Online banking services have been fast growing in popularity over the past decade, indeed they have become the norm in many developed countries. However, the COVID-19 pandemic has pushed the progress of this industry forward at an incredible speed. This change has also spurred the growth of online banks, often referred to as challenger banks. Because these banking service providers are fully online, they have lower overheads and can offer cheaper services. Now these banks are partnering with FX brokers in order to cut their money transfer costs to the minimum. With these incentives at their disposal, they are poised to gain the advantage they need to truly sideline traditional banks in the market.
The Matter of Online Banking in the 21st Century
While even a decade ago online banking was used by small groups of highly privileged people, today it has become widespread. It is more popular in developed countries because the availability of the necessary technology is much greater. That said, even developing countries are embracing it and using the power of digital banking to boost their economies through remittances.
Overall, it is widely accepted now that online banking will inevitably replace visits to traditional bricks-and-mortar branches. Now it’s just a matter of whether dedicated online banking providers will replace their more traditional counterparts.
The competition within the banking industry is growing ever more intense, which is very beneficial for us as customers. Whilst the newer players aren’t at the same level yet, they are already challenging more traditional providers to up their own games. The banking industry has been quite stagnant, and today it is forced to fight to retain customers. Some of the benefits which have resulted from this include a more versatile selection of cards and accounts, better interest rates, cashback, and even banks giving you money for opening an account with them.
However, whilst online banks are revolutionizing the industry, they are not as yet in a position to fully usurp the dominance of traditional institutions. But this might be changing now that they are partnering with forex brokers in order to offer their customers cheap and fast international money transfer services. Considering how important this service is in the modern globalized world, this partnership might yet be the tipping point.
Online Challenger Banks Are Now Offering Cheap Global Money Transfers
One of the bigger problems that big traditional banks have in the eyes of customers is that the international money transfer services they offer are usually expensive. The cost of these types of transactions can range from about 3% to 10% or even more for some currency corridors. A big part of the reason why these services are so costly is that banks use an unfavorable foreign currency exchange rate. They have margins which benefit banks instead of clients. Thus you may end up paying over the top for a transaction without even realizing it.
Now though, exclusive online banks which hitherto had no opportunity to challenge this particular order of things finally have the chance. Institutions such as Virgin and Starling in the UK are working with FX brokers to make it possible. Starling Bank’s international payments now cost only 0.4% of a transaction fee over the inter-bank rate. This means that customers can save a lot of money on each and every transaction, not to mention other benefits offered by online banks.
It is true that challenger banks are still in the development stage, but developments indicate that they will soon be in a position to match traditional banks for service provision. When this happens the majority of consumers will have no reason to stick with overpriced services.
Pairing up online banks with FX brokers means that customers receive not only an additional layer of security, but convenience as well. This also means they will be able to meet all their money-management needs in one place. Moreover, they won’t have to look for a better broker every time they need to make a transfer.
This level of stability in their customer pool will help these challenged service providers to grow, and governments will be quick to catch up.
The Matter of Legality
One big concern which stops many people from using the services of online banks is their lack of regulation. At present this industry is poorly regulated, so the risks are quite real. But as the industry grows, changes are bound to occur.
There are already reputed financial authorities, like the FCA, which audit and monitor these providers. Once their full legal status is confirmed, they will be able to offer the same services as traditional banks do. At the same time it is important to note that it’s the very fact that FX brokers work in the murky waters of unregulated FX markets which helps them to keep their rates low. So should they be subject to the same international money transfer rules as banks, they might lose their competitive edge.
The good news is that under the current legislation, it is impossible to make online banks and FX brokers comply with those laws. As such the system would be changed by default. Considering the progress being made toward digitalization, it is highly unlikely that any new legal regulations will be outdated and restrictive. After all, to do this would mean hindering the country’s economy by weakening its global trading position.
Final Thoughts: Are Online Challenger Banks Our Future?
Online banks are definitely growing and offering better and cheaper services. This gives them a competitive advantage that one cannot overlook. It’s all the more important now, when the world is heading into the worst economic recession since World War 2. Today, everyone has to re-evaluate their savings and money management plans. Switching to a challenger bank which offers better terms is a very sensible strategy in these circumstances. Even if you don’t do this right away, it should definitely be on your list of personal finance tips to keep in mind.
As more people come to realize this and understand the benefits that these banks offer, it’s possible that the industry will be redefined. After all, online banks already have the means to be nearly as secure as traditional ones. And the majority of the world’s money exists in digital form anyway.
There is nothing to stop these challenger businesses from toppling the mammoths of banking. That is, of course, unless traditional banks accept the challenge and themselves embrace innovation. If this happens, they might be able to offer even better terms. Plus, they will have a long history of reliability on their side.
However, it remains to be seen if any of these changes can happen in time to stop the rise of online banks.