Digital banks: faster deposit, slower loan repricing
Digital banks adjust deposit pricing faster but loan pricing slower than traditional peers, reshaping monetary policy transmission. This shift is explored in a new blog post from the European Central Bank.
Monetary policy's digital divide
Digital banks adjust deposit rates more quickly and by a greater extent than traditional banks during monetary policy tightening phases.
This allows them to maintain retail deposit inflows by offering higher rates.
However, their lending rates do not rise proportionally, leading to compressed margins compared to their branch-based counterparts.
Consequently, digital banks expand their lending less during tightening.
Early evidence from the 2024-25 easing phase shows a partial reversal, with digital banks reducing new deposit rates faster, supporting margin recovery, though their deposit attraction advantage has narrowed.
This indicates that bank digitalisation strengthens the funding leg of the lending channel.
The app-based advantage
An analysis of over 170 euro area digital banks from 2016 to 2025 reveals they are generally smaller and rely more on overnight retail deposits, holding larger cash buffers and more intangible assets.
Their income is also more diversified, including a larger share from fees.
The faster adjustment of deposit pricing at digital banks, particularly stand-alone entities, is attributed to the nature of app-based banking, which lowers search and switching costs for customers.
This creates greater pressure for digital banks to reprice deposits quickly to retain their customer base, a dynamic less pronounced for group-affiliated digital banks due to established trust and branch networks.
Profitability under pressure
The study highlights a critical vulnerability: squeezed margins during tightening phases, which recover only partially and with delay during easing, can strain digital banks' profitability.
In an increasingly digital banking system, more institutions may face such profitability pressures and potential capital erosion.
For banking supervisors, this necessitates closer monitoring of retail funding composition and stability, alongside stress-testing that accounts for margin pressure from rapid deposit repricing.