Digital banks are essentially an extension of the digital transformation of traditional financial institutions, which have significantly reduced their branch networks as the vast majority of transactions are now conducted electronically. This shift benefits both the banks—by lowering operating costs—and their customers, who enjoy the convenience of web and mobile banking services.
According to a recent report by the European Central Bank (ECB) on financial stability, as of the end of 2024, there were 60 fully digital banks operating within the Eurozone, of which 7 were subsidiaries of traditional banks. While their share of the banking sector’s total assets remains relatively small, it has grown from 3.1% in 2019 to 3.9% in 2024.
A key feature of digital banks is their role in fostering competition to the benefit of consumers, primarily through offering higher interest rates to attract deposits. Approximately 80% of their funding comes from retail depositors, with around 90% of these deposits covered by national deposit insurance schemes. In contrast, corporate deposits and interbank market borrowing play a much smaller role in their funding structure.
Independent digital banks typically offer average deposit rates of around 2.5%, compared to 1.5% from digital banks that are subsidiaries of traditional institutions, and just 1% from systemic banks in the Eurozone. This indicates that depositors are significantly better rewarded by fully digital banks.
The ECB notes that the limited funding sources of digital banks—namely, their minimal reliance on corporate deposits or interbank borrowing—makes them more vulnerable to potential bank runs. To mitigate this risk, they maintain high levels of liquidity and capital reserves.
Regarding their asset structure, two distinct models can be observed. The first resembles that of traditional banks, wherein deposits are used to issue loans, generating profit from the interest rate spread. Digital banks following this model often specialize in a specific category of lending—such as consumer, mortgage, or business loans—with only a few maintaining diversified loan portfolios.
The second model involves using only a small portion of deposits for lending, with the majority placed in highly liquid assets, such as central bank reserves. These substantial liquidity buffers likely reflect the limited lending activity of such banks.
Despite not operating physical branches, digital banks remain less profitable than their traditional counterparts. This is due to their higher cost of deposits and significant fixed expenditures on electronic infrastructure and technological systems. Additionally, their lower profitability is further impacted by higher capital ratios, which limit their ability to pursue more lucrative investment opportunities.
