The digital euro – Complement or competitor in the payment portfolio?

On November 1, 2023, the European Central Bank launched the preparatory phase for the introduction of the digital euro. After a two-year investigation phase, the development of the required infrastructure and platform will now begin. This phase also includes tests to determine whether the digital euro has a sustainable future. In two years from now, the Governing Council of the central banks will decide whether the digital euro will be introduced and issued.

What is the digital euro?

The digital euro would be a digital form of central bank money issued by the central banks of the euro area and available to all citizens in the euro area. It would complement existing means of payment such as banknotes and coins and could be used for payment at the point-of-sale (POS), in e-commerce, between private individuals and with public authorities. The aim is to offer a secure, universally applicable and efficient form of digital central bank money that promotes digital business models and strengthens the strategic autonomy and sovereignty of European payments.

What are advantages of the digital euro?

Firstly, it should be noted that the digital euro has functionalities that are in most respects no different from other payment instruments. Nevertheless, the ECB highlights fundamental differences:

For end customers

1. Universal means of payment: In enhancement of cash, the digital euro offers access to digital central bank money. This enables citizens to use both physical and digital forms of money in their everyday lives. Merchants should be obliged to accept the digital euro. This should ensure that every consumer can use the digital euro.
2. Free of charge for basic services: The digital euro should be free of charge for basic services, which makes it particularly attractive for end users. Payments can be processed in real time without incurring additional costs.
3. Offline functionality: The digital euro should offer the possibility to pay without an internet connection. This is particularly useful in areas with limited network coverage or in situations where the internet is not available. It remains questionable how the ECB will avoid double spending.

For Merchants

1. Improved negotiating position: The digital euro might give merchants a stronger negotiating position vis-à-vis other payment service providers thanks to the acceptance obligation.
2. Higher conversion rates: If every customer can use the digital euro, conversion rates should increase.
3. Efficient payments: The introduction of the digital euro could lead to a reduction in transaction costs. Merchants could benefit from the lower costs, as no scheme fees are to be incurred in the system.
4. Immediate availability: Instant Payment enables merchants to access their funds immediately. This improves liquidity and enables more efficient business management.

For Banks

1. Great reach: The digital euro has the potential to reach a broad customer base. Banks can benefit from this great reach by gaining new customers and strengthening existing relationships.
2. Reduced costs: As the Eurosystem is state-funded, banks could benefit from an exemption or reduction in scheme and settlement fees. This could lead to a significant reduction in costs.
3. Platforms for innovative ideas: Banks have the opportunity to develop new business models and services based on the digital euro. This could expand their product portfolio and help them to remain competitive.

How does the digital euro work?

Payments with the digital euro should be risk-free, free of charge for the consumer and possible in real time. The digital euro would be stored in an electronic wallet, which would be set up at a bank or an intermediary. It is planned that customers are only allowed to have one wallet. The money can be converted directly from the current account into digital euros, with the option of manual top-up or an automated top-up function.

In contrast, a merchant may have several wallets, but is not allowed to hold the digital euros in them. The zero-interday holding limits mean that the digital euros must be transferred to the merchant’s bank account on the same day they are received.

Intermediaries play a central role in creating value with the digital euro, however the ECB has a partial claim to the customer interface. It is planned that a dedicated app / wallet will be provided either by the ECB itself or by other authorized providers.

How does the economic model of the digital euro work?

With the aim of striking a balance between appropriate incentives for banks to spread the digital euro and protective measures for end customers, a compensation model was presented that is based on clearly defined basic principles.

Free basic functions for end customers

It is planned that banks will not be allowed to charge end customers for the basic functions of the digital euro. This ensures that the digital euro is free of charge for end customers.

Compensation between acquirer and issuer

Compensation between acquirer and issuer that is comparable to interchange is being considered. This fee is currently to be limited to the level of comparable procedures, similar to debit card payments.

No scheme fees

In contrast to existing traditional four-party models, there would be no scheme fees for the digital euro. The Eurosystem would bear its own costs, which ultimately corresponds to state financing of the digital euro scheme.

What impact could the digital euro have on banks?

The introduction of the digital euro could have various effects on banks:

1. New business models and services: Banks would play a central role in the provision of the digital euro. They could use the pan-European platform provided by the Eurosystem as an important point of contact for individuals, retailers and companies and develop new business models and services to expand their product portfolio.
2. Competition with fintechs: As fintech companies could gain direct access to the digital euro, competition in the financial sector could intensify and lead to pressure on banks to optimize their services and make them more cost-efficient. Fintechs are known for their innovative strength and could force banks to react more quickly to market changes.
3. Cannibalization effects: As the ECB is planning its own app or wallet for the digital euro, which could be used for payment, there is a risk that existing payment methods such as payment with a physical girocard or credit card will be displaced by the digital euro wallet. Banks would have to adjust in order to keep their existing payment solutions competitive and minimize potential losses.

What impact could the digital euro have on merchants?

For retailers the question arises as to whether the digital euro will bring real added value or just become another checkout button. The ECB promises various benefits for users and therefore also for retailers:

1. Universal acceptance: The digital euro would be usable in all retail situations and available throughout the eurozone. It would also cover a wide range of payment situations and offer a high level of user-friendliness. This could promote the acceptance and usage of the digital euro.
2. Data protection and high security: The digital euro offers full control over personal data, as the processing of personal data by payment service providers would only be permitted with the explicit consent (opt-in instead of opt-out) of the user for certain purposes. This could strengthen consumer confidence in the digital euro. In addition, the digital euro would offer a higher level of privacy than other electronic payments, especially for offline payments. This could be a decisive argument for users who value data protection and security.
3. Cost efficiency and immediate availability: By eliminating scheme fees, the acceptance costs for merchants could be lower than comparable procedures. In addition, the digital euro is intended to enable instant payment, giving merchants the possibility of immediate access to their funds.

What about the relationship between the digital euro and EPI?

The European Payment Initiative (EPI) was launched to create a standardized payment system in Europe. It is a commitment by 14 banks from 5 countries – Germany, France, Belgium, the Netherlands and Luxembourg.

The digital euro and EPI both aim to create a standardized payment system in Europe. Both provide their own app or are integrated into banking apps and are based on the same business model. It is difficult to differentiate between them, yet both have the potential to strengthen the banking ecosystem. The appropriate networking of the two is a key success factor. It will be crucial how banks adjust and what strategies they pursue to remain relevant and competitive.

What future prospects does the digital euro offer retailers and banks?

Whether the digital euro has a sustainable future remains to be seen. In any case, the introduction of the digital euro would bring further momentum to the market.

Merchants should therefore prepare for the future at an early stage and optimize their payment transactions. Topics such as payment orchestration and smart routing are relevant to reduce costs, increase conversion and optimize the payment load.

Banks in turn face the challenge of developing a payment transaction strategy that meets the real needs of their customers and uses the regulatory framework to create value. Payment transactions must be considered as a holistic strategy to meet the requirements of the future. The collaboration and integration of different payment systems and methods could strengthen the banking sector and open new opportunities.

We continuously monitor market developments to evaluate possible courses of action and develop suitable strategies together with our customers and partners. Only with a comprehensive and future-oriented strategy at hand can banks, merchants and end customers benefit from the advantages of the digital euro and meet the challenges of the modern payment world.

What impact does the digital euro have on your company?

Discover in our exclusive workshop “NextGen Payments: Revolution or Evolution by 2030?” how the digital euro and the future drivers of digitalization, cyber security and regulation will affect your business models and how you can make your company future-proof.

We look forward to hearing from you and will be happy to answer any questions you may have.

About Projective Group

Established in 2006, Projective Group is a leading Financial Services change specialist.

We are recognised within the industry as a complete solutions provider, partnering with clients in Financial Services to provide resolutions that are both holistic and pragmatic.  We have evolved to become a trusted partner for companies that want to thrive and prosper in an ever-changing Financial Services landscape.

About Thede Consulting

Thede Consulting, with over 30 years of experience, offers advisory services in the payments sector both domestically and internationally. Their team brings distinct skills that drive collective success. They specialise in future payments, innovative business models, and using advanced technology to boost competitiveness through digital transformation. Moreover, Thede Consulting has a stronghold in supporting its clients during implementation, e.g. finding an appropriate partner for a payment product and orchestrating the subsequent migration.