What to Watch Out for When Choosing Online Banks Over Traditional BankingEditorial Team
By Sandeep Todi, Co-founder and Chief Business Officer at Truly Financial.
Small businesses are only too familiar with the joylessness of dealing with traditional banks. They are constantly stung by high fees. They are even put on hold indefinitely while the piped music attempts to lift their mood.
According to a survey by BlueVine, less than 10% of small businesses feel that current banks meet their needs. The survey also says 70% of small businesses are looking to switch banks. Some of them are trying to find alternatives that offer updated features and services. The issue is that traditional banks never designed their services for modern small and medium-sized businesses (SMBs). Instead, they have always shown interest in serving larger enterprises.
Traditional banks have attempted to expand their reach with online banking via websites and mobile apps during the last decade. They have the only goal of making it possible to transfer money between accounts or pay bills online. Digital banks have given traditional banks a run for their money. The number of people using their smartphones for banking and payments has almost tripled since 2012, and it is the services offered by online banks and neobanks that have grown exponentially.
Around 76% of small business owners are now opting to use digital or online banking features as they open up opportunities for tech-savvy customers who need to get more done with fewer resources, and are therefore demanding more.
There are some significant differences between traditional brick-and-mortar banks and entirely web-based banks, including fees, rates, account options, customer service, and network size. So, let’s break down how to make the move to choose online banking over traditional banking.
The Evolution of Online Banks and the Growing Benefits
Even back in 2013, a study by MoneyRates.com already showed that online banks had six times higher interest rates than the nationwide average. And digital banks are still making competitive strides against traditional ones – with some quoting rates nearly 10 times higher.
The ground reality hasn’t changed much in 2021. Online banks have better interest rates than conventional banks. Do you know why? Because they don’t have to deal with huge investments in a large workforce or a brick-and-mortar infrastructure. Their digital support lines offer seamless and prompt on-demand customer services since they use technology to their advantage. They can serve more customers per staff compared to in-person interactions with staff spread over physical branches.
There has been a leap in technology, though, allowing the digital banking ecosystem to grow further. From a customer point of view, with an online bank, you can now set up your team banking and corporate spending accounts. This allows you to run your business without going back and forth with an accountant for routine matters.
As the SMB and freelance ecosystems grow post-covid-19, many more people will be turning to online business banking to separate their funds from personal accounts for tax benefits. There are many more online banks than five years ago, which means more choices for these entrepreneurs and SMBs. There’s a downside too. Some banks end up being replicas of another, with little differentiation in their core services. So, how do you choose?
Checking for Deals or Agreements Worth Having
Some online banks offer fee-free checking and savings accounts or don’t charge ATM fees or transfer fees. So, small businesses need to be on the lookout for which online banks offer these deals or have agreements with ATM networks, should cash withdrawal be required.
The first thing to do is to check the services description and pricing page. There should be a transparent mention of all charges. Look to see if conditional fees or overage charges are disclosed up front. Oftentimes, there’s no clear mention of the real cost, and takes effort to find, which is clearly a red flag.
For example, an online bank may have a home page where they use the phrase “free transfers”. But if there isn’t a monthly fee, ask yourself how they are making money. More than ever, it pays to check the small print.
Unfortunately, there isn’t a lot of information available online to compare one online bank’s fees and charges with another. Your best bet is to go directly to the online bank websites and do the groundwork yourself.
Choosing Online Banks That Put Security First
One of the biggest concerns for consumers considering web-based banking is security issues. So, what are the best practices for small businesses?
While online banking has several advantages, like higher interest rates and low monthly fees, it also means that business owners have to be more diligent in choosing one amongst the many. You don’t have the benefit of talking to someone in person in a branch, and this means you need to be circumspect when evaluating their services.
Compared to mainstream banks, online banks have the advantage of a robust digital presence. Although this is positive, you have to peel off the layers of redundant buzzwords often present in their marketing communications and advertising.
Don’t Trust Blindly
Many online banks say they have the “best security” or “bank-grade security” just because they have encrypted transactions. You have to look beyond that: Do they have a secure login system or, even better, two-factor authentication? When you request information from this online bank, how would they identify you to prevent impersonation? Technologies like facial recognition, voice ID, and two-factor authentication are useful for online banks to make themselves as secure, or even surpass, the security standards of traditional banks.
Next, look at how their products or services could offer real value to your business. If they boast an unlimited overdraft (which looks great at face value), ask yourself if your business needs this. What are the terms and conditions attached? Look at how long it would take them to provide certain services, too, such as account credits or statements.
You must also check out their customer service helpline before taking a decision – all good online banks offer extended hours for customer service. Don’t just look at an online bank’s website when you are unsure about the service level agreement or clauses; call the helpline and speak to someone so you can figure out for yourself how effective their service is.
Online banks are required to follow strict security measures, as stipulated by their countries. However, they are newer in the game, and each bank could have a different approach when dealing with security. Therefore, it falls on the customer or business to dive deeper into what security measures are employed, before signing up.
Understanding Why Opening an Online Bank Account Is Faster
When you choose online banking and open an account, it may seem like a linear process. However, it involves a complex set of ID verification and other checks happening in the background, in parallel.
Online banks are well aware that their Unique Selling Point (USP) is offering fast services that don’t involve long queues or specific opening hours. So, they save their customers the hassle of long waits while they perform the necessary checks.
Online banks meet their obligations to verify all information about their users using modern cutting-edge Know Your Customer (KYC) technology that delivers fast results. They can quickly determine who is a good actor, who can have potential involvement with money laundering, and who is likely to take undue advantage of the service.
Learning About Making Easier Payments Abroad
The traditional banking process for overseas payments does not work properly anymore. B2B payment capability and international payments take time and cost a lot when done through a regular bank or via a wire transfer system. It is cumbersome for any bank to keep track of or have visibility of payments being processed on the wire network. If there are delays, calling the bank probably won’t solve your issue as they often don’t have the answers.
To re-emphasize, traditional banking is not suitable for small businesses. SMBs often make frequent payments and wire transfers (about five to 10 every month), between five to 10 thousand dollars. So, how can they keep track of that all with the traditional banking system?
With online banks, you can find options with no maximum limit for transactions, same-day or next-day payments, no monthly fees, 0% foreign transaction fees, low currency exchange markup, and zero or low ATM withdrawal fees.
When Should Small Businesses Turn to Traditional Banks?
Indeed, there are a few situations where SMBs would need a loan of say two million dollars, which most online banks don’t offer. In this case, they would have to turn to the larger institutions of traditional banking. Most online banking is transactional banking-based infrastructure, so if small businesses want to secure deposits too, again, a traditional bank may come in handy. You should look for whether the bank has FDIC insurance (for US accounts) or CDIC coverage (for Canadian accounts).
The reality is: Every business needs good online banking service for quick day-to-day business needs, loans with better terms, or more interest on savings. SMB business owners should stop doing the “plumbing” – trying to combine several different banking and payment services to run their business efficiently. With the right set of criteria, you should be able to find an online bank that is not only faster and more secure but one that meets all your business needs.
Sandeep’s 30-year career has been focused on building financial software and championing small businesses. He is a co-founder and Chief Business Officer at Truly Financial. With his company, he gives small businesses a global payments service and a seat at the table. Prior to this, he helped build the first multi-currency accounting software, grew one of India’s first community portals to nearly a million users, and was the founder of a global HR & Payroll Saas platform.
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