You’ve heard the term 'digital banks', but like many, you may not fully understand what it means. Is it just a bank with a good mobile app? Is it a completely new type of financial institution? The rise of neobanks and other digital platforms has further complicated the situation, leaving millions wondering what distinguishes a 'digital bank' from a traditional bank.
This guide will define digital banks, explain how they differ from traditional banks, and why the future of digital banking will look entirely different due to the emergence of decentralized banking technologies.
By 2025, the very definition of 'bank' will be contested.
What is a digital bank?
In simple terms, a digital bank is a type of financial institution that operates entirely online, without the use of physical branches. This means that people can access their accounts, make payments, transfer funds, and manage all their finances virtually, through a mobile app or website.
The lack of physical branches is a defining characteristic, but it's important to note that most digital banks still offer traditional banking services. This includes opening checking and savings accounts, sending and receiving payments, and applying for loans—all through a smartphone, tablet, or computer.
Under the banner of digital banking are 'neobanks'. This is a special type of fintech company that offers banking services through partnerships with existing banks or by obtaining independent banking licenses. Their goal is to provide a more convenient and efficient alternative to traditional banking by improving user interfaces and experiences.
As we will explain, neobanks are just one step in the ongoing evolutionary process of digital banking.
How digital banks differ from traditional banks
There are several critical differences between them, such as:
Physical infrastructure vs. access only through digital channels
Traditional banks rely on a network of physical branches to serve customers, manage accounts, and conduct transactions. This infrastructure incurs significant overhead costs, such as rent, utilities, and staff. These costs are passed on to customers through account maintenance fees. For traditional banks, personal interaction is considered essential for many services, such as opening accounts, applying for mortgages, or resolving disputes.
In turn, neobanks offer access through apps and digital technologies, using modern technology to automate processes, reduce costs, and ensure 24/7 access and convenience to banking services. While customer support may be limited, they typically offer support by phone, online chat, or email, as well as pre-written help guides.
Legacy systems vs. modern tech stacks
Traditional banks operate on what we call 'legacy infrastructure', which is a polite way of saying that these are outdated systems that are complex, inflexible, and difficult to upgrade. This naturally leads to inefficiencies, delays, and security vulnerabilities. Trying to perform modern banking with outdated tools is unlikely to achieve optimal performance.
On the contrary, neobanks use modern APIs and cloud systems to provide much faster and more flexible user experiences. They can also modularly integrate with other fintech services to offer more personalized services and quickly adapt to changing customer needs. However, even neobanks rely on outdated systems for core banking functions, such as regulatory compliance and fund transfers. Behind the elegant and modern interfaces, connections to legacy infrastructure still exist.
Fee models and flexibility
Traditional banks are known for their high or hidden fees for monthly maintenance, overdrafts, ATM withdrawals, and bank transfers, among others. These fees can quickly add up.
Neobanks typically offer lower fees, some even advertise banking services with no fees. However, by avoiding fees like monthly maintenance, they may impose limits on free ATM withdrawals, charge for certain transactions, or offer tiered paid services on a 'freemium' basis. The transparency of neobanks is often much better than that of traditional banks, but it is extremely important to read the fine print.
User experience vs. user control
One major friction point that account holders at traditional banks face is that banks can freeze accounts, block payments, and limit withdrawals. This means that users never have full ownership of their funds and essentially trust the bank with their money.
Neobanks have significantly improved the banking experience by offering well-designed and intuitive apps with useful features for budgeting, expense tracking, and instant notifications. Opening accounts and managing services have also been simplified, but despite all these improvements, they still operate within the same regulatory framework as traditional banks. This means they face the same rules and restrictions.
Deobanks: The next step in digital banking
The digital banking model, including neobanks, is centralized and custodial. This creates a situation where users still rely on a third party to manage their funds and control access to their accounts. What if there was a new way to combine the convenience of digital banking with the autonomy and transparency of decentralized finance?
This is where neobanks come into play.
A deobank is a decentralized financial platform based on blockchain that provides digital banking services with transparency, autonomy, and flexibility. They use decentralized technologies to give users greater financial control.
Here’s what distinguishes deobanks:
Non-custodial or hybrid account options: Non-custodial wallets give users full control over their private keys and funds, while hybrid models combine custodial and non-custodial features.
Blockchain data transparency (on-chain): All transactions are recorded on a public blockchain, providing greater transparency and auditability.5
Lack of dependence on outdated financial infrastructure: Deobanks are built on new infrastructure, reducing reliance on intermediaries and legacy systems.6
Limitless and programmable money: Stablecoins and smart contracts give users access to a global financial system with automated financial processes.
Maxim Sakharov, CEO of the group and co-founder of WeFi, explains how the misunderstanding of digital banks helps shape WeFi's approach to 'banking'.
He says: 'People think that a 'digital bank' automatically means more control and transparency for the user. They assume that because they are using an elegant app, they have more power, but in reality, many digital banks are centralized organizations operating within the same constraints as traditional institutions. This is why WeFi is focused on creating a platform that gives users the ability to self-custody their funds, transparency through blockchain data, and the ability to participate in a permissionless financial system.'
The future of banking may not look like a bank at all
The future of digital banking will quickly go beyond banking licenses and centralized control. Self-custody wallets, DeFi protocols, and programmable smart contracts have created a new class of financial platforms that look like banks but do not operate like them. They will offer savings, lending, and payments, but in a decentralized and permissionless manner.
Agne Linge, Head of Growth at WeFi, explains: 'From WeFi's perspective, a deobank is assessed by its commitment to decentralization, user empowerment and transparency, as well as by the tools for managing their finances without intermediaries. Deobanks are a logical next step for digital banking, creating a more equitable and accessible financial space for all.'
Rethinking what a bank can be
Times have changed. We have come a long way from physical branches to neobanks, and now to deobanks, with each step bringing us more convenience and accessibility. However, the ultimate goal should be user empowerment and control.
We must rethink how finance works in a decentralized world, and this may mean that tomorrow's digital banks will not be banks at all.
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