What are Virtual Bank Accounts and how do they work?

Virtual banking is on the rise in Africa, but how can you leverage virtual bank accounts for business growth?

Virtual bank accounts are the most common trend in digital banking today.

In recent times, the African startup ecosystem has witnessed a surge in the rise of digital banking, from startups like Kuda launching back in 2016 to the recent launch of online banks like Sparkle.

Digital banking is on the rise in Africa due to the numerous benefits that come with it. With a mobile device, internet connection, and from the comfort of your home, you can perform transactions you’d rather have had to visit a physical bank for.

Thanks to technology, you no longer have to endure the long queues at traditional physical banks, since you can make a money transfer or withdrawal right from the comfort of your home. This undoubtedly points to one thing — virtual accounts are here to stay.

In this article:

  • What is a Virtual Bank Account?
  • How do Virtual Bank Accounts work?
  • Types of virtual Accounts
  • Who can open Virtual Accounts?
  • Pros and Cons of using a Virtual Bank Account
  • Use cases of Virtual Bank Accounts

What is a Virtual Bank Account?

A Virtual bank account is a type of bank account typically issued via a banking-as-a-service infrastructure. They operate similarly to traditional bank accounts while providing peculiar advantages like saving time, convenience, and security.

Virtual Banking refers to accessing bank institutions and their functions online without having to visit a branch or wait in line. It is an online alternative to doing everything you’d have to go to a physical bank for.

The best thing about this type of banking is that it's easy to set up and use your bank account anytime. Once you open the account, it's the same as having money with your typical commercial banks — giving you an online solution to accessing money, paying bills, and making bank transfers.

How do Virtual Bank Accounts work?

Virtual bank accounts are just like traditional bank accounts, but they’re operated online. You can open a virtual account, complete your KYC and instantly start to use your account, 100% online via your computer or mobile device. There’s no need to go into the physical branch and deposit checks or take out loans — you can do it all from home or at the office whenever it’s convenient for you.

You can open a virtual account with any financial institution that offers the service in 3 steps:

  • Creating a Virtual Bank Account: To open a virtual account, you must provide your basic information (name, address, email, phone number) to your service provider — this could be a FinTech app or a digital bank.
    When submitted, you are instantly issued a unique NUBAN account number for use. This usually takes between 5 - 10 minutes.
  • Updating your KYC Details: When you get your account number, you may not be able to use it immediately without verifying your identity. Know Your Customer (KYC) is a mandatory regulatory process required by the CBN for anyone who wants to open and operate an account in Nigeria. It is essential, as it enables the service provider to protect your account and track fraudulent activities easily.

    To do your KYC, depending on the tier, you’d need to provide identity verification documents like your NIN slip, International Passport, Voter’s Card or Driver’s Licence. Other things typically requested are your Bank Verification Number (BVN), liveliness check, and utility bill.

  • Making transactions: Once your KYC is done, you can use your newly created account to send and receive money. Depending on how much information you provided during KYC, you may have limits on what you can do with your account.

If everything is done, you can make unlimited transactions, such as bank transfers, downloading account statements, bills payment, loans, etc., with your virtual account, depending on your service provider.

KYC Tiers issued by the Central Bank of Nigeria

Who Can Open Virtual Accounts?

Anybody above the age of 18 can open a virtual bank account. As long as you have a digital device that connects to the internet, you can open and operate a virtual bank account.

Pros and Cons of using a Virtual Bank Account

Like everything in life, virtual bank accounts have great benefits and come with some trade-offs.

Some benefits of having a virtual bank account are:

  1. Multiple Currency Accounts: With foreign accounts, you can have virtual accounts in different currencies enabling you to accept payment in multiple currencies without having to walk into a physical account. Some digital banking operators even allow you to convert foreign payments you accept into your local currency—all online, hassle-free, and at prevailing exchange rates.
  2. Convenient and Cost-Effective: Some physical banks require a minimum holding balance to be able to open an account, however, most digital banks do not include this as a requirement. Also, a virtual bank account can save time, avoiding time-consuming tasks like going to a physical location to make payments or even asking for support. The era of online banking has ushered in the convenience of being able to make a transaction at any time of the day. You can make a bank transfer in the middle of the night, right from the comfort of your home.
  3. Online Customer Support: Although an underrated benefit, having banking support from anywhere is a massive flex because it gives you more control over your money.

Additionally, virtual banks usually employ better technology, which simplifies many of your banking operations. This, in turn, reduces the need to reach out to customer support.

Cons of Virtual Bank Accounts

  1. Security Concerns: Virtual accounts run purely online and, therefore, utilize a highly secure platform that enables the encryption of sensitive information to guarantee that all customer data is secured.
    Although rare, in unfortunate circumstances, virtual banks may encounter a security breach, and if that occurs, your financial details may be at risk. Use a password generator to create strong passwords or 2FA apps like Google Authenticator as an extra layer of security to ensure that only you can access your account.
  2. Lack of Human Relationship: A significant downside of using virtual accounts is the lack of physical interaction, weakening the strength of having a physical relationship with an account manager. Also, virtual banking poses a roadblock for actions requiring physical presence for verification.
  3. Speed or technology Interruptions: As virtual bank accounts exist through technology; they are prone to be affected by technological interruptions like internet downtimes or bugs. Moreover, if you are in a place with weak internet access, you will most likely witness a slowdown in how you can use your virtual account.
  4. Fees: In some places or for some activities, fees for certain virtual banking features are higher than those charged at a physical bank. This can be due to regulations set by the body governing financial services in the region.

Use-Cases of Virtual Accounts

There are numerous use cases for virtual accounts, however not all virtual bank accounts are built with every available use case. Some well-known use cases of virtual accounts are:

  1. Cross-Border Payment: Easily collect payments from your customers across continents and convert them to your local currency without having to meet them physically.
  2. Payment Links: Create payment links that allow customers to pay you a specific fee without sending any account details—just a link.
  3. Salary Payment: Ease the burden of paying hefty fees in charges to traditional banks by simply opening virtual bank accounts for your staff to collect their paycheck.
  4. Grow Wealth: Through verified online banking services that offer savings and investment options, you can save any amount you wish, without worrying about losing it. You can even start investing towards certain milestones for your unborn children.
  5. Build your Product: You can embed virtual accounts into your product, allowing you to issue virtual accounts to your customers.
  6. Sub-Accounts: Create sub-accounts underneath a main account. This is a great use case if you’re a parent looking to create accounts for your children. You simply create an account under yours (a sub-account) with your child’s name as an alias. e.g If a parent’s account name is “Ayo Davis”, his child’s account name (with Alias) will be “Ayo Davis - Barbara”.

Luckily, Bloc’s Virtual Account API allows you explore all of the use-cases above and more, to build a robust virtual account product that is convenient and cost-effective for your customers.

Leverage Virtual Bank Accounts for Business Growth

Virtual bank accounts are becoming popular because they are easy to use and provide a safe place to keep money. With no physical branches, most digital banks offer easily accessible customer service, which saves you a lot of time and effort compared to traditional banks, where you would have to wait in long queues.

Virtual accounts can be an excellent alternative to traditional, physical bank accounts but it is important to understand how it can benefit you and your business, as well as the possible disadvantages before you open one.

Looking to issue virtual accounts to your customers? Get Started with Bloc Accounts here.

Toluwanimi Olubanke