8 Best Banking Alternatives to Traditional Banks in 2023

Traditional banks have been the solution for businesses to handle their payment and financing needs for many years. And the solution has been effective for retail customers and larger businesses. However, traditional business banking doesn't always meet the needs of businesses, especially for small and medium enterprises (SMEs).

Why Are Businesses Leaving Traditional Banks?

Banks are an integral part of a business. However, traditional banks, in particular, can still be difficult to work with due to their outdated processes and inefficiencies. As more and more demands for quality services are unmet by traditional banks, customers begin to turn their attention towards alternative solutions instead. These alternatives will be discussed later in this article.

Strict Requirements

Many traditional banks still maintain strict requirements for businesses to access their services. It seems to be consistent when applying for a business bank account or other services like loans, there is a lot of paperwork and documents required to apply. Additionally, physically visiting the branch doesn't make it easier. To give you an example, according to a report from Asian Development Bank, 40% of trade financing applications rejected by banks were from SMEs.

Expensive Fees

Then once the account has been opened, businesses can find that working with a traditional bank can be costly. Especially for services such as international transfers and wire transfers, the costs can add up. These costs can pose challenges to businesses in maintaining profits.

Best Traditional Bank Alternatives

Because of the challenges that we have covered above, companies have started to look into alternative solutions for their banking needs. Today, some solutions can provide services that are more affordable and convenient and are more catered to the needs of businesses.

In this article, we will discuss the different available alternatives to traditional banking. We will also give some examples of these alternatives together with some advantages and drawbacks of their solution.

1. Credit Unions

Credit unions are bank alternatives that allow you to bank locally with like-minded people.

A credit union is a nonprofit bank cooperative owned by its members, who pool their money to offer each other loans and other financial services at reasonable interest rates.

Credit unions generally offer lower fees and stronger customer service than banks do, but they also typically have fewer branches and ATMs available.

To join a credit union, you must live or work within the area that it serves.

Most cities have several local credit unions; check around your city for options near you!

Joining will usually require an initial deposit of $50 or more, as well as proof of residence/employment within the boundaries set by the specific union (i.e. a utility bill or pay stub).

Some notable credit unions include:

• Navy Federal Credit Union: Serving members of the military, Department of Defense employees, and their families
• Alliant Credit Union: Open to anyone who lives or works in select Chicago-area counties
• Bethpage Federal Credit Union: Offers membership to those who live, work, worship, attend school, volunteer, or are related to someone who does any of these things in Nassau and Suffolk counties on Long Island, New York

Pros of Credit Unions

• Personalized Service: Because you're banking with like-minded people as an alternative, services are more likely to be personalized and catered to your preferences.
• Lower fees: Credit Unions charge lower fees because profits are returned to the members who are shareholders of the credit unions

Cons of Credit Unions

• Limited Access: Credit Unions will typically have fewer branches and ATM services, which makes accessing your accounts more difficult than banks.
• Fewer Services: Because credit unions don't have the same resources as traditional banks, the services they offer may also be limited. This includes being unable to access your accounts through digital means.

2. Online Banks

Online banks offer all of the services and functionality of traditional brick-and-mortar banks, but they're accessible entirely online - no physical bank branches or ATMs are needed.

Small businesses that don't have time to visit a bank in person, as well as individuals who want to bank on their own schedule, will find this to be a convenient and viable option.

Many online banks do not charge monthly fees, and many of them offer competitive interest rates on deposited funds.

Opening an account with an online bank is usually very simple, involving little more than filling out an application form and providing proof of identity.

Some notable online banks include:

• Revolut: A bank that offers a current account, budgeting tools, and a contactless Mastercard
• N26: A bank with no fees, a free bank card, and the ability to set up direct deposits and recurring payments
• Mox: A bank that offers a free checking account, no minimum balance requirement, and mobile check deposits

Pros of Online Banks

• Advanced Technology: Online banks usually try to equip themselves with the latest technology which allows them to provide more developed banking services. For example, automating regular transactions and being able to make instructions from your mobile.
• Lower Fees: Online banks will normally have lower overhead costs than traditional banks which allows them to charge lower monthly maintenance and transaction fees for their services.

Cons of Online Banks

• No Physical Branch: When customers need support, they can only rely on online communication or provided FAQs for support as most online banks don't have a physical location to cater to customers
• Lack of Personal Touch: Because all of the services are provided online, customers can find a lack of human touch when dealing with online banks which makes their experience less personal.

🔎 Did You Know: The first website for online banking services was launched by Stanford Credit Union in 1994. Since then, online banks have become a staple in our society and economy.

3. Neobanks

Neobanks, also known as “challenger banks” are bank alternatives that operate exclusively online.

They differ from traditional online banks in that they may provide fewer services than traditional banks. You may find that some neobanks don't offer loans or credit card services.

Since neobanks don't have the same overhead costs as traditional brick-and-mortar banks, they're able to offer their customers lower fees and more competitive interest rates.

Opening an account with a neobank is usually very simple, involving little more than filling out an application form and providing proof of identity.

Here are some examples of Neobanks:

• Statrys is a Hong Kong-based neobank that provides multi-currency business accounts to SMEs.
• Currenxie is another Hong Kong-based neobank offering global payment services to businesses.
• Neat Commerce (Rapyd) is a Hong Kong-based fintech providing multi-currency wallets to businesses.
• Airwallex is an Australian-based neobank, offering accounts completely online in multiple jurisdictions.
• Wise, formerly Transferwise, offers payment accounts in many different countries. With a debit card, you can spend your money easily wherever you're at.

Pros of Neobanks

• Convenience: Neobanks make their services available 24/7 through mobile apps which give customers ease of access that traditional banks might have limitations with.
• Fast Account Setup: Applying for an account with a neobank is usually faster and easier due to the online and digital process. Customers can have their business bank accounts ready within days.

Cons of Neobanks

• Security Concerns: As neobanks are relatively new and run completely online, customers may have doubts and concerns regarding the security of their personal data and funds.
• Limited Services: Neobanks may not offer financial services that a traditional bank does such as loans, investment accounts, and trade financing.

4. Regional Banks

Many small businesses find that a regional bank is the best banking option for them.

Regional banks are typically smaller than national banks, and they focus their services on specific geographic areas.

This can be a great option for businesses that are located in or do business in, a particular region.

Many regional banks offer competitive interest rates on deposited funds and no monthly fees.

They also often have more flexible lending criteria than national banks.

Opening an account with a regional bank is usually very simple, involving little more than filling out an application form and providing proof of identity.

Some notable regional banks include:

• BB&T: A bank with branches in 15 states that offers small-business checking, savings, and money market accounts as well as term loans and lines of credit
• TD Bank: A bank with branches along the East Coast that offers small-business checking, savings, and money market accounts as well as term loans and lines of credit
• Huntington National Bank: A bank with more than 800 branches in Ohio, Pennsylvania, Michigan, Indiana, West Virginia, Kentucky, and Florida that offers business checking accounts

Pros of Regional Banks

• Local Presence: Because regional banks operate within specific areas, they usually have in-depth knowledge of the local economy which can provide insights and personalized services to business customers.
• Lower fees: Regional banks normally have lower fees in comparison to bigger banks as they have fewer costs in operating within specific areas only.

Cons of Regional Banks

• Limited Access: Since regional banks only operate within a specific area, customers may find difficulties in accessing services from outside the area.
• Limited Resources: Regional banks may have fewer resources than traditional banks which can result in limited and less-developed services such as the lack of mobile banking.

5. Community Banks

Community banks are another option for businesses that want a bank alternative.

Community banks are small, local banks that focus on providing banking services to the residents and businesses in their communities.

Community banks typically offer very competitive interest rates on deposited funds and don’t request a monthly fee.

They also often have more flexible lending criteria than national banks.

Opening an account with a community bank is usually very simple, involving little more than filling out an application form and providing proof of identity.

Some notable community banks include:

• The Farmers Bank: A bank located in Kentucky that offers business checking, savings, money market accounts, and certificates of deposit (CDs)
• The First National Bank: A bank located in Missouri that offers business checking, savings, money market accounts, and CDs
• The Home State Bank: A bank located in Iowa that offers a variety of commercial banking services, including business checking and savings accounts

Pros of Community Banks

• Community-catered Services: Community banks generally provide more catered services to their customers as they have a better understanding of the community needs giving personalized insights and services.
• Relationship-Oriented: Community banks focus on building relationships with their customers and this generally results in more flexibility with services.

Cons of Community Banks

• Limited Services: Community banks may offer fewer services than traditional banks as they have limited resources that compete with larger retail banks.
• Limited Reach: As community banks are set up in specific communities or areas, customers who need access or support from outside those areas may find limited access and difficulties in doing so.

6. Peer-to-Peer Lending

Peer-to-peer (P2P) lending is a type of crowdfunding that allows businesses to borrow money from individual investors.

With P2P lending, businesses post a loan request on a P2P platform and interested investors can then choose to fund the loan.

Interest rates on P2P loans are typically much lower than those offered by traditional lenders, such as banks.

This is because P2P lenders do not have the same overhead costs as traditional lenders.

Some notable peer-to-peer lenders include:

• Lending Club: A leading P2P lender that has funded over $16 billion in loans
• Kiva: A global P2P lender that has provided over $910 million in loans to date
• Funding Circle: A leading P2P lender in the United Kingdom
• Zopa: The largest P2P lender in Europe.

Pros of Peer-to-Peer Lending

• Accessibility: P2P lending has become widely accessible for businesses that need funding, most especially for businesses that are unable to get loans from traditional banks.
• Faster Approval: Approval times for loans are typically shorter than when applying with banks.

Cons of Peer-to-Peer Lending

• Higher Risk: There are usually higher risks than traditional lending with banks as there is no collateral making the loans unsecured.
• Varying RatesL: Interest rates may vary with P2P lending. Though they may offer competitive rates, some borrowers can pay higher rates due to poor credit scores.

7. Payment Service Providers

Payment Service Providers are digital payment platforms that enable businesses to handle payments through the internet and mobile devices. Most payment services come with a mobile app to add to the convenience.

The systems facilitate funds being transferred from buyers to sellers through different methods such as credit and debit cards and other digital wallets, and they can be used for different purposes like payment methods for ecommerce websites, bills, and regular money transfers.

Instead of making and receiving payments through traditional bank transfers, businesses can link these solutions to their business accounts to open up more payment methods available to partners and customers.

An example of a payment service provider is Fondy.

Fondy provides a wide range of payment solutions for businesses of all sizes. You can benefit from payments in 150 currencies across over 200 countries and territories. Additionally, you can choose from multiple payment methods, including Open Banking across 300+ banks in the UK and EU, and give your customers complete flexibility.

Fondy's multi-currency accounts are an option for businesses that want to send or receive money quickly and easily in multiple countries. 

Their multi-currency accounts come with a business IBAN, making sending and receiving funds instantly via the Faster Payments network easier. 

It's also a great fit for freelancers and small to medium-sized enterprises (SMEs) that need to manage revenue and expenses, pay suppliers, and handle settlements online.

Here are some other examples of Payment Service Providers:

• PayPal: PayPal is a payment processor that allows businesses to accept payments from their customers and pay bills.
• Stripe: Stripe is also another payment processing platform that enables businesses to receive payments online.
• Google Wallet: Google Wallet is a digital wallet that allows users to pay using their credit or debit cards through their mobile phones.
• Apple Pay: Similar to Google Wallet, Apple Pay is a digital wallet that allows users to pay through their Apple devices.

Pros of Payment Service Providers

• Quicker Transfers: Transfers are streamlined making receiving and making payments much faster than traditional bank transfers. Most transfers through this method can be completed almost instantly.
• Convenience: Payment Service Providers allow customers or partners to make payments from anywhere at any time, eliminating the need for cash.

Cons of Payment Service Providers

• Security Concerns: Since all operations are done online and digitally, there may be security concerns that open up the potential for fraud or scams.
• Limited Services: With this solution, customers may find limited banking or financial products and services are lacking. Businesses may consider combining this service with another solution for wider coverage.

8. Offshore Bank Accounts

Offshore bank accounts are bank accounts that are located in a country where you are not a resident. It's a bank account outside your country of residence.

In business terms, it's a bank account that is located in a different country from where your company is registered in.

If you’re looking for a more complete banking solution, an offshore bank account might be right for you. Offshore accounts provide a wide array of financial products and services.

Your business may also profit from using an offshore account through lower tax rates compared to your local country.

We have an article discussing more popular countries for offshore banking.

Pros of Offshore Bank Accounts

• Tax Benefits: With offshore bank accounts, businesses can potentially enjoy lower tax rates in comparison to their local countries.
• Privacy and Protection: Offshore bank accounts can provide increased privacy and protection of assets due to the difference in banking laws and regulations between the home country and where the offshore account is located.

Cons of Offshore Bank Accounts

• Higher Fees: Due to the complexity of the account and services, the banks may charge higher fees and required deposits for maintaining an offshore account in comparison to domestic accounts.
• Negative Perception: Offshore accounts are more commonly associated with illegal activities which can bring more attention or suspicion to the business.

Final Note

After going through the different alternatives to traditional banking, you may have a better idea of what suits the needs of your business.

It's important to weigh out the advantages and drawbacks of each alternative in comparison to what you prioritize as a business. Ultimately, there will be an alternative that will suit your needs.

You may also find that a single solution may need to cover all your requirements, so signing up with two or more alternatives might be the way to go.