How Is the Digital Euro Expected to Impact the Financial Ecosystem?

If you are involved in the fintech scene, you have probably heard about the pan-European plan to introduce the digital euro in the foreseeable future. This is big news for the industry, as it is not just another technological milestone - it’s a major leap toward integrating digital currencies into mainstream financial systems and reimagining the way we conduct payments.

But how soon will this significant shift happen, and what exactly does the emergence of e-currency mean for consumers and businesses? In this article, we delve into the digital euro topic and answer these and many other burning questions - keep reading not to miss out on all the valuable insights!

Why Is There a Need for a Pan-European Digital Currency?

However, the list of reasons behind the demand for a digital euro doesn’t end there! This important step has the potential to bring multiple other benefits to the table, including:

• Better interconnectivity. A pan-European digital currency could help harmonize regulations and standards across member states, which would reduce regulatory fragmentation in the EU’s financial sector.
• Enhanced financial inclusion. Currently, approximately 13 million European citizens lack access to formal financial services. The digital euro could help tackle this issue, as it is more inclusive than traditional banking systems, as they often require less infrastructure and can be accessed through smartphones or other digital devices.
• Lower transaction costs. Cross-border transactions that use e-currencies typically involve lower fees than those conducted via traditional banking and payment systems.
• Increased innovation. Digital euro adoption is expected to encourage the development of new payment solutions, financial products, and business models in the EU and EEA.
• Improved security. The digital euro’s use of advanced cryptography techniques and distributed ledger technology is predicted to enhance transaction privacy and reduce the likelihood of data breaches, identity theft, and unauthorized access to personal financial information.

At the same time, industry experts hope that the digital euro will facilitate the shift away from middlemen in financial processes. In turn, this is forecast to streamline money transfers and make them more transparent.

Yet, such changes will also inevitably prompt banks to rethink their role in the payments landscape, which is a challenge that intimidates many financial institutions. Read on to find out what other adjustments European stakeholders will need to undertake during the initiative’s implementation!

Project Implementation: For Which Changes Should Stakeholders Prepare

The preparation phase of the digital euro project launched in November 2023. This means that the European authorities are currently laying the foundations for the e-currency’s potential issuance, creating a dedicated rulebook, and selecting providers that will develop all the necessary infrastructure for it.

Once these crucial elements are prepared and tested, the project will move on to the next stage. While the final decision on whether the digital euro will be issued can only be made after the legislative framework for it is adopted, it is already possible to predict some of the major changes that European stakeholders need to prepare for if it gets a green light:

Banks

As the key financial ecosystem players, banks are at the forefront of the digital euro implementation. Some of the main aspects in which they will require adaptation in the context of this project include:

• Infrastructure upgrade. Banks would need to invest in renewing their infrastructure to seamlessly integrate digital euro transactions with their existing services.
• Higher competition. FIs are expected to face increased competition from neobanks and alternative PSPs, which will push them to dedicate more resources to innovation.
• Regulatory compliance. Banks will also need to ensure compliance with digital currency regulations that are likely to undergo multiple adjustment rounds.

Overall, the introduction of the digital euro is forecast to bring substantial upfront costs to most FIs. However, these investments are bound to pay off once the pan-European digital currency gets widely adopted and leads to increased money transfer efficiency, reduced transaction costs, and potential new revenue streams for banks.

Businesses

The advent of a digital euro poses both opportunities and challenges for businesses across various sectors and calls for some strategic adjustments related to:

• Payment acceptance. Businesses will need to prepare to accept payments in digital euros, which may require updating point-of-sale systems and online payment gateways.
• Accounting and reporting. Companies may face the need to adjust their accounting and reporting processes to account for transactions involving the novel digital currency.
• Customer communication. Merchants will need to inform their customers about the option to pay using digital euros and provide support for any questions or issues that may arise.

All in all, despite some potential hurdles, businesses are expected to benefit from the digital euro project, mainly due to its promise of broader customer reach, reduced reliance on traditional banking infrastructure, and the possibility of accessing new markets easier than ever before.

Consumers

As the news of the possible digital euro implementation becomes more and more prominent, some consumers seem to be excited about it, while others feel uncertain about what exactly it means for them. While the specific user-related advantages and hurdles will become more evident during later stages, some areas that will require adapting are already clear to see, including:

• Trust and loyalty. Before fully adopting this payment method, most users will have to build trust in the security and reliability of digital euros.
• Education and awareness. It will take time for consumers to understand how to use digital euros for various transactions, both online and offline.
• Legal aspects. Consumers will likely need to familiarize themselves with some new policies related to the use of digital currencies, such as taxation laws, consumer protection measures, and anti-money laundering regulations, and ensure they remain compliant in their financial activities.

Generally speaking, while the learning curve for the newly implemented digital euro may be steep, especially for older users, consumers are likely to appreciate its convenience, efficiency, and cost-effectiveness in the long run.

Summing Up: Will Digital Euro’s ROI Be High Enough?

As you can tell from the information provided in this deep dive, the digital euro initiative is a large-scale project that would require significant adjustments from all the stakeholders involved. So, is it worth all the hassle?

Although it’s impossible to predict its outcome with certainty, the potential benefits of the digital euro introduction seem to outweigh all the challenges and investments by a mile. By embracing digital currency, Europe grasps the opportunity to revolutionize financial systems, enhance accessibility, and foster innovation while supporting the global shift toward a cashless society.