A groundswell of support from European policymakers and even bankers for central bank-issued digital currencies could turn the banking business model on its head, with particular implications for payments and deposits, according to experts.

The European Central Bank is currently exploring the concept of a digital euro, although the project is in its early stages. The Bank of International Settlements, considered to be the central bankers' central bank, has given its blessing to central bank digital currencies, at least in theory, with General Manager Agustín Carstens saying in July that the bank would support other central banks who wanted to issue one of their own.

Being proactive in Libra era

A growing number of European politicians, policymakers and bankers in Europe have voiced support for a digital euro, arguing that it could help the development of a more efficient financial system and provide a bulwark against Facebook Inc.'s proposed digital currency, Libra.

The Association of German Banks, a trade body that represents around 200 private banks, called for the creation of a digital euro in an October policy paper.

The arrival of Libra is raising fundamental questions about the nature of the global monetary system in a digital era, as well as about who will shape it, the paper argues. Ultimate responsibility for the monetary system must remain with central banks, and that any private sector digital currencies must mesh with the state-determined system. "Anything else would ultimately lead to chaos and instability," the paper said.

Bruno Le Maire, French finance minister, and Olaf Scholz, his German counterpart, have also come out in support of a digital euro. Both also are critics of Libra, arguing that central banks should take the lead in this space rather than leaving it to private companies.

Why a central bank digital currency?

A digital euro, or other central bank digital currency, is a digitized version of fiat currency, and is a store of value in and of itself, unlike regular digital payments, which are representations of money. Central bank digital currencies, or CBDCs, would form part of the base money supply, alongside physical notes and coins.

A fundamental difference between regular money and CBDCs is that the latter could be stored and accessed by the general public in the accounts of the relevant central bank — for example, the Bank of England or European Central Bank. This theoretically cuts out the need for a commercial bank account, according to a policy paper by Positive Money, a group of researchers campaigning for a more inclusive banking and monetary system.

There are two ways that this can be done. One is through the central bank providing accounts directly to the public along with bank cards and online banking, although this could stifle competition and put undue burdens on the central bank, according to Positive Money. The other is through an "indirect access" approach in which the central bank would hold the digital currency, but private-sector digital cash account providers would manage the accounts. These companies would be responsible for providing payment services, debit cards and internet or mobile banking, but would not be allowed to lend or take risks with their customers' money, according to Positive Money.

For Adam Bujnowski, a management consultant at Zeb Consulting, CBDCs could create the opportunity to "skip various intermediaries such as clearing agencies, settlement institutions, payment cards issuers, payments system providers and banks."

Banks could see decreased volumes in credit transfers, lower usage of payment cards and fewer ATM withdrawals, Bujnowski said in an email. Lending activities connected to credit cards, however, would not be affected.

"Banks should improve their offer for products and services as international transfers and credit card products, which have additional features not provided by CBDCs," he said.

Banks could also see an outflow of deposits if the option to open accounts directly with a central bank became a reality, he said. This would lead to higher financing costs due to the need to replace lost deposits with wholesale financing, he said.

'Banks and consumers will need a rethink'

CBDCs do not mean that central banks would "necessarily become retail banks," Stanislas Jourdan, head of Positive Money (Europe), said in an email.

In fact, there is no reason why commercial banks could not be the ones to administer CBDC accounts, he said.

Central bank-held CBDC accounts held directly would call into question the need for a state-guaranteed deposit scheme for commercial banks, Jourdan said. This would raise some existential questions about the business of deposit-taking, but could also create opportunities.

"I think the key point is that if CBDC provides full safety of savings, then banks and consumers will need to rethink how to use and run the system. If a consumer can just park their money in a CBDC account with no remuneration and no risk, they will think of normal bank deposits as an actual investment, creating room for banks to offer different remuneration and deposits policy conditions," he said.

The Association of German Banks, which counts Commerzbank AG and Deutsche Bank AG as members, does not foresee an overall negative impact on commercial banks.

"We do not expect that the central bank will enter into the business of commercial banks. In our opinion CBDC will start in very specific fields of economic transactions, such as enabling smart contracts. It will not become a general means of exchange," a spokesperson said.