May 2024
As mentioned in our previous article, many central banks have moved forward with their plans for digital currencies in response to the acceleration of digital payments, the growth of cryptocurrencies, and the actions of their peers. Something happened. The European Central Bank (ECB) is no exception, and its plans for a digital euro have made significant progress since the “exploration phase” was announced in October 2021.
The first phase of the Digital Euro project has now concluded and a two-year “preparatory phase” is underway. This includes activities such as finalizing the rulebook, testing concepts, exploring service providers, and engaging with stakeholders. These activities include not only ordinary people using the digital euro, but also, just as importantly, banks. After all, banks will be the main sellers of the digital euro to the general public and are therefore key to ensuring a smooth implementation of this new technology.
In recent months, there has been a flurry of publications from European authorities on the digital euro, but the European Commission's legal framework on the legal framework for a digital euro, even if it may be delayed somewhat due to elections scheduled for June 2024, is Includes legislative proposals for June 2023 and bills for February 2024. His ECB blog on “Exposing banks' fear of losing deposits” and his March 2024 presentation by ECB Director Piero Cipollone entitled “Digital Euro: The Future of Money”. All these complement the Eurosystem's retail payments strategy, which was first developed in 2019, expanded in 2020 and further developed in November 2023.
All these developments mean that the high level of design features expected in a future digital euro are rapidly gaining traction. These are expected to include:
- Free to use for basic consumer transactions
- Can be used for all digital payments in the euro area (online, in-store, person-to-person payments, etc.)
- Strongest level of privacy allowed by regulation
- Intermediation through banks and other payment service providers
- Compensation to intermediaries through merchant commissions
- Financial inclusion of the unbanked through public agency intermediaries
- Retains limits for individual users, no interest or other compensation
- Available for offline trading
Perhaps most importantly, a digital euro is expected to strengthen the euro area's strategic autonomy and monetary sovereignty. For the eurozone, this is seen as part of Europe's critical infrastructure and paves the way for European payment solutions that currently rely on foreign technology and companies.
The decision to issue a digital euro could theoretically be taken as early as 2025, although development would probably take several years. However, serious preparations and strategy development have already begun in the payments sector, with commercial banks realizing that the digital euro will have a significant impact on their business and operating models in areas such as liquidity, privacy and interoperability. I am becoming more and more aware of this. However, despite recent publications, many practical questions regarding the digital euro remain unanswered. At this point, commercial banks' potential concerns about this concept include:
- deposit: Banks are generally concerned that the introduction of a digital euro could encourage customers to move away from traditional deposits at commercial banks. How might this impact banks’ customer relationships and funding strategies?
- cost: How much will it cost commercial banks to develop a digital euro interface for their customers? Will they use existing banking systems or other private wallet initiatives? Should we contribute to the potentially huge costs of developing new “payment rails” for a digital euro?
- Revenue: To what extent can banks offset the cost of providing “free” digital euro services to their customers by charging merchant fees? Could commercial banks completely lose existing or potential customers and their associated revenue streams? Perhaps micropayments, split payments, billing, receipt management, cross-border payments, subsidies, programmable Are there new value-added services such as free or conditional payments?
- competition: What impact could fintech innovations leveraging the digital euro payment rails have? New entrants could use this infrastructure to compete with banks or replace them completely? Looking at it from another angle, is the digital euro a win for banks? Does it mean that they can outsource payments, reduce the cost of maintaining legacy systems, or This could be an opportunity to eliminate it completely. Perhaps we could see more collaboration with private initiatives by commercial banks using intermediary apps.
- talent: Given the new technologies that underpin digital currencies, will banks be able to attract and retain staff with the skills needed to build and operate a digital euro interface?
For banks, the potential commercial benefits of a digital euro, i.e. leveraging a strong digital euro proposition for cross-selling and up-selling, as well as acquiring new customers from underserved social groups. There is also some uncertainty. Furthermore, it is unclear how banks should prioritize his plans for a digital euro compared to other major initiatives such as DORA and instant payments.
That means there is uncertainty for banks about how decisions should be framed around a digital euro. A digital euro is a unique, slow-moving and difficult to quantify concept, but one that could have a huge long-term impact. For now, there appear to be risks associated with both acting too late (giving up a competitive advantage) and acting too soon (wasting resources and attention).
There are no easy answers to these questions. Still, strategic planning is extremely important. In our view, commercial banks need to model potential scenarios, along with their possible impacts and practical responses. However, we believe that the digital euro rulebook already points in a positive direction for banks and should form the basis of their future strategies.
More specifically, we believe banks should:
- the potential for significant disruption to current business and operating models, including in areas such as funding strategies, IT front and back-end systems (including interfaces), payment strategies, transaction management, investment strategies and the need for new external partnerships; Evaluate an area. .
- Assess the potential impact on customer and product offerings such as deposits, digital wallets, and digital assets, as well as the potential impact on current and future revenue streams.
In summary, significant uncertainties remain, including uncertainty as to whether a digital euro will ultimately gain traction in terms of reach or whether a sovereign infrastructure can be built to support it. However, there is clarity about the actual functionality of a future digital euro. The euro is rising rapidly. Many banks are already actively considering how a digital euro will impact their strategies and operations. Other institutions should do the same if they want to reduce potential risks and take advantage of potential opportunities.
