Virtual bank

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A virtual bank is a bank with a very small or inexistent branch system. It offers its financial services by:

telephone banking
online banking
automated teller machines (often through interbank network alliances)
mail banking

By eliminating the costs associated with retail banking, virtual banks may offer higher interest rates and lower service charges on their savings accounts than their competitors.

[edit] History

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Traditional banking was revolutionized with the commercialization of the internet in the early 1990s. As internet became more and more accessible to the common man on the street, banks began to realize the potential of the internet to deliver services to their customers. Added to the fact that it was cheaper in the long run, traditional banks initially started to offer limited services via the internet.

Buoyed by the initial success of internet banking, some pioneers took the idea to a whole new level – an internet-only bank or a virtual bank. They hoped to pass on the savings of not having a traditional banking infrastructure to their customers – higher interest rates on savings and lower interest rates on loans. The idea caught on and it was a huge success.

The world’s first fully functional virtual bank was the “Security First Network Bank” (SFNB) which began operations on October 18, 1995. Based at Atlanta, Georgia, USA, it was the first virtual bank to be insured by the Federal Deposit Insurance Corporation (FDIC). After three years of operation, it was acquired by the Royal Bank of Canada (RBC). Though SFNB did not make much profit in the initial years, it proved to the world that the concept of virtual banking works just fine and was here to stay.

Europe’s first full-service virtual bank was “First-e” launched by Enba, a Dublin-based company under the banking license of Banque d’Escompte, France. First launched in the UK in late September 1999, it garnered appreciable attention, resulting in more such ventures all over Europe. After about two years of operations, it shut down its operations during the dot-com bubble bust. Though “Egg Bank”, launched earlier in October 1998 by Prudential, was touted to be a virtual bank, it was not a full-service virtual bank, initially. But Egg Bank was a huge success unlike First-e.

Asia’s first virtual bank was “finatiQ” – a division of the Bank of Singapore. It opened its virtual doors on April 3, 2000 (though the public launch was on April 18, 2000), heralding the arrival of virtual banking in Asia.