Banking services are increasingly processed electronically, leading to purely digital credit institutions that have no network of physical stores but do all their transactions online.

Digital banks are essentially the extension of the digital transformation of traditional credit institutions, which have drastically restricted the network of stores as their transactions are made electronically, with the benefit of themselves (reduction of operating costs) and their customers.

According to the recent report of ECB For financial stability, at the end of 2024 there were 60 purely digital banks in the eurozone, of which 7 were subsidiaries of traditional banks. Their share of the banking system’s assets remains low, although it increased from 3.1% in 2019 to 3.9% in 2024.

A key feature of these banks is that they boost competition for the benefit of consumers, as they offer higher interest rates to attract deposits. 80% of the funding of digital credit institutions comes from small depositors, whose money is covered by 90% by national deposit insurance systems. On the contrary, business deposits and lending from the interbank market play a much smaller role in funding.

The average deposit rate offered by independent digital banks is about 2.5% against 1.5% of digital banks which are subsidiaries of traditional institutions and 1% of eurozone systemic banks. That is, there is a significantly higher reward of depositors than purely digital banks.

The ECB notes that the absence of other sources of funding for digital banks – such as corporate deposits and lending from the interbank market – makes them more vulnerable to a possible bank run and to face such a risk, maintain high levels of liquidity and capital.

In terms of digital banks, two models are observed. The first is that of traditional banks who use their deposits to lend and make profits from this activity (the difference between interest rates and deposits), with digital banks usually specializing in some loan category – consumer, housing or business – and only a few loans.

The second model is in which digital banks only have a small percentage of deposits they collect to borrow, placing the rest in liquid assets, such as the available central banks. The very high liquidity pillows of digital banks are likely to reflect their limited activity in loans.

The highest cost of deposits and high fixed costs (for electronic technology systems) result in digital banks remaining less profitable than traditional banks, despite having no branch network. The highest capital indicators also contribute to their lower profitability, as this deprives them of the possibility of more lucrative placements.