Virtual Banks

Introduction

Continuous innovation in technology has altered the way in which business is conducted in each industry. This is especially true for that of financial services or banking. The banking world has evolved tremendously since its inception with most recent trend being towards the development of an online platform. Most Institutions currently offer financial solutions via branches as well as over the Internet. The appeal of online activity has in turn led emergence of online only or “virtual” banks. Virtual Banks Defined

A virtual bank is one that exists online only in which nearly all financial transactions are conducted over the Internet. The differentiating factor for online banks is the absence of physical branches and ATMs. Also referred to as direct banks, these entities offer identical products and services to its compared to traditional “brick and mortar” institutions. This includes opening checking and high interest savings accounts with which bill payments, transfers, deposits and withdrawals can be made. Client’s can access money via partner ATMs or attain cash back at point of sale at certain merchants.

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Deposits are made directly, by mailing a check, and partner ATMs. Moreover, investments, lending products and professional advice can be acquired through the respective website. Furthermore, most virtual banks are insured by the FDIC (Federal Depository Insurance Corporation). Brief History Banks began to move online with the commercialization of the Internet in the 1990s. Traditional brick and mortar banks were seeking ways to reduce costs simultaneously providing quality products and services. The solution was discovered by the development of an online system.

Considering the success of the launch of online banking, institutions began to expand their online presence through website innovation and improvements as well as by diversifying their online product and services offerings. Following the establishment of an easily accessible and profitable online banking structure, virtual online only banks emerged. These entities were successful in overhead cost reduction having only to support the costs of a single online computer network rather than those of operating physical branches and ATMs. This enabled the provision of higher returns to their clients.

The first fully functional direct bank insured by the FDIC was the Security First Network Bank, based in Atlanta, It began operations on October 18, 1995 and was eventually bought out despite having been the first to prove the viability of virtual banks. Competition The rise of online only banks has stimulated further competition within the financial industry. These institutions face heavy competition from traditional counterparts who excel in both online and personal customer service experience. Each provides respective benefits and drawbacks however; clients may choose to utilize both options and make transfers between the two.

Major Players

There are several major players within the virtual banking segment of the financial services industry. INGDirect, is currently ranked first amongst competitors. HSBCDirect follows ranked second. Others include: Ally Bank, Banco Best, Discover Bank, First Direct etc. Use Amongst Canadians: Some Statistics Online banking is experiencing continuous and rapid growth. It has become the most popular means of conducting financial transactions. According to the Canadian Bankers Association, more than half of Canadians have used online banking within the last year.

Its use is increasing amongst all age groups as the ease and convenience of these innovations is valued. ? 47 per cent of Canadians now use the Internet as their main means of banking, up from only eight per cent 12 years ago. ? 53 per cent of young Canadians between the ages of 18 and 34 say online is their main way of banking as do 45 per cent of those 55 or older. ? 41 per cent of Canadians report that their use of online banking has increased, while only four per cent say it is on the decline. (According to the Canadian Bankers Association) Benefits vs.

Drawbacks of Virtual Banks

Online banking websites are widely used in today’s society. The way in which individuals conduct transactions is dependent on accessibility and time constraints. One must also consider desired return and the importance of lower interest rates. Customers must weigh the benefits and drawbacks of each option using these criteria when choosing between a traditional branch system and an online only bank. There are both advantages and disadvantages in respect to virtual banks Advantages There are several benefits to using an online only bank.

These include convenience, higher returns, ease of use and environmental friendliness. A. Convenience Online only banks are convenient for those subject to time constraints such as working long hours, attending school and caring for a family. Most branches are limited to open hours of between 8 am and 5 pm, and are closed on weekends. These conflict with the work and school hours of many people. For this reason, numerous individuals are unable conduct their required banking transactions at a branch. Moreover, branches may be difficult to reach for the elderly and physically impaired.

Virtual banks solve these issues by being accessible and operable 24hours a day, 7 days a week. Further, with the development of smart phone applications, Virtual banks have become even more advantageous in terms of convenience and accessibility. With the creation of a bank application the customer can easily access his bank account balance with a touch on his phone. B. Higher Returns and Lower Transaction Fees Customers can benefit from competitive rates by bringing their business to virtual banks. Lower rates are offered on loans as well as higher returns on savings accounts and investments.

Direct banks can afford to provide their customers with these advantages due to the reduction of overhead costs caused by the elimination of branches and ATMs. These institutions spend significantly less on human resources and equipment than do traditional banks. In addition to competitive rates, virtual banks do not charge fees for financial transactions. A client may conduct an unlimited number of transfers, bill payments, deposits and withdrawals free of charge creating big savings for customers in turn. Compared to traditional banks, customers will pay less for more. C. Ease of Use

The ease of use of virtual banking products and services is another major benefit. This is facilitated by the clarity, design and value added features of the respective bank’s website. Opening an account can be easily done on the institutions’ website submitting all required documentation over the net. The steps for each desired transaction are included and help is provided upon request. Once familiar with the internet and website navigation, virtual banks are extremely easy to use. D. Environmentally Friendly Finally, Online-only banks prove to be an eco friendly alternative to traditional institutions.

Paper waste is almost entirely eliminated as all required documents are directly uploaded and submitted through the respective bank’s website. There is no longer the need for transportation lower fuel emitted by vehicles. Also, the elimination of branches and ATMs decrease requirements for technological equipment and thus lower energy consumption. Disadvantages Although the technological advancements of virtual banks have created much needed solutions for today’s banking industry, some of its benefits are offset by several drawbacks.

These include; the lack of a personal experience, transaction problems, service issues, the learning curve and online security.

Face-to-Face Banking Relationship

Virtual banks eliminate the face-to-face relationship that is created in the traditional banking environment. Building a relationship with bank representatives such as account managers, loan officers or tellers facilitate the process in which customers fulfill banking needs and are important to many people. Bank representatives resolve issues such as changing terms in their banking agreements or reversing undeserved fees.

As well, these representatives get to know their clients better, and are able to tailor the banking services to their unique needs and personal circumstances. Transaction problems Complex transactions or errors may require direct and timely assistance from bank representatives. A traditional bank can be called for support or a visit to the branch can quickly solve the issue at hand. Customers of virtual banks do not have the option of attaining timely aid, as this requires waiting on the phone for a representative in hopes of solving the issue at hand.

Service Issues

Another disadvantage stems from the lack of human resources amongst virtual banks. Regardless of accessibility, certain transactions may require signatures or stamps from a financial institution in order to be processed. These are transactions, which cannot be processed through a virtual bank. As well, traditional banks thrive on the provision of excellent customer service. This is a major factor in customer loyalty and retention as well the acquisition of new long-term client relationships.

Virtual banks cannot compete on this matter as only standard services are provided to all clients equally over an impersonal online venue. Learning Curve Most of the individuals who visit a branch regularly will find the transition to virtual banks quite complex at first. This is due to the fact that virtual banking pages can be hard to navigate and might be complicated for those who are unfamiliar with the virtual bank page or the Internet in general. Consequently, time may be required for traditional bank users to adjust to this technologically advanced service.

Online Security

As a technological society, security has become a primary concern to all Internet users across the globe. Issues ranging from fraud to identity theft decrease consumer confidence in the Internet driven services offered in today’s economy. Virtual banks are governed by the same laws and regulations implemented by the FDIC within the traditional banking sector. Online banking accounts can be subject to hackers, phishing or malware that may disrupt processes or allow the processing of unauthorized activities within these accounts.

Traditional banks offer solutions such as scanned copies of cleared checks to its clients in order to prevent fraud. Virtual banks cannot offer substantial record keeping measures as such to identify and prevent such interferences. Implementation of Virtual Banks in Canadian Banking System Given the advantages that online banks provide, it is widely believed that most of retail banking operations will be done through electronic means in the near future. Does that necessarily cause established banks in Canada to look outdated and force them to go out of business?

In our point of view, those banks will remain the major players in the future and the only change that we believe is going to take place is the adaptation of these banks to changes in technology and emergence trends. Let’s recall the introduction of access cards in the banking system. Though this introduction brought a large amount of advantages with it, it was still confronted with considerable resistance. Today, we are to some extent in the same position. The trend of virtual banks is inevitably coming, but it also brings disadvantages into play, as previously discussed.

Since it takes time for people to get comfortable with new innovations, banks can establish a plan with short and long term goals to accommodate the changes in the industry. We believe the plan below will help modernize the big banks in Canada towards the trend of Direct Banking.

• Create a parallel direct bank for the sole purpose of virtual banking Our first suggested step is the creation of a banking line that solely operates online similar typical virtual banks. Customers are expected to move their funds from conventional accounts to the online-only accounts because of their convenience and advantages.
• The cost of maintaining such virtual accounts is considerably lower; hence banks can offer competitive rates as a tangible incentive for customers to switch to direct banking.
• Increase the number of ATM machines Banks should make it more convenient for their customers to access and deposit cash without having to go to a teller. ATM machines should be more available to stakeholders; either through direct investment of the bank or through outsourcing to one of the established ATM Machine providers operating in Canada.
• This was the strategy of American Direct Banks to ameliorate their service and attract even more customers. After all convenience is a key aspect clients look for when it comes to their banking choice.
• Reduce the number of branches In order to meet required profit margins, and given the incurred expenses caused by the additional benefits they will be offering (more competitive rates), banks are expected to cut their costs. Since operations will take place in a virtual environment, brick and mortar branches will become less necessary.

Banks at that point can start merging their branches and close-down others. Downsizing of some locations could also be an option. For the above plan to be successful, it is essential to monitor the change in consumer preferences and implement each step accordingly. After establishing a plan, it is essential to study the feasibility of it given the circumstances. The literacy rate in Canada has been 99% in 2003 and is close to perfect score nowadays (Gordon, 2003). Moreover, In 2010, close to 80% of Canadian households had access to the Internet (Statistics Canada Web, 2011).

The country possesses one of the most advanced communication networks in the world making direct banking technically easy to introduce and more importantly, logical.

References

1. Canadian Bankers Association.
2. How Canadians Bank.
3. November 9, 2012. http://www. cba. ca/en/media-room/50-backgrounders-on-banking-issues/125-technology-and-banking.
4. Accessed November 18th, 2012 Canadian Internet Use Survey, May 25th, 2011.
5. Statistics Canada Web. http://www. statcan. gc. ca/daily-quotidien/110525/dq110525b-eng. htm, accessed November 18th, 2012. Gordon, Elaine H. Gordon, Edward E. (2003).
6. Literacy in America: historic journey and contemporary solutions. New York: Praeger. p. 255. ISBN 0-275-97864-8. Investopedia. The Pros and Cons of Internet Banks. April 14, 2011.
7. http://www. investopedia. com/articles/pf/11/benefits-and-drawbacks-of-internet-banks. asp. Accessed November 18th, 2012 Weisbaum, Herb. Looking for Better Rates? Visit a Virtual Bank. July 29, 2009.
8. http://www. msnbc. msn. com/id/32206206/ns/business-consumer_news/t/looking-better-rates-visit-virtual-bank/#. UKRTuxzok1A. Accessed November 18th, 2012

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