Reading between the lines of the EU's payments reform package

On June 28th, the European Commission published its long-awaited proposals on reforming the EU’s payments and open finance rules while also setting out further details on plans for a single currency package on the digital euro and the legal tender status for cash. These proposals and the timing of them are significant, particularly that proposals on seemingly different issues have been published together. Beyond the pure practicalities for the Commission, this also demonstrates how the package of files is being viewed politically as there is significant but not obvious interrelation across the files.  

There is a substantial history to the EU’s payment services rules which have increased in ambition and approach with each passing review. Since the first adoption of harmonised rules on payments in 2007, the industry and how consumers interact with financial services has fundamentally changed. According to the European Commission, electronic payments in the EU have experienced constant growth, reaching €240 trillion in value in 2021 (compared with €184.2 trillion in 2017 and €28.9 trillion via retail payment systems in 2007).  

The proposals come at a significant time for the industry as it faces increasingly competitive headwinds and structural challenges as more payment types emerge and cash use continues to decline. The mandated rollout of instant payments in euro, the legislative basis for stablecoins and the potential introductions of the digital euro will increasingly challenge the assumptions the industry and investors have on their business models, due in large part to the increasing amount of payment types and the underlying economic implications of each one.  

Market initiatives such as the European Payments Initiative (EPI), the Commission’s decision not to review interchange or card fees, the introduction of EU-wide digital identity frameworks and the expansion of open banking provide distinctly differing and increasingly complex market dynamics since the last review of the payment services directive back in 2012 and will reflect how member states and industry approach the proposals. 

The rules on the digital euro are likely to take up much more of the political space in conversations across the EU with significant controversy related to the privacy implications of an EU-issued digital currency, the mandatory acceptance of the digital euro by merchants and increasingly for member states – the purpose of a digital euro.  

The introduction of digital euro legislation is a fundamental turning point for the EU and makes clear the Commission’s current intention of moving towards the issuance of a euro Central Bank Digital Currency (CBDC). It notably comes ahead of a decision by the European Central Bank (ECB) Governing Council to launch a ‘realisation phase’ for the digital euro in September 2023. A digital euro will have long-term implications for the EU institutions and the independence of the ECB given the introduction of an EU-backed currency and questions on whether treaty changes would indeed be needed to enable the digital euro’s issuance.  

Questions have also arisen on the power the ECB holds as both issuer of digital money (which will compete with commercial bank money and a substantial number of EU citizens will use) and the EU institution charged with monetary policy and financial stability which can create inherent conflicts. The establishment of legal tender status for the digital euro equally presents significant issues with implications on the level of expectation for mandatory acceptance of the digital euro related to commercial payment mechanisms. 

The EU’s publication of a payments and single currency package comes towards the end of the current European Commission mandate. This means that the files will take several years to negotiate, and their progress will be reflected in large part by a number of political drivers, such as the makeup of the next European Parliament with a drive to the right or left of the political spectrum having significant implications, particularly for the digital euro proposals.