When it comes to business accounts, the high street bank is no longer your only option.
Neobanks, alternative banks, challenger banks – you've probably seen a few terms used to describe these versatile newcomers.
The truth is, no matter what you call them, new fintechs are causing a massive shift in the banking landscape.
They've helped startups get their businesses off the ground, opened borders for established firms looking to go global, and spurred 100-year-old traditional banks to start re-evaluating the way they do things.
But is alternative banking the right option for your business?
To answer that, let's look at some of the ways alternative banks have taken the lead over their older competitors.
Location, location, location
The most obvious difference between challenger banks and high street banks is that challenger banks are only online whereas high street banks have physical branches.
But is having physical locations necessarily an advantage? Many of us are doing all our banking from smartphones or computers, anyway.
In fact, you could argue that alternative banks have the edge here as they’re designed with online access as a priority, not an afterthought.
Since they don't have to spend so much money on maintaining physical infrastructure, they can pass these savings onto their customers in the form of lower – or even non-existent – fees.
They can also put this extra money into research and development, improving the services they offer and ultimately making it easier for clients to manage their businesses.
This brings us to another perk:
Neobanks come from the world of startups.
Where traditional banks are hemmed in by bureaucracy and bloated business structures with thousands of different divisions and services, alternative banks can move quickly and pioneer unique solutions to problems.
This flexibility extends to user experience. If you use software like QuickBooks or Xero alongside your business, neobanks offer the ability to integrate these – and other third-party apps – with your account dashboard through APIs.
The result is streamlined and simplified management of your business finances.
Onboarding with a traditional bank can take weeks, and possibly at least one trip to a local branch.
An alternative bank account is much easier to set up. 3S Money's application process, for instance, takes about 15 minutes, and you'll get a response within 5 days. And of course, onboarding is entirely remote.
Traditional banks don't have the best track-record at providing financing for small-to medium-sized enterprises (SMEs). They tend to favour larger companies because they represent a better return on investment.
They will also avoid businesses they consider to be risky, as well as large segments of the population that remain "credit invisible".
As a result, so many SMEs and innovative startups are looking for financial solutions to support their growth. This, more than anything else, has opened the field to challenger banks.
Depending on the alternative bank, customers can access personal and startup loans. For instance, Starling Bank offers SME loans from £25,001 to £250,000 to UK-based businesses.
Alternative banks are more likely to use alternative lending models like cash-flow based lending that open opportunities to entrepreneurs who may not (currently) have much in the way of assets.
Other neobanks provide peer-to-peer lending. These are loans provided by “normal” people who can look at each individual case and decide whether they want to support a particular business concept.
This way, people with low credit scores or insufficient credit histories can gain access to loans, and investors can get a much higher rate of return than they normally would.
Overall, alternative banks help democratise the business world by enabling entrepreneurs – no matter where they're from or how much startup capital they have – to launch and grow their companies.
Traditional banks have a curious, complex business model: they use money deposited by their clients to fund loans and make money by charging interest on these loans. They'll take some of that profit and give it to account holders when they make a withdrawal.
In other words, the money you deposit is never really "in" your account.
So, what happens if a big bank goes under? According to FCA regulations, if a traditional bank fails, you're guaranteed to receive at least £85,000. This is known as a deposit insurance scheme.
Well, that's great, but £85,000 may be just a small part of your business's total cash assets. In other words, if a traditional bank collapses and takes all your working capital with it, your business might not be able to recover.
Alternative banks utilise a different mechanism called safeguarding, also required by FCA regulations.
With safeguarding, money in clients' accounts is stored separately from the alternative bank's own corporate finances.
Clients' money is kept in what are known as tier-1 financial institutions. This type of solution means, ultimately, that your money exists independently of the bank's own stability.
Banking licences vs. EMIs
Most alternative banks don’t have traditional banking licences – instead, they have EMI licences. EMI stands for electronic money institution. Simply put, EMIs are allowed to deal with electronic money (e-money).
If you've ever used a service like PayPal, you've used e-money.
Since so many of our transactions are performed online now, EMIs can provide many, many services. However, they can't offer some features common in traditional banks such as loans, credit cards, or savings accounts.
Some challenger banks, such as Starling Bank, have received their banking licence.
But for those that don't, there's a way around this issue: they can partner with traditional banks and provide these services through them. For example, US-based neobank Chime partners with several banks to offer a high-yield savings account.
Tide, on the other hand, offers a Mastercard that you can use just as easily as one issued by a traditional bank. So, by looking through various neobanks, you can most likely find one that offers the services that may be critical for your business.
Neobanks are specialised
Traditional banks provide a lot of services – they're not really focused on any one area. Challenger banks often are. They may have been founded by people with niche knowledge who can offer complete business solutions.
This reflects 3S Money's story - our Founders had set up a business in the Netherlands, but couldn't open a local bank account because they didn't have Dutch citizenship.
Fintech helped us get around this problem and expand our reach globally. Now, we help both startups and larger businesses in over 190 countries do the same.
International business is one area where traditional banks are seriously lagging behind alternative banks.
Say you want to send a payment from the UK to Spain. Using your local bank's wire transfer, you'll pay a transfer fee of perhaps £20-£30.
Not only that, but you'll have to pay more on top of the exchange rate. Here’s why.
If you Google “1000 pounds in euros” right now, what you'll see is the mid-market rate. This is the number at which buyers and sellers are willing to meet – it's exactly what your £1,000 is worth at the minute.
For the sake of this example, let's say the current exchange rate is £1,000 = €1,100. When you send the £1,000, the recipient should be getting €1,100. But they've only received €1,000. What gives?
Well, to make a profit, your bank has taken some off the top. With the cost of the wire transfer and the markup on the exchange rate, you've lost around £110 on this deal.
Now, imagine if you're sending and receiving much larger payments, and you're doing this frequently. You're going to be losing a lot of money.
Thanks to their lower maintenance costs and superior online integration, EMIs can charge much less than traditional banks – for example, 3S Money charges just £0.60 for sending payments regardless of the transaction size.
That’s about 5x less than your high street bank.
Not only that, but your payment will get there faster. Wire transfers can take 1-3 days, whereas 3S Money payments take a few hours at most. Traditional banks also often charge to receive wire transfers. So, if you're moving money from your exports in Poland to your domestic account, for example, you'll possibly pay a fee.
Overall, challenger banks help you preserve the value of international transfers in a way that traditional banks can't offer.
The traditional way to manage international financial transactions is to have different bank accounts in different countries: you have your euro account in Italy, your zloty account in Poland, and your yuan account in China.
But is this really the best way to do things? You do have to pay fees on all these accounts, after all, and sending from one to another will bring in those transfer fees and unfavourable exchange rates.
With a multi-currency account from 3S Money, you can send and receive more than 65+ currencies across 190+ countries, all from a single dashboard.
The innovation of local IBANs
Something else that makes alternative banks the better choice for cross-border trade are local IBANs.
These international bank account numbers allow you to set up local infrastructure without the hassle of trying to open a domestic bank account. If you live in one of the more than 190+ countries we work with, your 3S Money account provides you with the equivalent of a US, UK, and EU bank account.
As you can imagine, this helps immensely in doing business in any of these regions.
With competitive exchange rates, multi-currency accounts, and local IBANs, 3S Money offers the best business bank account for startups looking to go international.
Customer service and support
The advantages of challenger banks don’t end there. Getting support from a high street bank isn't always easy.
Even when you do get through on the phone (and manage to speak to an actual human), you'll likely have to call back more than once before your problem is solved.
As the new contender, without physical locations, neobanks have put a lot of effort into making sure their phone and online support are top-notch. Usually, accessing customer support is as easy as swiping a few times on your phone app or pressing a button on your web-based dashboard.
3S Money goes a step further – you'll get a dedicated Client Manager with expert knowledge in cross-border trade.
While banks are mainly for storing and accessing funds, EMIs tend to be more comprehensive. Some companies, for example, offer budgeting tips and tools built into their platform, helping clients grow their businesses sustainably.
Sign up for a 3S Money account today
So, as you can see, alternative banking offers just about everything traditional banks can, often with a lower price-tag. In some areas, they offer more.
You're in business to make money, not to have your revenue slowly drained by banks taking a share every step of the way.
Especially if you're doing international business, challenger banks can save you a great deal of money and help you grow.
If you're ready to access new markets, save money on currency exchange, and bring your business to a new level, consider applying for a 3S Money International Business Account today.