In the wake of the financial crisis of 2008, there were many that predicted that by necessity, new financial ecosystems would soon replace the hulking juggernauts of the global banking system. Whilst great steps have been taken towards this future vision, the vast majority of business banking continues as before.
Governments have proved slow or reluctant to move away from the status quo, which in turn has enabled the very financial institutions that played a part in causing the financial crash, to continue operating using out of date technology and out of date practices. This has resulted in an underserved business banking market, where customer’s needs and interests are not properly understood and not properly provided for by incumbent banking institutions.
As a reader of this blog you are probably well aware of the impact Fintech companies across the globe are having as we strive to establish that new financial ecosystem. At Intergiro, we are passionate about our role in helping to bring about this change – our solutions are designed to help safeguard our customers against the types of practices which can lead to financial instability, and more generally to help them thrive in the digital age. If you’re not already banking with us, perhaps now is the time to question, are we safer than your bank?
Your money, safer?
‘Banks’ were originally established to serve as secure places to store excess money or valuables – whenever a customer had spare cash or wanted to deposit valuables, they would pay banks to keep their assets locked away until they needed them. Over time, this simple relationship evolved, and clever bankers discovered that, rather than just letting their customer’s assets sit idle, they could put them to work for profit.
In return for a fee, banks began lending their customer’s money to other people who needed cash. Bankers soon learned that the original owners of the money they lent out often took longer to claim back their assets than the borrowers to whom the bank had then lent the same assets out, tended to take to pay back their debts. This meant that the banks could lend the same deposits to multiple borrowers - safe in the knowledge that all of their customers would not claim back their deposits at the same time.
This method (known as the ‘fractional reserve model’), allows banks to effectively ‘create’ money - as for every unit of real money they hold in deposits, they can lend out a multiple of that in loans. Whilst this practice has evolved in complexity over time, the dual function of taking customers’ deposits and then creating money through the fractional reserve lending model remains common practice today.
This practice can be risky for customers. The model inherently relies on the trust of the depositors and where this trust runs out, a so-called ‘run’ on the bank can occur. A ‘run on the bank’ is where a large enough number of depositors seek to reclaim their assets at the same time. Given that the bank does not physically hold all of their assets at any given time, the bank is unable to pay back all the depositors when requested. In turn, this can lead to banks collapsing and customers being left out of pocket.
In an effort to mitigate against this risk, European banks are now required to implement additional measures, including initiatives such as safety deposit schemes. However, the underlying problem remains - in spite of objections from leading economists that the ‘fractional reserve model’ creates systemic risk and instability (a topic which we will explore in more detail in future blog posts), institutional banks continue to operate the practice.
This is where Intergiro offers an alternative approach. We are not a bank - we are a regulated e-money institution. Under the terms of our e-money licence (issued and regulated by the Swedish Financial Authority) we cannot and will not lend customers’ funds to other customers.
Not only do we not lend out our customers’ deposits, but we also adopt ‘safeguarding’ practices to further secure our customers’ money. E-money institutions, like us, safeguard their customers’ deposits by storing them separately from their own money. This means that in the unlikely event of insolvency, an e-money institution would be able to return funds to their customers immediately, via a low risk holding bank (customers will always rank first in any claim on funds kept in such secured accounts). In Europe, this is regulated under an EU-wide initiative, the E-Money Directive (2009). This practice ensures that whenever our customers need their money, even in the most challenging financial times, they will be able to access it. Secure and always available – this is what safe business banking should be.
Your business, safer?
We believe our customers’ businesses are safer when our customers have the time to focus on running them. This is why we focus on developing features which save our customers’ time.
Our customers can open an account with us online, in a matter of minutes, thereby avoiding the long waits and branch meetings typically involved when opening an account with a traditional bank. Using our multi-currency wallets is a fast and easy way for our customers to make international payments and to manage foreign currencies, and with instant notifications our customers are always up-to-date with live information about their finances – no need for them to wait for that monthly bank statement in the post.
Soon, our customers will be able to keep track of their employees’ expenses via a virtual card management system, receipt capture technology will do away with the hours spent working through paper receipts and smart invoicing will automatically chase and track overdue invoices.
All these features serve to save our customers’ time, otherwise lost to financial admin, and allow them to concentrate on what really matters for their businesses.
Safer than a bank?
So, which is safer - an e-money institution or a bank? You can probably guess what we think – how about you? Let us know by dropping us a message here.