A bank with no branches still has to cover its costs. Digital-only providers earn from a different mix of sources than traditional banks, and that mix explains most of their product design.
Interchange is the starting revenue
Every card payment generates a small fee paid by the merchant's side of the transaction, part of which reaches the card issuer.
For a provider whose customers use the card constantly for small purchases, this accumulates into meaningful revenue without any charge to the customer.
It explains the emphasis on making the card the default payment method, through instant notifications, spending categorisation and rewards tied to card use.
Deposit margin arrives with scale
Balances held by customers can be placed with a central bank or in short-term instruments, earning a return the provider keeps in part.
This income depends on prevailing rates, which is why the economics of digital banking look very different in a high-rate environment than in a low-rate one.
It also depends on customers holding real balances rather than topping the account up for a weekend, which is why providers push for salary deposits.
Subscriptions replace the account fee
Tiered plans charge a monthly amount for features such as travel insurance, higher withdrawal limits, metal cards or additional currency allowances.
Subscription income is predictable in a way interchange is not, which makes it valuable to a business being assessed on recurring revenue.
The free tier is retained as an acquisition channel, with the paid tiers positioned as the destination once the account is being used seriously.
Lending is where the margin is
Credit generates far more revenue per customer than payments, which is why providers that started as card issuers moved into overdrafts, instalment credit and personal loans.
Lending requires capital, regulatory permissions and risk management, so it arrives later and marks the transition from payments business to bank.
It also introduces credit losses, which is the first time such a business faces a cost that rises when the economy turns.
Why the cost base is the real difference
Without branches, the cost of serving a customer is dominated by software and support rather than property and staff.
That allows a provider to be profitable at revenue per customer far below what a branch network requires, which is what makes free accounts viable.
The constraint moves to customer acquisition cost, since the whole model depends on adding customers cheaply enough that thin per-customer revenue eventually covers it.