Recent advancements in technology within the financial and banking sectors have facilitated increased accessibility for individuals to manage their bank accounts and conduct financial transactions through various devices and applications. These progressive developments are rendering traditional physical bank branches nearly obsolete, particularly for fundamental banking services and products. These advancements, along with the growing
, led to the emergence of a new player in the financial sector: the digital bank.
What is a digital bank?
Digital banks, alternatively referred to as challenger, online, digital-only, disruptor or neobanks, operate as app-based financial service providers without a physical presence for their clientele. Capitalizing on reduced operational expenses, these emerging entities within the banking sector prioritize customer experience, user-friendly interfaces, and personalized services. Consequently, they can provide more cost-effective solutions, featuring lower fees compared to traditional banks and even offering free basic accounts. The number of digital banks has increased rapidly since 2014, despite a notable drop in new launches in recent years and, with that, the awareness of these innovative fintech enterprises. Despite their relatively recent inception, many of these enterprises
raised billions of U.S. dollars in funding.
How do digital banks expand?
Digital banks struggle to turn a profit in their early years. From launch until 2020, for instance,
Revolut reported a net loss at the end of each year, while
N26 has yet to report end-of-year profits. Due to the lack of profit, in order to expand further, digital banks turn to investors. The investors, who are aware of the appeal and potential of this innovative business model, are willing to provide capital and
funding to challenger banks in exchange for high returns in the future.
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