Is it worth keeping your money in digital banks? - Higher interest rates on deposits than physical ones. Small players remain in the market
Digitalization is transforming the provision of banking services, bringing about the emergence of new business models of digital banks, which do business only in the online space, without developing physical branch networks. Albania will now have such a bank.
But what are these banks and are they very widespread in other countries?
There are about 60 digital banks in the Eurozone. Seven of these banks are branches of traditional banks. They own and offer a range of products identical to physical banks, such as bank accounts and cards, loans, deposits and others. Like other banks, digital banks must be licensed to operate.
Fully online banks typically have lower margins than traditional banks, due to higher deposit costs and fixed expenses. They typically offer higher interest rates as they seek to expand their market to a customer base that is more price-sensitive than that of traditional banks.
Relatively high IT costs and significant marketing expenses limit the ability of digital banks to achieve a similar level of profitability to that of physical banks.
These banks remain relatively small players with limited product offerings. Their further growth could be good for consumers, as it increases competition among banking market players and could push existing banks to improve their service offerings.
However, this could also turn into a threat to financial stability if traditional banking business models are disrupted and incumbent banks rapidly lose the deposit exclusivity that provides sustainable funding, which in turn supports their lending to the real economy.
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