A lion’s share of cash settlements in today’s world are conducted through a network of interconnected banks. And, for that matter, global trade owes its existence to the worldwide web: money transfers and online shopping rely heavily on internet banks.
The cashless payments industry grows every year, so does the demand for online banking services. Perhaps, you yourself are a client of an internet bank or even thinking about opening your own. In this article, we are going to dive into how one can create an internet bank of their own.
Internet banking officially came into existence at the end of the 20th century as US-based Home Banking. The service facilitated basic operations via phone. In 1995, the first virtual bank came online due to the fact that the number of “real” bank offices was limited by the law. The modern internet bank became a thing in 2001—in the Bank of America personal profile users could see their account balance, and bank clients could send payments and transfers by themselves.
And now, 16 years later, internet banks can fully replace traditional banks: today they assist with transferring money to other countries and paying utility, internet, phone bills, fines, etc. Some organizations offer expenses analytics, chat with support, voice recognition and fingerprint login.
Have you ever noticed that many spheres of the economy are gradually shifting into virtual space: shops, stock exchanges, casinos? Banks are no exception. There is a reason for that: online services have some competitive advantages over their “conservative” counterparts.
According to analysts, at the end of the previous century 90% of all bank operations in the world were carried out in bank offices and 10% through ATMs, mobile and internet banking. Nowadays, it is exactly the other way around: 90% of transactions are carried out via remote channels, while 10% in bank offices. Users who are aware of the advantages of internet banking prefer it.
Branchless banks are available everywhere where the internet is. Aside from maintenance periods, they provide services 24/7 without holidays. If internet access is not an option, people can get service anyway by calling customer support. Account information is a couple of clicks away, which speeds up and simplifies funds management.
The lack of vast infrastructure and collateral expenses enable internet banks to offer higher deposit rates and lower mortgage and loan rates. Some offer checking accounts and high-yield deposit certificates as well as deposit certificates with early penalty-free termination.
Branchless banks usually have more advanced websites that provide more options than branch banks. Functional budgeting and prediction tools, financial planning, investment analysis tools, loan calculator, and equity trading platforms.
Online banking also includes mobile functionality. New applications are created to further expand it for smartphones and other portable devices.
Account balance can be automatically replenished by electronic transfer from traditional banks. Most internet banks offer free unlimited transfers including transfers to external accounts. They also support direct deposits and withdrawals, e.g. direct payroll payment or automatic bill payment.
Creating an online account poses no hardship and doesn’t require any more information than doing so in a traditional bank. Users fill out paperwork online and send the forms via email.
Modern internet banks use the “thin client” technology which allows for centralized storage of currency registries, BIC, SWIFT, client information, etc. The client can remotely view and make changes to information in the database. The database is kept on the server, and “thin client” connects the client to the server—it is a diskless computer that runs a light operating system (WTWare or Thinstation). This technology helps save money on equipment, software and maintenance, ensures platform stability, and just makes it easier for the client—there is no need to install anything.
An internet banking system comprises 4 modules:
Internet server that the client side sends requests to;
Back office that stores client documents, guides, open keys to electronic digital signatures of clients;
Gateway to automated banking system—facilitates data transfer between systems.
Before launching an internet bank, one has to strike a perfect balance among ergonomics, functionality, and system security. Betting on ergonomics alone while disregarding security dooms a project. The other way around—the same result. A project with limited functionality cannot be successful.
Along with the obviously important security factor, convenience and ease of use, practicality and so-called usability affect the aggregate result. Extraneous functionality can start negatively affecting perception of the system. The client cares mostly about convenience which can influence their willingness to opt for bank services or continue doing so.
An internet bank is, first of all, a bank, which is why the procedure of its creation is a lot like with a traditional bank. However, the former is not as expensive as the latter: there is no need for a wide network of offices, numerous employees, or licenses—a bare minimum is enough, and despite this, internet banks fully satisfy the needs of today’s clients.
Thus, internet bank creation comes down to several elements: legal—license, jurisdiction, organization form, etc. Let’s now take a look at the process of creating an internet bank.
One brain is good, but two, three, or four is better. As the first step, gather a team of bank-savvy people. You’ll need attorneys, economists, programmers, managers, investors, etc. Together with them, you’ll be able to design a comprehensive and viable internet bank development strategy.
Your team will need to decide on the magnitude of your business: regional, country-wide or global; and the organization form: Ltd., LLC, Corp., etc. This determines the range of documents and the country of registration of your financial organization.
Choose a jurisdiction carefully: offshore jurisdiction simplifies the process of obtaining a financial service provider license. American and European licenses are highly regarded, but obtaining either is pretty hard.
Since internet banks specialize in transactions with electronic money, a banking license would suffice. Such a license is granted by the central bank of a respective country. Document requirements vary by country but usually include the following:
Bank license application;
Applicant company information: name, registered capital;
Company documents: articles of association, certificate of registration, etc.;
List of beneficiaries/major investors: names, residential addresses;
Proof of legality of each shareholder’s wealth;
Information about directors: resumes including personal and professional history;
Description of company structure and management;
Description of security, control, and technical support layers.
Every bank has to have money. The minimum registered capital amount depends on the country of registration and can vary between $30,000 and $3,000,000. The required amount of capital must be submitted while the central bank scrutinizes the documents.
When submitting an application, you’ll have to describe the role of each shareholder, beneficiary, stakeholder, prove the legality of their wealth and impeccable reputation.
In order to become a part of the financial world, your internet bank will need a bank identification code (BIC) and a SWIFT code. To gain rights to carry out transactions in different currencies, you’ll need either permission from central banks or agreements with correspondent banks that can take care of transactions in their respective currencies.
Study the peculiarities of the banking sector in the jurisdiction of your choice. What pricing policies and services attract clients? What operations do they carry out most of the time? This information will help you come up with a relevant and effective client attracting strategy.
When an internet banking system is ready to launch, it is the best time to start promoting it. Create communities on social media websites, make videos about the bank and upload them to Youtube, buy ads in search engines. An internet bank needs maximum exposure on the internet.
In order for a project to be successful, it has to satisfy clients’ needs to the best of its ability. The following tips will help you build an in-demand internet bank.
Give users the freedom to work with the bank on different platforms;
Use only the latest technologies (not Flash, Silverlight, Java applets, but two-step authentication);
Ensure quick website/app response to user action. Each action should take no more than 3 seconds to complete;
Simplify payments: use as few fields as possible;
Implement automatic formation of counterparties lists, tags attachable to payments (automatically and manually);
Implement mechanisms that would automatically notify a counterparty and send them a notarized payment copy with a “send via e-mail” option;
Implement history of actions and add automatic payment notifications;
Create templates for regular payments where users could enter digits and time periods in the same form for multiple payments;
Simplify additional services, such as opening a secondary account, payroll projects, etc.
Create services for expenses check and suggestions on how to optimize them;
Create services for automatic recommendations on client personal funds management;
Create a section with recommendations on expenses management. For example, if the commission amount is time-based, the client will see how much they can save if they pay at a different time;
On the foundation of the internet bank, create a sales channel for all those who are prominent online. These are not loyalty programs nor special offers, but a sales channel with an agreement that a percentage of purchased services from the bank are to be paid.
Cut down on paperwork and confirmations to the minimum.
Make your internet bank convenient and appealing. Take the industry leaders as an example;
Organize deployable client service. Allow online uploading of documents for the purpose of account opening;
Do not burden users with the necessity to provide documents that the bank can get from the government;
Integrate online bookkeeping tools, so that major clients have one more reason to be your clients.
Create an API for integration with your internet bank: payments processing, payment/counterparty information parsing, etc.;
Let partners integrate their services into different sections of the internet bank, e.g. checking a legal person against a database of unreliable entities;
Create a simple and intuitive API for acquiring and an uncluttered connecting procedure;
Create a simple and intuitive API with bank information: currency exchange rates, loan/deposit calculators, etc.
Internet banking is not a technology that only needs a server—it is a whole system of online cooperation with clients. In order for this system to work effectively and make profits, much time and money have to be invested, including the development of appropriate software solutions.
Internet banking doesn’t stagnate: clients request new options, new technologies are implemented every once in a while, weaknesses are dealt with, etc. Each change requires updating the whole system and new modules. This is when a choice has to be made: developing an internet banking system from scratch or opting for an out-of-the-box solution.
Out-of-the-box solutions from IT companies can help quickly and affordably prepare the software side of an internet bank for work. Medium and small organizations prefer ready-made solutions because this allows them to cut development time and expenses. A ready-made internet banking platform (for example, KoenigFinance) usually costs between $100,000 and $1,000,000 depending on the size of the business.
Pros: internet bank development does not require time and labor investment; regular updates and product support from the developer.
Cons: time and resources may be needed to set it up; a ready-made platform may fall short of expectations or not fit in the project.
Major organizations that possess vast resources and time prefer developing their own software from scratch. As a result, the outcome fully meets their expectations. Developing an internet bank from scratch takes approximately one year and costs from $700,000 to $3,000,000 depending on the magnitude of the business.
Pros: full control over the internet bank; freedom to define the project’s future
Cons: high development cost; platform updates are your responsibility; development may be drawn out indefinitely.
As the online services industry grows, so does the volume of online payments. Paying online is more convenient and sometimes even more beneficial than offline. Nobody has to go to the bank office if they can do everything they need from anywhere in the world. It means that for those who want to establish their own bank the task gets easier: today, all it takes is one headquarter from where all clients around the world (potentially) can be served from. It is not easy, but possible.