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The Impact of the Digital Economy on the Banking and Payments Sector

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The Impact of the Digital Economy on the Banking and Payments Sector 1

By Gerhard Oosthuizen, CTO Entersekt.

New banking regulations, digital consumers, the eradication of passwords, contactless technology – these are just some of the trends that will shape financial services and payments in 2021, writes Entersekt CTO, Gerhard Oosthuizen.

Since the outbreak of COVID-19, traditional businesses have been compelled to further undergo the digital transformation to meet the needs of a consumer base largely confined to their homes. Indeed, we estimate that there has been a 30% growth in the digital space. With this acceleration towards a digital world, banking, transacting and payment trends have and will continue to be redefined into 2021.

We have witnessed a rising number of digital first timers. That is, people signing up for online banking and e-commerce, whilst progressively shifting away from traditional channels. Businesses that have previously depended on walk-in stores and having a physical presence have also had to recognise that online transactions are now the new norm, and to adjust accordingly.

Whereas in the past, registering a customer for a service could take place in a shop, a booth or a branch, today it has become more important than ever to have a remote digital registration option available as well. Even working behaviour has changed considerably, with many businesses accommodating for remote working in the long term.

This is what sets the scene for 2021 – people expect to work from home as well as carry out their transactions from home.

Banking and Payment Trends in 2021

The use of contactless technology is undeniably growing, but on top of more people tapping with their cards, we are also seeing much more engagement with QR payments. A technology already frequently employed in Asia, we know QR codes can work. It would enable consumers to authenticate themselves when making a transaction without needing a PIN pad. More importantly, it allows consumers to gain complete control of their transactions from their own device and have an overall richer experience. Recognising this, we anticipate noteworthy developments in QR and NFC-enabled tap and go payments over the next year.

In light of FIDO (Fast Identity Online) and the ever-expanding network of FIDO-compliant solutions, we also expect the emergence of entirely passwordless systems. Organisations will likely begin enlisting customers by way of biometric authentication through devices and digital identities that already exist, such as banking apps. Long gone will be the days of having to remember numerous passwords, only to forget and reset them again. That is the idea anyway.

In 2021, there will probably be a pronounced adoption of delegated authentication as well, whereby

Gerhard Oosthuizen

Gerhard Oosthuizen

merchants as opposed to traditional issuing banks will take the reins of authenticating e-commerce payments. In this way, consumers will be offered a greatly improved online shopping experience with a simple and intuitive checkout that acts as an extension of the retail brand.

The Challenge of PSD2

While each of these transitions will undoubtedly introduce growing pains, PSD2 will be among the most challenging. Europe is already going through PSD2 now, implementing a number of regulations that is opening up competition in banking and electronic payment services. However, on the 1st of January 2021, these regulations will take a legal effect. At the end of the first quarter, so too will another set of regulations concerning 3-D authentication of card-not-present payments. Europe is simply not prepared to make this leap into “open banking”. As such, banks will face a tough year of struggles with regulators and competition from non-traditional quarters.

In fact, the process towards becoming PSD2-compliant is often arduous for banks and recoups hardly any additional revenue. Many banks see it as a competitive disadvantage as they are being forced to open up their systems and processes for the likes of Google, Facebook, Apple and many smaller niche fintech operations. Their valuable client data risks being taken by a challenger and used to on-board their accountholders.

Regardless of the commercial opportunities that open banking may provide, fraudsters will also endeavour to take advantage of this change and the weaknesses that will appear as systems open. With money moving faster, the faster it can be stolen too. We will likely see some reaction to this in 2021 as fraud returns to being a top priority for banks. Yet, whether through regulatory pressure or by market forces, open banking will become the new normal – and the world needs to prepare for this. Hopefully, many lessons will be learned from Europe’s experiences in 2021.

Next year is going to be about change – and managing that change without alienating already unsettled consumers. Organisations that have customer experience top of mind will emerge as winners, but they must nonetheless expect additional pressure from regulators, new competition, ever more digitally-demanding consumers, and no slowdown in technological innovation.

Banking

Over a quarter of Brits now have an account with a digital-only bank

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Over a quarter of Brits now have an account with a digital-only bank 2

Over a quarter of Brits now have an account with a digital-only bank 3 The number of Brits with a digital-only bank account has gone up by a percentage increase of 16%

Over a quarter of Brits now have an account with a digital-only bank 4 Almost 1 in 6 Brits (17%) plan to open a digital bank account over the next 5 years

Over a quarter of Brits now have an account with a digital-only bank 5 The top reason for opening an account was the convenience of banking online for the third year running

Over a quarter of Brits now have an account with a digital-only bank 5However, 16% of traditional banking customers who aren’t planning to switch said their bank had been helpful during the COVID pandemic

Currently over a quarter of Brits (27%) say they have at least one bank account with a digital-only bank, according to personal finance comparison site finder.com.

This is a percentage increase of 16% from last year when 23% of Brits said they had an account with a digital bank. It is also over 3 times the amount of Brits who had one in January 2019 (9%).

Finder’s 2019 research found that 24% of Brits intended to have a digital-only account by 2024. However with 27% now having an account, Brits have gone digital 3 years earlier than expected.

A further 17% of Brits intend to join them over the next 5 years, with 11% planning to do so over the next year. This could mean that 44% of Brits could have an account with a digital bank by 2026. If this percentage were applied to the UK adult population, it would equal almost 23 million people.

The top reason for opening an account continues to be convenience that digital-only banks provide, for the third year running (26%). The second most common reason was that users needed an additional account and setting up a digital account seemed to be the easiest option (20%). Customers also wanted to transfer money more easily (19%), making this the third biggest priority.

People wanting a trendy card is still driving signups as well, with 1 in 10 (10%) existing, or future, customers citing this as a reason to get an account.

Despite the increase in digital-only banking customers, the numbers who aren’t considering one have actually risen. Last year, 23% of respondents said they aren’t considering a digital-only bank account, but this has risen substantially to 42% in the latest survey.

This is likely a result of increased customer loyalty, 58% of those without a digital bank account said they felt as though their incumbent bank had treated them well and therefore had no desire to open a digital bank account. Additionally, 16% felt as though their incumbent bank had performed particularly well during the pandemic.

Over a third (36%) of those without a digital bank account said they had not decided to bank with digital providers because they preferred to be able to speak to someone in branch.

Digital banks are still most popular with younger generations, 46% of gen Z say they currently have a digital bank account, with a further 28% intending to get one over the next 5 years. This would mean that by 2026 just under three quarters of gen Z (73%) could have a digital bank account.

To see the research in full visit: https://www.finder.com/uk/digital-banking-adoption

Commenting on the findings, Matt Boyle, banking specialist  at finder.com said:

“This research shows that digital-only banks are here to stay, with the number of users in the UK rising for 3 years straight. On top of this, Starling and Revolut announced this year that they have made a profit for the first time, really demonstrating that digital banks are starting to become a serious part of the banking furniture.

“The pandemic has also played a role in the rapid digitalisation of the banking industry, with those who had never experienced online banking having no other choice but to take their finances online. It seems that Brits are starting to realise the convenience that can come with digital banking and this is reflected in our research.”

Methodology:

Finder commissioned Censuswide on 6 to 8 January 2021 to carry out a nationally representative survey of adults aged 18+. A total of 1,671 people were questioned throughout Great Britain, with representative quotas for gender, age and region

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Banking

Protecting the digitally-excluded: biometric identification ensures access to payments in a cashless world

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Britons embrace biometrics but over half will abandon applications if not fully digital

By Vince Graziani, CEO, IDEX Biometrics ASA

The events of this year have exacerbated a number of challenges for vulnerable members of our society. Fears over health have been compounded by the accelerated digitisation of activities in their daily lives, such as video calls with family, shopping online and mobile banking – activities they may have already been daunted by. Chief among these evolutions has been the pronounced lean away from the use of cash. With many not comfortable with the complexity and security of digital payments, banks must explore an alternative in the form of biometric identification.

COVID-19 and subsequent lockdown restrictions have not only made the handling of cash difficult, but even unsanitary. As a result, many retailers have either stated their preference for digital payments, or indeed forbidden the use of cash during transactions. As a result, the UK cash machine network, Link has reported a 55% drop in ATM usage over the course of 2020.

Meanwhile, in the US, a similar decline in cash has led to a rapid rise in digital payments and mobile payment apps, thanks to comparable regulations and an increase to the contact less payment limit of up to $250. According to recent research, 28% of US shoppers would avoid a retailer that doesn’t offer contactless payment options. That hesitation is causing a shift to digital payments, with the US mobile payment market expected to rise to $130.3 billion in 2020.

When the adoption of technology is accelerated so suddenly, it’s understandable that those vulnerable, older or even just reluctant and sceptical members of society aren’t thought about enough. The resultant fear of leaving vast swathes of people behind means we need a new touch-free payment solution that helps to comfortably and securely bridge their transition away from cash.

Who fears the transition, and why?

The idea of digital exclusion isn’t necessarily a new concern. In the UK, Which? has long been calling on the government to protect cash as a payment option, knowing that its eradication could negatively affect vulnerable members of our society.

Despite the concept of going cashless advancing, as many as 27% of UK consumers still operate only in cash, while across the Atlantic, 70% of US citizens regularly use cash. Looking globaly, research by the Global Index has explored the nascency of countries including India, Mexico, Nigeria and Pakistan in transitioning from cash to a digital banking system, finding that 1.7 billion adults around the world lack a bank account, while around 1 billion still pay their bills in cash.

Across the board, there is also a notable percentage of consumers who, while being banked, may struggle to maintain their financial independence. Old age or physical and mental health limitations can make the current transition difficult.

What if you can’t remember your PIN or your online banking password, or even your signature?

Banks must be aware that a wholesale veer away from cash isn’t going to suit or benefit all of their customers. They must therefore seek alternative options that still adhere to the  trajectory towards touch-free payments, while addressing the above digital exclusion challenges that some will face during this transition.

A secure and convenient payment option

Rather than making payment transactions a game of memory or self-controlled security, the banking sector should look towards the benefits of biometric authentication. When incorporated into a bank card, fingerprint authentication offsets the need to put people under pressure to note down, secure, remember and then input various passwords, PINS or usernames. Instead, biometric authentication, through fingerprints, automatically and categorically links a person to their finances in the most understandable and seamless way possible.

For retailers it would ensure that the evolution away from cash can continue seamlessly; also meaning they’re less likely to lose out on an entire segment of the customer base. But, more importantly, for consumers, it provides a more safe, secure, immediate and convenient payment method that balances the positives between cash and digital payments.

It’s an ideal balance that relieves pressure on the digitally excluded. Vulnerable members of society will firstly be spared from a growing need to invest in expensive smartphones, or to learn complex digital banking features in order to carry out purchases.

Additionally, at a time where cash is potentially harmful to health, and equally at risk from a security perspective in the longer-term, they are able to make a safe step forward without any of the innovation headaches that might come with it.

The enrolment of biometric payment cards can even now take place remotely in people’s homes, making the transition even more seamless than the idea of extracting cash from ATMs.

Going beyond payments, biometric smart card solutions can also serve as the direct and unequivocal identification many would need to open a bank account, build credit and enhance their financial footprint, as seen in India’s Aadhaar biometric ID programme.

The solution to a prolific challenge

As we move away from cash and towards a world of digital payments, biometric payment cards provide the ideal balance of security, convenience and hygiene for touch-free transactions, without having to rely on expensive smartphones, mobile banking, or PINs.

Banks and payment providers must now embrace biometric payment cards to provide consumers with a secure and easily accessible means of touch-free payment. In doing so, financial exclusion will be one less critical factor to worry about as we transition to a cashless society.

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Banking

Can a United States Citizen Have an Offshore Bank Account?

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Can a United States Citizen Have an Offshore Bank Account? 7

By Luigi Wewege, Senior Vice President, and Head of Private Banking of Belize based Caye International Bank

One of the downsides of the Internet is the dissemination of misinformation. That has led some to believe that US citizens cannot open and maintain offshore bank accounts, investment accounts, and other types of financial resources. That’s not the case.

While some things have changed over the years, the truth is that US citizens are free to open accounts outside the country’s borders. Here is some necessary information about this type of financial strategy and what it could mean for you.

What Qualifies as an Offshore Bank Account?

An offshore bank account is any financial account based in a country outside where you hold citizenship. In the case of a US citizen, this means establishing and maintaining a checking, time deposit, savings, investment, or any other type of financial account with a bank that is based and operates outside the jurisdiction of the United States.

Offshore bank accounts are sometimes considered the province of the wealthy alone. The truth is that offshore banks often welcome clients who would more readily identify as middle class in terms of economic status. That’s made them increasingly attractive to people who are seeking to build financial reserves for the future.

Reasons Why You Would Want an Offshore Account

Why open an offshore bank account when you can have your choice of domestic ones? There are reasons why opting to augment your domestic accounts with offshore ones makes a lot of sense.

For example, the higher rates of interest may apply to checking, savings, and time deposit accounts based in another nation. When the plan is to allow the money to remain in those accounts and watch the balances grow over time, you could enjoy a greater return on the deposited funds.

How could more interest income benefit you? Should you be thinking of retiring in a nation where the cost of living is lower, and your pension and other retirement funds would allow you to live more comfortably, it makes sense to utilize offshore accounts. You may also find it easier to purchase a home in that offshore location if you have established banking or investment accounts in place.

Understanding the Role of FATCA and How It Applies to US Citizens

Where do the rumors about US citizens not being able to have offshore accounts arise? One possible source is due to misunderstanding what is known as the Foreign Account Tax Compliance Act, better known as FATCA. When FATCA was passed as part of the HIRE Act, several financial pundits claimed that the whole point of the new Act was to prevent citizens from establishing offshore accounts. In fact, that was not the point.

For individuals, what FATCA did establish is the necessity of filing documents that verify the existence of the accounts and make a note of any interest earned in some cases. Despite what some still insist, FATCA does not automatically mean that any tax is assessed.

If you need to file with the IRS, the key to understanding is monitoring your offshore account balances. If the cumulative total of your offshore balances meets or exceeds USD $10,000 at any time during the tax year, you will need to report the activity with Form 114 FBAR or Foreign Bank Account Report.

Remember that the cumulative balance doesn’t have to remain above the USD $10,000 figure for any length of time. If that should happen on a single day during the tax year, you will need to file the report. Even then, that doesn’t mean you will owe any taxes on those account balances. In many cases, anything that you might owe will be offset by the Foreign Tax Credit, assuming that you meet the qualifications for receiving the credit.

What About Offshore Investment Accounts? Do They Work the Same?

The same general principle applies to investment accounts. If they reach a specific value, then there is the need to report the activity to the IRS. This is because some investment accounts, especially those classified as foreign retirement accounts, may be considered foreign grantor accounts.

Depending on the nature of the account, it may be necessary to file IRS Form 3520. The report’s proper name is the Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts. It may also be necessary to file IRS Form 3520-A or the Annual Information Return of Foreign Trust with a US Owner.

Don’t let the addition of another form or two discourage you from opening offshore accounts. The tax forms themselves are not as daunting as the names suggest. Further, the institutions where the funds are based will be happy to help you assemble the data needed to fill out the forms accurately.

Penalties for Failing to File the Proper IRS Forms

If you are required to file any of the forms mentioned above, make sure they are completed correctly. By not filing the forms or omitting required information, you run the risk of being assessed a penalty.

Dependent on the error or omission, these penalties could be as much as 35% of the funds involved. You might also have liens placed on your domestic salary or court-ordered deductions from your domestic bank accounts.

Offshore Bank Accounts and FATCA Compliance

With the passage of FATCA, there was speculation that offshore banks would stop doing business with US citizens. A few banks decided to turn away any new US depositors while urging current depositors to find new homes for their accounts. However, offshore banks in many nations chose to adjust their reporting and client support to be in full compliance with FATCA.

What does this mean for you as someone who has offshore accounts? It means you may have another form or two to fill out when tax season rolls around. The offshore bank where your accounts reside has mechanisms in place to help you know if filing the form is necessary. You can expect the same level of support on every other front.

Should You Open an Offshore Bank Account?

US citizens continue to enjoy the benefits of opening offshore bank accounts legally. If you are searching for options to grow your financial portfolio, offshore accounts remain a great option. Consider this as one more way to build wealth and enjoy more security in the years to come.

For anyone who would like to learn more about offshore account types, how to set them up, and which accounts would be best for specific purposes, contact our professional financial services team at Caye International Bank. We are happy to answer your questions and establish accounts that ultimately provide the financial security you crave.

 

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