This is an excerpt from Finextra’s report, 'The Future of Digital Banking North America 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 confront these waves 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 this change is the need to strengthen fraud mitigation strategies, manage new regulatory requirements, create products with improved user experience, and cater to the needs of small businesses and the creator economy.

Banks are currently moving on either offensive or defensive lines when it comes to regulation and compliance. Contextualising the situation, Kathleen Pierce-Gilmore, head of payments at Silicon Valley Bank, explained: "Some financial institutions might feel like they are more on the defence because of a regulatory enforcement action that they are still recovering from, while others might seem more on the offence because of a concerted effort to take hold of an opportunity. Some might even be playing both defence and offence, where different parts of the organisation are looking at the same change from two different viewpoints. An example of this would be embedded payments; the product and innovation teams at financial institutions are looking to serve this space may be taking the offence position while the compliance and risk management teams may look to play more of a defence role.”

Cybersecurity and regulation in the US

In the first half of 2022, US crypto policy has primarily focused on establishing regulatory guidelines around digital assets and stablecoins. Under the Biden Administration, it appears that progress is being made towards establishing an governmental department on digital assets.

The Biden Administration made an Executive Order on Ensuring 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 been actively enforcing these policies.

With an increasing reliance on digital platforms, the threat of cybercrime has also become more concerning. Cybersecurity governance and management testing are in progress for firms in the US in order to bring banks’ technological methodologies up to speed when it comes to cybercrime. Ransomware and cyber defences are increasingly important to US authorities due to geopolitical tensions currently at play after the Russian invasion of Ukraine.

Commenting on fraud mitigation and complying with regulation, Pierce-Gilmore commented: “Fraud mitigation is top of mind and, in fact, the key point of much of the innovation we are seeing and exploring. Whether it is for our core treasury management solutions or for our embedded payments clients, fraud is at the centre of the discussion. While understanding and managing the regulatory expectations by which we operate and ensuring adherence to the various policies that govern us is complex and resource intensive, I would not call it a hindrance. It is how we ensure a safe and sound system and is a key part of the role we play for our clients. They are counting on us to ensure they can operate, so I see doing it well as part of our value proposition.”

Cybersecurity infrastructure such as the State and Local Government Cybersecurity Act and the Federal Rotational Cyber Workforce Program Act has been integrated across sectors in the US, identified by the Department of Homeland Security, and Canada ’s Department of Public Safety has similarly employed cyber policy by implementing their National Cybersecurity Action Plan. 

Canadian banking authorities are currently working on modernising payments 21 by adapting to non-traditional payment systems. The Bank of Canada and OSFI are prioritising sustainability and climate change projects to transition the financial system to a low-carbon economy. These developments indicate the Canadian financial industry is adapting to the trends and new technologies emerging in the financial sector internationally.

Due to the shifting nature of the financial landscape, risk assessments being carried out by watchdogs are adapting to leverage 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 the current technological developments in order to stay ahead of cybercriminals and online scammers.

John Pitts, head of policy at Plaid, noted that fraud prevention was at the centre of innovation in the digital finance sector: “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. In the closed finance world, regulation treated fraud as a one-to-one issue between a consumer and their bank; 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.”

US Congress has laid out regulation on compliance and anti-money laundering perimeters, adding new digital services under consumer protection and Bank Secrecy Acts. Further action has been taken to strengthen data infrastructure, cyber resilience, and third-party risk management among financial service providers. Financial regulation on divisive topics such as DeFi and stablecoin is expected to be determined by the results of the upcoming US midterm elections. Additionally, it is expected that US financial regulators will continue to emphasise and prioritise their climate response.

Digital assets in Central America

Central America has seen an emergence of digital wallets, crypto usage, and QR-based transactions. Mexico specifically is a large market for growth for neobanks, with large European players such as Revolut expanding to the nation. Mexico has also announced its intention to develop a central bank digital currency (CBDC) prior to 2024.

In 2021, El Salvador became first country in the world to adopt Bitcoin as legal tender, since the move however, the country has suffered around $40 billion in losses due to lack of technical availability among businesses and the general population. President Nayib Bukele is currently working to stabilise the Bitcoin price.

Due to sanctions placed on Central American countries’ economic activity, digital assets are popular in Cuba and Nicaragua, with over 100,000 of Cuba’s 11 million citizens having a stake in some form of cryptocurrency. Cuba’s central bank approved licensing in April for virtual assets providers after allowing cryptocurrencies for personal usage in 2021.

The state of many central bank currencies in Central America are tied to the US dollar, which limits the financial and economic powers of national governments. Through digital assets, Central American currencies can circumvent their reliance on the US economy and foreign remittances.

As these developments indicate, a cashless society is coming into fruition in Central American countries, and digital banks and fintechs are targeting the unbanked and underbanked populations. Central American nations are leveraging digital assets to their advantage through the development of financially inclusive services which appeal to the underbanked.

However, with the advent of new banking technologies comes the possibility of new opportunities for fraud. According to F5 Networks, Latin America has been highly susceptible to cybercrime and scamming schemes. Panama nation recently regulating eight major cryptocurrencies for private business and civil usage, and consequently Panamanian lawmakers are taking action to prevent fraudulent crypto activity and money laundering, with Congress decisively placing financial transparency and protective regulation in place for watchdogs to enforce.

Improving customer experience in payments

As fintechs and banks increasingly find new ways to collaborate in order to provide more effective services to customers, financial institutions in the US are taking steps to assess how fintechs are transforming the financial industry and fundamentally changing the way people bank.

Authentication processes, embedded banking services, and credit assessment technologies are among a few of the new developments fintechs can offer the industry, and as a result, banks need to adopt offensive strategies to remain competitive.

Pierce-Gilmore stated: “While we are always trying 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 the investors), the requirements for success and what we can do to support the client from the very beginning through their lifecycle.”

A spokesperson from Wells Fargo added that the bank ensures user experience by carefully leveraging scale and deep customer insights. “We have a strong opportunity to synthesise a customer’s multiple relationships with financial institutions and provide one cohesive experience. Our goal is to further establish trust and deepen our customer relationships by solving complex pain points and creating quicker ways to conduct business.”

Looking forward

Financial institutions in North America are embracing 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 manageable cryptocurrency usage, whilst Canadian and American financial watchdogs are tightening the reins on the financial industry to enforce incoming policies. Looking ahead, North America is prioritising crypto policies, advanced cybersecurity technologies, and enhanced user experience for consumers to support digital banking innovation in the future.