This is an excerpt from Finextra’s report, 'The Future of Digital Banking North America 2023'.

Digital banking is now very much in the mainstream, with the World Bank reporting that two-thirds of adults globally make or receive digital payments. However, with the successful rise of digital banking in North America, vulnerability has become a common feeling. Furthermore, the Covid-19 pandemic proved to be a catalyst for the rise of digital banking, but while this has proved beneficial for its aims, it is not without its downsides.

An increased number of people were encouraged to open digital bank accounts, when they would have otherwise stuck to banking at their local bank branch. We can see this partially in the number of branches which are closing, S&P Global found that in 2021 there was an increase of 38% in bank closures across the US. A spokesperson for Wells Fargo noted that: “Most [customers] no longer visit a branch in-person to accomplish simple self-service tasks like depositing a check, opening an account, or moving money.” While this is difficult to measure across the entirety of North America, which includes countries such as Honduras, El Salvador, or Haiti, it can be said that this trend has become increasingly apparent in the US.

Moreover, this has exposed consumers to technology they may not have been overly familiar with at a time of global tension. In this environment, there has been an increase in fraud scams such as authorised push payment (APP) and romance scams, for which the US Federal Trade Commission (FTC) reports that a total of $547 million was lost.

The US market share of fraud detection and prevention and is projected to reach $190 billion by 2030. This can be seen as a response to the increased fears around fraud.

On this point, Wells Fargo commented: “As the pandemic has proven, we have reached the tipping point for the way customers want to manage their money, with digital adoption growing at an unprecedented rate. From mainstream consumers to large commercial clients and everyone in between, our customers live on their mobile devices, accomplishing every task and planning their next important life moment all via digital.”

John Pitts, head of policy at Plaid, noted how “fraud mitigation needs to be at the centre of innovation into digital finance, because trust and confidence are central to consumers’ expectations of their financial service provider. This is an area where consumers would benefit from some regulatory evolution.”

Beyond uncertainty leading to increased use of new technology and subsequent valid paranoia around fraud, it is evident that consumers can be at risk as a result of a variety of forms and payment methods.

While notable, but not inherently bad, the increased use of financial tools such as Buy Now Pay Later (BNPL) may lead to risky behaviours, yet the area where there is the most risk is in cryptocurrencies.The FTC reported that since the start of 2021, 46,000 people in the US have reported losing over $1 billion in cryptocurrency scams, with a median loss of $2,600.

Even outside of cases of fraud, cryptocurrency can leave some feeling more financially vulnerable. The Pew Research Center found that of the 16% of US adults who have invested in, traded, or used cryptocurrencies, 46% reported the investments had done worse than expected. Education around managing money is more important than ever today, particularly due to the impending recession expected to hit the US.

Other North American countries are also facing the reality of recession. Mexico had its growth forecast downgraded by the Bank of America to 0% from 1%, and Moody’s has predicted the country cannot avoid recession next year. Many island nations in North America were greatly impacted by Covid-19, but have seen growth in their economies since. For example, the Inter-American Development bank finds in their 2022 Latin America and Caribbean Macroeconomic Report that while 2020 was the worst single-year recession suffered by the Caribbean, these countries experienced a bounce back in 2021. However, although the Caribbean experienced 2.4% growth in early 2022, the Ukraine war has impacted commodity prices which could lead to a return to recession for the region.

Deloitte reported that 46% of CFOs expect the North American economy to be in recession by 2023, and a further 39% believed it would be in stagflation by next year.

In Amit Parikh, EVP of banking platform services at Green Dot’s view: “Consumers’ financial stability is being tested now more than ever, with a recession looming on the heels of the panic and uncertainty created by the pandemic."

Innovation

Positions of vulnerability can be the birthplace of innovation, providing a creative environment to make positive change.

On their approach to innovation, a spokesperson from Wells Fargo mentioned that they “keep a close eye on the marketplace, pivot quickly, and understand that failure, paired with learnings, is critical to the innovative mindset.”

They added: “The investments we are making build on the digital foundation for the company and reduce risk, while also creating digital-first experiences and embracing technology to evolve ahead of customer expectations…we believe new digital experiences will ultimately improve customer satisfaction, and allow our bankers to focus on more complex needs for customers.”

Pitts commented, “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.”

Here Pitts touches on one of the major areas of innovation and seemly hope for a better financial system in North America which our respondents discussed, that of open banking and its next step —open finance.

The US has taken more of an industry-led approach to open banking, unlike that of the UK and Europe which took a regulatory approach. There has been some guidance from US regulators, such as president Joe Biden’s executive order in 2020 which aimed at allowing consumers to change banks more easily.

In Canada, a roadmap has been laid out for open banking to become operational by January 2023.

In 2020 the Banco de Mexico published their rules for open banking as part of an update to their 2018 ‘Fintech law’. Additionally, Mexican fintech Finerio Connect has this year collaborated with Ozone API and Visa to help support financial institutions in the Caribbean navigate open banking.

Rohit Chopra, the director of the Consumer Financial Protection Bureau (CFPB) previously commented, “CFPB will be looking to harness technology in ways that give American families the power to more easily fire poor-performing banks. We can only accrue the benefits of competition if customers can vote with their feet. Unfortunately, switching bank accounts isn’t easy. It involves new account numbers, new debit cards, updating direct deposit, updating auto-debits, and much more. If America can shift to an open banking infrastructure, it will be harder for banks to trap customers into an account for the purpose of fee harvesting.”

Wells Fargo argued that the “growth of open banking has been driven by increased consumer demand, particularly from Gen Z consumers who are the more invested in digital solutions than any past generation. This is reshaping how digital solutions are built – with a focus on speed and flexibility without sacrificing security. The future of financial services includes distribution and getting products to customers in experiences that are most relevant to them…the goal is to use APIs to bring the bank to our customers in experiences most meaningful and relevant while providing greater access, transparency, and control.”

Pitts shared this perspective on a changing digital atmosphere: “Plaid helped found the Open Finance Data Security Standard (OFDSS) because financial services industry is undergoing a broad digital transformation, representing a significant change in how financial services are delivered, and the profile of companies that provide them. Existing data security standards were not designed specifically for modern, cloud-native delivery models or the resource constraints of early stage companies. OFDSS was created to help raise the bar for data security across the digital finance ecosystem while also continuing to foster innovation.”

Connected this is another key area of innovation, that of embedded finance. Open banking allows the distribution of data to be much easier, and open finance takes this a step further providing more open data. Embedded finance allows for non-financial actors to use this data to provide financial offerings. Bain & Company and Bain Capital forecast that embedded finance transaction value will double in the US to $7 trillion by 2026.

Parikh explained Green Dot’s role: “Embedded finance and banking-as-a-service (BaaS) are putting the power in the hands of the end user and forcing both financial and non-financial companies to innovate quickly to provide customers the best experience possible. Consumers are demanding seamless access to their money and convenient experiences where banking and payments are embedded into the flow of their daily lives. They might now have a dozen apps or platforms for managing their money and have the power to switch at any moment should they not get the convenience they are expecting.”

Outlook

In many ways Covid-19 had made quick learning for a lot of companies. The pandemic may have equipped them with the lessons of the benefits of digital banking for how to cope with the current circumstances of recession and inflation.

With these innovations under their belt, the current rocky conditions may not be as bad as they initially seem. These could simultaneously provide greater protection for customers, and a roadmap to better digital banking. Customers may struggle with continued vulnerability, but there is the opportunity for controls to be in place.

Parikh offered some advice on the role of fintechs in this continued innovation: “Fintechs can and must rise to the occasion – as we have with accessible digital banking, contactless payments, and more tools aimed at serving the underbanked – to accelerate the rate at which we bring innovative products to market to help support and empower consumers facing continued challenging circumstances. Products like earned wage access, overdraft protection (when designed and offered properly), and credit tools can serve as a lifeline providing the cushion and flexibility customers need, while also helping them build smarter money habits for the long-term.”

Parikh continued to say: “We see vulnerability as a strength and an asset. The more ‘human’ you can be – among your colleagues and on behalf of your customers – the more connected and inspired your environment and ultimately your outputs. When it comes to product design – particularly for low- to moderate-income consumers, gig workers, and small business owners: people with real challenges and tremendous potential – having a deep understanding of the end user’s feelings throughout the customer journey is the key to success. Of course, this may be uncomfortable at times, but bringing vulnerability to the table is critical if you want to inspire, innovate, and deliver for your customers.”

Despite this positive outlook, it should be noted that there are still outliers in the areas of vulnerability, particularly for the position of digital assets. Cryptocurrencies remains a concern without much of a plan for its future control and protection of customers. The US government is moving towards protecting people from the potential pitfalls of cryptocurrencies, but these themselves could be so stringent that they are a block to innovation.