Consumers are turning to online and mobile channels for their financial transactions and are adopting a wide variety of new payment methods, from peer-to-peer (P2P) to e-wallets and cryptocurrencies. What was once a steady but slow migration has suddenly been accelerated by the COVID-19 pandemic. As people stayed home to slow the spread of the virus, they had no choice but to manage all aspects of their financial lives through digital and mobile channels.
As a result, banks and traditional financial institutions have come under pressure to digitally transform to provide the digital services consumers need – but this rush has exposed a porous financial infrastructure prone to fraud and lacking in regulations or standards. solutions designed for our new, digital age.
As banks strive to digitally transform, they have been hit by a crushing increase in fraud, as the federal government has responded to the pandemic by allocating more than $1 trillion for expanded unemployment benefits, small business loans, stimulus checks and more. Fraud attempts on new accounts more than doubled and fraud on demand deposit accounts roughly tripled at the start of the pandemic, according to a leading study. The Federal Trade Commission reported more than 70,000 fraud reports related to COVID-19 stimulus funding in the first half of 2020.
Fraudsters overwhelming the system, financial institutions and government agencies were forced to freeze funds as they strive to distinguish between legitimate and fraudulent claims, and to this day, millions of people are still waiting to receive their benefits.
The fastest, most efficient and cost-effective way to distribute relief funds would have been to use a digital currency. This should not be confused with the many types of digital payment options we have today. As consumers increasingly use payment options such as P2P and mobile payments to transfer money through digital channels, these solutions are all based on the traditional dollar and existing banking system and rails. payment cards.
A real digital dollar would look a lot like a cryptocurrency, but issued by the Federal Reserve and backed by the US government. This would allow immediate access to relief funds through free bank accounts connected directly to the Federal Reserve – which is especially important for the unbanked and underbanked. A proposal for a new digital currency was included in early versions of the CARES Act, but it was not in the final bill.
The massive fraud caused by the COVID-19 pandemic and the resulting freezing of funds for legitimate people truly in need tells us that the need for a digital currency is more urgent than ever. But to achieve this, lawmakers, regulators and financial industry leaders must create new standards designed to support the secure use of digital money and the unique challenges that come with it. These standards should include:
A framework for guaranteed instant settlements: Our traditional financial system is built in silos and settlement delays were necessary as people transferred money from one silo to another. With a digital dollar, transfers are instantaneous and immediate settlement must be guaranteed for both the consumer and the merchant.
Efficient Dispute and Fraud Resolution: In our current financial ecosystem, chargebacks allow banks to reverse fraudulent transactions and return funds to their rightful owner. Instant money exchanges would make it harder to identify, dispute and reverse fraudulent transactions. More modern technologies and policies would be needed to detect fraud and preemptively stop unauthorized transactions.
Enhanced data security and identity verification: Currently, there is no federal law surrounding consumer data protection in the United States, nor any national framework for verifying identities across digital channels. Nationally strengthened data security, identity verification and user authentication would be needed to keep consumer funds safe and combat systemic fraud as the financial sector becomes increasingly digital.
A fully digital financial future promises greater financial inclusion, making it easier for people to access their money, reducing fees and settlement times, and offering a greater variety of ways to send money and make payments. payments. However, we can only achieve this if we come together and develop new standards designed to secure the digital money ecosystem.