The world of banking has seen a number of changes in recent years, as the rise in technology and the Internet has allowed for the creation of new types of financial services. One of these developments is alternative banking, which refers to a range of financial products and services offered outside of traditional banks.
Alternative banking is seen by some as a welcome addition to the financial landscape, offering services that are often more convenient and cost-effective than those offered by traditional banks.
This type of banking can provide individuals with access to services such as online banking, mobile banking, peer-to-peer lending, microfinance, and more. The majority of alternative banking services are provided by fintech companies and independent providers, who often offer more innovative products than traditional banks.
So, what else should you know about alternative banking solutions, involving how they work, and why they have gained such considerable popularity lately?
We take a look at the answers to these questions below, as well as all of the other information and insight that you will require in order to understand the fascinating world of alternative banking.
What Is Traditional Banking?
The term “traditional banking” refers to the services offered by traditional banks, such as commercial and retail banks. It is usually the first thing that springs to mind when many of us think of “banking” as a general term or concept.
This type of banking has been around for centuries and provides a wide range of services, from savings accounts to loans, mortgages, and more.
While these traditional banking services can be very convenient for customers, they can also come with high fees and other drawbacks. This has resulted in many businesses and individuals seeking viable alternatives, such as the aptly named “alternative banking”.
What Is Alternative Banking?
When someone refers to “alternative banking”, they will typically be thinking about the range of financial services that are offered outside of traditional banks. It is independent providers and fintech firms that tend to provide such services, which can encompass the likes of online banking, mobile banking, peer-to-peer lending, and microfinance, among other things.
Generally speaking, the primary goal of alternative banking is to provide customers with more cost-effective and convenient solutions than those offered by traditional banks. Sure enough, this has been a major factor in the increasing popularity of alternative banking.
Types of Alternative Banking
Alternative banking comes in a wide range of types. Some of the best-known of these include:
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Custodial Accounts
A custodial account is a financial account established for the benefit of a minor, often managed by a parent or guardian. It serves as a vehicle to hold and manage assets, such as money, investments, and securities, on behalf of the child. Custodial accounts are typically governed by the Uniform Gifts to Minors Act (UGMA) or the Uniform Transfers to Minors Act (UTMA), varying by state. These accounts offer a way to transfer assets to a minor while maintaining legal control until the minor reaches the age of majority.
The custodian — usually a parent — manages the account, making investment decisions and withdrawals in the child’s best interest. Once the minor reaches the age of majority, the account ownership is transferred to them, allowing them to utilise the assets for various financial purposes.
Custodial accounts can hold a variety of assets, including cash, stocks, bonds, and mutual funds. They offer potential tax advantages and are a popular method for parents and guardians to provide for a child’s future financial needs, such as education expenses or other significant life events.
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Peer-to-Peer Lending
An increasingly popular form of alternative banking is peer-to-peer lending. As the name of this form of lending indicates, it offers individuals and businesses the ability to borrow money from other people, instead of borrowing from traditional banks or credit unions.
This type of lending is facilitated by dedicated online platforms, which match borrowers with lenders in order to provide loans. The loans are unsecured, meaning that the lender does not require collateral in order to extend credit. A variety of loan terms is possible, including fixed or variable interest rates and a wide range of repayment periods.
Peer-to-peer lending can offer many advantages for both borrowers and lenders. For borrowers, it provides access to funds that may not be available to them from traditional banks or credit unions. It also offers the potential for lower interest rates due to the competitive nature of the lending market. For lenders, it provides an opportunity to earn higher returns than more “traditional” investment options, such as the money markets.
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Fintech Banks and Companies
Another type of alternative banking is financial technology (fintech) banks and companies, which use technology to provide financial services. These companies are often referred to as “neobanks” or digital-only banks, as they do not operate physical branches, and instead offer services through online platforms or mobile applications. They typically offer a range of services, including payment processing, money transfers, investments, loans, and other financial products.
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Digital Currency
Digital currency is another form of alternative banking that has become more and more popular in recent years, seeing an explosion in popularity over the last decade.
Digital currencies, also known as cryptocurrencies, are digital assets that are designed to act as a medium of exchange, and that use cryptography to secure transactions. These currencies use blockchain technology to ensure transparency and decentralisation, allowing users to transfer funds without the need for a central authority.
Some of the most popular digital currencies include Bitcoin, Ethereum, and Litecoin. They offer many potential benefits, including faster transaction speeds, lower fees, and greater security than traditional banking methods.
Advantages of Alternative Banking
Some of the main advantages that customers enjoy from alternative banking include:
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Faster Transactions
A major source of appeal for many customers when it comes to alternative banking is the speed of transactions. In most cases, transactions can be completed within minutes or even seconds, whereas traditional banks can often take days and sometimes weeks for a transaction to be completed.
This is due to the fact that alternative banking solutions are often based on a digital platform. That, in turn, means there is no need to wait for the paperwork or manual processing that can slow down transaction processes.
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Lower Fees and Interest Rates
Fintech companies tend to operate with lower overhead costs than traditional banks, which allows them to offer services at a fraction of the cost. This can make possible lower fees for transactions, as well as lower interest rates on loans and other services.
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More Convenient Access
One of the main advantages that alternative banking provides is its convenience. Many solutions are based on digital platforms, meaning that customers can access their accounts and manage transactions from any device with an Internet connection. This, in turn, makes it much easier for customers to manage their finances on the go.
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Greater Security
Another major benefit of alternative banking – especially in the current economic climate and amid the rise of ever-more aggressive and sophisticated hackers – is that it tends to offer greater security than traditional banking.
Fintech companies tend to be much more advanced than a lot of their traditional counterparts when it comes to using the latest technologies to protect customer data and prevent fraud, making them a safer option for customers.
Moreover, many alternative banking solutions use two-factor authentication or other forms of verification to ensure only authorised users access accounts. This adds another invaluable layer of protection.
Are There Any Downsides?
As could be said about any financial service, there are always potential risks associated with alternative banking. It is therefore important that customers understand the risks before using any services – especially if they are planning to invest large amounts of money.
Some of the possible risks include:
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Lack of Oversight and Regulation
One of the most significant risks associated with alternative banking is that many of the services are not subject to the same level of oversight and regulation as traditional banking. This means that customers need to be extra diligent in researching the company they are using and making sure they are legitimate, as there is far from any guarantee that their money will be safe.
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Technology Failures
Due to the reliance on digital platforms for many alternative banking solutions, there is always a risk of technology failure or disruption. Although fintech businesses take steps to ensure their systems are reliable and secure, customers should be aware that there is still some scope for problems to arise.
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Lack Of Knowledge and Understanding
Although alternative banking can offer many advantages, it is important that customers have a good understanding of how the services work before they use them. This is particularly true when it comes to investing, as there are often complex terms and conditions associated with these services, and it is important that customers understand them in order to make informed decisions.
Final Thoughts: Alternative Banking Is Here to Stay
Alternative banking has become increasingly popular in recent years, and we don’t envisage that this trend will slow down at any point soon.
While there are some potential risks associated with these services, they can also offer many advantages. Such benefits can include faster and more convenient ways to manage finances, as well as lower fees and interest rates, and enhanced security.
Ultimately, the merits of alternative banking services will need to be considered carefully, and customers should ensure they are fully informed before using or investing in any services in this category. Remember, after all, that your money will be at stake when you take advantage of any such solutions.
With the sophisticated alternative banking services that we make available here at New Age Partners, we would be pleased to help give you the peace of mind you require when it comes to the management of your finances. Please feel free to enquire today to learn more about everything that we do.
