When the European Central Bank raises or cuts interest rates, not every bank responds the same way. A new study from inside the ECB reveals that digital banks are playing by a completely different set of rules and that shift is quietly reshaping how monetary policy reaches millions of people across Europe.
What the ECB Study Actually Found
ECB monetary policy adviser Katarzyna Budnik found that compared with traditional branch-based institutions, digital banks adjust deposit rates more quickly, while showing a slower response in lending rates. The big picture, Budnik says, is that bank digitalisation strengthens the bank funding leg of the lending channel of monetary transmission. The analysis is based on a panel of over 170 digital banks operating in the euro area, observed in supervisory reporting from 2016 to 2025. These banks can be grouped into three business types: e-retail, which are deposit-funded and household-facing; e-service, which are payments and fee-heavy; and e-wholesale, which are market and corporate-focused. On average, digital banks are smaller than their branch-based peers. Their balance sheets rely more heavily on overnight retail deposits, include larger cash buffers, and contain more intangible assets such as software platforms and IT systems. Digital banks also generate a bigger share of income from fees and commissions alongside interest income.
The 2022-2023 Rate Hike Test
The ECB’s aggressive tightening cycle between July 2022 and September 2023 served as the ultimate stress test for digital banks. Between July 2022 and September 2023, the ECB raised interest rates from minus 50 basis points to 400 basis points. During that tightening phase, digital banks adjusted the interest rates they pay on deposits faster and by more than traditional banks. By offering higher interest rates, they kept retail deposits flowing in. At the same time, they did not raise lending rates more than their peers. **This created a painful squeeze. Digital banks were paying more to keep depositors happy but could not charge borrowers more to compensate.** This compressed their margins relative to other banks. Consequently, digital banks expanded their lending less. Here is a quick breakdown of how digital banks behaved differently during the tightening cycle:
| Area | Digital Banks | Traditional Banks |
|---|---|---|
| Deposit rate adjustment speed | Faster and by greater magnitude | Slower, more gradual |
| Lending rate response | Broadly in line with peers | Broadly in line with peers |
| Interest margin outcome | Compressed significantly | More stable |
| Lending growth | Weaker due to margin pressure | Relatively stronger |
| Deposit inflows | Strong inflows maintained | Slower inflow growth |
Why Digital Banks Move So Fast on Deposits
The speed at which digital banks move on deposit rates is not random. It is a direct consequence of how these platforms work and who uses them. The findings consistently showed that deposit pricing is more responsive in digital banks, reflecting the lower switching costs associated with app-based banking. Customers can easily move funds between institutions, forcing digital banks to react more quickly to retain deposits. This pattern is strongest for stand-alone digital banks, with group-affiliated institutions tending to adjust more gradually due to stronger depositor trust. Think about it from a customer’s perspective. Opening a new savings account with a digital bank takes minutes on a smartphone. There are no branch visits, no paperwork, and no long waiting times. That convenience works both ways. Digitalisation increases price elasticity, since depositors at digital banks are quicker to respond to rate differentials. On the one hand, a faster transmission of rates through digital banks enhances monetary policy effectiveness. On the other hand, it weakens the traditional cushion of sticky deposits, increasing liquidity risks for banks.
Squeezed Margins and What Happened When Rates Fell
When the ECB began cutting rates in June 2024, a partial reversal began to play out. Since starting its rate-cutting cycle in June 2024, the ECB cut its key rates eight times, lowering the deposit rate from 4% to 2% overall. Transmission on the funding side also occurred earlier for digital banks in the easing phase. With the first monetary policy rate cuts in 2024 to 2025, new deposit rates at digital banks fell faster than at traditional banks, particularly for longer maturities. This helped their margins to normalise. Another key finding was that price adjustments played a greater role than volume changes during the tightening phase. Digital banks maintained steady inflows by offering attractive rates rather than significantly increasing deposit volumes. “Adjustments during tightening occurred mainly through prices rather than changes in deposit volumes,” Budnik said. As a result, their interest margins narrowed, reflecting the gap between higher funding costs and relatively unchanged lending returns. This margin compression translated into weaker lending growth compared with traditional banks, as digital lenders became more constrained.
What This Means for Regulators and Your Savings
The findings carry real consequences for financial supervisors, policymakers, and ordinary savers across the euro area. From a financial stability perspective, the findings raise concerns about sustained pressure on profitability among digital banks. “Squeezed margin during tightening can strain profitability and erode market value if sustained,” Budnik stated. In an increasingly digital banking system, more banks may be exposed to profitability squeezes and capital erosion. For banking supervisors, this argues for closer monitoring of the composition and stability of retail funding. Stress-testing and supervisory reviews should consider both the pressure on margins when deposits are being repriced rapidly and also banks’ capacity to absorb this pressure. The growth of digital banking across Europe makes this even more pressing. Europe dominated the global neobanking market with a share of 37.20% in 2025.
That is not a small corner of finance anymore. It is a major structural force. For savers, the picture is actually more favourable. Savings accounts are forecast to expand at 41.33% CAGR from 2026 to 2031, reflecting rate sensitivity and app-driven transparency that attract deposit inflows to instant-access and term products. Bank disclosures in 2025 highlighted accelerated deposit growth for digital-native providers as customers searched for yield and easy-to-manage products. The ECB study also flagged the need for regulatory frameworks to catch up. Basel III’s liquidity coverage ratio assigns run-off rates to different categories of deposits, based on their presumed stability. Yet these assumptions were calibrated in an era when withdrawals required a visit to the bank. If outflows can occur at extreme speed, those run-off rates may underestimate risks. Supervisors may need to revisit assumptions for uninsured, digitally active deposits. The world of banking is being rebuilt one app at a time, and as this ECB study makes clear, the rules central banks once relied on are no longer working in exactly the same way. Digital banks move faster, feel the pressure sooner, and amplify the effects of every rate decision the ECB makes. That is a profound change, and getting supervisory frameworks right before the next rate shock hits matters enormously for both the banks and the people who trust them with their savings. What do you think about how digital banks are reshaping rate policy in Europe? Share your thoughts in the comments below.
