estimates that nearly two-thirds of income goes unreported due to a lack of third-party reporting. A significant portion of small and mid-size businesses (SMBs), which are highly dependent on hourly workers, typically handle payments via cash and, similarly, consumers do the same with many of their everyday service providers (i.e., gardeners, dog walkers, etc.). The key factor contributing to this is independent contractors’ reliance on instantaneous payments.
The Fed’s initiative has opened up a window for innovation, the effects of which could be realized as early as next year.
With the advent of FedNow, contractors can now get paid immediately, specifically via ACH, which will result in many transactions moving away from cash as the primary medium of payment. Yet, while this is cause for celebration among independent contractors, increased transaction traceability brings with it increased tax reporting requirements and liabilities.
Moving forward, we foresee a heightened focus on assisting independent contractors with tax management navigation, as well as financial planning.
Main Street can now compete with Wall Street
Smaller financial institutions like community banks can now offer the same level of service as larger banks or modern fintech companies and support further migration to online banking. In effect, this could reduce the need for physical locations, due to the reduction of check flow and improve the margin profile for these smaller financial institutions that have historically shouldered the cost of a large retail footprint.
Given the absence of risk in overdrawing one’s bank account or paying overdraft fees (as banks verify fund levels before initiating instant payments), this will greatly diminish the costs that banks currently incur for settlement fees and fund verification.