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The Rise of Virtual Banking and the Way Forward

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Traditional banks are rooted in a system that is slow to change and resistant to anything new. This conservatism has rendered the banking system slow to respond and integrate new forms of transaction. Banks have dragged their feet when it comes to updating their corporate and retail banking products with products that appeal to today's immediacy-obsessed consumers. 

Many traditional banks insist on sticking to a traditional banking model approach and as a result, may be left behind as much of the world embraces a new way of transacting and investing.

Brick and mortar-style banks have become vulnerable to a number of new entrants into the financial sector that promise to revolutionize the banking system through new technologies such as crypto, e-wallets, fintech companies and virtual banks.

Can the traditional banking model survive in the face of the virtual banking revolution? Let's find out.

Table of Contents:

What Is It?

Virtual banking is a concept that refers to the use of virtual technologies combined with traditional finance systems to build comprehensive financial services. The goal of virtual banks is to provide value-added services for existing customers while attracting new ones through modernized channels. A "virtual bank" uses one or more online channels as its primary distribution channel(s).

It delivers financial products and services over the Internet using both mobile devices and web browsers on desktop PCs. A virtual bank also typically provides phone support to customers during its business hours and has an online customer service presence 24/7.

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Virtual Banks Can Disrupt Traditional Banking Systems

The advent of virtual banking has rendered traditional banking systems much more vulnerable to attacks by virtue of the fact that they now operate in an environment where competitors are able to adopt new technologies at a faster pace. There are many examples of how traditional finance systems have been disrupted already with companies utilizing advanced technology to quickly take advantage of these vulnerabilities. This disruption can come from startups, financiers, large technology firms - and anyone who sees an opening in providing services to an increasingly technology-savvy customer.


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For example, companies like PayPal, Wise and even Amazon have created an alternate system for transacting, lending and exchange. Instead of using a credit card at the point of sale, you can use a wallet payment systems which takes only a few seconds to complete the transaction saving both time and money - this means that people may not need traditional bank accounts like they used to, especially since they can transfer money via e-wallets easily online.

The simplicity and ease of use are quickly leaving traditional banks behind in the dust as they have failed to explore other methods of interacting with their customer base. It's important to remember that finance is essentially based on trust and if virtual banking can achieve secure transactions, then it could prove that trust is better placed with them rather than with traditional fiat banks.

This poses a real threat to many financial institutions around the world as they won’t be able to compete with the speed and security provided by virtual systems as they are inundated with higher overheads and models that restrict growth.

How is a Virtual Bank Different from Banking-as-a-Service (BaaS)?

As mentioned above, a virtual bank is a bank that operates completely online, has its own clients and provides services similar to those provided by more traditional banks. 

Banking-as-a-service (BaaS), on the other hand, is the backend service that accredited banks provide to their fintech partners. Providing this service allows the fintechs to operate and offer some of the same services that traditional banks do while reducing the number of regulatory hoops they have to jump through in order to operate. Meanwhile, banks who offer BaaS are able to provide their core competency services of payments, deposits, and withdrawals while also reducing some of their marketing and staffing costs.

The two concepts aren’t necessarily at odds with one another: a virtual bank can offer BaaS to potential fintech partners. Whether a virtual bank pursues this course of action is dependent on its management team’s strategic vision for its bank.

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Advantages Over a Traditional Bank

Convenience and Accessibility

Virtual banks can operate completely online and individuals can use banking services anytime. The importance of being able to access banking services anytime has been played out most evidently during the pandemic where people stuck in lockdown and walk-in banks shut still needed access to banking services. Suddenly, banks that were completely dependent on in-person transactions and face-to-face meetings had to completely change the way they did things.

Reduced Minimum Account Balances

Virtual banks do away with some of the attendant costs associated with opening a physical branch, including construction costs, bills for utilities like water and electricity, and even staffing costs. This means that virtual banks can offer clients accounts with low or zero minimum account balances. 

Accelerated Operational Scalability

Traditional banks dependent on opening new branches to increase coverage area are left with traditional forms of growth. On the other hand, virtual banks have taken the prevalence of online interaction and transacting to market themselves in non-traditional ways to cater to the changing demographics. 

Steps to Take to Become One

The first step towards becoming a virtual bank is to decouple traditional banking systems and upgrade your bank’s tech stack. This will enable a bank to transition towards banking via websites and mobile apps, rather than remaining shackled to SMART cards and in-person transactions.

The next step is to build a backend service like banking-as-a-service (BaaS). This provides you with an opportunity to partner with fintech companies and provide them with the back-end services they need to run their businesses effectively. It also allows your bank to open up new revenue streams and engage in business partnerships, while greatly reducing marketing costs and overhead staffing costs.


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Finally, hire top talent from within the tech industry rather than from the banking sector itself. This will help attract younger talent from innovative fields experiencing major growth opportunities, such as blockchain technology. Through this combination of hiring practices and BaaS implementation, banks can sustainably grow or even become virtual banks without bearing the weight of physical locations.

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Can Provide Better Services Than Traditional Ones

Many 'virtual' banking options are typically cheaper than traditional ones as they don't rely on physical branches, customer care centers and other such resources that often drive up operational costs.

Virtual banks can then provide cheaper foreign exchange trading services, lower commission rates for trading stocks and bonds, app management software for portfolios and mobile-based integration that allows users to login and conduct transactions with a number of different platforms easier and more streamlined than with a traditional bank.

Change Whether You like it or Not

Forbes ran an article showing just how rapidly this industry will be changing, stating, “What we’re seeing is the greatest acceleration of digital banking in history, Wells Fargo Securities analyst Mike Mayo told American Banker in June. What’s taken place over the last few months may have taken place over two to 10 years if the pandemic had not come along." The movement toward a virtual banking interface is now a reality. The question is, who will keep up and who will be left behind?


Virtual banks have been around for a while but have gained momentum owing to the pandemic along with the rise of alternative payment systems and users moving toward mobile applications.

Traditional Banks that decide not to innovate may be less able to deliver the services that today’s clientele expects. Over time, these banks become less relevant and will eventually be completely passed over in favor of more tech-savvy banks.

In the banking and finance world, where branches, banks, and credit unions have long relied on human connection to attract clients, present-day firms are facing a new problem: keeping customers engaged in an era of digital banking and social disconnection.

For more: Offshore Banking for Cryptocurrency


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*Note for U.S. citizens: US citizens are limited in their tax reduction possibilities due to FATCA and CFC laws. Opening an offshore company can increase privacy and asset protection, but you can not eliminate your taxes without giving up your citizenship. If you are a US citizen you are obligated to pay taxes on all worldwide income. 



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