The political zeitgeist in Brussels institutions has evolved over the years towards more emphasis on regulations rather than directives, with increasingly detailed specifications. This is now leading to a situation in European payment transactions that is putting banks, payment, and e-money institutions in a tight spot, as the introduction of new payment methods and instruments is indicating a future without returns in transaction business.

The main bone of contention is particularly the instant payment regulation, which, will be introduced in steps starting from early 2025, does not allow any surcharge on transaction fees compared to the usual SEPA transfers. This pricing method hinders the dissemination of real-time transfers. However, the EU Commission and central banks still want to push this payment method into the market, as the instant payment infrastructure, combined with the digital euro, is intended to lay the groundwork for an EU payment system independent of US corporations.

But as it is currently designed, this will not work. How can a thriving payment landscape develop if market participants have no chance of recouping their investment costs at least through the bread-and-butter business of transaction processing? Everything one hears about potential value-added services does not seem capable of generating significant revenue streams. Thus, what remains are the transfer fees plus merchant fees – whereby the markup imposed in trade is passed on to consumers through prices.

And since banks are essentially taking on sovereign tasks in fulfilment of a geopolitical agenda, the architects in Brussels would be wise to grant some leeway in merchant fees (motto so far: cheaper than credit cards and debit cards) with a cost-free transaction side. Firstly, because it is justified solely by the strategic importance of the project. Secondly, because there are already somewhat resigned voices in the industry saying that without a return on investment, there will be no payment transactions. Hence: Only if it economically works for all parties involved will instant payment be a success.

The revenue potential for institutions in the introduction of a digital euro also appears rather nebulous. The project is currently in political limbo, but the probable market model suggests that while central banks provide a wallet backend for integration by banks, additional revenue streams are likely to emerge only if wallet fees are established similar to account charges, alongside zero transfer fees and minimal merchant charges. And since a digital euro wallet can only be loaded with a small balance, additional services would need to thrive despite a lack of volume. Although reloading via the so-called waterfall mechanism is said to be possible, from a banking perspective, it likely only makes sense if the (non-interest-bearing) digital euro wallet can generate more additional business than the actual bank account. That seems, to say the least, improbable.

The question remains: Where is all of this heading? Contrary to popular belief, Europe does indeed need the digital euro as part of an autonomous payment system. Such a means of payment can only work if it is embedded in an ecosystem that allows market participants a certain return profile. Banks, in turn, should finally end their senseless fundamental opposition to the digital euro and focus their lobbying efforts on shaping the economic model. And to the Brussels bureaucrats, it should be noted that their idyllic visions of free services are out of touch with reality, ultimately causing more harm than good.