Digital Banking for Business – The Complete Guide
Business banking for dummies
The financial crisis of 2008 dealt a shock to the world of business banking. When the dust settled, it revealed a brave new world of intense scrutiny and increased competition. New fintech startups emerged that were steeped in the culture of the internet. Why have 500 branches, they asked, when you can have one app?
And the better the technology got, the more the apps could do. Digital banks now offer a full range of banking services online. ‘Challenger’ banks – created to exploit both new technology and diminishing trust in traditional financial institutions – are often digital-only. Traditional high street banks retain (albeit reduced) networks of branches and ATMs, but now also offer a complete range of digital business banking services through apps and their websites.
What is the benefit of a digital business bank account?
Digital banks operate at digital speed. Realtime updates mean you get instant clarity over the state of your finances. They offer increased simplicity control over your money, letting you move cash between accounts, pay bills and set up standing orders from an app on your phone. Your bank will be by your side 24/7.
You can access online accounts wherever you are and whenever you like. That convenience is more important than ever. More than a third of UK bank branches have closed since 2015.
Other benefits of digital banking include:
- Reduced costs. The absence or scaling back of large networks of bank branches makes banking cheaper. Extra oversight reduces the chances of missed payments and resulting penalties. The electronic processing of bills and payroll, meanwhile, reduces the time spent on mundane banking tasks and frees up staff for more profitable work.
- Digital banks sync with modern accounting software to make jobs like reconciliation quicker, easier and all but error proof.
But my traditional bank already has an app…
And it may be all you need. If traditional banks were initially slow to identify the threat from digitally savvy challengers, they see it now. They are rushing to catch up, throwing money at technology projects of their own or partnering with established fintech innovators.
If you’re happy with the service you normally receive from your high street bank, check out its digital business bank account first. But be prepared to compare and contrast. Do you need overdraft facilities, multiple payment methods, or multi-currency handling? Think about your current and future needs before deciding on the right digital account for you.
Do I need to move everything?
No, and having a traditional and digital account running concurrently might be useful for budgeting purposes, or for sole traders who need to keep business and personal accounts separate. You might use your digital account and the oversight it offers as your operational account, and keep extra cash in a traditional business savings account.
Why should I consider a digital business bank account now?
For two good reasons.
Open Banking is a secure, government-backed system which is making banks open up customer data to third parties via Application Programming Interfaces (APIs). A new generation of financial products use this data to create more personalised, intelligent and responsive business banking propositions, but you will need a digital account to access them.
Making Tax Digital
Making Tax Digital (MTD) is a Government initiative to make it easier for individuals and businesses to get their tax right, while eliminating the mistakes that cost the exchequer over £9 billion a year. For businesses, it means keeping digital records and filing tax returns digitally, which is much easier with a digital account synced to modern accounting software.
Doing finance better!
A digital business bank account can improve financial management in a number of ways.
Day-to-day financial management
The ability to analyse your finances in real-time is one of the key benefits of digital banking. Easy 24/7 monitoring means you’re more likely to spot unusual activity. It makes it easier to avoid fees by transferring money between accounts in a timely manner. Most of all, it means you always have a clear picture of how your business is performing.
Budgeting and forecasting
Detailed summaries of income and outgoings are the foundations on which accurate budgets and forecasts are made. With a digital account, expenditure can be broken down into staff, service, building and expense costs, giving you insight into where savings might be made. Income can be categorised (best customers, most profitable lines) and used to forecast future revenues. Some digital accounts will produce profit and loss accounts at the click of a mouse.
Similarly, making your finances digital can help you make broader plans for your business.
For example, by linking to small business accounting software, you can easily identify the trends and patterns that inform good business decisions. Should you modify sales targets, focusing more resources on particular services or customers? Would outsourcing back office processes save money as you scale? These and scores of other business decisions are better made with the insight digital banking allows.
Working with a financial adviser
Armed with insight from a digital business bank account, your accountant can give better and more tailored advice for the ongoing success of your business. They can view records in real time, sniffing out anomalies. They can help you create a streamlined digital bookkeeping process that maximises the potential of digital automation to reduce your administrative burden.
It’s your legal obligation to keep a comprehensive list of accounts for at least six years, including money in and out, records of business debts, and details of goods bought and sold. Again, digital banking synced with small business accounting software can save this essential data automatically and store it safely.
Comparing leading digital banks
If you’re going digital, you’ve got plenty of options – but some may be names you’ve not heard of before. Here’s a brief rundown of the best digital business bank accounts.
Tide – Best for sole traders
Tide isn’t a bank, quite. Instead, it offers e-money accounts provided by PrePay Technologies. As such, deposits aren’t covered by the Financial Services Compensation Scheme (FSCS).
Fees: There is no account fee but bank transfers cost £0.20p. Cash withdrawals cost £1 at ATMs, while depositing cash costs £1 at Post Office branches or 3 per cent via PayPoint. An associated business Mastercard comes with no purchase or foreign transaction fees.
Features: Get instant notification of card use, and freeze and unfreeze cards at will. Create invoices from within the app. Integrate with accounting software and auto-categorise income and expenditure.
Monzo is one of the most popular new banks for personal accounts. It has been trialling a business bank account but it is not open to new customers – yet. You can register your interest here. At the moment, details of fees and features are thin on the ground, though we do know that trial accounts came with accounting software integration, different money pots (for, say, overheads and tax savings) and instant notifications.
Starling – Best for small businesses (2 – 25 employees)
Starling is a registered bank, so deposits are covered by the Financial Services Compensation Scheme (FSCS).
Fees: There is no account fee with Starling, and no bank transfer fee. Cash withdrawals are free at ATMs but cost £0.50 at the Post Office, while depositing cash costs £3 at Post Office branches. Non-sterling purchases are free, which is handy for travellers.
Features: Starling includes all standard features, like instant notifications, categorised transactions, accounting software integration and money pots (called Goals). A big sell for Starling is its Business Marketplace, a suite of potentially useful integrations for your business account, covering lending, accounting and more.
Curve claims to be “one place to spend, send, see and save money.” It collects information from all your accounts in one place, so it might be the ideal solution if you’re keeping a traditonal bank account, too.
Fees: The account is free, as is using the Curve Mastercard in the UK. Using Curve abroad is free during the week, but costs 0.5% per transaction at weekends. Withdrawing from ATMs is free up to £200, and £2 after that.
Features: Curve comes with real time notifications, automated expense reports, 1% cashback on selected business purchases, and the ability to freeze and unfreeze cards.
Like Tide, Coconut is not a registered bank and offers e-money accounts provided by PrePay Technologies. As such, deposits aren’t covered by the FSCS.
Fees: Coconut offers two business accounts – Start is free, while Grow costs £5 per month. Bank transfers are free, but cash withdrawals cost £1. Non-sterling purchases cost 2% for Start users, but are free for Grow users.
Features: Coconut offers instant notifications, card freezing and in-app invoicing, along with a tax estimation tool based on your earnings. One downside is its lack of integration with accounting software.
You can only open a Monese business account if you already have a personal account.
Fees: Monese costs £9.95 a month. Local payments and transfers are free, but international payments attract a fee worth 0.5% of the transaction value. You can withdraw cash for free six times a month, with a £1 charge per withdrawal after that.
Features: Monese gives you instant notifications, balance updates, categorised transactions, a free contactless business debit card and budget management features.
Traditional banks – Best for larger SMBs (25 employees plus)
The proliferation of online-only banks have forced traditional banks to respond. All the major banks now offer business banking apps and a range of customer-centric features. Barclays’ online business banking, for example, provides what it calls SmartBusiness Insights, helping you to identify key trends in customer spending and business performance. Text alerts give you instant notifications of account activity.
The Lloyds business banking app does much the same, and also lets you deposit cheques up to £500 using your device’s camera.
All the main banks charge an annual fee for business account services, generally between £60 and £80. Cash payments – in and out – range from £0.50 per transaction to £1.50.
Traditional banks have caught up fast. Their apps may not be as feature-packed as some digital-only competitors, but large networks of branches, business advisers and telephone banking operations mean high street banks may still be the best option for larger SMEs with more complex requirements.
Doing it all digitally
A digital business bank account can do a lot. But link it to a raft of associated services and it becomes the centre of your financial universe. Once your banking is digital, lots of other things become digital too, creating automations, insights and innovations that wouldn’t otherwise be possible. Here are a few examples.
Accounting – Xero
Link your digital business bank account with accounting software and use an automatic bank feed to draw down transaction data. Then categorise and reconcile every transaction with a click or swipe. Automatic bank feeds make everything from tax calculations to expense management quicker, easier and less error-prone.
Expenses – Soldo
Connecting your digital business bank account to a powerful expense management platform like Soldo lets you quickly and easily transfer funds onto a contactless prepaid debit card. Users get controlled access to company funds, but not to the company bank account or credit card, which means you never lose control of expense spending. Soldo connects directly to Xero, making expense reconciliation and reporting simple.
International transfers – Transferwise
Need to pay a foreign supplier? Transferwise lets you transfer money abroad cheaply and efficiently. You can receive payments from abroad, too. It’s simple, efficient, and cost effective, and it only works with a digital business bank account.
Taking payments – Square
Square (and several competitors – it’s a busy sector of the market) is a credit card processing and point-of-sale system, helping small businesses get paid efficiently, especially if you deal with consumers. Square transfers sales money to your digital business bank account and, like Transferwise and Soldo, also links to accounting software like Xero, automatically creating accounting entries for your daily Square sales and speeding up data entry and bank reconciliation.
Borrowing – Iwoca
Iwoca is a fast and fair way to get small business loans of up to £200,000. If you have a digital business bank account, you can apply for a loan in minutes and have the funds in your account within a couple of hours.
A connected universe of tools and services
These business banking apps, and many others, use APIs to create a connected suite of small business services. By syncing with each other, they save time, free staff from mundane tasks and provide real business insight. At the centre of this connected ecosystem is your business bank account, collecting transaction data from prepaid business cards, sales platforms and loan providers, and feeding it into your accounting software for accurate reporting and reconciliation. With all that data to hand, you can more easily identify the trends and patterns that lead to better business decisions.
Recent consumer research highlighted that, although digital-only accounts are popular, most of us have yet to fully switch to one. We might have an app-only account, but we don’t pay our salary into it.
That’s at least partly because we still don’t fully trust online banking. To create more confidence, many digital accounts offer both businesses and consumers a range of enhanced security innovations.
- Instant notifications make it easier to spot fraudulent transactions.
- Lose your card, or suspect it has been compromised, and you can freeze it from the app.
- Some accounts – Starling is one – let you toggle various types of payments – contactless, chip and pin, online, ATM withdrawals – on and off.
- If you lose your phone, many digital accounts can block the app specifically on that phone.
- As with all banks, digital-only banks must refund genuinely fraudulent transactions, so long as you haven’t been negligent.
- Challenger banks like Monzo, Starling and Atom are covered by the Financial Services Compensation Scheme (FSCS) for deposits up to £85,000.
- Others, like Revolut and Monese, aren’t covered by the FSCS, but funds are ring fenced in a separate account and can’t be lent out, offering reasonable protection in the event of insolvency.
No online account is completely secure, however. Earlier this year, nearly half a million Monzo customers were asked to change their PINs after their account details were left in a vulnerable file. In 2018, Tesco Bank was fined £16.4 million after a sophisticated fraud drained £2.26 million from customer accounts.
Customers didn’t lose money in those attacks. Nevertheless, business owners should take sensible precautions to protect themselves from cybercrime, especially when you consider that SMBs are collectively subject to 10,000 cyber attacks a day. Here’s some simple advice to keep your first foray into digital banking secure:
- Only give trusted employees access to your business bank account and the authority to make payments.
- Choose a bank that uses two factor authentication, the gold standard for online security.
- Change passwords regularly, and make them secure.
- Turn on text alerts and real time notifications if your provider offers them, and see instantly when a large transaction is made.
- Install and update anti-virus and anti-malware software on all computers. Use a firewall.
- Never reply to emails asking for personal or security data. Don’t click on links or attachments in emails you aren’t expecting. This should be company policy and followed by all employees.
- When you’re outside your home of office network, use a Virtual Private Network (VPN) to share data. Don’t use public WiFi to access your bank account.
Basic security protocols make it far less likely that your business will become a victim of cyber crime, so don’t be put off exploring the opportunities offered by a digital business bank account. It is the first step to making your entire financial operation more efficient, cost-effective and insightful.