Digital Dividends: (unlocking) innovation in the payments ecosystem

Notwithstanding all the current focus that has arisen from the announcements from Washington DC – and I intend to write about them once I return from my trip to the IMF later this month – the payments infrastructure has continued to function in supporting the wider economy and the daily lives of households and businesses throughout the country. And, as it has been a while since my blog on monetary innovation, it feels timely to return to the subject. The payments landscape in Ireland has evolved significantly over the past decade, and the pace of change is accelerating.  Innovation in financial services is driving this transformation amid increasing digitalisation and shifting consumer expectations.

Over the long course of history, changes to payment systems have been relatively infrequent, often siloed, and local. Changes to the very nature of money have been even rarer.  Yet we are now going through a period of accelerated transformation at a global level. Cash, which has been in daily use for centuries, has been surpassed within decades, most recently by electronic payment methods such as contactless cards and digital wallets.

In the ‘old days’ – which some of us can still remember – retail staff had to write down card numbers and imprint them on pressure-sensitive paper using printing presses. Purchasing with cards could be a slow and error-prone process at the point of sale as a result. However, the time it took to settle payments decreased rapidly with the widespread adoption of the internet in the early 1990s.

The arrival of Near Field Communication (NFC) technology proved to be pivotal in enabling contactless payments.[1] One of the first commercial implementations of NFC technology came in the late 1990s in Star Wars action figures that could ‘talk’ to each other when placed close together.

More practical applications followed rapidly, when mobile phone manufacturers started incorporating NFC capability into their products.

Smartphones brought a major paradigm shift in how retail payments are conducted and from then we have seen an exponential adoption of contactless payments. (By the way, the first iPhone is still less than 20 years old.)

This accelerated advance, over a period of just 30 years, reflects a rapid journey of constant innovation, to deliver easier, cheaper and faster payments, in a digital world.

However, frictions remain in the European payments landscape with no digital payments method meeting all user needs.  Moreover, the shift towards digital payments has led to a dominance of global card payment providers (PDF 346.38KB), accounting for 54% of all non-cash transactions in 2023. This dominance matters in view of the critical nature of the payments infrastructure.The design of payment systems has important implications for the functioning of the economy, the conduct of monetary policy, and the soundness of the financial system (Lane, 2025). New technologies bring vast potential to take financial markets to the next level of efficiency, speed and safety. But it is the responsibility of the Central Bank, working with our partners in the Eurosystem, to ensure that we can achieve the benefits these innovations can offer, while preserving monetary and financial stability and ensuring that the financial system operates in the best interests of consumers and the wider economy.

Central bank digital currencies (CBDC) represent a natural evolution in response to this transformation and offer much more in addition to preserving the role of the central bank in offering safe means of payment. The public payments infrastructure that needs to be built to facilitate a digital euro would not only fill the gaps in our current fragmented infrastructure, but would also foster innovation and competition in European payments generally with benefits for payments service providers, business and consumers.

In the evolving geopolitical landscape, this motivation comes into even sharper focus. There is a clear need to preserve our strategic autonomy.  I believe strongly that the lack of a unified, pan-European payment rail that does not rely on foreign providers is a key vulnerability for the euro area.  And recent geopolitical tensions have reinforced my view.

Our existing payment systems comprise a vast network that took decades to build and are still evolving thanks to new developments in technology. It is our ‘financial plumbing system’.  The time is now upon us to consider what it will take to shore up this vast ecosystem of infrastructures, in an age of rapid technological change and geo-economic fragmentation.

As I said in London last year, the payments landscape is changing rapidly, so Europe and its citizens cannot afford to be left behind. We need to harness the potential of technological innovation, including those embodied within CBDCs to further unlock digital dividends in the payments system.

Addressing payment system fragmentation at the retail level…

European policymakers have taken significant steps to foster the development of private European payment initiatives that span the euro area including lowering the barriers to entry. The hope was that these initiatives could enhance competition within the European payments landscape, providing consumers and businesses with more choice and better services (Cippolone, 2024).

However, the private sector has not stepped up. It is now more than 30 years since the inception of the Single Market yet most European retail payment solutions remain national in scope, addressing limited use cases.

In his report on European competitiveness, Mario Draghi argued that completing the capital market and strengthening the single market “would enable Europe to develop and operate digital payment solutions independently”. And Enrico Letta called for an “advance (in) the implementation of the digital euro to strengthen EU's financial autonomy and improve the retail payment infrastructure.” I agree with both of them. It seems plausible that novel forms of private digital assets, trading on Distributed Ledger Technology (DLT) platforms, may scale up substantially in the coming years, particularly in the US given its recent policy direction. Such alternatives could have important implications for Europe’s monetary sovereignty and security, especially if they were seen as an alternative to the euro.

A digital euro, to complement cash, would make our payments system more cohesive, competitive, innovative and resilient. Market-led initiatives embracing digitalisation and innovation are to be welcomed, as the digital euro will make as much use as possible of existing industry standards, components and technology.

Development of a retail CBDC is especially relevant in the euro area due to the fragmentation of the payments landscape. It would support the overall resilience of the European payments ecosystem by bringing another way to pay, introduce a level of competition to the benefit of merchants and consumers, and foster an environment that supports the adoption of payment innovations throughout Europe by reducing the investment needed by individual firms interested in providing new and needed services to payments users.

Addressing payment system fragmentation at the wholesale level…

Multiple market players, both private and public, in many jurisdictions in Europe and elsewhere are exploring the possibilities that technology can bring, including DLT.  To preserve and strengthen financial stability, international standards prescribe that a Financial Market Infrastructure (FMI) should conduct its settlements in central bank money where practical and available. This is particularly relevant for the settlement of wholesale financial transactions, as they are usually of high value. Central banks have a key role to play in the reinvention of wholesale financial markets, both as enablers of innovation and providers of public infrastructure.

The Eurosystem has to offer a solution, not least to avoid the risk that central bank money settlement could be replaced by more risky settlement assets on private FMIs. This would likely add to existing market fragmentation and could disrupt the existing two-tier monetary system.

Recognising this, the Eurosystem has concluded a very successful series of trials and experiments that ran from May to November 2024 exploring the use of wholesale central bank money settlement with DLT technologies. Following this successful exploratory phase, and responding to market feedback, my colleagues and I on the ECB’s Governing Council announced plans to further develop this initiative by way of a two track approach for the Eurosystem.

First, as soon as feasible, we will develop and implement a safe and efficient platform for such settlements in central bank money. And second, we will look into a more integrated, long-term solution for settling DLT-based transactions in central bank money. This will also include international operations, such as foreign exchange settlement.

Addressing payment system fragmentation at a global level…

Cross border payments have some of the biggest frictions and developing technologies offer an opportunity to harmonise cross border payments. The development of potential new models to connect to instant payment systems would ensure international interoperability, so that domestic or network-based initiatives do not become isolated ‘digital islands’.

Enhancing cross-border payments' speed and transparency, while increasing access to cross-border payment services and reducing their costs, are the key objectives of the G20 cross-border payments programme (G20 Leaders endorsed the Roadmap for Enhancing Cross-border Payments in 2020). By collaborating to tackle fragmentation and enable seamless global interconnectivity, we can create the conditions for innovations to scale and contribute to an instant and frictionless future for cross-border transactions.

The benefits of public and private cooperation

Central banks have a key role to play in the payments landscape but they should so in partnership with other public agencies as well as with private sector participants.  An approach that simultaneously takes into consideration both industry and public policy objectives is desirable, enabling the significant synergies that exist between the public and private sectors.  We can leverage our respective experience and expertise to avoid further fragmentation.

Deputy Governor Vasileios Madouros recently characterised this inter-relationship as one where the role of central banks and regulators ensures trust, which builds the foundations that then enables the private sector to do what it does best: interface with customers, innovate, compete to win business and, ultimately, meet the evolving financial needs of households and firms.

Public policy should aim to provide a catalyst effect in fostering innovation in the financial sector and balancing the need for investment between the public and private sectors. We want to see innovation and encourage it, and make sure it is in keeping with our core objectives of monetary and financial stability, enabling opportunities to be realised while ensuring risks as well managed.

Conclusion: moving forward to enhance welfare

From bartering to digital wallets, each advance in technology has brought us closer to seamless transactions spurring on economic activity. The adoption of the digital euro and a wholesale CBDC would be further welfare-enhancing.

We still don’t have a European owned digital payment solution that works effectively, everywhere in the euro area, in all payment situations.  The technology is here now to make this happen. There is no option of standing still; the counterfactual to not acting is not staying where we are but a different future, one where public money might not play its critical role and where the entire system is affected by forces that do not have any public good objective.

To keep pace with innovation, central banks and regulators must be part of the innovation ecosystem and must themselves innovate to ensure the core aims of monetary policy, financial stability, safety and soundness, and consumer protection remain central and primary and, as a result, truly unlock the digital dividends in the payments ecosystem.

[1] Near field communication (NFC) a set of communication protocols that enables communication between two electronic devices over a distance of 4 centimetres (1.6 in) or less.

Gabriel Makhlouf