The European Central Bank published a Financial Stability Review analysis of euro area digital-only banks, identifying about 60 such banks at end-2024 and noting that their market share rose to 3.9% of total assets in 2024 from 3.1% in 2019. The box contrasts digital and traditional bank business models and sets out potential financial stability risks linked to the growth of digital banks. Digital banks’ funding is heavily concentrated in small retail deposits, which account for about 80% of funding; the lack of physical branches is associated with an unusually large share of cross-border deposits, with over 90% of retail deposits covered by deposit guarantee schemes. On the asset side, the ECB distinguishes between “lender” models (often specialised in consumer, mortgage or non-financial corporate lending, with some subsidiaries placing sizeable assets within their banking group) and “money market fund-like” models that invest deposits mainly in high-quality liquid assets, primarily central bank reserves; across both types, liquidity buffers are unusually high. The analysis also finds digital banks to be less profitable than traditional banks, reflecting higher deposit costs and high fixed expenses such as IT and marketing (for example, in Q4 2024 administrative expenses excluding staff were 1% of total assets versus 0.5% for traditional peers), alongside higher capital ratios that mechanically reduce return on equity. The ECB notes that further expansion of digital banks could intensify competition for customers but may also create financial stability risks if incumbents lose stable deposit funding that supports lending, or if higher funding costs push traditional banks into additional risk-taking. It also highlights a potential channel for cross-border spillovers and financial fragmentation where digitally mobile depositors react to idiosyncratic shocks and deposit insurance remains at the national level.
European Central Bank 2025-05-21
European Central Bank research maps 60 euro area digital-only banks and highlights run and cross-border spillover risks
The European Central Bank's Financial Stability Review notes digital-only banks' market share rising to 3.9% of total assets in 2024. It identifies potential risks, including concentrated funding in small retail deposits, high liquidity buffers, and lower profitability compared to traditional banks. The ECB warns that further expansion could intensify competition and create risks if traditional banks face higher funding costs or cross-border spillovers occur due to digitally mobile depositors.