In a rapidly digitising market, the European Central Bank (ECB) is taking an active, ambitious role in shaping the financial future of the bloc. The digital Euro aims to provide an inherently stable form of money that could become, one day, a reliable backbone of a forward-looking monetary and financial system.
With the ECB having recently released its fourth progress report on the investigation phase of a digital euro, we look at the major opportunities presented by this digital upheaval, as well as how banks and payment providers can play a leading role in enabling a digital future.
A public-private partnership for financial revolution
As far as new financial products go, the digital euro is particular, emerging from a unique fusion of political ambition and economic protectionism, as opposed to free market innovation. To work, digital euro requires a tripartite agreement between institutions, economic actors, and users, which is no small task. To succeed, it must demonstrate genuine innovation and product-market fit, like any new product. Making this ambition a reality requires overcoming several key challenges.
Building a network-effect
As the digital euro attempts to penetrate the market, it will have to bring key stakeholders onboard to scale effectively. While the ‘four corner’ model —the most efficient compensation model in the market— coupled with public good features like free basic use for individuals, wide usability across the euro area, and affordable fees for merchants, should foster adoption, the technical path still needs clarification.
- The digital Euro needs to avoid imposing excessive complexity, expense and work for merchants, who have to update their systems and processes.
- The policy limiting one digital wallet per citizen poses a barrier to its widespread use, further complicating the digital euro’s integration into the financial system.
Creating trust in the market
In theory, a Central Bank Digital Currency (CBDC) should create more stability than, say, commercial digital currencies such as crypto-currency or stable-coins. However, it will also face the same challenges as any new public project.
Banks evolve with an eye on their bottom line and are likely to adopt the digital euro faster when they see a commercial incentive that can make up for the cost, risk and time involved.
The EU has made privacy a key concern, meaning the digital euro faces an uphill battle from its own issuing body. As it attempts to align with GDPR and other data privacy rules, the digital euro will have to keep up with new regulations, creating additional compliance challenges for institutions.
And with the currency being issued by the ECB, data protection will be at the heart of the ecosystem, requiring high levels of data privacy beyond current digital payment methods for stakeholders.
Moving forward into a digital future
As digitalisation becomes more entrenched in everyday life, stakeholders have already adapted quickly to other payment trends such as mobile payments, predicted to grow 28% year on year between now and 2028.
- The digital euro aims to protect European strategic autonomy and monetary sovereignty while mitigating the risk of market dominance by private providers.
- It aims to safeguard against private digital currencies that could potentially destabilise and compromise the system.
As highlighted by the ECB, the digital euro is not here to replace cash, but rather to complement it, being widely accepted and easily accessible. At the same time, it aims to promote efficiency and low-cost transactions, making it an inclusive choice for all EU citizens, including those with limited digital skills.
Balancing control and freedom
A key feature of the digital euro, in common with cash, is that it allows consumers the freedom to use their digital euro as they see fit, without constraints.
- The ECB has no intention of setting limitations on when, where, or to whom people can pay with a digital euro.
- Consumers will be protected by tools to control the amount in circulation, with different limits for online and offline use.
- Settlements will occur without tracking holdings and transaction patterns of users.
The ECB guarantees that it will issue, redeem, and settle transfers of its own liabilities and the central bank has no intention of accessing user identities or enabling the currency to be programmable.
Laying the groundwork for the digital future
The future success of banks and PSPs will be closely tied to their ability to adapt to and embrace this new technology in line with consumer preferences. But existing legacy solutions risk increasing the cost, risk and lead time for integrating the digital euro, either stalling the project, or giving more agile competitors to gain market share. Preparing for the digital euro will require investment in more agile, open and secure infrastructure that can:
- Accommodate a wide range of use cases, including peer-to-peer transactions, consumer-to-business payments, machine initiated payments, and government-related transactions combined.
- Deliver homogenous end-user experiences across the euro area, with customizable account settings for budgeting and automatic functions.
- Distribute and unify domestic solutions, streamlining transactions, as well as accommodating advancements like smart contracts and a single EU VAT implementation.
- Demonstrate robust compliance with GDPR and other payment regulation to provide secure rails for digital-first transactions.
For the majority of the market, this will require choosing the right partnerships to innovate and improve existing core systems, linking the public plans and private incentives.
Payconiq International has a long history of working with leading European providers to implement future-ready payment networks that can offer the necessary integration, visibility and security for a digital future. Our experts have deep insight into the compliance needs of the fast-moving payments market and the systems required to keep businesses on track.
While this presents the largest financial shakeup since the introduction of the common currency 20 years ago, the move towards payment digitisation and the backing of the biggest players in Europe have provided this ambitious project with the momentum to succeed.
The opportunity of opening a new era in payments is simply too big to ignore, for regulators, institutions and merchants. The question is not ‘if’ it will happen, or even ‘when’ – it’s who will move fast enough to take the lead.