European banks are progressively losing their dominance in the payments landscape. The initial challenge came from mobile apps, which captured transaction fees and valuable data. This was followed by digital payment platforms and startups assuming even greater control. Now, the European Central Bank (ECB) is issuing a warning about a more severe threat: stablecoins could siphon away the very deposits that banks depend on.

This message was delivered on a Friday by Piero Cipollone, a member of the ECB's executive board, during a banking conference in Rome. He positioned the digital euro project as the strategic solution to this impending problem.

The Escalating Payments Challenge

Cipollone highlighted the ongoing shift away from traditional banking services. "Even traditional debit card payments are becoming less popular," he noted. "In fact, mobile payments are on the rise and they already exceed one in ten point-of-sale transactions in Ireland, the Netherlands and Finland."

He further detailed the financial and informational losses banks are sustaining. "When their customers use mobile payments, banks typically pay higher fees than those associated with debit cards and often do not receive any information about the payment, so they lose both fees and data," Cipollone explained. The risk intensifies with crypto-assets, as he added, "If the use of stablecoins increases in the future, banks will also lose retail deposits."

His audience, comprised of executives from Italian cooperative banks, had specific reasons for concern. In Italy, half of all cooperative bank branches are situated in towns with populations under 10,000. In these communities, the loss of payment data threatens to undermine the local lending business.

How Stablecoins Change the Game

Stablecoins introduce a fundamentally new challenge. These are privately issued digital tokens that are pegged on a 1:1 basis to a government-issued currency, most commonly the U.S. dollar. They enable users to hold and transfer funds completely outside of the conventional banking system, functioning akin to a digital dollar stored in an application instead of a bank account. This differs from even modern fintech companies like PayPal and Stripe, which still rely on traditional banking infrastructure in some capacity.

According to data from DefiLlama, the global market for stablecoins is valued at approximately $300 billion and is overwhelmingly denominated in dollars.

Cipollone worries that widespread adoption of stablecoins could render cash deposits obsolete. While mobile payments cost banks fees and data, stablecoins could deplete the deposit base that is essential for their lending operations. Deposits are not merely figures on a balance sheet; they represent the fundamental resource that banks utilize to provide credit to businesses and homebuyers. A reduction in deposits directly translates to a decrease in lending capacity. For smaller cooperative banks, which operate on thin margins and serve local clientele, this represents an existential crisis, not just a financial inconvenience.

The Digital Euro as a Countermeasure

The ECB's proposed solution is, perhaps ironically, a central bank digital currency: the digital euro. This would be a government-issued, electronic version of cash, but it would be distributed through commercial banks rather than in place of them. The current design ensures that banks would maintain customer accounts, collect interchange fees, and have access to transaction data.

To advance this initiative, the ECB has already selected 36 payment providers for a 12-month pilot program scheduled to commence in the second half of 2027. Participants include major financial institutions such as Deutsche Bank, UniCredit, and Revolut.

Safeguards and Skepticism

A significant objection to the digital euro is that a risk-free, government-backed digital wallet could just as effectively drain deposits from banks as a stablecoin. The ECB has planned for this possibility with specific guardrails. The digital euro will not accrue interest, which discourages users from holding large balances in it. Additionally, holding limits will be imposed to cap the amount any individual can store in a digital euro account. A financial stability analysis conducted by the bank itself concluded that this design does not present a material risk to bank liquidity.

Despite these assurances, critics have not been entirely persuaded. The ECB's recurring stablecoin warnings have not noticeably curbed the growth of the stablecoin market. However, the legislative process for the digital euro is now in motion.

Cipollone reported that negotiations on the digital euro are proceeding, having been approved on July 9 with the first session taking place four days later. Lawmakers are aiming to finalize an agreement by the end of 2026, with the first issuance of the digital currency anticipated in 2029.