The New Digital Frontier Calls for Immediate Digital Cash Standards

By Eric Solis

A wide variety of digital banking and payments options have emerged in recent years and have grown in popularity. Consumer desire for fast, frictionless ways of receiving, sending and spending money has driven the rise of mobile wallets, peer-to-peer payments applications, new mobile and online banking services, cryptocurrencies and more. Just as consumer adoption of these digital cash and payment options grew, the COVID-19 pandemic lockdowns and stay-at-home orders spread across the world. Javelin reports that mobile banking in the U.S. increased 50 percent in the first half of 2020, with a 200 percent increase in new registrations in the month of April alone.

In parallel, the rise in digital financial services options was accompanied by a corresponding surge in fraud targeting banks, neobanks, payments providers, fintech companies and all types of financial activities taking place in online and mobile channels.

Cyberattacks aimed at the financial sector have risen more than 200 percent during the pandemic and new account fraud has increased more than 130 percent, driven in large part by a growth in synthetic identity fraud around the world. The entire financial services ecosystem is under tremendous strain, attempting to keep up with the dramatic growth in demand for digital services, while at the same time struggling to stop the surge in fraud. The pandemic has made it clear that digital banking and payment options are essential, but to securely enable a more digital ecosystem while preventing fraud, the financial sector needs new standards designed specifically for digital cash and digital payments.

The pandemic hastens the move to digital cash

The COVID-19 pandemic dramatically hastened the adoption of digital cash and digital payments in the U.S. As people stayed home and bank branches closed, consumers found new, digital ways to pay their bills and send money to loved ones. When consumers did venture out for essentials, many initially eschewed cash, out of fears that it could spread the virus. They turned instead to digital payment methods such as mobile wallets and contactless cards for in-store purchases. Nearly 50 percent of shoppers around the globe say they are using digital payments more now than before the pandemic, and Forrester Research reports that consumer use of contactless payments increased almost 70 percent since the beginning of 2020.

The value of bitcoin hit an all-time high during this time and Congress even debated creating a government-backed cryptocurrency, or digital dollar, as part of the CARES Act. Adoption and integration of cryptocurrency as a viable digital currency would have enabled a faster and more cost-effective way to distribute stimulus payments and relief funds to those who needed it most. Instead, as the federal government poured trillions of dollars into the economy in the form of stimulus checks, paycheck protection loans and enhanced unemployment benefits, fraudsters swept in like a tidal wave to target the money. The entire financial system was overwhelmed with fraud and institutions were forced to freeze funds while they worked to sort the legitimate accounts and claims from the fraudulent ones. Roughly 300,000 stimulus deposits, or about $50 billion, were made to nonexistent or incorrect bank accounts and millions of Americans were forced to wait weeks for paper checks to arrive.

The increased acceptance of digital banking and payment options will improve financial access and services for all consumers—including the unbanked and underbanked. But the only way for us to move forward toward the creation of a new, digital cash ecosystem will be if we can properly secure the system and stop the widescale fraud occurring in real time, across digital channels. This will require new industry standards conceived specifically for the digital era.

New standards designed for the digital era

Currently there are few, if any, industry standards for how to securely enable the exchange of digital cash. The financial industry’s existing standards and regulations are a product of a previous era—one based on central banks, physical currencies and the need for settlement times when money is transferred from one party to another. As fintech startups and neobanks have introduced innovative, new digital services and applications, the standards and regulations have not kept pace. New standards should include processes for ensuring guaranteed, instant settlement for both consumers and merchants. We must all work together to create a new framework—and we must act urgently.

We will also need an effective way to resolve fraud disputes and chargeback resolution for digital cash payments. Much like settlement times, chargebacks are a product of an earlier era. They serve as a fail-safe, giving banks the ability to reverse fraudulent transactions and return money to its rightful owner’s account when needed. However, when money exchanges become instantaneous, this will be much more difficult. Financial institutions and payments providers will need more advanced technologies for continuously monitoring funds as they move about the ecosystem, and for identifying fraud in real-time in order to stop unauthorized transactions before they go through.

Lastly, the industry, and our nation, need to adopt stronger data security and identity verification standards. There is currently no federal law in the U.S. governing the protection of consumer data. Unlike our peers in Canada and the United Kingdom, we also lack any national framework for proper identity verification in digital channels. Stronger data security, identity verification and authentication standards at the federal level will be essential for keeping the financial sector secure as we become increasingly digital.

The era of digital cash is upon us and there is no going back now. The COVID-19 pandemic exposed the holes and vulnerabilities in the financial sector that have enabled fraud to run rampant. We can successfully usher in a new financial ecosystem that provides greater access and more services for everyone—but only if we first work together to create new standards designed for the digital era that strengthen security, prevent fraud and finally give consumers more control over their money.

Eric Solis is CEO of MovoCash.