Innovalue #payments INSIGHT | OPINION Vol 5 • Q4 2013 Quo Vadis Acquiring in Germany Jan Lettow, Associate, Innovalue Acquirers in the German payment market are currently confronted with a set of challenges. These are partly due to a historically challenging business environment and partly due to new developments within the market. The market for acquirers in Germany has always been under pressure due to 1. a strong position of payment methods not relying on a 4-party scheme, 2. a fragmented market with many small acquirers and hence missing economies of scale, 3. low customer loyalty and a perception of acquiring as a commodity which is Interchange Fee) Regulation proposed by the Accordingly, major acquirers are already only differentiated through the price European Commission in July 2013. Especially considering ways to bypass the regulation, and the questionable market intervention to cap e.g. through foreign subsidiaries in order to 4. a low level of innovation and the MIF of cross-border acquirers at 0.2% for be able to offer the reduced MSC as well investments into new products by the debit and 0.3% for credit card transactions (cf. Der Handel, 03.10.2013). The discussions incumbent acquirers. bears the potential to disrupt the acquirer and consultations with regard to the The already strained market environment will landscape. If the regulation is adopted in regulatory package are currently ongoing in become even more burdened as existing its current form, foreign acquirers will have Brussels. According to market opinions, this challenges continue to intensify and new the opportunity to profit from a temporary arbitrary market intervention will not be present challenges will materialize in the near future. regulatory arbitrage and will be able to in the final form of legislation. In this case The first upcoming challenge will be the offer a MSC (Merchant Service Charge) defensive actions would not immediately be regulatory package of the PSD2 (Payment which is up to 70% lower than that of required by the domestic acquirers. The outlook Service Directive 2) and MIF (Multilateral domestic acquirers. would on the contrary be rather optimistic TABLE OF CONTENTS Quo Vadis Acquiring in Germany M&A Activity The German acquiring market is currently in a state of change, confronting new and M&A Activity – What are the key drivers of M&A activity? Which transactions established market players with a set of challenges and opportunities. Jan Lettow made headlines in the 4th Quarter of 2013? What are major trends for 2014? will present an overview of the major drivers leading to a new market reality. p1 Andreas Habersetzer and Robert Kayser answer these questions. p4 20 years of Bluetooth - VC Activity Will Bluetooth experience a second spring in mobile commerce? Once again Niels Denefleh reviews the latest startup funding activity; deriving Beacon, Bluetooth low energy and Bluetooth Smart – Mirko Krauel and Kalle global investment trends within the payments industry. Which payment startups Dunkel will discuss why the newest incarnation of Bluetooth has what it takes to be received funding in Q4 2013? What are current product or service innovations for the next big thing for mobile commerce. p2 investors? p6 Innovalue #payments INSIGHT|OPINioN 2 as the regulation bears the potential for competition, acquirers will also be confronted consumer is carried out via direct debit, credit additional customers and transaction volume with changing payment behaviour of transfers or operator billing. Acquirers can still in the medium to long term as the attractiveness consumers. The classical duo of cash and play a role in the context of POS mobile pay- of 4-party credit card payments in particular card at the physical POS will prospectively be ment if these are based on 4-party schemes. increases. supplemented by M-payments. Currently, the They have, however, not clearly positioned themselves yet in this respect and are endan- gered of not being part of the solution that "The search for economies of scale will be taken to the next finally sets the standard. level and a process of market consolidation on a European These remarks also apply to E-Commerce level will eventually unfold, ultimately establishing a truly payments as the borders between E- and cer- European acquiring market." tain types of M-payments are vanishing. In an E-Commerce context, the danger of losing market shares to substitute products has his- The regulatory changes in the context of the market is observing many different ideas to torically been high and will continue to PSD2 and the MIF Regulation will nevertheless achieve this vision and users can almost increase. Payment methods like PayPal, further fuel pan-European competition with exclusively be found in form of technology direct debit and credit transfer are common the creation of a level playing field for acquirers affine early adopters. However, as soon as in an E-Commerce environment and have in the EU. The search for economies of scale viable business models are identified, it will always put pressure on the share of 4-party will be taken to the next level and a process of change the payment behaviour of payment methods. market consolidation on a European level will consumers. At this point it will be crucial for All of these movements within the market eventually unfold, ultimately establishing a truly acquirers to still be part of the value chain of confront German acquirers with challenges European acquiring market. This process will these new payment methods. and opportunities. The new market reality will force German acquirers to further broaden Mobile POS payment solutions without the be a fast-paced pan-European market with their current market scope and consider explicit need for acquiring solutions can be multiple payment methods. Acquirers will entering acquiring markets in other European found, for instance, in PayPal QRShopping, need to actively shape the market in order to countries. Yapital, paij and closed-loop solutions like net- remain part of it. Apart from the depicted challenges from toApp. An acquirer is usually not required for the side of regulators and pan-European these methods as the final settlement with the 20 years of Bluetooth - Will Bluetooth experience a second spring in mobile commerce? Mirko Krauel, In the 2000s Bluetooth was not ready for Principal, Innovalue mCommerce In the late 2000s the idea was to use Bluetooth to Kalle Dunkel, push marketing measures to the consumer, such Associate, Innovalue as simple information, coupons or even small sound clips. This idea was strong but the technology could not deliver. Bluetooth 3.0, the current This Year Bluetooth will celebrate standard at that time, had two significant its 20th birthday drawbacks: power consumption and need for Since its original development as a cable activity by the user. The marketers had to pester replacement technology in 1994 by Ericsson the consumer to activate his Bluetooth connection in Sweden Bluetooth has gone through many every time. This was often seen as intrusive iteration, changes and use cases. and was not well received by the consumer. Page1 ALTERNATIVE 3 Innovalue #payments INSIGHT|OPINioN 3 Bluetooth 4.0: The advent of Bluetooth Low way it can be used to replace current fallback Fig. 1 shows a snapshot of the database at Energy and beacons technologies such as QR-codes, alpha-numeric the beginning of 2014. We clearly see that This weakness was addressed in 2010 through codes, sound based systems etc. from a quantitative standpoint Bluetooth has the Bluetooth 4.0 standard. This standard split not gained a significant market share yet. the Bluetooth technology into three parts. Bluetooth’s market penetration as a Classic Bluetooth, Bluetooth High Speed and technology for mobile commerce "Bluetooth in its newest Bluetooth Low Energy (BLE), which is also To answer our initial question, whether Blue- marketed as Bluetooth smart. BLE reduces tooth will have a second spring in mobile standard excels as a stimulus. power consumption and production costs commerce, we will look at the market as it is As opposed to other significantly and retains a similar communication today. At Innovalue we use a database to technologies such as NFC range compared to classic Bluetooth. This track initiatives from Europe and the U.S. and QR codes BLE does not enables BLE-capable smartphones to remain which are active in mobile proximity-based need active initiation by the active without noticeably draining battery commerce, such as loyalty, couponing, power. In addition standalone Bluetooth tickets etc. One factor we analyze for each consumer." micro transmitters have become more initiative is the technologies used, to let the affordable. smartphone of the user interact with the But our continuing evaluation of the Such small “beacons” can locate other system of the merchant. market shows that from a qualitative stand- Bluetooth devices around them and send point Bluetooth is on the rise. PayPal is offering relevant location-specific information. BLE as its Beacon product. Apple supports BLE Figure 1: Mobile commerce technologies Jan. 2014 - Market survey with 255 initiatives through iBeacon. There is no NFC capability Bluetooth’s place in the consumer’s mobile for iPhones so far, but BLE has been integrated 0 10 20 30 40 50 60 commerce path 3% as of the iPhone 4S. In general all major To understand how BLE can help consumers 6% smartphones produced since the end of 2012 Barcodeand / QR Codemerchants alike, we will look at60% the path are BLE-capable, be it iOS-, Android- or 9% Alpha-Numerica consumer Code takes from wandering12% into a Windows-based. Another early adopter of Geolocation 10% NFC shopping mall, to his purchase and beyond.9% BLE is the startup shopkick. They added … Bluetooth Bluetooth in its newest standard3% clearly 10% iBeacon under the synonym shopBeacon to excels as a stimulus.