What is Virtual Banking? The Latest Hot Buzzword in Finance
Virtual Banking refers to financial services that are conducted online without the need to go to a branch or office. It may be that your existing traditional bank offers some virtual banking if you can conduct some transactions over the web or via an app. However, what the term specifically refers to is banks that exist only online and do not have physical branches at all.
The trend looks to have started in the 1990s in Japan when the Japan Net Bank opened for trading. Around the same time in Canada, Manulife Bank formed with no physical branches. But as a result of improvements in technology, the rise of smartphone use and changing consumer behaviour, virtual banks are becoming more and more successful and common.
What does virtual banking mean for you?
For the average user, virtual banking has a range of benefits. First and foremost they can offer cheaper services and higher interest rates, as they do not suffer from the overheads that traditional banks do in running branches. This might take the form of an improved interest rate, a cheaper loan or free withdrawals and transactions when users travel.
Service with virtual banks tends to be much faster, money can be transferred within seconds, even between countries and currencies. Rather than travelling to a branch, waiting in a long queue before requesting a transaction that might take a few working days to complete, everything can happen in seconds using a mobile device. The systems are also more convenient. Even the opening of a new account can be conducted without using paper, instead requiring just a few verifications via the user’s mobile phone.
The service is also more personalised as the virtual banks have the data and the scope to serve each customer as an individual. Take for example the Monzo banking app, which can track spending on daily categories such as groceries, entertainment and transport. This allows users greater control over their budget. Plus the data can then be used to deliver exclusive offers to account holders based on their preferences. A cinema-goer would be given discount movie tickets or a health and fitness fan given cut-price membership to a nearby gym.
The extra transparency people have over their spending is also allowing users to save more carefully or pay off debts more quickly, another way in which virtual banking is expected to save users money in the long term.
For this reason, virtual banks trump the traditional banks every time when it comes to serving niche markets for example foreign workers and the mobile-savvy. As Mr. Venkatesh Srinivasan, group vice president at Oracle Financial Services, which helps virtual banks set up and launch explains:
“Virtual banks are fairly nimble and they tend to operate in a particular segment… the millennials, freelancers, students, immigrants.”
Foreigners may not otherwise open a bank account due to the amount of paperwork and difficulties with sending cash home to family and friends in their native country. Virtual banks solve both of these problems with efficient and paperless account opening and quick, cost-effective transactions even overseas.
Of course, the biggest uptake in virtual banking has been seen by the tech-savvy Millennials. The generation for whom convenience is king love seeing their transactions pop up on their device and are happy to be able to conduct their banking from their phone whilst their on the bus or at work.
SMEs are another segment of society that is likely to benefit from the rise of virtual banking. A traditionally risky group to lend money to, they are able to acquire loans through virtual banks more easily thanks to the reduction in paperwork and the use of data to assess risk.
Can virtual banking be trusted?
The lack of “face to face validation” leaves virtual banks more open to the risk of fraud and money laundering. Criminals are becoming more and more savvy to how the internet can help them move money around, and using techniques such as “smurfing” (moving money a little at a time to avoid detection) they can use virtual banking to fly under the radar of the authorities.
Traditional banks have invested time and money in knowing their customer base and in fraud detection systems, it is imperative that virtual banks do the same.
That said, it is hoped that the level of transparency and visibility on customer expenditure should help customers themselves identify and report fraud more quickly and more often than in the traditional banking setup where you receive statements at the end of the month.
The future of banking
In recent weeks, the regulator in Singapore Senior Minister Tharman Shanmugaratnam, Chairman of the Monetary Authority of Singapore announced the issue of 5 new licenses for digital banking: two full and three wholesale in a bid to liberalise the sector and keep it “resilient, competitive and vibrant”. It is believed that the taxi company Grab is interested in entering the market.
It is hoped that this will diversify the Singapore financial scene, and give help to SMEs who need a cash injection to reach their business goals.
Though this does appear to be the future of banking, it is predicted that Singapore will be slow on the uptake. Estimates suggest that by 2020 virtual banks will still only account for 1% of the banking sector. Traditional banks are prepared to offer all the convenience of a virtual bank but with the stability of being a big-name player in the traditional finance market.