Two economists at the European Central Bank have modelled how to get consumers to adopt a central bank digital currency (CBDC) and the digital euro in particular. They distinguish between adoption and usage. While consumers may decide to include a new payment method, they won’t necessarily use it that often.
To create their model, the economists used the 2022 ECB Study on Payment Attitudes of Consumers in the EU (SPACE). Given it was post COVID, it showed changes in payment behaviors such as an increase in usage of mobile payments for person-to-person payments which rose from 3% in 2019 to 10% in 2022.
Unsurprisingly, they found consumers prefer to stick to familiar methods, such as cards and cash. Switching incurs a significant adoption cost, in terms of money, time and effort.
Three steps to make adoption worthwhile
One avenue to make the switching costs worthwhile is to design the CBDC to combine the relative advantages of both cards (usability) and cash (controlling usage and privacy). The model showed this could increase adoption by 80% and usage by 140%.
A second strategy is to communicate these benefits effectively. While this had some benefit, the impact was smaller compared to the design choices.
Thirdly, the economists highlight the importance of surfing network effects. We believe this implies there could be different strategies for different jurisdictions. In some regions P2P payments might be more popular, so this could be the area to push. In other jurisdictions there may be more potential for Point of Sale payments (PoS). For example, the SPACE survey showed usage of mobile payments at PoS at 10% in the Netherlands versus 1% in Slovenia.
They argue that regions more eager to adopt new payment technologies will be more open to CBDC. That makes sense. However, we see a counterargument that if users adopt new payment technologies they could perceive less need for a CBDC.
The economists also highlight the role of legislation in ensuring distribution, such as obliging banks, and requiring merchants to accept the digital euro at PoS.
Other digital euro reports
Meanwhile, in other digital euro news, during August an NEBR paper explored the impact of a potential digital euro on banks, European payment providers and US payment providers. It found upbeat press mentions of a digital euro coincided with positive stock price movements for European payment firms and negative ones for American firms. There was no impact on banks.
Another report was published by the Veblen Institute and Positive Money, two organizations that are critical of banks. They highlight that there’s an option for the ECB and national central banks to sidestep private payment providers and go direct to consumers. We confirm that legally the central banks and governments are also ‘payment service providers’ (PSPs), and it is PSPs that will provide wallet services for the digital euro, per draft legislation.
The IMF recently published a report on CBDCs exploring how to encourage adoption by consumers and merchants.
