Rising interest rates, long viewed as a headwind for fintech, have turned into a meaningful tailwind for digital banks with strong deposit bases. As rates climbed through 2022-2024 and stabilised at elevated levels into 2025, fintechs holding customer deposits began earning net interest income at rates not seen since before the 2008 financial crisis. The companies best positioned to benefit were those that had built deposit-funded models rather than relying exclusively on fee revenue.
How deposit funding changes the economics
A traditional payment fintech earns revenue from transaction fees and interchange. Its margins are structurally thin and exposed to regulatory pressure on interchange rates. A deposit-funded bank earns interest on the gap between what it pays depositors and what it earns on assets. When the Bank of England base rate sits above 4%, a bank holding £10 billion in current account deposits that pay 0-1% interest can earn hundreds of millions in net interest income annually.
Starling Bank was among the first UK neobanks to explicitly build a deposit-funded model. Its business banking focus attracted larger average balances per customer, amplifying the interest income benefit. When rates rose, Starling’s profitability accelerated. Revolut, which reached £790 million in net profit in 2024, also benefited from interest income on its growing deposit base alongside its other revenue streams.
UK fintech investment of $3.6 billion across 534 deals in 2025 per Innovate Finance reflects confidence in these proven models. Investors can now point to demonstrated profitability at multiple UK digital banks as evidence that the deposit-funded approach delivers sustainable returns.
The balance sheet building race
To maximise deposit funding benefits, digital banks need to convince customers to hold meaningful balances rather than using neobank accounts as secondary cards while keeping savings elsewhere. This has driven a wave of savings product launches. Revolut, Monzo, and Starling all offer savings accounts with competitive rates. The competition for deposits is real and shapes product strategy.
Mordor Intelligence projects the UK fintech market growing from $21.44 billion in 2026 to $43.92 billion by 2031, with the business segment holding 57.55% market share. Business banking customers typically hold larger balances than retail customers, making them disproportionately valuable for deposit-funded models. Starling’s strategy of targeting small and medium businesses is, in part, a balance sheet strategy: business deposits are larger, stickier, and more valuable than consumer current account balances.
Savings rate competition and deposit strategy
To maximise the deposit base that funds net interest income, digital banks have competed aggressively on savings rates. In an elevated rate environment, this means offering easy-access savings accounts and fixed-term products that pay meaningfully above what high-street banks offer on equivalent products. The strategy serves two purposes simultaneously: it attracts deposits from customers who would otherwise park savings in a competitor, and it deepens the relationship with existing current account holders who would otherwise move surplus cash off-platform. The trade-off is that paying higher deposit rates compresses the net interest margin compared with a bank that holds deposits at 0% current account rates. Digital banks have largely resolved this tension by segmenting their deposit base — current accounts pay little or nothing, while savings products pay competitive rates only to customers who actively move money into them. How fintech platforms are enabling banking transformation includes this deposit segmentation strategy, which allows digital banks to offer attractive savings products without paying competitive rates on their entire deposit base.
Regulatory capital and the maturity of the model
Deposit-funded digital banks must hold regulatory capital against the assets they fund with those deposits, which imposes a discipline that pure payment fintechs do not face. The capital adequacy requirements that come with a full banking licence mean that growth must be funded responsibly — a bank cannot simply take in deposits and deploy them into high-risk assets to maximise short-term returns without consequence. This regulatory framework, while constraining in some respects, has also been instrumental in building consumer confidence in digital banks. The FSCS deposit protection scheme, which covers deposits up to £85,000, became available to fully licensed digital banks as they obtained their banking licences. Knowing that their deposits are protected by a government-backed scheme has meaningfully reduced the hesitation among customers who previously were reluctant to hold significant balances with a digital-only institution, enabling the deposit gathering that funds the net interest income model.
Credit products as the next margin layer
Deposit funding enables lending, and lending is where the highest margins in banking are earned. Digital banks that have successfully built deposit bases are now expanding into credit. Revolut has launched credit products in multiple markets. Monzo offers a Flex credit product and overdrafts. Starling has built a significant SME lending book.
The margin on lending significantly exceeds the margin on payments or subscriptions. A bank that lends at 8% and funds itself at 2% earns 600 basis points of net interest margin on every pound deployed. At scale, this transforms the P&L. Venture capital’s continued investment in UK fintech is partly a bet on the lending expansion of digital banks that have already proved their deposit gathering ability.
The risk that comes with deposit funding
Deposit funding is not without risk. When rates fall, net interest income compresses. Digital banks that became profitable primarily through interest income need to ensure their fee-based revenue streams are strong enough to sustain margins through rate cycles. The most durable models are those where deposit income adds to an already profitable fee-based business rather than substituting for it.
Fortune Business Insights projects global fintech growing to $1.76 trillion by 2034. Companies that build diversified revenue across fees, subscriptions, and net interest income will navigate that decade with more stability than those dependent on any single stream. The future of digital banking profitability lies in this diversification, with deposit-funded models serving as one pillar of a multi-revenue structure rather than the whole edifice.
The deposit-funded model has validated itself in the UK market. The next phase is scaling it across geographies and customer segments while building the lending infrastructure that converts deposits into the highest-margin asset class in banking.
