8 Best Alternatives to Traditional Banks
Traditional banks have long been the go-to choices for companies and corporations, but the one-size-fits-all approach can make it challenging for new and small businesses to thrive.
If you are overwhelmed by the eligibility requirements and complex paperwork when applying for a corporate account for your business, it’s worth it to explore other options that might be more beneficial for your business operations.
This article will guide you through the 8 business banking alternatives, from credit unions to challenger banks and non-bank solutions. We will look at the key services each of them offers and weigh their pros and cons to help you make the right move.
Why Consider Other Options Than Traditional Banks?
Banks are an integral part of a business, providing services necessary for operations, including business accounts, payment processing, debit cards, credit cards, and loans. However, while traditional banks may be the default choice for individuals and businesses, there are other financial institutions and providers offering modern services tailored to specific business needs.
Let’s look at some reasons it’s worth looking for other options to handle your money.
Personalised Support
Customer service is one of the most important factors for almost 90% of small businesses when choosing a bank.
New and small businesses can benefit significantly from personalised support that offers timely assistance in managing their often limited budgets. While traditional banks may offer similar services through relationship managers, these resources are typically reserved for larger corporations.
Alternative financial providers also often provide multiple channels to contact customer support, including in-app chat, messaging platforms like WhatsApp, and phone support. Many also offer flexible service hours, often extending beyond traditional banking hours, which is highly beneficial for busy entrepreneurs.
Strict Requirements
Many traditional banks maintain strict requirements for businesses to access their banking services. When applying for a business bank account or other services like loans, a significant amount of documents is consistently required. These can include financial statements, business licences and registrations, business plans, credit reports, and more.
Moreover, 77% of brokers report that traditional banks are less willing to fund SMEs, with the approval rate for SME loans dropping sharply from 71% in Q1 2023 to only 45% in Q2 2023. This suggests that major banks are using stricter criteria for loan and business account applications from businesses in their early stages of operation, making it challenging for startups and new businesses to secure the financial support they need.
Fees
Traditional bank fees can be costly for small businesses, especially when it comes to fees for cross-border payments and wire transfers which can quickly add up and pose challenges to businesses in maintaining profits in the long run.
According to Treasury Management International, 55% of SMEs struggle with international transfer pricing charged by their traditional banking partners. These fees may include bank service fees, intermediary bank handling fees, and foreign currency exchange rates. On average, high-street banks typically charge up to GBP 30 per transaction.
Additionally, many traditional banks charge a monthly fee, typically ranging from GBP 8-10, to keep your account active. This fee may be waived if you maintain a certain minimum balance in your account, although this can limit your liquidity.
Lengthy Process
In general, traditional banks may take a significant amount of time for tasks like opening an account, getting a loan, or sending money globally.
This is because traditional banks may require you to visit their physical branches, provide additional documentation, or wait longer in lines for approval due to a larger customer base or more stringent requirements.
Best Traditional Bank Alternatives
Having explored the challenges of traditional banking for SMEs, let's now move on to the viable options you can use to manage your business finances. Whether you are looking for an affordable service or trying to avoid the lengthy process, here are the 8 alternatives for you to consider.
Type | Characteristic | Best For |
Credit Unions | Member-owned, non-profit organisations | Small businesses in specific areas or professions |
Online Banks | Banks that operate exclusively online, often offer lower fees and higher interest rates. | Businesses that prefer digital banking and are comfortable with app-based services |
Fintech Companies | Technology-driven companies that provide SaaS-based financial solutions, often regulated as financial service providers or money service operators | Businesses seeking specialised financial solutions, such as multi-currency accounts |
Building Societies | Mutual organisations owned by their members, similar to credit unions | Businesses looking for a community-focused approach with competitive rates for savings and mortgage lending |
Community Banks | Smaller banks that focus on specific areas | Small businesses deeply connected with their local community |
Peer-to-Peer Lending | Financial platforms connecting borrowers and lenders | Quick funds |
Offshore Bank Accounts | Banks located in foreign jurisdictions | Businesses operating internationally or those interested in potential tax benefits |
Payment Service Providers | Digital payment solutions | Ecommerce businesses seeking diverse payment methods |
1
Credit Unions
Best For: Eligible individuals who have recently started a business and seek flexible loan terms and a community-focused approach, especially those with limited credit score histories
Credit unions are financial cooperatives owned by their members. These organisations are rooted in the community, either based on location, profession, or affiliation with the same charitable organisation.
Members' deposits in a credit union create a pool of funds that are used to provide loans and other financial services to other members. To join a credit union, you typically need to meet the membership criteria, which often involves living or working within a specific geographic area or having a common bond with other members.
As they are not-for-profit, credit unions often offer competitive rates, lower fees, and more personalised services than high street banks. However, they may have limited physical branches and ATMs.
In the UK, deposits in credit unions are protected for up to GBP 85,000 per eligible person under the Financial Services Compensation Scheme (FSCS).
Some examples of credit unions include:
- Co-op Credit Union: This is one of the largest credit unions in the UK, offering a wide range of financial services to members nationwide. Employees and pensioners of cooperative organisations are eligible to join this credit union.
- London Mutual Credit Union: This credit union offers a range of financial services to individuals and businesses in the London area.
- NHS Credit Union: A credit union specifically designed to serve NHS employees and their families.
Common Services Offered by Credit Unions
The availability of products and services varies depending on what each credit union provides, but some commonly offered ones include:
- Saving accounts
- Checking accounts
- Member accounts
- Investment accounts
- Retirement accounts
- Credit and debit cards
- ATM cards
- Direct deposits and withdrawals
- Personal loans
- Business loans
- Auto loans
- Home equity loans
- Student loans
Some might offer mobile apps for convenient Internet banking as well. Moreover, some credit unions also offer financial education resources and counselling services to help members manage their money effectively.
Pros and Cons of Credit Unions
Pros of Credit Unions
✅ Personalised Service: As you are banking as a member of the community, services are more likely to be personalised than with banks.
✅ Competitive Rates: Credit unions often offer high-yield savings accounts with higher Annual Percentage Yield (APYs) and lower Annual Percentage Rates (APRs) on loans compared to traditional banks.
✅ Community First: Credit unions are built to support the well-being of their members and the community.
Cons of Credit Unions
❌ Limited Access: Each credit union has its own eligibility requirements and isn’t open for anyone.
❌ Fewer Branches and ATMs: Credit unions typically have fewer physical branches and ATM locations than banks.
❌ Fewer Services: Because credit unions don't have the same resources as traditional banks, the services they offer may also be limited.
2
Online Banks
Best For: Tech-savvy entrepreneurs and business owners seeking digital-first banking experiences with competitive interest rates and less paperwork and are comfortable with online-only banking services.
Online banks are licensed and regulated banks that operate exclusively online without any physical bank branches. Customers can access their accounts, make transactions, and contact customer support through the mobile banking application or the bank’s official website.
Online banks are also known as challenger banks, neobanks, and virtual banks. These terms are often used interchangeably to describe digital-only banks. However, the term “neobank” is sometimes used to call non-bank fintech providers, while “virtual bank” is a regulated term in some jurisdictions.
As they operate entirely online, online banks are able to offer competitive interest rates as well as significantly low fees compared to brick-and-mortar branches. Opening an account with an online bank is also simple, typically involving digital document submission and identity verification.
Some examples of online banks include:
- Axos Bank: Axos is an American, FDIC-insured bank that provides checking and savings accounts, loans, mortgages, and investment options. You can access their services through their website or mobile app.
- N26: N26 is an online bank holding a full European banking licence. They offer no fees, a free bank card, and the ability to set up direct deposits and recurring payments.
- Monzo: Monzo is a challenger bank offering various financial products, including personal and business current accounts for customers in the UK. It offers free basic accounts that can be opened quickly and easily online.
Insight: Explore our comparison between online and traditional banks and learn more about online banking security.
Common Services Offered by Online Banks
Online banks typically offer a range of products and services for personal finances similar to traditional banks. However, their business banking services tend to be more accessible to startups and small businesses with simplified account opening processes, lower fees, and digital-first features.
The products and services provided by different online banks vary, but commonly offered ones include:
- Checking accounts
- Savings accounts
- Merchant accounts
- Business accounts for freelancers
- Overdrafts
- Accounting software integrations
- Debit cards
- Credit cards
- Chat-based customer support
- Small business loans
Pros and Cons of Online Banks
Pros of Online Banks
✅ Online-based: Customers can access online banking services, including contacting customer support, from anywhere with an Internet connection.
✅ Advanced Technology: Online banks utilise advanced technology to protect customers’ data and offer services like automated recurring payments and software integration.
✅ Lower Fees: Online banks often charge low or zero monthly fees and significantly lower transaction fees compared to banks.
Cons of Online Banks
❌ No Bank Branches: Customers can only access banking services and customer support via online channels.
❌ Technological Requirements: Online banking relies on internet connectivity and digital devices. Customers without reliable internet access or technical skills may find it challenging to use online banking services.
3
Fintech Companies
Best For: Busy business owners seeking innovative and cost-effective financial solutions that are accessible beyond traditional banking hours.
Financial technology companies, or fintech companies, are technology-driven companies that leverage advanced technology and data analytics to provide efficient, user-friendly financial solutions. They are often regulated as financial service providers or money service operators, depending on each jurisdiction, but do not hold a banking licence.
Many fintech firms offer specialised services, such as multi-currency accounts, for specific groups of customers, typically small businesses and startups. They usually provide online-exclusive services through their own platforms or software.
While fintech companies cannot offer deposit insurance directly, they can do so through their custodian banks.
Here are some examples of fintech companies:
- Statrys: Statrys is a Hong-Kong based financial service provider offering multi-currency account and company incorporation services. It is licensed as a Money Service Operator in Hong Kong and a Small Payment Institution in the UK.
- Wise: Formerly known as Transferwise, Wise offers personal and business accounts for worldwide customers, facilitating international remittances and transfers.
Common Services Offered by Fintech Companies
Each fintech company often offers unique features that cater to a specific group of customers, such as expatriates sending remittances home and global businesses paying international suppliers. However, their accounts often have features that facilitate business operations, such as:
- Multi-currency or foreign currency accounts
- Digital wallets
- Pre-paid cards
- Virtual cards
- Budgeting tools
- Foreign exchange services
- International money transfers
- Integration with accounting tools
Pros and Cons of Fintech Companies
Pros of Fintech Companies
✅ Digital Convenience: Fintech companies offer services through online platforms, which are accessible 24/7
✅ Dedicated Support: Fintech companies often offer personalised and responsive customer support through multiple channels
✅ Competitive Rates: Fintech companies usually offer lower transactions and FX fees, as well as a more transparent pricing structure compared to traditional institutions.
Cons of Fintech Companies
❌ Digital Security Concerns: Fintech companies are relatively new and dependent on technology, which may be a point of concern for some.
❌ Limited Services: As these companies are not fully licensed banks, they cannot offer some products, such as loans and credit cards. Some may also not support cash deposits and withdrawals.
4
Building Societies
Best For: UK-based small businesses looking for competitive rates on savings accounts, loans, and mortgages.
Building societies are member-owned financial institutions that prioritise the needs of their members, not shareholders like banks. This cooperative structure means that building societies reinvest profits into the business, offering competitive rates on savings accounts and loans.
While operating similarly to credit unions, building societies typically have broader membership criteria, allowing any individual or business to access their services and become members.
Building societies are more common in the UK and other commonwealth nations than in other places.
Some of the popular building societies include:
- Nationwide Building Society: One of the largest building societies in the UK, known for its competitive rates and community focus.
- Yorkshire Building Society: A regional building society with a strong presence in the Yorkshire and Humber region, offering a variety of financial services to individuals and businesses.
Common Services Offered by Building Societies
Building societies often focus on savings, loans, and mortgages. However, large building societies may also provide extensive financial services, including credit cards and insurance.
- Savings and Individual Savings Accounts (ISAs)
- Current accounts
- Personal and business loans
- Mortgages
- Credit cards
- Investment products
- Insurance
Pros and Cons of Building Societies
Pros of Building Societies
✅ Competitive Rates: Building societies offer competitive interest rates on loans and savings accounts.
✅ Member-Owned Structure: Building societies are owned and controlled by their members, ensuring decisions are made in their best interests.
Cons of Building Societies
❌ Less Technological Advancements: Some building societies may be slower to adopt new technologies and digital solutions.
❌ Limited Access: Some building societies only operate within specific areas.
5
Community Banks
Best For: Local SMEs that prefer a strong local connection, especially those located in smaller towns.
Community banks are small, local banks that focus on providing banking services to individuals and small businesses in their communities. They are a good alternative to traditional commercial banks for small businesses that operate locally.
Community banks typically offer very competitive interest rates and prioritise supporting the local economy. They often offer personalised services and tailored financial solutions to meet the needs of individuals and small businesses.
Some examples of community banks include:
- Metro Bank: A relatively new community bank that has gained popularity for its innovative approach and focus on customer service.
- Northwest Community Bank: A US-based community bank that offers a wide range of personal and banking services with branches throughout Connecticut and Massachusetts.
- Avon Mutual: A customer-owned mutual bank that serves individuals and businesses in the West of England region.
Common Services Offered by Community Banks
What each bank offers can vary, but some common services include:
- Saving accounts
- Certificates of deposit
- Debit cards
- Individual loans
- Small business loans
- Auto loans
- Mortgage loans
Pros and Cons of Community Banks
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's needs.
✅ Relationship-Oriented: Community banks focus on building relationships with their customers, and this generally results in more flexibility with services.
✅ Local Branches: Community banks often have physical branches in the local area, making them accessible to people in the community.
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: Because community banks are set up in specific communities or areas, customers who need access or support from outside those areas may find it difficult to do so.
6
Peer-to-Peer Lending
Best For: Startups and new businesses seeking quick funds.
Peer-to-peer (P2P) lending, also known as crowd lending or social lending, is a type of financial technology platform that allows individuals to lend or borrow money directly from each other. It is commonly used in business to borrow funds 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 investors in P2P do not have the same overhead costs as traditional lenders. Meanwhile,
On the other hand, these P2P lenders can secure a more favourable return on their savings than a traditional bank savings account would offer.
Some notable peer-to-peer lenders include:
- Funding Circle: A leading P2P lending platform in the UK, offering business loans.
- Zopa: One of the largest P2P lenders in Europe.
- Kiva: A global P2P lender that focuses on microlending to individuals and small businesses in developing countries
Common Services Offered by Peer-to-Peer Lending
- Personal loans
- Business loans
- Investment Opportunities
Pros and Cons of Peer-to-Peer Lending
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 Rates: 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
Offshore Bank Accounts
Best For: Global businesses that frequently make and receive international transactions or businesses looking to benefit from lower tax rates.
Offshore accounts are bank accounts that are located in a different country from where your business is registered or where you are a resident.
While it may involve traditional banks in a foreign country, offshore banking is practical for businesses that has to manage their finance on an international scale, as they simplify international bank transfers in different currencies and can offer other benefits such as currency diversification and asset protection.
Businesses can potentially benefit from lower corporate tax rates on deposits in offshore bank accounts. However, it’s essential to inform tax authorities and comply with all relevant regulations in your tax residency jurisdiction, as tax evasion is illegal.
Tip: Wondering the best place to open an offshore bank account? Check out our article about popular countries for offshore banking and when to consider banking offshore.
Common Services Offered by Offshore Bank Accounts
- Multi-currency accounts
- Foreign exchange services
- Digital banking
- Wealth management
- Trade finance services
Pros and Cons of Offshore Bank Accounts
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 often associated with illegal activities, namely money laundering, which can bring more attention or suspicion to the business.
Tip: Interested? Learn how to open an offshore bank account.
8
Payment Service Providers
Best For: Ecommerce businesses seeking diverse methods to send and receive payments.
Payment Service Providers are digital platforms that enable businesses to handle payments through the Internet and mobile devices. They are third-party platforms that facilitate electronic money payments, such as credit and debit card processing, digital wallets, and online invoices.
Instead of making and receiving payments through traditional bank transfers, businesses can link these solutions to their business accounts to offer flexible payment options for their partners and customers.
It's also a great fit for freelancers and small to medium-sized enterprises (SMEs) that must 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 send payments to others.
- Stripe: Stripe is another payment processing platform that enables businesses to receive payments online.
- Fondy: Fondy is a payment gateway that simplifies international payments for businesses, offering features like multi-currency accounts and virtual IBANs to streamline financial operations.
- Apple Pay: Similar to Google Wallet, Apple Pay is a digital wallet that allows users to pay through their Apple devices.
Common Services Offered by Payment Service Providers
- Payment processing
- Payment gateway
- Merchant accounts
- Payouts
- Currency conversion and multi-currency support
- Ecommerce Integration
Pros and Cons of Payment Service Providers
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
❌ Cybersecurity 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: Payment service providers are money transfer solutions that do not offer other financial products. Businesses may consider combining this service with another solution for wider coverage.
Which Option Is Right for My Business?
Choosing the right financial institution or service provider from the many options available can be a daunting task. Here are some key factors to consider:
- Your business needs: Consider factors like your business size and industry, as different financial services may be more suitable for businesses of varying sizes. SMEs maybe able to benefit more from non-bank alternatives.
- Your financial goals: Consider your short-term and long-term financial objectives, such as growth, expansion, or debt reduction. You might need options that provide loans and lending services.
- Available services: Ensure that the financial institution offers the essential services you need, especially if you have specific needs, such as international payments or foreign exchange.
- Fees and costs: Carefully review the fees and costs, including account maintenance fees, transaction fees, and interest rates.
- Customer service: Look for a provider with a responsive and helpful customer service team. Consider their accessibility, including their operating hours and communication channels.
Tip: Consider opening multiple business accounts with different types of providers to leverage various benefits.
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 prioritise 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.
FAQs
What is the best alternative to traditional banking for business?
You can consider the following options as an alternative to business banking: 1. Credit Unions 2. Online Banks 3. Fintech Companies 4. Building Societies 5. Community Banks 6. Peer-to-Peer Lending 7. Offshore Bank Accounts 8. Payment Service Providers
