Digital Euro Regulation Delivers More Scepticism Than Clarity

August 21, 2023
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The EU’s payments community has long accepted the inevitability of a digital euro being issued, but that does not mean people are pleased or engaged.

The EU’s payments community has long accepted the inevitability of a digital euro being issued, but that does not mean people are pleased or engaged.

Last year, when the European Commission held its public hearing on a digital euro, more than one source told VIXIO that they were disappointed.

They felt like nothing new was being announced, and that the commission could not provide justification for a digital euro beyond geopolitics.

Even after the EU unveiled its Single Currency Package, which includes a regulation catering for the digital euro, on June 28, this type of thinking lingers among payments experts.

"The digital euro is an interesting animal. From what I have seen, nobody is interested in it, or thinks that it is necessary,” said Scott McInnes, a partner at Bird & Bird. “Except the commission and the European Central Bank (ECB) of course."

It seems to be a purely political animal, McInnes argued. “Perhaps it is good for monetary policy, and for Europe's sovereignty, but it seems like more of a backup means of payments online."

"With the digital euro, it should be said that consumers don't change their habits unless they have a reason to,” said Kjeld Herreman, head of strategy advisory at RedCompass Labs.

Herreman continued that the digital euro, nor the European Payments Initiative (EPI), will be adopted easily because of this.

“With other payment methods, you can still do a chargeback, for example, but with the digital euro, this may not be the case,” he said. “The method may also turn out to be more clunky."

Victory for merchants?

Herreman argued that the party that appears to benefit most is merchants.

Merchants have taken part in the project so far, with the ECB ruffling feathers by allowing Amazon to take a prime role in testing digital euro prototypes last year.

Considering Amazon’s rocky relationship with the international card schemes, one payments expert quipped to that it was “basically a f**k you to Visa”.

According to Herreman, merchants are the winner because they could end up paying less fees.

“Merchants stand to win with the digital euro or any type of account-based payment. Merchants will now need to incentivise payers.

“Who are the merchants that are most capable? Those are the very large merchants and some in the fast-moving consumer goods space,” he said.

“These can provide some type of loyalty, and push consumers towards these methods. However, how the local bakery or webshop will adapt will be very challenging."

Merchants across the euro area would be required to accept the digital euro, except very small merchants who choose not to accept digital payments, as the cost to set up new infrastructure to accept payments in digital euro would be disproportionate.

"Merchants like card payments, even if they complain that they are too expensive. No merchant, as far as I can tell, wants this digital euro,” McInnes continued.

McInnes added that merchants will not like the fact that somebody is telling them that they have to accept the digital euro.

“Nobody likes to be imposed with anything, especially with a cost,” he said. “There will be fees, although the commission says that they are trying to limit here."

One suggestion is that the digital euro could introduce more competition to payments, reducing reliance on the international card schemes.

Of course, this has been tried before.

“Merchants can try to steer customers with a discount such as a PISP or Payconniq, which is cheaper, already. However, in my experience, this happens very rarely,” said McInnes. “This all depends on how expensive it all is.”

For example, payment initiation services (PIS) under PSD2 were supposed to be a cheaper way of accepting payments online.

In practice, McInnes said that this does not seem to have happened at scale, especially as interchange fees also for cards got reduced at the same time.

“I wonder, if frank, whether the digital euro could end up like PISPs?"

'Totally unheard of'

"It is totally unheard of to have a regulation creating a framework for a retail means of payment that shall mostly be a public service, while financial institutions and merchants would still have to promote and distribute it,” said Victor Warhem, digital finance expert at the Centres for European Policy Network.

“Even with the fear regarding Chinese and American alternatives, it is hard to justify,” he said.

According to Warhem, what the digital euro looks to do is insert into the EU financial system a big bank for payments.

Even with some regulators downplaying the costs and impact, Warhem suggested that this would mean a lot of change.

In the package, the European Commission says that banks and other payment service providers across the EU would distribute the digital euro to people and businesses.

“It is a huge ask on payment service providers and will pose an issue for elements of the system such as interchange and merchant fees,” he argued. “This would have a downward effect on a revenue segment in the financial sector and yet, there is nothing in return.

“We are asking the financial sector to invest massively but without many perks to doing so."

Here, basic digital euro services would be provided free of charge to individuals and, to foster financial inclusion, individuals who do not have a bank account would be able to open and hold an account with a post office or another public entity, such as a local authority.

It would also be easy to use, including for persons with disabilities.

"The most interesting point to me is that there will eventually be a unified retail payment method in the EU. When you read the proposal, you realise that there will need to be debit cards created that are unique to the digital euro,” said Warhem.

Warhem explained that this is is because people without a bank account will be able to have a digital euro account. “How do you do that without a card? You can't. So, are we going to see digital euro-specific cards everywhere in the EU?"

"The Commission want everyone to be able to pay with a digital euro and to make it a simple process,” said McInnes. “There are references to the concept of a payment instrument. I wonder if you could have a card that is associated to your digital payment account?

“The ECB is depending on a reflex, like Apple Pay or a card, for this to be successful. If you're spending digital euros, but you will perhaps need to open up your EU digital wallet app, which will take more time, compared to a slicker experience with a card."

As with the EU’s new payments legislation, spectators should expect the European Parliament and Council to begin establishing their position on the digital euro proposal in the autumn.

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