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Digital Euro Talks Hit US Payment Giants – Visa & Co See $127 Billion Wipeout

Last Updated May 18, 2024 11:12 AM
Giuseppe Ciccomascolo
Last Updated May 18, 2024 11:12 AM

Key Takeaways

  • A study finds that investors see a digital euro as a threat to US payment giants like Visa and Mastercard.
  • The digital euro is a way for Europe to reduce dependence on US payment systems.
  • While some initially feared a negative impact on banks, the analysis suggests it will be manageable.

An analysis  of stock market reactions to central bankers’ speeches on digital currency between 2016 and 2022 revealed significant impacts on payment companies. US giants lost $127 billion while their European counterparts gained $23 billion.

While the banking system – both in Europe and abroad – recorded no impact, the study results show that a Central Bank Digital Currency (CBDC) may benefit Europe and represents an innovation that poses a risk to the old payment system.

Analysis Of The Digital Euro

The study found that US payment companies, including Visa, Mastercard, and PayPal, lost $127 billion on the stock market on days when central bankers discussed the potential introduction of a digital euro. In contrast, European payment companies, such as Adyen, Worldline, and Nexi, saw their value rise by $23 billion.

This market reaction arrived in response to over 150 interventions by central bankers between 2016 and 2022, according to a paper  by economists Tobias Berg, Jan Keil, Felix Martini, and Manju Puri.

The analysis found that “when central bank speeches about the digital euro have a positive bias, a value-weighted index of European payment companies increases by 56 basis points on the day of the speech. At the same time, an equivalent index of US payment firms declines by 19 basis points.”

The economists identified a “geopolitical dimension” to the digital euro: “Payment systems are critical infrastructure, and CBDCs can promote local control over payment schemes, thus reducing dependence on foreign operators,” the paper emphasizes. “The topic of autonomy is particularly relevant in the context of the digital euro, as US companies such as Visa, Mastercard, and PayPal currently play an important role in the European payments landscape.”

Talks Impact On Payments Giant

Piero Cipollone , a member of the ECB executive committee, cited  the paper recently at a Consob – the Italian financial watchdog – conference. He highlighted that 64% of electronic card transactions today are carried out in Europe with international operators.

At the end of April, Cipollone, who in November became responsible for the digital euro project in place of Fabio Panetta, highlighted  that “due to the fragmentation of the European market, cross-border transactions within the euro area have become dependent on a very small number of non-European operators.” The EU thus finds itself in a “paradoxical situation” as efforts to accelerate digitalization generate additional revenues for non-EU groups, whose market share is continuously increasing.

Digital euro project timeline
Digital euro project timeline. l Source: European Central Bank

In this scenario, there may be competition problems – such as higher costs for individuals and businesses – and barriers to entry, such as those of Apple in the wallets, which the European Commission is investigating.

Furthermore, Europe is exposed to the introduction of a euro stablecoin by PayPal, which would have significant consequences for financial stability, though specific limits may mitigate the impact of the digital euro.

No Damage To The Banks

According to the paper, the market believes the impact on banks, sometimes feared in Europe, is generally low. Instead, there is concern about a scenario where US companies increasingly exclude European credit institutions from the payments sector.

“The impact on banks is manageable,” according to a separate analysis  by ECB economists, who estimated a deposit replacement of €500 billion for “moderate” use of the digital euro. With a limit of €3,000 per person, the maximum impact would be around €1,000 billion.

However, this effect would see mitigation by replacing banknotes, which are already liabilities of the central bank rather than commercial institutions, and the likely initiation of ECB refinancing to support bank liquidity.

“We found that positive central bank speeches on the digital euro are associated with positive returns for European payment firms, negative abnormal returns for US payment firms, somewhat negative but statistically insignificant abnormal returns for European banks, and no returns for US banks,” the researchers said .

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