Virtual Banking, Demystified

South African banking used to be limited to four big players: Absa, FNB, Nedbank, and Standard Bank. It wasn't very exciting, but it was easy to understand, and more importantly, it was easy to trust them.

Today, there are a host of new banks without physical branches or the other trappings many of us expect. What's more, they offer low fees and fresh perks, that are very attractive.

If you're considering a move, you'll find the answers to a few FAQs around banking in the 21st century here, and why it doesn't need to give you any sleepless nights.

What is a virtual bank?

Virtual banks don't have physical branches (although TymeBank does have kiosks in retail outlets, like Pick n Pay and Boxer stores). Instead, they focus on offering a digital-first banking experience that prioritises slick online banking portals and mobile apps where customers can conduct transactions themselves. But perhaps most importantly, virtual banks offer innovative product offerings, transparent terms and conditions, and low (or no) fees.

How can a bank survive if they don't charge as much?

Digital-only banks save by not having any branches and the associated expenses that come with them. Often, they also save on other infrastructure, like core banking systems, by outsourcing much of their technological requirements to third parties. Those reductions in overheads can be translated into lower charges for customers.

Virtual banks still make most of their money the way conventional banks do, though. Although some don't charge a monthly admin fee, they earn interest on the money they hold for clients, and generate income from the fees merchants pay on card transactions, or banks charge one another to move funds between them.

Also, in the case of Bank Zero, virtual banks can choose to be structured as a mutual bank, not offer credit, and therefore not have to keep the sort of funds on hand legally required of credit providers.

So, what is a mutual bank?

Mutual banks have less onerous capital requirements, which means they can be more efficient in terms of how much money they need to have in reserve. They can, as Bank Zero does, allow their clients to effectively own a stake in the bank by holding certain products, and can offer group or community savings products (stokvels, for instance) to their customers far more easily than conventional banks can.

Can you trust virtual banks?

South Africa has some of the most stringent banking regulations in the world, and some of the most cutting-edge technology, thanks in part to the tenacity and persistence of fraudsters. Virtual banks are held to the same standards as their traditional counterparts, but have the added advantage of not being encumbered with old systems.

Virtual banks can verify a new client's identity by checking databases like the Department of Home Affairs, build in the latest security measures from the outset, and use the newest verification methods to protect against identity theft.

Digital-first banks can also use cutting-edge fraud detection technology like mobile phone location services in conjunction with other data — for example spending habits — to proactively identify and prevent your account from being hacked.

Like all banks, virtual banks have to protect their clients' data and safeguard them against fraud, because all it takes is one serious mishap for customers to flee.

Why should you consider a virtual bank?

Alongside world-leading security (great), South Africa also has some of the highest bank fees globally (not so great). If you seldom use cash, are comfortable with app-based banking, and don't need specialised banking services, virtual banks can save you a significant amount in bank fees, even when compared to the big-name banks' pay-as-you-go products.

Discovery Bank also offers attractive benefits like personalised interest rates that are adjusted based on your banking behaviour (much like Discovery Vitality, which rewards you for meeting fitness goals). TymeBank and Bank Zero on the other hand offer higher interest rates on positive balances than traditional banks.

If you're willing to put in a little effort getting to grips with how the incentives work and fees are charged, virtual banks could help to keep your banking costs down while boosting the return on your savings. Plus, who actually wants to go to a bank branch?

Read more: Banking Fees Guide for 2020/2021

This article is for informational purposes only and should not be construed as financial, legal or medical advice.