In the past few years, Europe has witnessed a rising trend of “debanking” – a phenomenon where individuals and businesses voluntarily or involuntarily sever ties with traditional banks.
Recently, it has been more of the latter. According to figures originally obtained through a freedom of information (FoI) request made to City watchdog the Financial Conduct Authority and reported through various media outlets, banks are closing more than 1,000 accounts every working day.
The report further detailed that between 2016 and 2017, just over 45,000 accounts were shut by banks. This has increased every year since, climbing to just over 343,000 accounts from 2021 to 2022.
Unfortunately, debanking has been gaining traction due to various factors, and its implications are far-reaching for the financial ecosystem. Today, we try to shed some light on the reasons behind the emergence of debanking in Europe and its potential consequences.
What is debanking?
Generally speaking, debanking refers to the process of customers, both individuals and companies, choosing to withdraw their funds and services from traditional banking institutions. Instead of relying on conventional banks, they seek alternatives such as fintech companies, peer-to-peer lending platforms, or decentralized finance (DeFi) solutions. This movement has captured the attention of regulators, financial institutions, and consumers alike.
As of late, however, debanking has not also come to include the instances when financial institutions close customers’ accounts and do so for various (yet, often, vague) reasons.
Trust deficit with banks
A significant factor contributing to debanking is the declining trust in traditional banks. Historical events such as the 2008 global financial crisis, coupled with subsequent scandals involving major banks, have eroded public confidence in the financial system. Customers are now seeking greater transparency, accountability, and ethical practices, which some fintech companies and digital platforms promise to deliver.
Similarly, some banks have seen fit to close consumer accounts with a lack of trust as a reported cause. Banks sometimes say closures due to concerns over financial crime such as money laundering and fraud. Unfortunately, many traditional banks continue to simply hide behind money-laundering regulations to refuse to say why an account has been closed.
Access to financial services
Debanking also stems from the notion that banks, especially traditional ones, may not adequately cater to the needs of all customers. In many cases, individuals with limited credit histories or businesses with unconventional models find it challenging to access financial services from established banks. Fintech companies, on the other hand, leverage alternative data and modern risk assessment models to extend services to a broader customer base.
These limits are particularly visible when customers come from another country or frequent travelers. When one has little to no credit history set in one place, it becomes particularly challenging to access local banking services. In the event that some do manage to have an account set-up, they eventually find themselves in the crosshairs of the financial institutions themselves who debunk them for the supposed lack of credit history or history as local residents.
The rise of fintech and digital disruption
The rapid advancement of technology has paved the way for innovative financial services, challenging the status quo of traditional banking. Fintech companies have emerged as key players in this digital disruption, offering user-friendly interfaces, faster transaction processing, and personalized financial solutions. As a result, many consumers find these alternatives more convenient and cost-effective, leading to a gradual shift away from traditional banking channels.
Among these financial institutions with a modern approach is London-based Black Banx. Geared towards unlocking a borderless financial system for everyone where money can flow freely, Black Banx empowers customers with the means to make payments and manage their finances from wherever they may be and no matter their economic status.
For other customers, debanking is a means to escape the burdens of high fees and complex fee structures associated with traditional banks. Fintech firms like Black Banx offer more cost effective solutions via lower transaction fees, reduced foreign exchange costs, and competitive interest rates on savings accounts. This cost advantage is a compelling reason for individuals and businesses to embrace alternative financial service providers.
To the same extent, other financial institutions who’ve debanked some of their customers have done so for the benefit of lowering their operating costs. While they likely won’t admit it, maintaining thousands or even millions of individual accounts is a large endeavor, and in these times of economic downturns
Embracing Financial Inclusion
Debanking by customers in Europe has also been driven by a growing awareness of financial inclusion. Traditional banks may not adequately serve underbanked or unbanked populations, leaving a significant portion of society without access to mainstream financial services. Fintech companies and digital platforms aim to bridge this gap by offering inclusive services that cater to the needs of marginalized communities.
With the likes of Black Banx, customers are able to make transactions and manage their finances across 28 FIAT currencies and 2 cryptocurrencies. This no matter where they are from and whatever their financial capacities. This is the type of flexibility that most traditional banks and domestic financial institutions can offer, save for allowing cross-border transactions with a hefty fee attached.
Impact on the European Banking Landscape
The growing debanking trend has the potential to reshape the European banking landscape in several ways:
Increased Competition: The rise of fintech companies like Black Banx intensifies competition, forcing traditional banks to innovate and adapt to changing customer preferences. It has also forced them to reconsider their debanking actions, as customers now have the power of choice and can simply sign up for accounts with the likes of Black Banx.
Job Market Transformation: The shift towards fintech and digital platforms could impact the job market, creating demand for tech-savvy professionals while traditional banking roles might face transformation or reduction. Similarly, both remote working professionals and domestic businesses aiming to enter overseas markets have the means to transact with employers, employees, suppliers, and customers who are in other countries.
Bucking the debanking trend
Debanking is a compelling phenomenon reshaping the European financial landscape. Driven by technology, changing customer preferences, and the pursuit of financial inclusion, this trend challenges traditional banking norms.
Embracing innovation and always prioritizing customers’ evolving financial management needs, Black Banx further separates itself from the traditional banking and fintech industries ensuring no customer is left unbanked, underbanked, and, given current trends in the market, debanked.
In the first half of 2023 alone, the company has earned the patronage of over six million more customers, bringing its total private accounts to over 28 million. Partner companies have not been far behind, with half a million new business accounts adding to Black Banx’s total of over 2.5 million.
As the company continues to onboard an average of 1.3 million new customers per month, it is evident that Black Banx is bucking the trend of debanking, and is instead eagerly looking to further its reach and ensure anyone and everyone are able to exercise their right to take part in the global economy.