Italian expenditure of €880 million on digital euro development could potentially jeopardize banking sector innovations
European Banks Grapple with Potential Costs of Digital Euro
The European banking sector is facing a significant challenge as the digital euro, a proposed digital currency by the European Central Bank (ECB), could cost European banks €20.4 billion annually in additional funding costs, according to the European Banking Federation.
The digital euro aims to preserve Europe's strategic autonomy and monetary sovereignty, reduce dependency on non-European operators, promote innovation, and harmonize user experience in retail payments in Europe. However, various banking associations and stakeholders acknowledge potential costs and risks associated with the digital euro.
The ECB and allied banking bodies emphasize limiting the cost burden by reusing existing payment infrastructures and minimizing new investments for intermediaries. The Eurosystem would bear the costs of creating and maintaining the digital euro scheme and infrastructure, similar to how physical banknotes are managed. Payment Service Providers (PSPs) can charge merchants for digital euro services, but fees will be capped under EU legislative proposals to keep costs in check.
The banking sector is concerned about the risk that the digital euro might disrupt bank deposit bases, potentially disintermediating banks and threatening financial stability. To address this, the ECB proposes holding limits on digital euro wallets to ensure it functions similarly to cash as a safe store of value rather than as a substitute for bank deposits. Additionally, linking digital euro wallets to bank accounts would allow seamless payments beyond holding limits, protecting banks’ role in credit provision and financial intermediation.
The ECB has actively involved market participants, including retailers, consumers, and payment service providers, aiming to harmonize digital euro payments and respond to market needs. This inclusive approach ensures that the digital euro’s design incorporates risk management, dispute resolution, and real user requirements to reduce unforeseen costs and operational issues.
Banking associations also recognize that embedding privacy-by-design features, essential for user trust, must be balanced with compliance to anti-money laundering (AML) and counter-terrorist financing (CTF) regulations. Payment providers will face increased obligations for real-time monitoring and reporting, which may increase operational costs; however, these are integrated into the rulebook to standardize and mitigate those burdens.
Marco Elio Rottigni, Director General of the Italian Banking Association (ABI), wrote an opinion piece about the financial impact of the digital euro on banks. Mr. Rottigni proposed several measures to mitigate the costs, including rethinking the expensive offline functionality, allowing smaller banks to avoid costs by accessing the digital euro via larger banks, and simplifying the cash sweeping mechanism between the digital euro and bank accounts.
The estimated IT costs for Italian banks due to the digital euro are €880 million ($953m) plus, but this figure does not include the costs of adapting all ATMs, merchant point of sale changes, and offline payments without intermediaries. Silvia Attanasio, the ABI Lab leader, suggested that banks could reuse the infrastructure of the central bank for tokenized commercial bank money.
As the digital euro preparation phase enters its final stages, with the ECB set to decide whether to proceed after October this year, the banking sector continues to engage in discussions to ensure a smooth transition and minimize potential costs and disruptions. The European Parliament needs to approve legislation before the ECB can make its decision.
- European banking associations, such as the Italian Banking Association (ABI), are expressing concerns about the potential costs of the digital euro to banks, with Marco Elio Rottigni suggesting possible measures to mitigate these costs.
- The European Central Bank (ECB) has been working on harmonizing digital euro payments and responding to market needs, including involving retailers, consumers, and payment service providers in the design process.
- The digital euro aims to promote innovation in the banking sector, but it could disrupt bank deposit bases and financial stability if not properly managed, leading to potential costs and operational issues.
- Banking associations recognize that embedding privacy-by-design features in the digital euro is crucial for user trust, but they also acknowledge the increased obligations for real-time monitoring and reporting under anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.
- Technology, particularly in the form of reusing existing payment infrastructures and linking digital euro wallets to bank accounts, will play a significant role in minimizing costs for banks and ensuring a smooth transition to the digital euro, should it be approved by the European Parliament. Additionally, insights from stablecoins and central bank digital currencies (CBDCs) in other regions could provide valuable lessons for the European banking sector.
