The ECB is reacting to three emerging trends. Firstly, evidence of a steady reduction in the demand for cash for all types of payment, but particularly at the point of sale and for person to person payments, which the reaction to the pandemic has reduced further.
Secondly, the evolving structure of the payments market. Although fintech innovation is increasing competition, few of the solutions offered are useable for day to day purchases. In addition, card schemes are often only useable in the domestic market. The impact of these new entrants is to fragment the market.
At the same time, the market is becoming concentrated and there is insufficient competition as a result. PayPal dominates online payments in Europe and Visa and MasterCard accounted for two thirds of card payments in 2018. In addition, in the wings are the big technology firms who are starting to move into payments. The power of what is known as their ‘network effect’ is significant. The ECB wants to facilitate market entry and diversity of suppliers.
Finally, there are increased risks associated with dependence on foreign payment instruments and technology. These risks come from their ownership of critical data, the ability to trace payments in the fight against money laundering, terrorism and tax evasion, dependence on such critical technology if it is abroad and a risk to the sovereignty of payments.
Continued provision of cash
Faced with these trends the ECB is taking steps to ensure the continued provision of cash. It will increase the resilience of the cash supply chain and has a ‘Cash 2030’ strategy to ensure cash is widely available and accepted as a competitive, reliable payment tool and as a store of value.
In the meantime, the ECB welcomes the EC’s decision to reconvene in 2021 the Euro Legal Tender Expert group to examine developments regarding the acceptance and availability of cash.
Retail payment strategy
In order to foster a competitive and innovative payments system, the ECB wants the development of a cutting edge payments infrastructure. It has established five objectives for payment providers. They must:
- Be pan-European reach and offer a seamless customer experience;
- Be convenient and low cost;
- Be safe and secure;
- Have a European brand and governance;
- Be accepted globally.
In line with these principles, the ECB is working on and supporting a number of initiatives. The European Payments Initiative aims to move national schemes for card, online and mobile payments to be pan-European. It has taken steps to accelerate the implementation of the TARGET Instant payments Settlement system so that it is in place by the end of 2021. It is actively supporting European Fintech companies and promoting the pan-European harmonised ID and signature systems in retail payments.
All of these actions are complemented by the EC’s Retail Payment Strategy for the EU.
An important part of achieving the ECB’s and EC’s ambitions for payments is enhancing the oversight system. A framework for electronic payments is being developed consistent with the principle of ‘same business, same risks, same requirements’.
The ECB will put out to consultation shortly its electronic Payments Instrument, Schemes and Arrangements (PISA) proposal. This will apply to all providers, including the big technology companies, and will also include issuers and service providers of significant stablecoins. This is needed to ensure a level playing field and avoiding regulatory arbitrage.
The ECB sees PISA, along with the EC’s legislative proposals on crypto assets (MiCA) and the Digital Operation Resilience (DORA) proposals, as important to address the broader risks and threats posed by new products and players.
The work and thinking going into a possible future ‘Digital euro’ was described as, ‘an insight into the future of retail payments.’ The ECB sees it sitting alongside cash, accessible to all, simple, costless, risk-free and trusted. Because a central bank does not have a commercial interest in consumer data, it should also increase privacy compared with other digital payment methods.
The ECB has issued a report on a digital euro and started a consultation. It comes with potential risks, for example cyber security, privacy and an impact on banks, increased financial stability and monetary policy. A properly designed digital euro needs to address these, of course.
A digital euro would be useful if people start to become reluctant to use cash, if electronic payment methods are not available or if a foreign digital means of payment threatened to displace domestic European money. If it is designed well, the ECB believes it would deliver its payment objectives of responding to consumer preferences, fostering a competitive payments market and preserving European autonomy.
This keynote speech lays out clearly the ECB’s plan for European payments, why they are needed, the key principles involved and the way ahead. In particular a continuation of cash, pan-European payment solutions along with instant payments, comprehensive oversight and, to be ready for a possible future digital euro.