Digital euro: towards a remuneration model to protect merchants

The remuneration model for the digital euro, based on the average of fees across the euro area, is the best way to achieve one of the objectives of electronic cash: to protect merchants and limit the costs and charges borne by them for this new financial service and payment method. This is the finding of an analysis carried out by three economists at the Bank of Italia in a new paper.

The remuneration model for the digital euro – that is, the level of service fees that merchants will have to pay to banks – is a ‘fundamental political decision for the digital euro ecosystem’, and is also one of the issues that will need to be resolved by the trilogue by the end of the year: The European Council, the European Parliament and the European Commission will, in fact, need to reach an agreement on the key features of the digital euro and adopt the regulation – the legal framework that will enable the European Central Bank to introduce electronic cash alongside banknotes and coins. Two proposals will be put before the trilogue to establish the digital euro’s remuneration model based on service fees: the first approach is that of a market-wide cap: a single ceiling applied to all merchants in the euro area, or within a single Member State, calculated using a weighted average of the fees associated with comparable digital payment methods. The second approach, by contrast, provides for a specific rule for each merchant: every merchant in the euro area would have a different cap, based on the lowest price that a payment service provider (PSP) charges that merchant for comparable digital payment methods.

The authors of the paper, Nicola Branzoli, Stefano Pietrosanti and Alessia Vita, believe that models based on the average commission and a market-wide cap are capable of meeting “with good results” the two main criteria set out by the European Council: they are compatible with current systems, are free from the influence of service providers and are manageable – that is, verifiable – and therefore enable merchants to compare fees transparently and without additional costs. The alternative remuneration model – the second approach, which is based on a specific rule for each merchant – would, however, fail to achieve this dual objective. To reach this conclusion, the paper conducts an in-depth analysis of the current European electronic payments market, highlighting how smaller merchants are at a disadvantage compared to larger ones: merchants who generate high transaction volumes are able to negotiate discounts. Small merchants pay ‘significantly higher’ fees, ‘not because the payment service is intrinsically different, but because their alternatives are more limited’. The paper cites an ECB estimate based on currently available market data, according to which European merchants pay a weighted average fee of around 0.50 per cent per transaction for international card schemes, whilst smaller merchants may end up paying up to three or four times the fees paid by large merchants: the digital euro aims to eliminate these disparities and penalties. The digital euro is a public good. And its status as legal tender means that merchants are obliged to accept it for any transaction, regardless of the amount. The setting of service fees associated with the digital euro must therefore ensure that the payments borne by merchants are proportionate and take into account the obligation on merchants to accept it.