Current means of payment
Opportunities presented by the digital euro
Our ideas for a digital euro
Risk from disintermediation
Risks from falling revenues
Risks from a weakening of customer/bank relationships
Conclusions and guidelines for further dialogue
Digitalisation is transforming our society, in practically every way imaginable. And money and payment systems are no exception, which begs the question: what will money and payment methods look like in the future? The answer to these questions is crucially important for banks in Germany and for the future of our financial system.
The Association of German Banks has therefore been focused on this issue for some time now, addressing how new digital means of payment can support society while representing a useful addition to the current payments market. This position paper examines the European Central Bank’s (ECB) plans to issue a digital form of central bank money, that is a digital euro, for consumers.
The private banks believe strongly that a digital euro will present the opportunity for Europe to organise its payments market and associated services autonomously. However, a digital euro can only be successful if citizens needs are met. For this reason, the evolution of money must take place as part of a wider dialogue encompassing society, politics, central banks and market participants. Private banks want to take an active role in this discussion, entering into it with the following expectations:
- Evolution: it would be inadequate to simply copy current methods of payment. A digital euro should create additional benefits, that is it should represent a ‘better’ type of cash.
- Bank participation: in light of their expertise with customers, commercial banks are the obvious choice of institution for bringing a digital euro into circulation.
- Marketability and readiness to innovate: a digital euro should satisfy the needs of the market. It is also important to ensure that a digital euro rests on a solid foundation, one which will foster innovation in both the near and distant futures.
- Risk reduction: All risks associated with establishing a new means of payment – from investment requirements to changes on the money market – should be recognised and minimised.
Provided it is created after extensive dialogue and using a market-based approach, a digital euro will represent a valuable addition to current means of payment. It will also significantly enhance the appeal of the European financial hub and substantially contribute to an increase in European sovereignty.
The Association of German Banks has, for some time now, advocated for the development of modern, digital money and means of payment within Europe. In addition to a digital euro for consumers, issued by the ECB as a Retail Central Bank Digital Currency (Retail CBDC, or digital euro in the following), this spectrum also includes developing private sector offers. Some examples encompassed by the latter include a tokenised form of commercial bank money as well as customer-friendly solutions with which a digital euro could be made useful for consumers, such as a payment method based on the digital euro for retail and online businesses.
In an ideal world, the defining feature of these potential means of payment is that they provide optimal support for the flow of money in a digitalised society and economy – and that they are efficient, secure and sovereign, i.e. not solely dependent on providers outside of Europe. We believe that they are a necessary complement to existing means of payment. However, without wishing to question the necessity of existing means of payment or the offers and services on which they are based.
This position paper discusses, in particular, the project currently being implemented by the ECB, which focuses on the functional design of a digital euro for consumers. In Summer 2021, the ECB Governing Council decided to begin the investigation phase in October 2021, lasting two years and dedicated to the digital euro.
A digital euro can only represent a success from the point of view of the consumer when it meets the needs of all market participants and is designed in a manner that fosters the best possible economic and indeed social acceptance. At the same time, we believe that the digital euro is the next step in the evolution of money. It is therefore important that the advantages and disadvantages of existing means of payment and their underlying frameworks are taken into account when designing the digital euro.
Cash is currently the predominant established means of payment. Cash enjoys a high acceptance thanks to its status as legal tender, and also due to its anonymity, haptics and ability to withstand a crisis (e.g. in the event that electricity and communication networks fail). However, these positive characteristics are offset by the intensive logistical effort required and security risks from loss and theft.
Decades ago, the banking industry supplemented cash payment options by adding digital payment methods, card payments in particular, in order to meet the needs of consumers and businesses. The advantages of these methods are clear: increased convenience, reliable electronic security procedures (e.g. PIN for card payments), reduced risk of loss and the ability to integrate into digital business processes, as is the case in eCommerce operations or customer-oriented add-ons, such as bonus systems (bonus air miles, for example).
Digital payment methods therefore supplement means of payment with services that are indispensable within the digital context. At the same time, digital payment methods also have disadvantages when used in a retail setting. These include that they are less widely accepted than cash, that different European member states use different payment systems, so the market is fragmented and their high degree of dependence on international card systems and payment service providers.
We therefore come to the conclusion: a digital euro should be a means of payment that combines the advantages of cash and digital payment methods in such a way that it offers real added value to citizens and businesses, while simultaneously setting decisive trends for Europe’s domestic digital market.
To ensure that a digital euro can adequately meet these requirements, the ECB must determine the optimal technical design criteria for it, including the legal framework conditions and the associated distribution of roles for both the ECB and participants in the private sector. A balanced analysis of opportunities and risks will be important in this context. In terms of the risks, there should be plenty of public debate in the form of a large-scale dialogue between European political institutions, the Eurosystem, civil society and market participants. The Association of German Banks and its members want to provide a constructive contribution to this dialogue, allowing what we believe to be the most important requirements for the digital euro to be taken into account.
The digital euro will present a multitude of opportunities that have only appeared or become feasible via the changing requirements and new potential within the digital age. It will offer multiple benefits for consumers and businesses: because the payment process will be easy to use while remaining anonymous, due to the innovative technical opportunities promised by digital currency and, over the long term, due to the fact that consumers will be able to use the digital euro outside of Europe. Supporting the introduction of a digital euro from a political and economic perspective is the fact that it will foster European competitiveness and sovereignty.
Given the current fragmented state of digital payment methods, particularly in the retail sector, the use of a digital euro will be a crucial factor in its success; as an easy and risk-free digital means of payment, it could be embedded into commercial payment methods across Europe. If accompanied by European law mandating it as legal tender, the digital euro would have a clear advantage over existing means of payment, thus creating the necessary conditions for broad acceptance among the general public, in particular because, in the event that payment processes are anonymous, one of the core features of cash will be transplanted into the world of digital payments. Offline availability would be another option that would allow a digital euro to stand out as compared to existing digital payments. Not only that, new use cases in the payments market could be developed by linking a digital euro to citizen’s digital identities.
The introduction of a digital euro will also present opportunities on the world stage. The current dominance of non-European participants in the realm of digital payment methods has created a rising dependency, one that will continue to consolidate in the event that a European solution fails to emerge. A European solution in the form of a digital euro would, in contrast, create the potential for large economies of scale for a European payment infrastructure. Europe could use an interoperable European payment structure based on a digital euro, one that therefore allows for the possibility of cross-border payments, to strengthen its sovereignty and competitiveness both internally and externally.
Developments to existing payment types should also be taken into account in this context. For example, the programmability of payments using ‘smart contracts’ will be significant for securing Europe’s innovative and sustainable capabilities.
1. A digital euro should be a ‘better’ form of cash for retail customers
The next step in the evolution of money should be a digital euro which combines the advantages of cash with the benefits of digital payment methods. To achieve this, it should be introduced across Europe as legal tender that can be used securely by anyone, any time, and be available offline. Its high value as a liability to the central bank must be guaranteed and individuals must be able to use it as close to anonymity as the law permits. Under no circumstances should it have the same security and logistics problems that cash does. There should be a legal obligation to accept a digital euro and it should have the effect of discharging a debt. It should act as a kind of raw material, allowing commercial banks to develop customer-friendly payment methods and other services based on it.
It is also imperative that a digital euro meets strict European data protection requirements and adheres to the principle that users retain their data sovereignty.
2. A digital euro should be brought into circulation by the commercial banks, payment services are a matter for financial service institutions
The economic viability of its use and distribution are vital for the success of a digital euro. This means that investment costs should be kept manageable – for both public institutions as well as for private stakeholders. It is, therefore, necessary that a digital euro is distributed via the current relationships that commercial banks have with their customers.
In practice, this should mean banks provide their customers with a ‘digital wallet’ where they can keep their digital euros. This will simplify the link to their current accounts as the main payment platform; mechanisms that limit the amount held as digital euros can be implemented by the banks themselves. Since there would be a link to the current account, required services such as KYC checks carried out when new wallets are opened, could be implemented by the commercial banks using well-established processes. They would also be able to carry out anti-money laundering checks and other legal requirements of individual countries, where applicable.
Based on today’s business relationships, commercial banks know best what their customers need from digital money – and this applies to both consumers as well as the companies banks are doing business with. The use cases for a digital euro should be geared towards these needs. It should therefore be the responsibility of the commercial banks to identify and prioritise use cases and to design appropriate customer service offers, based on the business relationships that already exist today. Connectivity to modern technologies should be achieved through competition to ensure a fast rollout.
Since it is an initiative of the ECB acting with a public mandate, a digital euro should deliver benefits for the whole of society. Private sector spending on bringing a digital euro into circulation should be kept to a minimum and commercial banks should be appropriately compensated for their contribution to fulfilling this public mandate. This is necessary to ensure that the potentially huge investment costs are distributed fairly.
Existing initiatives should be utilised in order to keep implementation costs low. The European Payment Initiative (EPI) has done some exceptional groundwork on establishing a European payment solution. The EPI could be a fundamental building block for commercial banks to make a digital euro accessible to European citizens and businesses through attractive offers.
3. A digital euro should meet current market needs, facilitate innovation to meet future needs and be fit for purpose
Today’s payments market is very competitive and has a wide range of service offers aimed at very different customer needs. A digital euro should therefore be innovative to ensure long-term success in this very competitive environment. Due to its competitive nature, the private sector promotes innovative and marketable offers; we therefore see it as the driver of innovation when it comes to the digital euro. It will be the task of the ECB and lawmakers to create suitable framework conditions that give banks sufficient flexibility to make the technical adjustments necessary for new developments.
A digital euro should meet the high technical demands required of it, right from the get-go. Its ability to be used anonymously – as mentioned above – is one of its core elements and is hugely important, particularly for consumers. A digital euro should therefore be designed in such a way that the data autonomy of users complies with the motto: “as much privacy as possible, as much anti-money laundering (and therefore infringement on privacy) as necessary”.
In addition to being able to use it anonymously, another of the core elements of cash is its ‘offline capability’ – which should therefore also be a key feature of the digital euro. This means that it should also be possible to transfer a digital euro when neither the payer’s nor the payee’s mobile phone has access to the internet. As a result, a digital euro could be used in situations where today’s digital payment methods are either not possible or only possible to a limited degree.
Furthermore, as society’s digital transformation progresses, the programmability of payments is becoming increasingly important. Being able to use a digital euro to trigger automated payments would promote innovation in the banking industry, for example by reducing transaction risks in private purchases (e.g. delivery versus payment).
4. A digital euro should be designed to make risks manageable
Introducing a digital euro not only brings opportunities but also risks – the consequences of which have not yet been fully analysed by the ECB. These risks include, first and foremost, disintermediation risks due to a possible loss of deposits and changes to the banking industry’s refinancing structures, but also the risk of potentially weakening the customer/bank relationship in general and not just in terms of payment offers. These risks must not be allowed to endanger the financial system. They should be analysed promptly and publicly discussed.
There is a fundamental risk of bank disintermediation from the introduction of a digital euro – with a potentially negative impact on financing the real economy. In the event of considerable quantities of customer deposits being converted into a digital euro, a significant amount of central bank money would be withdrawn from the banking system and held directly by households. This would restrict the commercial banks’ ability to refinance against customer deposits. In this case, commercial banks would have to resort to refinancing options that are generally more expensive. This would have consequences for lending since offers of credit are likely to decline and/or credit costs are likely to increase. In these situations, the ECB could certainly make additional central bank liquidity available. However, this would give it more power and the ability to exercise greater influence over the economic allocation process.
Nevertheless, this could be effectively countered if the use of a digital euro as a store of value were to be strictly limited for retail customers (consumers) through a low upper limit and were not possible for businesses at all. The ECB should not be able to charge interest on the digital euro for the purposes of quantity control as it is not a suitable tool for this and due to focussing on its use in the payments market. It is crucial that banks and market participants are able to rely on these limiting instruments. Not least, they serve to prevent the symptoms of a crisis deteriorating and a loss of confidence in the event of a financial market crisis caused by uncontrollable transfers of deposits into the digital euro.
However, it is important in this regard that the action of limiting quantities held does not restrict the functionality of the payments market of a digital euro. Limits can be chosen that are based on usual patterns of behaviour among consumers. In addition, transaction amounts exceeding these limits could be controlled by banks using, for example, what are known as ‘waterfall mechanisms’, that is by automatically transferring surplus amounts into digital euro on a current account. It does appear possible to embed this mechanism into existing payment methods.
Another area of potential risk for banks is falling revenues from the payments market. Revenues generated from today’s marketable services offered within the framework of intense competition are necessary to create incentives for customer-friendly innovation and to enable a fair distribution of the costs arising from payments between all parties in the value chain – these include banks, service providers and retailers. This is particularly relevant considering the high investment costs accompanying the introduction of a digital euro.
Conversely, this means that the introduction of a digital euro via artificially low costs ‘at the expense of’ the commercial banks (and other service providers) is a fallacy: a digital euro will only be successful if banks can implement long-term viable and, at the same time, innovative business models. And if this is not the case, offers of services relating to the digital euro will never reach market maturity and will never be accepted by consumers. The costs would exceed the economic and social benefits, and a further fragmentation of offers on the European payments market could be expected.
Disregarding market mechanisms would not only result in a loss of revenue from payment market offers and make the further development of customer-friendly services more difficult, it would also have other serious consequences. Today’s payments market is an integral part of digital account management and acts as an anchor for customer/bank relationships. As a result, it also supports other services – from investment and savings products to digital budgeting tools and lending. If the framework conditions to be created by the ECB and lawmakers do not make this form of embedding possible, it could lead to a fundamental weakening of the customer/bank relationship and therefore to reduced innovative capability and a decline in the number of customer-friendly services offered by the banking industry.
And this point is worth reiterating: any lack of acceptance by consumers coupled with considerable restrictions on commercial banks making necessary investments could cause a digital euro to fail. This would have dire consequences for the competitiveness of the European financial sector and confidence in European offers.
However, all the risks described here have one thing in common: they could all be effectively mitigated against with the right framework conditions. And what is important here is that the division of roles between the central and commercial banks established over many decades remains in place. Central banks can set favourable framework conditions but only the private sector can translate them into positive market effects. Conversely, if a ‘market-compatible’ approach of this kind is not adopted, then the established distribution of roles might shift, opening the door to structural risks – with a negative impact on our monetary and currency system and on the competitiveness of the European economy.
Only a ‘market-compatible’ approach can effectively reduce the risks accompanying the introduction of a digital euro and strengthen both European sovereignty and the competitiveness of the European market. The requirements of a digital euro as outlined in the sections above in terms of
- its design as a ‘digital banknote’ and legal tender,
- harnessing the banking industry’s potential for innovation, not least through customer-friendly payment methods,
- implementing effective mechanisms to mitigate against negative effects on the refinancing structure and bank lending, in particular, robust upper limits aimed at preventing the digital euro being used a long-term store of value and
- a fair distribution of the costs associated with achieving a goal that benefits society as a whole
should serve as guidelines for further actions to be taken by the ECB and legislators as well as for public discussion.
 October 2019: https://en.bankenverband.de/blog/libra-casting-spectator-role-digital-euro/; June 2020: https://en.bankenverband.de/newsroom/comments/europe-answer-libra/; July 2021: https://die-dk.de/en/topics/press-releases/german-banking-industry-committee-presents-policy-paper-on-digital-euro/; December 2022: https://en.bankenverband.de/newsroom/comments/digital-euro-setting-course-could-fundamentally-change-europes-payment-system/
 In addition, the Association of German Banks has noted the need for the creation of a wholesale CBDC, which, acting as a further evolutionary step for central bank reserves, can provide support for DLT-based business processes in the interbank sector.