Author: Zhang Feng
Today, as the European single currency system has traversed over twenty years, the wave of digitalization is profoundly changing the payment ecosystem. Recently, ECB Executive Board member Pier Carlo Padoan delivered a speech outlining the core propositions of the digital euro payment strategy—developing a digital euro. He believes this initiative is not only a response to technological innovation but also a strategic choice to maintain European monetary sovereignty, deepen the single market, and address the challenges of payment market fragmentation.
I. Why Develop a Digital Euro? — An Inevitable Choice Under Multiple Motivations
Payment market fragmentation restricts the deepening of the single market. Although the "Single Euro Payments Area" (SEPA) has essentially achieved "borderless" payments within the eurozone in the fields of credit transfers and direct debits since its launch in 2002, Europe still faces serious fragmentation issues in digital payments. Currently, most retail payment solutions primarily cater to domestic market needs, lacking true pan-European coverage. In payment scenarios at "interaction points" such as physical stores, mobile devices, and e-commerce, local European solutions are scarce, and person-to-person (P2P) payments are particularly fragmented.
This payment landscape, with national borders as barriers, forces citizens living, working, traveling, or shopping across borders in Europe to rely on a few non-European payment service providers. For small and medium-sized enterprises, these payment barriers increase the costs and complexities of cross-border operations, objectively suppressing the vitality of the single market. The fragmented state hinders the digitalization process of the European economy, even creating a paradox: the EU's efforts to reduce trade barriers and promote digitalization inadvertently benefit the already dominant non-European payment giants rather than providing inclusive benefits to European consumers and businesses.
Lack of competition and sovereignty risks under non-European payment service providers. The second major challenge facing the European payment market is insufficient competition and excessive reliance on non-European service providers. Data shows that international card schemes account for nearly two-thirds of electronic transactions made with cards issued in the eurozone, with 13 out of 20 eurozone countries completely dependent on international card systems. As contactless payments become the norm, high terminal upgrade costs and a lack of open near-field communication (NFC) cores further raise market entry barriers, limiting the emergence of new competitors.
The lack of competition directly leads to rising transaction fees. Between 2018 and 2022, the average net merchant service fee charged by EU card schemes nearly doubled, and these costs are often passed on to consumers, forming a kind of "hidden consumption tax," with revenues not retained in Europe. Additionally, large tech companies are entering the payment field relying on their closed ecosystems, potentially abusing their market dominance (as seen in the case of Apple Pay), raising antitrust concerns.
More importantly, excessive reliance on non-European payment service providers exposes the European payment system to external interference risks, weakening Europe's voice in setting payment standards. As a key infrastructure for economic and social operations, Europe must enhance its autonomous control capabilities to improve the resilience of the eurozone and the single market in the face of external shocks.
Diminishing cash status and challenges to financial inclusion. Cash is the only payment tool with legal tender status that can be used for free anywhere in the eurozone, playing an irreplaceable role in ensuring financial inclusion for a long time. However, the wave of payment digitalization is eroding this function of cash. If the current situation is allowed to continue, certain groups (such as those with limited digital skills, the elderly, and people with disabilities) may be excluded from the payment system, harming social equity and economic inclusivity.
The digital euro is seen as a natural extension of cash in the digital age, aiming to maintain the key role of public currency in the digital environment, ensuring that all citizens can participate in the digital economy equally and at low cost, continuing the inclusive mission that cash embodies.
Urgent need to enhance the global competitiveness of the European payment industry. European payment service providers struggle to achieve pan-European scale, making it difficult for them to compete with international giants even in their home markets. The market value of Europe's largest banks is far below that of institutions dominating international card schemes. The lack of competitive local payment solutions not only limits the choices available to European consumers and businesses but also constrains the development and innovation of the European fintech industry.
The development of the digital euro aims to build a public digital payment infrastructure covering the entire eurozone, serving as a foundation to empower the private sector to develop globally competitive payment products, reshaping Europe's industrial position and innovative capacity in the digital payment field.
II. How to Develop a Digital Euro? — A Dual-Pillar Strategy of Public-Private Collaboration
The ECB's digital euro strategy is not to replace private payment services but to build a dual-pillar system that complements "public currency" and "private currency."
(1) Core Design of the Digital Euro as Public Currency
Pan-European coverage and seamless experience: The digital euro will achieve unparalleled pan-European coverage, ensuring seamless digital payments anywhere in the eurozone, in any scenario (online, offline, P2P), completely eliminating cross-border payment barriers.
Free basic services and strict privacy protection: As a public good, the basic use of the digital euro will be free for citizens. At the same time, it will establish strict privacy standards, providing a level of privacy close to cash for offline transactions, while online transactions will enhance data protection to ensure user rights are not eroded.
Offline payments and robust resilience: The digital euro will support offline transaction capabilities, ensuring that payments are uninterrupted in cases of poor network coverage or power outages, enhancing system resilience—an advantage that existing digital payment tools cannot match.
Inclusive accessibility: The ECB is committed to ensuring that the digital euro is easy to access and use, especially for groups with limited digital skills, disabilities, or the elderly. The euro system will provide an official digital euro application that supports all official EU languages, designed to be intuitive and uniform, ensuring it is as easy to recognize as euro banknotes. This application will also provide a distribution channel for small payment service providers (PSPs) that cannot develop front-end solutions.
Clear intermediary role and innovation space: The official application will not replace the relationship between PSPs and customers but will serve as a unified entry point providing basic functions. PSPs can integrate digital euro services into their own applications and develop customized value-added services based on this.
(2) Stimulating Private Sector Vitality through Retail Payment Strategy
The digital euro alone is insufficient to address all challenges; it must be accompanied by the development of pan-European private payment solutions focused on "interaction points."
Supporting market-driven initiatives: The ECB welcomes and encourages market-driven pan-European payment projects like the "European Payment Initiative" (EPI), supporting their geographical coverage expansion in areas such as instant payments and P2P transactions to achieve true pan-European operations.
Advocating interoperability and collaborative integration: To avoid new fragmentation, the ECB advocates for interoperability between different payment solutions and encourages payment communities in various countries to collaborate, integrate resources, and jointly create comprehensive solutions with economies of scale, shortening the time to achieve pan-European coverage.
(3) Catalyzing an Innovation Ecosystem through Digital Euro Infrastructure
The digital euro will provide a set of open, unified underlying infrastructure and a rulebook, similar to a "unified European railway network."
Reducing innovation and expansion costs: Open infrastructure will enable private PSPs to launch innovative payment services across Europe at lower costs and higher efficiency, breaking the current deadlock caused by inconsistent standards and high costs that hinder cross-border expansion.
Stimulating value-added service innovation: Businesses can develop new services such as conditional payments, bill splitting, and micropayments on this infrastructure, and even explore cross-border account services (e.g., Belgian citizens using specialized services provided by Spanish PSPs), driving business model innovation and enhancing user experience.
Strengthening the "typical SEPA" framework: The digital euro strategy will work in synergy with existing initiatives such as strengthening SEPA instant payments and SEPA payment account access (SPAA) to jointly build a more efficient, innovative, and resilient European payment backbone network.
III. Risks and Challenges in Developing the Digital Euro
Technical complexity and implementation risks: Building a secure, efficient, scalable digital euro system that supports offline transactions and can handle massive transactions is highly complex, with risks of delays, cost overruns, or failure to fully achieve design goals.
Privacy and data security challenges: Balancing convenience with privacy protection, ensuring transaction data is not misused, and preventing mass surveillance are key to gaining public trust in the digital euro. The system will also become a high-value target for cyberattacks.
Financial stability and disintermediation risks: If the digital euro is poorly designed (e.g., unrestricted as a store of value), it could trigger large-scale transfers of bank deposits to digital euros during crises, exacerbating bank run risks and affecting financial stability and credit supply.
User acceptance and behavioral change: Convincing the public and merchants to accept and use a completely new payment tool poses challenges, requiring overcoming habitual usage, building trust, and addressing natural resistance to change.
Coordination and competitive relationship with the private sector: Balancing the roles of the public and private sectors, ensuring the digital euro complements rather than stifles private innovation, and promoting healthy competition without creating new market distortions requires careful institutional design.
Cross-border and legal coordination: Ensuring consistency in digital euro rules under the legal frameworks of multiple eurozone countries and addressing interoperability with non-eurozone countries involves complex legal and policy coordination.
IV. ECB's Response Strategy
Phased and cautious advancement: The digital euro project is currently in the "preparatory phase," conducting detailed investigations, prototype testing, and design optimization. This gradual approach helps identify and mitigate risks, ensuring the final solution is robust and reliable.
Strengthening privacy design (Privacy by Design): By employing technical measures (such as anonymizing offline transactions and minimizing data processing) and legal safeguards (clarifying data usage rights), privacy protection will be embedded at the core of the system.
Setting holding limits and non-interest-bearing design: To mitigate financial stability risks, the ECB is considering setting limits on individual holdings of digital euros and clarifying that digital euros will not pay interest, reducing their appeal as a large-scale investment tool and primarily positioning them as a payment medium.
Building an easy-to-use user experience: By providing multilingual support, accessible design, and integration with PSP applications through the official app, the barriers to use will be lowered. Extensive public consultation and educational outreach will help build awareness and trust.
Clarifying the "public-private complementarity" positioning and open infrastructure: Emphasizing the digital euro's role as a "foundation layer" for payments, providing a level playing field for the private sector and fertile ground for innovation. Ensuring transparency and fair access through the rulebook will encourage private entities to develop value-added services.
Strengthening internal EU and international collaboration: Working closely with the European Commission and national regulatory bodies to ensure legal framework coordination. Actively exploring cooperation with the Bank for International Settlements (BIS) and other central banks on central bank digital currency (CBDC) standards and interoperability.
The development of the digital euro is a strategic choice for Europe at the crossroads of payment digitalization. It is far more than a technological innovation; it is a comprehensive strategy to address market fragmentation, maintain monetary sovereignty, ensure financial inclusion, and enhance the competitiveness of European industries. Its core logic lies in providing a secure, inclusive, pan-European public digital payment option and building open infrastructure to empower private sector innovation, ultimately shaping a more integrated, competitive, innovative, and resilient European payment ecosystem.
As Padoan stated: "We cannot be satisfied with the status quo." Faced with the dual pressures of geopolitical and technological changes, clinging to the past means relinquishing control over the vital economic lifeline of payments. Developing the digital euro is a key step in reclaiming the "spirit of SEPA" and deepening European integration in the digital age. Its success or failure not only concerns payment efficiency and convenience but also the autonomy and influence of Europe in the future global digital economy landscape.
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