Garnet Capital Advisors Blog

July 9, 2015

Virtual banking billed as the new market disruptor

Virtual banking has been billed as the new market disruptor to the banking sector. Although these new entrants offer debit transactions and money-tracking software, virtual banks still only offer one-tenth of the options of a full-service bank, according to American Banker.

Emergence of virtual banking
As the new banking landscape continues to form, financial tech startups like the Simple and Moven smartphone apps have made their presence felt on the market. Being hyped as the future of banking, these virtual banks are seen by many as the new market disruptors. Brett King, founder of Moven, noted in a CNBC interview that the retail branch will be a thing of the past.

"The biggest banks in the world in 2025 will be technology companies, and banks that grew through branch acquisitions in the '80s and '90s, that grew by physical bank presence, will have a real problem," King commented.

One of the ways in which virtual banks like Simple and Moven have been successful is through contracting with FDIC regulated institutions, enabling them to offer users easy-to-use debit transactions and tracking software on smartphones. This has created a fruitful niche market for early movers. In fact, after Simple's sale to BBVA Compass last year, it appears they are set to expand their service options as well.

However, despite their positive reviews in the early stages, these virtual banks have several key issues to resolve.

Issues with virtual banking
Some of the critics have noted that the problem with virtual banks is that they are dependent solely on smartphone technology. As Kevin Tynan noted in American Banker, it is difficult to ensure long-term financial security when consumer banking is solely predicated on smartphone battery life and Wi-Fi connections. Tynan also claimed that this represents its own potential share of regulatory oversight, cybersecurity and banking system stability issues.

There are other issues concerning services provided as well. These financial startups may call themselves banking institutions, but they do not offer credit cards, lending options, business accounts, personal financial management services or investment advice. This is a contentious issue for millennials because a recent ORC International survey noted that 84 percent of 2,018 banking consumers aged 18 and older still prefer the full-service options available to them by traditional banks. 

Ultimately though, the primary concern of financial tech startups is that they cannot exist without traditional banking institutions. Smartphone apps like Simple and Moven partner with banks for insured deposits and checking accounts, meaning that the technology does not yet exist for a standalone virtual bank.