Introduction

The European FinTech Association (EFA) welcomes the Commission’s proposal on the Regulation to establish the digital Euro.

The EFA supports an open and competitive payment landscape. If correctly designed, the digital euro could generate new competitive value chains with potential benefits to consumers and businesses.

However, whilst the proposal considers that financial exclusion in the digitalised economy may increase – as private digital means of payments may not specifically cater for vulnerable groups of the society or may not be suitable in some rural or remote areas without a (stable) communication network (recital 5) – the reality of market competition and technological innovation have proved quite the opposite. The highest level of adoption of fintech services and mobile payment is in developing countries, where technology has granted higher and safer access to financial products to those that were initially excluded from them. Mpesa in Kenya and Tanzania provide first-hand great examples.

On the same grounds, Recital 8 states that the Digital Euro is therefore necessary. Whilst we consider it a great opportunity to further integrate European payment systems, we question this statement. The focus should be on existing European players – which are already well regulated – and on supporting the development of a well-functioning market for them to thrive and be able to provide their services across the Union. European fintechs should focus their efforts on continuing engaging with their customers, including the most vulnerable ones, in order to meet their specific needs and adapt product design to consumers’ requests, instead of shifting focus and efforts on implementing the digital euro rigid requirements that may not cater for the evolving needs of users.

High-Level EFA messages:

• The EFA supports the Digital Euro project, as a means to support further integration of European payments systems. The design of the Digital Euro should be functional to the achievement of this ultimate goal.
• The EFA welcomes the Commission’s proposal on the legal tender status and mandatory acceptance of the digital euro, as this will enhance uptake and ensure the creation of an interoperable ecosystem.
• The EFA strongly supports the Commission’s proposal to enable PSPs, including non-banks and third-party providers, to offer digital euro payment services to their customers as this will boost the uptake and ensure all EU citizens and businesses will have a convenient, secure, and easy access to digital euro. The EFA further emphasises that the security and privacy-preserving measures should be technology-neutral and future-proofed to enhance innovation in the payments market. They should also be aligned with existing regulations such as the Anti-Money Laundering Directive and the anti-fraud requirements of the Payment Services Regulation and the Data Protection rules (GDPR).
• The EFA observes that the proposal gives the ECB a double role as a market competitor and supervisor of intermediaries and calls for clarifying the separation of these roles to ensure the ECB’s entrance to the market will not cause disruptions and create unfair circumstances in the well- functioning and vibrant digital payments market.
• The EFA is convinced that the retail Central Bank Digital Currency (CBDC) could increase competition by reducing the operational disparities (e.g. fees) between smaller banks and non-banks which run their payments through the larger market players. However, further consideration should be given on whether the current design of the Digital Euro is able to deliver on such promises.
• The EFA supports the Commission’s proposal to set holding limits to digital euro accounts but calls for the European Commission to establish criteria via delegated acts for the European Central Bank (ECB) to determine these limits. It is essential that the holding limit is not set too low, as this would reduce the practicality of the digital euro. The EFA also considers that the benefits of such limits are undermined by the automatic waterfall option, which gives users the possibility to exceed such limits when performing the transactions.

Universal Acceptance and Platform Interoperability

The EFA understands and supports the Commission’s proposal to grant the digital euro a legal tender status, thereby requiring mandatory acceptance for payees. However, we emphasise that in order to ensure a level playing field and also reduce burden on merchants, there should also be a requirement for the payees to support at least one digital payment method, rather than only Digital Euro. This will also encourage the creation of an interoperable ecosystem around the digital euro, which is vital for its wide-scale acceptance in the EU.

This will also guarantee interoperability between different digital platforms that could otherwise control payment methods utilised on their platform. Hence, this approach will create a level playing field and ensure merchants always have a reliable and cost-efficient payment method available to sell their products, and consumers are not locked into platforms issuing their own digital currency. Regarding the point-of-sale (POS) integration, the payment could be performed by multiple payment methods, including a PSP proprietary payment or by providing a common standardised mechanism such as a QR Code.

The EFA further emphasises that the security and privacy-preserving measures should be technology- neutral and future-proofed to enhance innovation in the payments market and to ensure the digital euro can be distributed through the rails which bring the most value and convenience to the end users. This is especially important, considering the fast pace of technological advancements that are taking place in the digital payments ecosystem.

Competition in the digital payments market

In principle, if designed carefully, retail CBDC can increase competition by reducing the operational disparities (e.g. fees) between smaller banks and non-banks, which run their payments through the larger market players that are currently able to set the market rules due to their size. Ensuring universal and interoperable access to a digital Euro can create an even more competitive ecosystem contributing to the EUʼs objectives for the European Retail Payments space. Introducing the digital Euro as a safe and efficient payment method available to all, would ensure all payment methods would have to compete on pricing and added value at the POS rather than through bespoke deals and incentives to issuers, especially if merchants could choose how to route transactions. The EFA agrees with the pricing structure proposed by the European Commission, where, like cash, the digital euro should be free of charge for consumers, to enhance uptake, while the PSPs must be recognized for their service.

Furthermore, the EFA observes that, among others, the proposal gives the ECB a double role as a market competitor and supervisor of intermediaries. It is of utmost importance to ensure that the ECB’s role as a payment service provider will not cause disruptions and create unfair circumstances in the well- functioning and vibrant digital payments market. Thus, as the ECB would hold several roles, of which some are contradictory, the EFA calls for clarifying the separation of these roles to ensure fair market conditions.

Also, the EFA acknowledges that the ECB is proposing to establish an interface that would provide the same look and feel across the Union. Whilst having common features can help users to easily recognise the Digital Euro services, by standardising the interfaces and user experiences, the potential for innovating or the ability for providers to compete are stifled.

Likewise, the front-end services provided by the ECB (Art. 28) should have minimal functionality to address basic minimum requirements. They shall not be an alternative to instruments created by private financial institutions, that have the ability to innovate and the resources to conduct ongoing dialogue with their users, and therefore to offer services that adapt to the changing demands of customers.

Access to Infrastructure

The EFA believes the infrastructure that will underpin the digital euro will be of fundamental significance. Against this backdrop, it becomes important that the model used for the digital Euro ensures access of FinTechs to the underlying infrastructure.

We are convinced that for the digital Euro to realise its true potential, it needs to give all actors (PSPs, FinTechs etc.) the ability to access digital Euro funds freely in order for money exchanges to be the best experience possible for customers. In this context, the EFA would be in favour of a retail digital Euro based on a two-tier model as it would allow European citizens and businesses direct access to it.

Under the two-tier model for the digital Euro PSPs, including non-banks and third-party providers, would act as intermediaries, receiving access to the digital Euro from the central bank. As Fintech solutions are widely used by many consumers, this would heavily facilitate the distribution of the digital Euro to consumers and businesses, also driving acceptance and trust. Such a model would also lead to more efficient, seamless, and cheaper services to consumers. In parallel, ensuring equal access to market participants would also drive innovation and keep a level playing field in the EU single market.

Holding limits

The EFA agrees with the Commission’s proposal to limit the amount of funds for each digital euro account to avoid the confluence of significant capital to digital euro accounts and to mitigate the possibility of digital Euro being used for ML/TF in the EU. However, we recognise that with the waterfall option allowing for instant movement of funds from the bank account to the digital wallet, the merits of such a threshold are limited, given that users could easily exceed such an amount virtually at any transaction.

We regret to observe that the holding limits are purely left for the ECB to determine. We understand that such limits may need to be adapted in a prompt manner, and the ECB is thus the best suited for determining them. However, the EFA is convinced that the holding limits should be determined based on Union-wide legal criteria. Thus, we call for a clause to be added in the Regulation on the Digital Euro, requiring the Commission to set criteria for the ECB to determine holding limits in a Delegated Act.

Proportionality

The Commission proposal foresees an exemption for micro-enterprises and NGOs unless they accept similar means of payments. The EFA welcomes the principle of proportionality that is embedded in the provision, and therefore recommends maintaining the exemption even if the micro enterprise or NGO is accepting other digital means of payment. Indeed, the proposal is not considering whether such digital means of payment may have a better tailored offer or any other key features that make it ideal for such enterprises but that are not mirrored by the digital Euro. This means that such users cannot benefit from the proportionality principle that has been initially assigned to them and may result in having to accept digital Euro payments that are not necessarily tailored to their specific needs.

Fraud Prevention

The EFA understands the importance of ensuring that Digital Euro provides an alternative to cash rather than a substitute to it. However, in doing so, it is important that the shortcomings of cash are not replicated by the digital Euro. In particular, the features of the offline digital Euro shall be designed as to minimise the risk of money laundering, execution of fraud, or other illicit activities. Low value transactions could still be used for serious predicate offences (e.g. human trafficking, online child exploitation, development of new smurfing techniques). The EFA welcomes the exclusion of long distance offline payments, as this allows to to exclude transnational transactions.

It should also be noted that currently data processing by payment providers doesn’t differentiate between online and offline transactions and are based not only on consent, but also on any other legal basis offered by GDPR (e.g. legitimate interests). We recommend therefore ensuring that the Digital Euro requirements are in line with existing rules related to data processing.