Unsurprisingly, Lagarde encourages the digital revolution which has been accelerated by the pandemic. “As our lives have suddenly gone digital, so have our payments: there has been a surge in online payments and a shift towards contactless payments in shops.” said Lagarde.
In a June report, the Euro Retail Payments Board had concluded that “Not withstanding the current uncertainties, there is a generalised expectation that the trends observed will result in a structural rather than temporary increase in cashless payments, particularly induced by commercial promotions and the positive experiences of first-time users. However, the degree of this increase is hard to predict at this stage. If temporary measures are revoked and the limits for contactless payments reduced after the end of the pandemic, this effect might lose strength. On the other hand, online payments may return to pre-pandemic levels. User preferences (e.g. cash) prior to the pandemic may be restored once all limitations are lifted.”
However, Lagarde also emphasised that according to the ECB’s new payments survey, which is due to be published in November, cash is the most common way to pay, with cash payments accounting for 73% of all physical retail payments in 2019. This figure is down from 79% of all point-of-sale transactions measured by the previous ECB survey based on 2016 data, but cash remains far ahead of the group of payments instruments.
Lagarde adds that “almost half of consumers said they prefer to pay digitally, and this has increased further during the pandemic.” But one could also conclude that more than half prefer to pay in cash…
In the payments world, scale matters. This has led to the inevitable concentration of the market in the hands of a few dominant players. “Europe has fallen behind in this competition.” says Lagarde.
She emphasises the risks related with this concentration, which “magnify a host of issues, ranging from abuse of market power to ownership of critical data. It could also make it more difficult to combat illicit activities and ensure operational resilience.” She adds that “We are seeing an increase in protectionist policies, as sanctions and even exclusion from payment systems in recent years have shown. This presents new risks of payment disruption – especially for jurisdictions that are overdependent on dominant system providers.”
Lagarde welcomes the new European Payments Initiative launched by 16 European banks, which will strengthen the autonomy and resilience of the European payments landscape and offer an alternative to international card schemes.
Like many central banks, the ECB is investigating the benefits and risks of a central bank digital currency (CBDC). And no decision has been made so far. However, Lagarde stresses that three considerations will be key in the decision-making process.
The first is access to central bank money. This does not mean that a digital euro would replace cash. Quite the contrary. “The Eurosystem will continue to ensure that all citizens have access to banknotes at all times. A digital euro, in any event, would be a complement to, not a substitute for cash.”
The second consideration is related to the possible migration of bank deposits into a digital euro, which could negatively impact the capacity of the banking sector to finance the economy.
The third consideration is that a CBDC should not adversely impact competition in payments and should leverage the respective strengths of the central bank and the private sector to ensure a competitive and innovative landscape. This represents quite a challenge. According to the 2019 ECB report Implications of digitalization in retail payments for the Eurosystem’s catalyst role, only a fraction of over 230 fintech solutions were useable for all of the most common daily transactions: online, at the point of sale and peer-to-peer.