The way we manage our finances has evolved over the past two years. Cash usage continues to steadily decline with the growth of online retail and with fewer shops accepting physical money. At the same time, people and businesses are increasingly using virtual bank accounts via challenger and neo banks as well as non-bank financial organisations. For instance, the UK-based online bank Monzo which provides its users with virtual bank accounts now has over five million customers. But what exactly are virtual bank accounts, and how are they different from more traditional “physical” bank accounts?
First things first, there’s an important difference between a virtual bank account and a virtual e-money account we need to get out of the way.
A virtual bank account is provided by a virtual bank (sometimes referred to as a direct bank). It’s a non-physical bank account that exists with a solely online banking provider. In other words, it’s a fully FCA or equivalent regulated bank that’s branchless. Examples of popular virtual banks include Mercury Bank, Starling Bank, and N26—all of which provide their business and personal customers with virtual bank accounts. These fully licensed virtual banks and their virtual accounts are insured by the FSCS (Financial Services Compensation Scheme) in the UK up to £85,000 and they function just like traditional, high-street banks do—just without the brick and mortar branches.
In comparison, virtual e-money accounts are usually provided by business financial platforms that don't have a banking licence. That said, they function in a very similar way to virtual bank accounts and many people may not even notice a difference as they go about their daily banking activities. Your money is stored electronically in your virtual e-money account and you can receive payments as well as use your funds to make transfers and send payments. Financial platforms that provide virtual e-money accounts include Tide and Wise (formerly Transferwise). Virtual e-money accounts are not necessarily covered by the FSCS, but they are often covered by other private insurance schemes. Sometimes called ‘safeguarded funds’, these insurance schemes provide a similar level of protection as the FSCS, essentially meaning your money is protected and safe in e-money accounts.
Now you understand the basics of virtual bank accounts (and virtual e-money accounts), let’s dive into how they’re different from traditional bank accounts.
The main difference between a physical and virtual account lies in the way they handle and manage your money, as well as certain features such as borrowing and lending.
Virtual bank and e-money accounts are usually ring-fenced. This means that the bank or financial platform securely holds your money and does not use it for investment or other purposes. In comparison, the vast majority of traditional ‘high street’ banks reinvest and lend out customer money.
Businesses using non-ring-fenced bank accounts with traditional banks can run into some hurdles. These include waiting periods (sometimes several days) for withdrawing or transferring large sums of money as the bank must first clear the funds and authorise their release. In comparison, the majority of virtual bank and e-money account users have instant access to their money and they can handle and manage it as they please. This is because virtual bank and e-money account providers do not reinvest customer funds.
Some virtual banks and financial platforms such as Revolut and Tide don’t offer overdrafts facilities to their customers and this could be seen as a major downside to virtual bank and e-money accounts. However, there are several virtual banks and financial platforms that do offer competitive overdraft rates and loans including Rho and Revolut—so it’s important to check what features you need if you’re considering opening an account with a virtual provider. What’s more, almost all major virtual banks offer competitive interest rates on savings, making them almost indistinguishable from a physical bank. Plus, they have greater in-app functionalities meaning you can do all your banking from your mobile.
You’ll likely see very little difference between a virtual and physical bank account as you go about your daily banking activities. This is because both account types act in a very similar way. Virtual bank accounts such as those with Monzo and Starling work identically to a traditional bank account, issuing physical bank cards and protecting customer money through FSCS. Plus, many virtual banks also offer similar facilities as their traditional counterparts such as overdrafts and loans.
However, there are some differences you should be aware of.
One of the main differences you’ll likely notice if you use a virtual bank or e-money account is the option to easily open new virtual accounts in different currencies and to convert your funds from one currency to another quickly and at cost. This can be a fantastic benefit if your business sends and receives payments in different currencies. In fact, having virtual accounts with some providers is like having multiple overseas bank accounts. With Wise, for example, you can hold money in over 50 currencies and conversions are automatic. This contrasts sharply with physical bank accounts and their providers, as they often only offer SWIFT and IBAN services for international transfers which can incur relatively high costs and take considerable time to process.
Some virtual bank and e-money accounts, including rebank, offer international batch payments for larger pay runs which can be a great option for paying remote staff living overseas.
By utilising virtual accounts, you and your business can benefit from features including automatic currency conversion and seamless international transactions. Money deposited into virtual accounts is also protected through ring-fencing and private insurance schemes meaning your funds are well protected. Virtual bank and e-money accounts can be an excellent alternative to traditional, physical bank accounts but it is important to check first what features you require and choose accordingly.
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