This is an excerpt from the Finextra report, ‘The Future of North American Digital Banking 2023’.
Post-Covid-19, North America has seen significant market growth in e-commerce and digital payment systems. Financial institutions are determining how to move forward where non-traditional payment systems are being introduced.
To face this wave of change, banks need to determine what is valuable to preserve, and what must be adapted to keep up with new developments in the financial industry. At the forefront of these changes is the need to strengthen fraud mitigation strategies, manage new regulatory requirements, create products with better user experiences and meet the needs of small businesses and the creator economy.
Banks currently move along offensive or defensive lines when it comes to regulation and compliance. Contextualizing the situation, Kathleen Pierce-Gilmore, head of payments at Silicon Valley Bank, explained: “Some financial institutions may feel like they’re more on the defensive because of regulatory enforcement actions they’re still recovering from, while others may seem more on the offense because of efforts integrated to seize opportunities. Some may even play defense as well as offense, where different parts of the organization see the same change from two different points of view. An example of this is embedded payments; product and innovation teams at financial institutions that want to serve in the space this may take a culpable position while compliance and risk management teams may play more of a defensive role.”
Cyber security and regulation in the US
In the first half of 2022, US crypto policy is primarily focused on establishing regulatory guidelines around digital assets and stablecoins. Under the Biden Administration, it appears progress is being made toward establishing a government department on digital assets.
The Biden administration issued an Executive Order to Ensure Responsible Development of Digital Assets in March to protect customers and maintain financial stability. Financial watchdogs such as the Federal Reserve and the Securities and Exchange Commission (SEC) have actively enforced this policy.
With increasing reliance on digital platforms, the threat of cybercrime is also becoming more of a concern. Cyber security governance and management testing is underway for firms in the US to accelerate the bank’s technology methodology when it comes to cybercrime. Ransomware and cyber defense are increasingly important to US authorities due to ongoing geopolitical tensions following Russia’s invasion of Ukraine.
Commenting on fraud mitigation and compliance, Pierce-Gilmore commented: “Fraud mitigation is key and, in fact, central to much of the innovation we’re seeing and exploring. Whether for our core treasury management solutions or for our embedded payment customers, fraud is at the center of the discussion. While understanding and managing the regulatory expectations under which we operate and ensuring compliance with the various policies that govern us is complex and resource-intensive, I wouldn’t call it a barrier. That’s how we ensure a secure and robust system and is an important part of the role we play for our customers. They rely on us to keep them operational, so I see doing that well as part of our value proposition.”
Cyber security infrastructure such as the State and Local Government Cyber Security Act and the Federal Revolving Cyber Workforce Program Act have been integrated across sectors in the US, identified by the Department of Homeland Security and the Canadian Department of Public Safety have also adopted cyber policies by implementing Cyber Security Action Plans their nationality.
Canadian banking authorities are working to modernize payments 21 by adapting to non-traditional payment systems. The Bank of Canada and OSFI are prioritizing sustainability and climate change projects to transition the financial system to a low-carbon economy. This development shows that the Canadian financial industry is adapting to new trends and technologies emerging in the financial sector internationally.
Due to the changing nature of the financial landscape, risk assessments conducted by supervisors are adapting to take advantage of modern technologies such as AI, data analytics and cloud computing, according to the Federal Reserve. The way banks assess risk and protect customers needs to be amended to current technological developments to stay ahead of cybercriminals and online fraudsters.
John Pitts, head of policy at Plaid, stated that fraud prevention is at the heart of innovation in the digital financial sector: “Trust and confidence are at the heart of consumer expectations of their financial service providers. This is an area where consumers would benefit from some regulatory evolution. In the closed world of finance, regulations treat fraud as a one-to-one issue between consumers and their banks; but in open finance, consumers rely on multiple banks and apps to manage their financial lives, and fraud can best be addressed by updating regulations to reflect this new networked reality.”
The US Congress has established regulations on compliance and anti-money laundering perimeters, adding new digital services under consumer protection and the Bank Secrecy Act. Further action has been taken to strengthen data infrastructure, cyber resilience and third party risk management among financial service providers. Financial regulations on divisive topics such as DeFi and stablecoins are expected to be determined by the results of the upcoming US midterm elections. In addition, US financial regulators are expected to continue to emphasize and prioritize their climate response.
Digital assets in Central America
Central America has seen the emergence of digital wallets, crypto usage and QR-based transactions. Mexico in particular is a big market for growth for neobanks, with big European players like Revolut expanding into the country. Mexico has also announced its intention to develop a central bank digital currency (CBDC) before 2024.
In 2021, El Salvador became the first country in the world to adopt Bitcoin as legal tender, since that move however, the country has suffered around $40 billion in losses due to the lack of technical availability among businesses and the general population. President Nayib Bukele is working to stabilize the price of Bitcoin.
Due to restrictions placed on the economic activities of Central American countries, digital assets are popular in Cuba and Nicaragua, with over 100,000 of the 11 million Cubans having interests in some form of cryptocurrency. Cuba’s central bank approved licensing in April for virtual asset providers after allowing cryptocurrencies for personal use in 2021.
Many central bank currencies in Central America are pegged to the US dollar, which limits the financial and economic power of national governments. Through digital assets, Central American currencies can bypass their dependence on the US economy and foreign remittances.
As these developments show, cashless societies are coming to fruition in Central American countries, and digital banks and fintechs are targeting unbanked and underbanked populations. Central American countries are leveraging digital assets to their advantage through the development of financial inclusive services that appeal to the unbanked.
However, with the advent of new banking technology comes new potential opportunities for fraud. According to F5 Networks, Latin America is particularly vulnerable to cybercrime and fraud schemes. The country of Panama recently regulated eight major cryptocurrencies for private business and public use, and as a result Panamanian lawmakers are taking action to prevent fraudulent crypto activities and money laundering, with Congress firmly putting in place financial transparency rules and safeguards for enforced by supervisors.
Improve customer experience in payments
As fintech and banks increasingly seek new ways to work together to provide more effective services to customers, financial institutions in the US are taking steps to assess how fintech is changing the financial industry and fundamentally changing the way people do banking.
Authentication processes, embedded banking services and credit assessment technology are among some of the new developments that fintech can offer the industry, and as a result, banks need to adopt an offensive strategy to remain competitive.
Pierce-Gilmore stated: “While we are always working to make our actual user experience better, we always start with a deep understanding of the founding team, the business idea, the business model, the company’s key constituents (including investors), what it needs to succeed and what can we do to support customers from the very beginning through their lifecycle.”
A Wells Fargo spokesperson added that the bank ensures consumer experience by carefully leveraging scale and deep customer insight. “We have a strong opportunity to synthesize various customer relationships with financial institutions and provide a cohesive experience. Our goal is to continue to build trust and deepen our customer relationships by solving complex problems and creating faster ways to do business.”
Financial institutions in North America receive robust legislation and regulatory guidelines to enforce healthy competition, financial stability and limit cybercrime across digital assets. The current focus in Central America is the development of secure and managed cryptocurrency use, while Canadian and American financial watchdogs are tightening the reins of the financial industry to enforce upcoming policies. Looking ahead, North America is prioritizing crypto policies, advanced cybersecurity technologies and enhanced user experiences for consumers to support future digital banking innovations.