Being a leader in digital payments and digital finance needs to be at the top of the agenda for Europe.
As Mario Draghi highlighted in his latest report, the productivity gap between the United States and the European Union is largely accounted for by technology and finance.[1]
If we exclude the information and communications technology (ICT) and financial sectors, the gap vanishes.
If we are to bridge the productivity gap with the United States, we have to concentrate on these areas. Digital payments and digital finance are at the intersection of these two fields. And they are evolving quickly, spurred by transformation of habits and technology. This is both a threat and an opportunity for Europe. It is an opportunity to bridge the gap by creating innovative and competitive European solutions. But if we do not take that chance, we risk undermining our competitiveness, resilience and strategic autonomy.
At the European Central Bank (ECB), as custodians of our single currency, the euro, we view this as a matter of overriding significance. At the end of the day, it’s about the future of our currency. Now, the euro is the second most significant currency in the international monetary system. Its representation in a variety of indicators is approximately 20%, and the euro area represents about 12% of world GDP.
If we wish to avoid the euro losing significance on the world stage, doing business and investing in euro must be perceived as safe, effortless and effective even as reshapes payments and finance.
At the European Central Bank (ECB), as custodians of our single currency, the euro, we view this as an issue of utmost significance. It is, ultimately, about the future of our currency. The euro today is the second most significant currency in the global monetary system. Its presence in a variety of indicators is at the level of approximately 20%, and the euro area’s GDP share is approximately 12% of the world’s total.
If we are to avoid the euro losing its role on the international scene, paying and investing in euro must be perceived as secure, convenient and cost-effective, even as digitalisation redefines payments and finance.
Central bank money – the central pillar of the payments and finance system – can play a crucial role in integrating the various segments of the financial system in a secure and risk-free manner. This is especially true in Europe, where payments and finance tend to be fragmented by nation, keeping us from enjoying the full benefits of the single European market. This applies to both retail and wholesale transactions.
For consumer and business-to-business transactions in retail – payments on a daily basis made by consumers and companies – our dependence on non-European solutions erodes our strategic autonomy and holds back the growth of productivity. We should therefore inquire, for instance, as to why we do not have a European Mastercard or a VISA. A digital euro, i.e. central bank money in a digital representation for retail payments, would provide us with the opportunity to raise efficiency, competition, innovation and resilience while enabling European private payment solutions to grow and safeguard our monetary sovereignty.
For wholesale transactions – transactions among financial institutions – we must not repeat the error that we committed in the retail space and make sure that we give the conditions for European players to remain competitive. Emerging technologies provide us with the possibility of building a single market for digital assets in Europe from the very beginning, i.e. a European capital markets union.
A digital euro for daily payments
For businesses and households, central bank money presently exists only in cash form; there is presently no equivalent in digital format, which is increasingly becoming a problem since usage and acceptance of cash are reducing. In the euro zone, card transactions have surpassed cash transactions in terms of value.
The proportion of firms saying they never take cash has risen threefold over the past three years to 12%.
The European Commission has made a legislative proposal to guarantee the acceptance of cash
and the ECB is determined that cash will be as widely available and accessible as possible
Nevertheless, the trend to see cash being employed less in regular transactions is set to persist due to the digitalization of the economy consistent with what has been witnessed in most developed economies.
Existing European digital payment instruments, including cards from European payment schemes, are focused primarily on national markets and particular usage. To make payments across European countries, customers must depend on some non-European providers. Over two-thirds of card transactions in the euro area were settled by international payment schemes during the second half of 2023.
And 13 of 20 euro-area countries depend wholly on non-European solutions if their own domestic payments scheme does not exist. But even these international payment solutions are not accepted universally and are not available for all important use cases.
As a result, one of the key objectives of central bank money – to offer the public a means of payment backed by the sovereign authority that can be used for retail transactions across the entire currency area – is not being fulfilled in the digital space.
In addition, European payments have become a prime example of the situation that Enrico Letta and Mario Draghi described in their recent reports.
Market fragmentation along national lines, the absence of European payment solutions available at a European level and the inability of European payment service providers to keep up with technological developments mean that Europe is not competitive within its own market, never mind globally.
Furthermore, in a turbulent geopolitical landscape, we are being left to trust firms located elsewhere. In the future, this reliance might spread even beyond conventional payment service providers. Networks such as Ant Group’s Alipay have demonstrated they possess the know-how to connect geographically disparate spaces: during high-profile events such as UEFA EURO 2024 they were able to ramp up their payment app usage among European clients.
Merchants and consumers
 who pay the price – are left to cope with the fallout from the international card schemes’ market power. To provide just one illustration, the net average merchant service charges in the EU nearly doubled between 2018 and 2022.
This growth happened in spite of attempts to stem it through regulation. And the burden disproportionately rests on the shoulders of smaller retailers, who pay charges three to four times as much as their big-box brethren.
We should act quickly to respond to the threats arising from Europe’s present inability to ensure the integration and sovereignty of its retail payment system. This is one of the main causes of the digital euro initiative: to introduce central bank money into the age of digital money. That would give businesses and households a digital counterpart to cash and would enhance our monetary sovereignty.
advantages for consumers and merchants
Complementing banknotes, the digital euro would give all European citizens and firms the freedom to make and receive digital payments seamlessly.
The digital euro would provide a single, easy, secure and universally accepted public solution for digital payments in stores, online and from person to person. It would be available both online and offline, and would be free for basic use.
For traders, the digital euro would grant effortless access to every European consumer. Additionally, it would present an alternative that would enhance competition and reduce transaction costs in a more direct manner than is achievable through regulations and competition authorities.
Advantages to consumers and businesses
As a complement to banknotes, the digital euro would provide European citizens and businesses with the ability to make and receive digital payments effortlessly.
The digital euro would offer one, simple, secure and widely accepted public means of making digital payments in shops, online and from individual to individual. It would be accessible online and offline, and at no cost for basic usage.
For traders, the digital euro would give them instant access to all European customers. It would also give them an option that would boost competition, thus reducing transaction prices in a more effective manner than can be achieved through competition authorities and regulation.
Promoting competition and innovation in a unified payments system
The digital euro would make the euro area economy more robust by promoting competition and innovation.
It is getting harder for European payment service providers to compete with global card schemes and mobile payments. The latter are increasing in popularity, and banks risk missing out not only on interchange fees, but also on client relationships and user data.
Conversely, the digital euro would make sure that payment service providers would still have a central role to play, thereby allowing them to retain customer relationships and receive compensation for their services, as it is the case today.
It would also provide a choice over co-badging with international card schemes for cross-border payments in – and possibly outside – the euro area, thereby fostering competition.
The digital euro would also broaden the possibilities open to payment service providers and decrease the expense of providing their own services at a European level. Moreover, it would promote a supportive environment for the broad acceptance of payment innovations across the euro area.
Today, some innovations that will facilitate payments are being developed for the benefit of certain national markets or groups of a few nations, led by European payment service providers. Even though these innovations are extremely praiseworthy and would improve lives, structural hurdles are hindering them from reaching pan-European scale.
These solutions are not managing to reach the scale that is required in order to offer a service to all citizens of the euro area. This constrains them from competing on an even footing with the large global players who can tap economies of scale completely, even on a global basis.
The legislative proposal of the European Commission
 envisions that the digital euro should be a legal tender; this means that it would be endorsed by all merchants who accept electronic payments today. In practice this would amount to the establishment of a pan-European network with which also private solutions could be used, thereby bypassing the hurdles preventing their development.
This would promote a more unified European payments market. As geographic reach increases and product portfolios diversify for private providers, they will reap cost savings and be more competitive internationally.
Essentially, the network effects of a digital euro would act as a public good, serving public and private initiatives alike. It would be similar to developing a single European railway system or European grid for energy, such that several companies could competitively run their own services and provide value added to consumers.
Rather than calling for substantial investment to develop current services throughout the euro area, the open digital euro standards would allow cost-efficient standardisation, enabling private retail payment solution providers to introduce new products and features on a larger scale.
Ultimately, through either the digital euro or private solutions, such a framework would unleash innovation, create new business opportunities and enhance consumer access to a wide variety of goods and services.
Turning this vision into a common reality
The architecture of the digital euro and the centerpiece provision of the regulation envisioned by the European Commission includes all the essential ingredients necessary for turning this vision into a reality.
During the last years, we have intensively consulted a large number of market stakeholders to determine the features of the digital euro. We gathered and debated the feedback from consumer representatives, merchants, banks and payment service providers’ representatives. In addition, we are also considering how the digital euro would be utilized in offering services not yet offered on the market. To achieve this, we issued a call for expressions of interest, requesting stakeholder collaboration, and we have had a very positive response. With this open approach, we intend to take on board everyone’s needs and opinions to create a solid payments solution.
The function of central bank money in forming a European market for digital assets
Today, the ECB and the national central banks of the EU Member States whose currency is the euro provide central bank money in electronic form to financial institutions via our TARGET Services: T2 clears over 90% of the value of large-value payments between financial institutions, and T2S clears securities trades. These services have played a vital role in enhancing the efficiency and interconnection of post-trade platforms in Europe.
We are dedicated to continuing to offer cutting-edge settlement services in central bank money, even as new technologies are developed.
The promise of new technologies
In this regard, we acknowledge the promise of new technologies, including distributed ledger technology (DLT), to revolutionize and enhance wholesale financial markets by making it possible for assets to be issued or represented in digital token form.
DLT enables market participants to trade, settle and hold custody on one platform, minimizing credit risk, transaction failure and reconciliation requirements. It can make the system more efficient by being operational 24/7, 365 days a year and settling transactions in real-time, which has the potential to lower yearly infrastructure operating costs. A common DLT platform would reduce the barriers to market entry, allow small and medium-sized firms and new entrants to tap into capital markets and provide for the efficient trading of financial instruments that are not yet covered on regulated markets.
The function of central bank money and the exploratory activity of the The ECB recognizes that it has a contribution to make in this activity right from the start.
Central bank money available for clearing transactions on these new technologies is significant for two reasons. First, if we didn’t settle using central bank money, other settlement assets – like stablecoins or tokenised deposits – would be employed, thereby reintroducing credit risks and fragmentation of the financial system. And secondly, the ability to settle in central bank money is viewed by the market as a determinant for the uptake of new technologies.
The Eurosystem has already collaborated with the market to pilot settling wholesale transactions in central bank money through DLT. In experimental work we undertook in 2024, for instance, we provided three varying solutions for connecting our TARGET services to market DLT platforms. This enabled industry players to settle actual transactions in central bank money or experiment using fake transactions.
This pioneering work is unique at the international level by virtue of its magnitude and extent. In total, 60 industry participants participated, comprising incumbents and new entrants. Over 40 trials and experiments addressed a variety of securities and payments use cases, including the first issue of an EU sovereign bond on DLT. A total value of €1.6 billion was settled via trials over a six-month period, exceeding values settled in comparable initiatives in other jurisdictions.
Next steps
In the short term, the Eurosystem will aim to make it possible to settle DLT transactions in central bank money, with a view to enabling the further development of DLT on the market.[
The technological solution will be founded on interoperability with market DLTs and the Eurosystem, but also – and this is essential – between market platforms, underpinned by robust and enforceable standards.
Looking further into the future, we will examine how DLT can be applied to build a more integrated financial market. With new technology, there is the possibility of building a new system from scratch in an integrated and harmonised way. A possible way to have this integrated ecosystem in the longer term would be to transition to a European shared ledger. This would consolidate token forms of central bank money, commercial bank money and other digital assets into a shared, programmable platform, on which market participants could offer their services. Alternatively, there could be the joint development of an ecosystem of fully interoperable technical solutions, which could be better suited to particular use cases and allow legacy and new solutions to coexist.
The trade-offs against the advantages of achieving such flexibility and that of getting everyone onto one platform must be analyzed further. We will consider these trade-offs and further develop this long-term vision in consultation with private and public sector stakeholders.
Conclusion
In today’s rapid pace of change, Europe cannot stay idle. If we fail to transform central bank money for the digital age, we will impair Europe’s competitiveness, resilience and strategic autonomy. And we would lose the benefits that digital payments and digital finance have to provide. Others would gain the reward instead.
By ensuring that central bank money is up to speed with digitalisation and new technologies, we would protect our monetary sovereignty. We would bridge fragmentation by providing money that can be used for any digital transaction in the euro area. We would promote competition and innovation. And we would enhance our autonomy and resilience.