The rise of alternative banking

The global financial crisis of 2008 represented a watershed moment for the traditional banking industry, and whilst we are a long way from those dark days in 2023, recent high-profile incidents have led to increased focus on the sector.

Alternative banking options, which have steadily grown in popularity due to their long list of benefits, are emerging as leading solutions to restore a sense of security.

In this article, we’ll discuss the reasons behind the rise in alternative banking and why alternative banks might be the safest place to keep your cash in an uncertain market.

Recent black swan events have prompted counterparty scrutiny

If firms can take one lesson from the recent tumult, it’s the benefit of engaging diversified banking partners. Alternative banks, including electronic money institutions (EMIs), have become popular for those seeking a more user-friendly experience, flexibility with short-term lending, and greater transparency.

Some firms are wary of alternative banking, however, in the UK, EMIs are subject to strict regulation and oversight by the FCA. But as with any counterparty, a bit of due diligence goes a long way. Not all EMIs or other banking alternatives are created equal, so look into the bank’s diversification and the state of its liquid assets before moving your money around.

For their part, firms can diversify their banking risk by splitting up limits and using multiple counterparties to ensure they aren’t putting all their proverbial eggs in a single basket.

What are EMIs and why are they a popular alternative?

EMIs are financial institutions that provide online-only financial services using electronic money. They can do most of what a bank might do, including issuing and redeeming (digital) money and processing international payments. EMIs arose to meet a need unmet by traditional banks, which are often focused more on pleasing their shareholders than their customers. Here are just a few of the benefits offered by EMIs and other banking alternatives:

• More security: EMIs employ safeguarding, a process that keeps customer funds separate from the banking institution, providing reassurance that their money will be safe
• Best of both worlds: Electronic banking enables fast, efficient onboarding; clear communication; and funds held in global tier-1 banks
• Faster onboarding times: Onboarding typically takes days instead of weeks or months
• Improved transparency: With fully digital record-keeping and technology like blockchain to simplify tracking, customers retain full visibility into what happens with their funds (and when)
• Reduced risk of off-boarding or fees due to low/no activity: The commercial model of many EMIs means that they do not require any activity or existing balance on an account in order to preserve it
• Innovation: Traditional banks have long struggled to keep up with the pace of change, but EMIs and other alternative banks tend to stay on the leading edge of innovation and tech
• No limits: With alternative banks, there is no limit to what can be recovered in the event of a financial crisis. For example, SVB’s customers can only recover a maximum of USD$250,000 through FDIC insurance, creating a nightmare scenario for businesses that kept all of their liquid assets there
• Diversifying bank partners: EMIs allow firms to easily diversify their banking counterparties. As a best practice, at least one cash account should sit with an EMI-licensed FinTech or other reputable banking alternative
• Diversifying risk: EMIs can safeguard accounts amongst multiple tier-1 banks. This further diversifies risk away from just one counterparty
• Better customer service: With less red tape to consider, EMIs are able to act more nimbly than traditional banks

IQ-EQ’s relationship with Alpha Group uses global banks to mitigate counterparty risk. Get in touch to learn how to put our partnership to work for you.