While the digital euro project presented by the European Central Bank (ECB) offers several potential benefits, including improved payment efficiency, greater financial inclusion, and increased resilience of the financial system, it also introduces significant challenges for banks, including major financial, resource, and operational hurdles.

A new study by global consultancy PwC examines the change costs associated with the issuance and distribution of the digital euro, as well as the technology required to process digital euro payments. This includes automated teller machines (ATMs), point-of-sale (POS) terminals, and e-commerce infrastructure.

The study, which surveyed 19 banks and banking groups in H2 2024, reveals that, on average, each of these banks would need to spend about EUR 110 million to implement the necessary changes, excluding costs related to offline functionalities, multiple accounts, and merchant acquiring. Collectively, the banks in the study would need to spend over EUR 2 billion in total costs.

If these figures are applied to the entire eurozone, the total estimated expenditure could amount to approximately EUR 18 billion. Total change costs could rise up to as much as EUR 30 billion in a more expansive scenario.

According to the study, main cost drivers relate to technical adjustments, including intermediary applications, interfaces, and ATM infrastructure, accounting for around 75% of the estimated total costs of participating banks, or more than EUR 1.5 billion.

The commercial layer, comprising basic marketing activities as well as customer relationships, is expected to represent about 16% of the estimated total costs of participating banks.

Finally, the operational layer, comprising core back-office processes, such as fee calculation, reporting, and payment statistics, to support the seamless integration of the digital euro, is projected to make up 9% of the estimated total costs of participating banks.

On top of the estimated change costs, the introduction of the digital euro will require significant deployment of personnel from across various areas of expertise. On average, respondents expect that almost 46% of the resources with relevant skills would be tied up per year, with some banks assume even higher capacities.

These findings suggest that banks face big financial, resource, and operational issues with the digital euro, which could limit their ability to innovate, especially over the long-term when running costs come into play, PwC says.

To ensure long-term viability, and considering the broad impact of the digital euro, the total cost must be significantly reduced. This can be done by leveraging existing infrastructure and following industry standards, helping enhance efficiency while avoiding conflicts with private-sector initiatives.

A thorough cost-benefit analysis is essential for design development and targeted implementation. Also, banks should be fairly compensated to help offset investment burdens and maintain competitiveness in innovation by the European banking sector, the firm says.

The digital euro

The digital euro is a project launched by the ECB in 2021 to explore the potential introduction of a central bank digital currency (CBDC). This CBDC would serve as a fast and secure electronic payment instrument, complementing existing euro cash and bank account deposits. It would be issued by the European System of Central Banks of the Eurozone.

The digital euro would be designed to benefit consumers, merchants, and payment service providers, offering high privacy, ensuring fair fees, and supporting the European payments landscape in an increasingly digital economy. It would be free of charge, accepted across the whole euro area, and available via a digital wallet set up through banks or with a public intermediary, such as a post office.

Once set up, users would be able to load funds into their wallet from a bank account or by depositing cash and make secure, instant payments in stores, online, or directly to other individuals. Users would then get to hold digital euros up to a certain limit, with options to transfer excess funds to their bank account either manually or automatically. A cap on holdings would help prevent excessive outflows of deposits from banks, preserving financial stability.

The digital euro is currently in its preparation phase, which started in November 2023. This phase focuses on further preparing for a potential development of the digital euro.

The ECB published in December 2024 its second progress report on the preparation phase, outlining key developments, including updates to the digital euro rulebook, and the selection process for potential technology providers that could develop the platform and infrastructure. Ongoing research is being conducted to understand user preferences, particularly among small merchants and vulnerable groups, with results expected in mid-2025.

In parallel, the ECB is working with experts from the national central banks of the Eurosystem and national competent authorities to develop a methodology for setting digital euro holding limits, balancing user experience with monetary policy and financial stability implications.

The ECB’s Governing Council will decide on the possible issuance of a digital euro once the relevant legislation has been adopted.

CBDC efforts have accelerated over the past years. A 2023 survey of 86 central banks conducted by the Bank for International Settlements (BIS) found that 94% of the respondents were exploring a CBDC, with most working on both retail and wholesale CBDCs. More than half of the respondents (54%) were experimenting with proofs of concept while one out of three (31%) were running a pilot.

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