The European Central Bank is valuing the continent’s digital sovereignty at billions of euros, putting the viability of the banking sector on the line in a clash with US payments giants. While Frankfurt promotes the project as a necessary modernisation, the financial sector faces a dilemma as to how to fund the infrastructure worth billions without alienating customers with new fees.
Piero Cipollone of the ECB’s Executive Board estimated that commercial banks will need to invest between €4 billion and €6 billion over the next four years, which represents around 3% of their annual IT spending. The ECB itself will spend €1.3 billion to start, followed by €300 million a year to maintain the system. Although the regulator claims that these costs are ‘manageable’, in reality they represent a massive capital drain from traditional investment in innovation to a top-down imposed infrastructure.
The business model of the digital euro is based on the promise of cheaper payments for merchants, which is expected to hit the dominance of Visa and Mastercard. The ECB plans to introduce statutory limits on transaction fees, which are expected to be lower than market standards. For retailers, this is good news, but for banks it means having to operate on much lower margins while bearing the cost of maintaining free digital wallets for citizens.
The biggest question mark, however, is the cost pass-through mechanism. Although the ECB will not charge network fees, banks will be forced to look for profitability elsewhere. The history of financial regulation teaches that when interchange revenues fall or operating costs rise, financial institutions often compensate with higher account fees or other banking services. As a result, the ‘free’ digital euro may indirectly burden the wallets of the very consumers it is supposed to protect.
The success of the project planned for 2029 depends on whether the ECB manages to impose its vision without triggering a silent revolt from the private sector. If banks find that the fee caps imposed prevent a return on their investments, the digital euro could become another dead financial instrument for which European taxpayers and bank customers will pay.
