What Is a Virtual Bank Account?

Virtual bank accounts have been on the rise for the past couple of decades and offer unique possibilities and challenges compared to traditional bank accounts. Whether you are thinking about opening a virtual bank account or even offering virtual bank accounts of your own, having some knowledge about what a virtual bank account is and how it works will help you make an informed decision.

What Is a Virtual Bank Account? The Basics

Virtual bank accounts are bank accounts that are held with an electronic money institution that doesn’t have physical branches or automatic teller machines (ATMs). Examples are Wise (formerly Transferwise) in the U.S., Monzo and Revolut in Europe and Starling Bank in the United Kingdom. Digital banking is one of the top financial trends that are transforming e-commerce.

In contrast to a traditional bank account that you can manage with in-person banking, telephone banking and online banking, virtual accounts are managed entirely online through a mobile or desktop interface. They can even be used by e-commerce merchants as an alternative payment method. The merchant can simply ask their merchant services provider to add the virtual bank e-wallet to their payment gateway.

How to Open a Virtual Bank Account

To open a virtual bank account, you will typically fill out a web form and upload pictures or scans of your local ID to verify your identity. Many virtual banks also use biometric authentication such as fingerprint scans and facial recognition, so you might be asked to register your biometrics at this point.

Once your account is up and running (usually within minutes), you will be given a virtual international bank account number (vIBAN) and can begin to transfer funds between your virtual accounts and physical accounts, make international money transfers, allocate funds to savings jars and apply for credits and loans.

Debit Cards

Many virtual accounts come with virtual or physical debit cards that you can use to make purchases and withdraw cash—bridging the virtual and physical divide. Virtual cards can be used to complete transactions through a global payment gateway for:

• Making online purchases
• Making online bill payments
• Paying for subscription services

Physical debit cards can be used to:

• Make purchases at any store with a point of sale (POS) terminal
• Withdraw cash at stores that offer cash-out with purchases
• Withdraw cash from participating automatic teller machines (ATMs)

Multi-Currency Accounts

In contrast to standard bank accounts, virtual bank accounts can hold money in a wide range of currencies, including both fiat and cryptocurrencies, and can be opened in different countries. This centralised yet borderless approach to banking is especially helpful for customers who travel regularly or who work or employ others across borders.

In-House Virtual Bank Accounts

For businesses, virtual bank accounts offer an exciting opportunity that is becoming more widely known with the rise of fintech-as-a-service (FaaS), and that is the possibility of creating in-house banking services using a virtual banking API plugin. While the technology itself is maintained by a third-party provider, in-house virtual bank accounts are actual bank accounts that can be used to pay employees domestically and abroad—often saving employers significant amounts of money in the form of reduced transaction fees.

Benefits of Virtual Bank Accounts

Virtual Account Management

With a virtual account, customers don’t spend time physically going to the bank, filling out paper forms and waiting to speak with a teller or customer service representative like they would with traditional banks. Virtual bank accounts can be accessed and managed anywhere—as long as the customer has an internet-connected device—saving time, paper and hassle.

Lower Banking Fees

Because virtual banks have low overhead costs (no physical branches or ATMs to maintain and far fewer employees to pay), account and transaction fees are often much lower than they are for physical accounts. Alternatively (or in addition), virtual banks might pass these savings on to their customers in the form of higher interest rates for savings accounts and lower interest rates for loans.

Easier International Payments and Remittances

International money transfers through the traditional banking system tend to be expensive and slow—a pain point that virtual banks have sought to address. With a non-physical bank account, customers are not tied to any one location or even country and can make cross-border payments cheaply and quickly—sometimes in real time!

Multi-Currency Capabilities

Just as a non-physical bank account isn’t tied to a specific location, it’s also not tied to a specific currency. In contrast to a regular bank account, which is limited to Euros, dollars or pounds, virtual bank accounts can typically hold multiple currencies at the same time, saving on currency conversion fees.

Budgeting Support and Gamification

Finally, virtual bank accounts use artificial intelligence (AI) and machine learning (ML) to provide customers with insights into their spending habits and help them reach their savings goals. Many virtual banks use gamification—offering customers virtual badges and trophies as a reward for reaching their savings goals.

Challenges and Risks of Virtual Bank Accounts

Deposits and Withdrawals

With a physical bank account, deposits and withdrawals can be performed in person or through an ATM. For virtual bank accounts, deposits can only be made electronically or by mail. Likewise, withdrawals are usually tied to another bank’s ATM network and may come with a cross-institution fee. Most virtual banks get around this by forming relationships with traditional banks or reimbursing a certain number of withdrawal fees per month.

Cybersecurity

Digitising customer data puts virtual bank account information (and funds) at risk from hackers, identity theft and fraud. Fortunately, virtual banks are ahead of the curve as far as cybersecurity is concerned and use advanced fraud prevention tools. Merchants using virtual bank e-wallets can ensure an additional layer of security by choosing a payment processor that offers a complete range of merchant services, including advanced fraud prevention tools and chargeback mitigation.

Regulation

Virtual banks can be harder to regulate due to their virtual, international nature. However, just like traditional banks, electronic banking institutions must be registered with their local banking authorities. For virtual banks in the United Kingdom, this includes the Financial Conduct Authority (FCA) and optionally, the Financial Services Compensation Scheme (FSCS). As well as registering in the country where they are headquartered, virtual banks have to comply with local and regional regulations, including the General Data Protection Regulation (GDPR) for banking institutions located in Europe.

Customer Service

Last but not least, virtual banking comes without the one thing that sets physical banking apart—face-to-face contact with human beings. Getting answers to your questions or solving a problem with a live customer service representative—although you may have to wait your turn—often ends up being more efficient than messaging back and forth with a chatbot and waiting for a call-back from a customer representative overseas.

While 24/7 customer support and a robust technical support team usually get around this issue, some people still enjoy the human interaction that they get with a traditional bank. This is reflected in the fact that 19% of the people who responded to a global survey wanted digital banking services to make it easier to speak to a human representative.

Is a Virtual Bank Account Right for You?

Virtual bank accounts come with unique possibilities—such as multi-currency transactions and fast, affordable international remittances. They also come with unique challenges, including complications with deposits and withdrawals and the lack of face-to-face communication.

What most people ultimately do is use a virtual bank account for international transactions and a physical bank account for in-country transactions, deposits and withdrawals. This best-of-both-worlds approach maximises the benefits of each type of bank account and reflects the local-global mindset of 21st-century account holders.