The digital banks that will succeed in the future will not be lightweight versions of traditional banks, but rather financial systems centered around wallets.
Author: Vaidik Mandloi
Editor: Chopper, Foresight News
Where Does the True Value of Digital Banks Flow?
A review of leading global digital banks reveals that their valuations are not solely determined by user scale but rather by their per-customer revenue generation capacity. Revolut, a digital bank, serves as a typical example: despite having fewer users than Nubank, a Brazilian digital bank, its valuation surpasses the latter. This is because Revolut’s revenue streams are diversified, spanning foreign exchange trading, securities trading, wealth management, and premium membership services. In contrast, Nubank’s business expansion primarily relies on credit operations and interest income rather than card transaction fees. WeBank in China, on the other hand, has pursued a differentiated route by achieving growth through stringent cost control and deep integration into Tencent’s ecosystem.
Valuation of Leading Emerging Digital Banks
Currently, crypto digital banks are reaching a similar inflection point in their development. The combination of 'wallet + bank card' can no longer be considered a business model, as any institution can easily offer such services. A platform’s competitive differentiation lies precisely in its chosen core monetization pathway: some platforms earn interest income from user account balances; others profit from stablecoin payment volumes; and a few platforms pin their growth potential on the issuance and management of stablecoins, as this represents the most stable and predictable revenue source in the market.
This also explains why the importance of the stablecoin sector is becoming increasingly prominent. For reserve-backed stablecoins, the core profit stems from investment returns on reserves, which involve deploying reserves into short-term government bonds or cash equivalents to generate interest. These returns accrue to the stablecoin issuer rather than digital banks that merely provide users with stablecoin holding and spending functionalities. This profit model is not unique to the crypto industry: in traditional finance, digital banks similarly cannot earn interest from user deposits, as the actual custodian banks managing the funds benefit from these returns. The emergence of stablecoins has made this 'separation of revenue ownership' model more transparent and concentrated, with entities holding short-term government bonds and cash equivalents earning interest income, while consumer-facing applications focus primarily on user acquisition and product experience optimization.
As the adoption of stablecoins continues to expand, a contradiction is gradually emerging: application platforms responsible for user acquisition, transaction matching, and trust-building often cannot profit from the underlying reserves. This value gap is compelling companies to pursue vertical integration, moving beyond a simple front-end tool positioning to gain control over core aspects such as fund custody and management.
It is precisely for this reason that companies like Stripe and Circle are ramping up their efforts in the stablecoin ecosystem. They are no longer content to remain at the distribution level but are expanding into settlement and reserve management, which represent the core profit-generating segments of the entire system. For instance, Stripe has launched its proprietary blockchain, Tempo, specifically designed for low-cost, instant transfers of stablecoins. Rather than relying on existing public blockchains like Ethereum or Solana, Stripe has built its own transaction channels, enabling it to control the settlement process, fee pricing, and transaction throughput—all of which directly translate into superior economic benefits.
Circle has adopted a similar strategy by creating a dedicated settlement network, Arc, for USDC. Through Arc, inter-institutional USDC transfers can be completed in real time without causing congestion on public blockchain networks or incurring high transaction fees. Essentially, Circle has constructed an independent USDC backend system through Arc, freeing itself from reliance on external infrastructure.
Privacy protection is another significant driver behind this strategic move. As Prathik elaborated in his article 'Rebuilding Blockchain Brilliance,' every stablecoin transfer on a public blockchain is recorded on a transparent ledger. While this feature is suitable for open financial systems, it poses drawbacks in commercial scenarios such as payroll disbursement, supplier payments, and treasury management. In these contexts, transaction amounts, counterparties, and payment patterns constitute sensitive information.
In practice, the high transparency of public blockchains enables third parties to easily reconstruct a company's internal financial status through blockchain explorers and on-chain analysis tools. However, the Arc network allows inter-institutional USDC transfers to be settled off the public chain, retaining the advantage of fast settlement for stablecoins while ensuring the confidentiality of transaction information.
Comparison of Asset Reserves between USDT and USDC
Stablecoins are disrupting the old payment system.
If stablecoins represent the core of value, the traditional payment system appears increasingly outdated. The current payment process requires the involvement of multiple intermediaries: payment gateways aggregate funds, payment processors route transactions, card networks authorize transactions, and the banks of both parties ultimately complete the settlement. Each step incurs costs and causes delays in transactions.
Stablecoins bypass this lengthy chain altogether. Stablecoin transfers do not rely on card networks or acquiring institutions, nor do they require waiting for batch settlement windows; instead, they enable direct peer-to-peer transfers based on the underlying network. This feature has profound implications for digital banks, as it fundamentally alters user expectations regarding experience — if users can achieve instant fund transfers on other platforms, they will not tolerate cumbersome and costly transfer processes within digital banks. Digital banks must either deeply integrate stablecoin transaction channels or risk becoming the least efficient link in the entire payment chain.
This shift is also reshaping the business models of digital banks. In the traditional system, digital banks generate steady fee income through card transactions because payment networks control the core links of transaction flows. However, under the new system dominated by stablecoins, this profit margin is significantly compressed: peer-to-peer stablecoin transfers incur no fees, leaving digital banks that rely solely on card transaction revenues facing a completely fee-free competitive landscape.
As a result, the role of digital banks is transitioning from card issuers to payment routing layers. As payment methods shift from card-based systems to direct stablecoin transfers, digital banks must become central nodes in stablecoin transaction flows. Those capable of efficiently processing stablecoin transaction streams will dominate the market because, once users adopt them as the default channel for fund transfers, switching to other platforms becomes highly unlikely.
Identity verification is becoming the new generation account carrier.
While stablecoins make payments faster and cheaper, another equally critical bottleneck is becoming increasingly apparent: identity verification. In the traditional financial system, identity verification is an independent step where banks collect user documents, store information, and complete reviews in the background. However, in scenarios involving instant wallet fund transfers, every transaction relies on a trusted identity verification system; without such a system, compliance checks, anti-fraud controls, and even basic permission management would be impossible.
For this reason, identity verification and payment functions are accelerating their integration. The market is gradually moving away from fragmented KYC processes across different platforms toward a portable identity verification system that can be used across services, countries, and platforms.
This transformation is currently unfolding in Europe, with the EU Digital Identity Wallet entering the implementation phase. The EU no longer requires each bank or application to independently conduct identity verification; instead, it has created a government-backed unified identity wallet that all residents and businesses can use. This wallet not only serves as an identity repository but also carries various certified credentials (age, residency proof, licenses, tax information, etc.), supports users in signing electronic documents, and includes payment functionality. Users can complete identity verification, share information on demand, and make payments in a single process, achieving seamless end-to-end integration.
If the EU Digital Identity Wallet successfully takes off, the entire architecture of the European banking industry will be reshaped: identity verification will replace bank accounts as the core entry point for financial services. This would transform identity verification into a public good, diminishing the distinctions between traditional banks and digital banks unless they can develop value-added services based on this trusted identity system.
The cryptocurrency industry is also moving in the same direction. Experiments with on-chain identity verification have been ongoing for years. While a perfect solution has yet to emerge, all efforts are converging toward a common goal: providing users with a way to verify their identity or related facts without being confined to a single platform.
Below are several notable examples:
- Worldcoin: Building a global proof-of-personhood system that verifies users' real human identities without compromising their privacy.
- Gitcoin Passport: Integrating multiple reputation and verification credentials to mitigate Sybil attack risks during governance voting and reward distribution.
- Polygon ID, zkPass, and ZK-proof frameworks: Allowing users to prove specific facts without exposing underlying data.
- Ethereum Name Service (ENS) + Off-chain Credentials: Enabling crypto wallets to not only display asset balances but also associate users’ social identities and verified attributes.
Most cryptocurrency identity verification projects share a common objective: empowering users to autonomously prove their identity or related facts without locking identity information into a single platform. This aligns perfectly with the EU’s vision for promoting the digital identity wallet: a single identity credential that can move freely across different applications without requiring repeated verification.
This trend will also redefine the operational model of digital banks. Currently, digital banks treat identity verification as a core control mechanism: users register, platforms review, and ultimately create an account tied to the platform. However, when identity verification becomes a portable credential controlled by users, the role of digital banks shifts to service providers accessing this trusted identity system. This will streamline user onboarding, reduce compliance costs, eliminate redundant reviews, and allow crypto wallets to replace bank accounts as the central repository for users’ assets and identities.
Outlook on Future Development Trends
In summary, the core elements that once defined digital banking systems are gradually losing their competitive edge: user scale is no longer a moat, bank cards are no longer a moat, and even a streamlined user interface is no longer a moat. The true differentiating competitive barriers are reflected in three dimensions: the profit-generating products chosen by digital banks, the capital flow channels they rely on, and the identity authentication systems they integrate. Beyond these, all other functionalities will gradually converge, becoming increasingly substitutable.
The successful digital banks of the future will not be lightweight versions of traditional banks but rather wallet-first financial systems. They will anchor themselves to a core profit engine, which directly determines the platform's profit margins and competitive barriers. Broadly speaking, core profit engines can be categorized into three types:
Interest-Driven Digital Banks
The core competitiveness of such platforms lies in becoming the preferred channel for users to store stablecoins. As long as they can attract substantial user balances, these platforms can generate revenue through reserve-backed stablecoin interest, on-chain yields, staking, and restaking, without relying on a massive user base. Their advantage lies in the fact that the profitability of holding assets far exceeds that of asset circulation. These digital banks may appear to be consumer-facing applications but are, in essence, modern savings platforms disguised as wallets, with their core competency being the provision of a seamless experience for earning interest on stored coins.
Payment Flow-Driven Digital Banks
The value of these platforms stems from transaction volume. They will become the primary channel for users to send, receive, and spend stablecoins, deeply integrating payment processing, merchant services, fiat-to-crypto exchanges, and cross-border payment channels. Their profit model resembles that of global payment giants, where individual transaction profits are slim, but once they become the default channel for user fund transfers, they can accumulate significant revenue through sheer transaction volume. Their moat lies in user habits and service reliability, making them the default choice when users need to transfer funds.
Stablecoin Infrastructure-Oriented Digital Banks
This is the deepest and potentially most lucrative track. These digital banks are not merely conduits for stablecoin circulation but aim to control the issuance rights of stablecoins or at least dominate their underlying infrastructure. Their scope of operations covers core functions such as stablecoin issuance, redemption, reserve management, and settlement. The profit potential in this space is the highest because control over reserves directly determines revenue allocation. These digital banks fuse consumer-facing functionalities with infrastructure ambitions, evolving beyond mere applications into full-fledged financial networks.
In short, interest-driven digital banks make money from users storing coins, payment flow-driven digital banks profit from users transferring coins, while infrastructure-oriented digital banks can continuously generate profits regardless of user actions.
I anticipate that the market will bifurcate into two major camps: the first camp comprises consumer-facing application platforms, which primarily integrate existing infrastructure, offering simple and user-friendly products but with extremely low switching costs for users; the second camp advances toward core areas of value aggregation, focusing on businesses such as stablecoin issuance, transaction routing, settlement, and identity verification integration.
The latter will no longer be positioned merely as applications but as infrastructure service providers disguised under a consumer-oriented veneer. They will exhibit exceptionally high user stickiness because they will quietly become the core systems facilitating fund flows on-chain.
