Global Banking Practice A perspective on German payments What is the long-term relevance for banks, cash, and cards? September 2019 Authors and acknowledgements Dr. Franca Germann Associate Partner Frankfurt Reinhard Höll Associate Partner Dusseldorf Marc Niederkorn Partner Luxembourg The authors would like to acknowledge and thank Dr. Dr. Helmut Heidegger, Dr. Philipp Koch, Kai Schindelhauer, Prof. Dr. Uwe Stegemann, Birgit Teschke, Dr. Andreas Thurn, and Dr. Eckart Windhagen for their contributions to this paper. A perspective on German payments What is the long-term relevance for banks, cash, and cards? Germany has a reputation for being a high-tech country with a cash-dominated economy. Its cash usage is indeed high (67 percent of total number of consumer-to-business transactions in 2018), but the payments infrastructure is well developed, with approximately 165 million cards, roughly 1.1 million terminals, and a well-established processing landscape (Exhibit 1, next page). For incumbents, payments are an important current accounts, or instruments); the remaining 20 source of revenue and the most important percent are generated from interest margins. customer touchpoint. The question now is Importantly, most customer touchpoints with their whether developments such as Apple Pay or bank are payments related and linked to current Alipay, ubiquitous card acceptance, and emerging accounts, generating approximately €12 billion specialists such as Adyen and Wirecard lead in associated revenue in Germany. Leaving aside to a leapfrogging moment that relegates banks interest rate effects on the net interest income on to the role of high-cost providers of cash, current accounts, the revenue from payments has cards, and infrastructure, pushing them further increased in recent years (Exhibit 2, next page). The away from the heart of the vibrant payments growth has been driven by the following trends: industry. Or more succinctly, will nonbanks and fintechs be able to reap the benefits of the shift — A steady 1 to 2 percent annual decline in cash away from cash? usage across all age groups, leading to an increase in use of card and digital payments Noncash payments are growing — A steady 5 percent annual increase in card Payments can be defined as covering issuing usage, albeit with moderate revenue growth activities—transactions made through accounts, (mostly due to regulations such as MIF—Multi- credit and debit cards, and (new) payments types Interchange Fee—regulation ) such as PayPal, Apple Pay, and Amazon Pay. — An increase of approximately 10 to 15 percent It also covers payments acquiring (terminals, per year in e- and m-commerce channel usage merchant payments solutions) and ranges from the “traditional” point of sale (POS) to the growing In a European context, German payments revenues e- and m-commerce channels, as well as the are lower than average; at about €22 billion, they underlying processing and current-account, cash amount to 0.7 percent of German GDP, compared supply, and logistics activities. More than 80 percent with the 1.0 percent European average and the 1.3 of payments revenues in Germany are fee based percent US average. German banks rely more on (either directly or usage based from merchants, account-related liquidity than most other markets A perspective on German payments 1 Exhibit 1 An overview of the German payments market. Payments in Germany 50 Cash is still highly relevant . >15% billion Transactions by payments type, % 5 of bank revenues consumer- 12 are payments to-business Cash related transactions Direct debit 16 per year Cards 67 >90% of banks’ 165 Transfe r customer million touchpoints are cards payments . but used mostly for small payment amounts related 1.1 Ø transactions volume in € 74 million >70% terminals 49 of payments revenues in 13 Germany are generated by Cash Debit card Credit card banks Source: McKinsey analysis Exhibit 2 German domestic payments are dominated by current accounts, transactions, and debit cards. Growth p.a. Growth p.a. Revenues in the German payments market, in € billion1 201217 201722 27 24 25 22 -4% 1% 2 Current accounts 19 13 15 12 2% 2% 3 Transactions 6 2% 3% Credit cards 5 6 5 Debit cards 2 0% 5% 1 2 4 1 3 Alternative payments 1 0 2 0 2 0 1 20% 16% 2007 2012 2017 2022E 1 Excluding cross-border business. 2 €13 billion assuming constant interest rates, 2017-22; €17 billion assuming rising interest rates. 3 Includes cash, checks, transfers, direct debit, documentary business, remittances. 4 E.g., AmazonPay, PayPal, Sofort, paydirekt, giropay, ApplePay, GooglePay. Source: McKinsey Global Payments Map 2 A perspective on German payments Exhibit 3 Germany falls into the current account-related-liquidity-driven country archetype. Payments revenue drivers for dierent country archetypes in 2017, share in %, total in € billion 28 57 78 40 60 7 7 12 12 2 5 14 Retail Revenues from 29 30 11 payments1 payment type 24 11 12 10 9 7 Cross-border 26 8 transactions 11 15 23 24 Current 13 6 12 Business accounts 12 payments1 22 13 Transactions 22 9 26 11 63 9 5 8 5 5 Cards 6 Germany Liquidity Cards Retail Commercial driven driven driven driven Austria Finland France Czech Republic Belgium Spain Hungary Greece Denmark Sweden Ireland Poland Italy Switzerland Norway Russia Netherlands UK Slovenia Portugal Romania Slovakia 1 Retail versus business split dependent on revenue recipient. Source: McKinsey Global Payments Map (Exhibit 3), making them more vulnerable to the specialists and utilities—will continue to gain current low-interest-rate environment. ground, particularly in non-customer-facing areas such as cash logistics and processing. While German payments behavior is unlikely to Banks will continue to hold the balance sheet, suddenly rival that of China, where mobile payments and big technology firms are likely to focus on the methods such as Alipay are now used for 28 percent customer interface to support their core business. of consumer-to-consumer and consumer-to- business payments, some trends are evident: We believe that customers, not technology, will be the key driver of change, as they increasingly expect — The number of digital payments methods will seamless experiences across channels. continue to increase in the near term, enabled by increased adoption of mobile technology. However, other than in niche applications, A short-term proliferation in digital this growth in payments methods will likely be payments methods temporary, with merchants and consumers Online, Germans still mostly pay through traditional pushing for convenience and less complexity. means: direct debit and bill pay account for 63 percent of all transactions, with PayPal and credit — Germany may follow the trend in other European cards carving out most of the rest (20 percent and 11 markets and experience a continuing decline in percent, respectively). Meanwhile, mobile payments cash usage to 30 to 50 percent in the next three are still seen as distinct from online and brick-and- to five years, as increasing numbers of people mortar payments. Actual mobile payments are still pay by smartphones or cards. very low (less than 1 percent of all transactions) — The customer interface remains the competitive in Germany compared with countries such as focus of banks, card schemes, and payments Denmark, where mobile payments now make up 14 specialists. Nonbanks—that is, payments percent of total noncash payments. A perspective on German payments 3 However, digitization, the advent of PSD2, and methods may decline, given that merchants and strong e-commerce growth have paved the way for customers prefer simplicity and that payments the development of many new payments methods solutions are highly scale sensitive. This may (Exhibit 4). The emergence of Apple Pay, Google Pay, even lead to a leapfrogging moment when market and mobile payments solutions from banks, such as volatility leads to more fluid customer preferences Kwitt, are likely to fuel mobile growth. It remains to where alternative payments methods may gain be seen, however, how deeply digital payments will a significant market share. In this competitive penetrate, given German consumers’ skepticism environment, it is unlikely that payments providers toward new providers. Experiences from other will be able to charge payers significantly, as a markets such as Switzerland, where the increased large user base will be crucial in gaining scale and usage of TWINT has not led to a fall in card usage, ensuring enough merchant access. Moreover, in imply that cards are here to stay (mostly at the some very specific, niche use cases (e-gambling, expense of cash) and are likely to continue growth in for example), distinct digital payments methods are either physical, contactless, or digital form. likely to endure. Overall, we expect both mobile and online payments To succeed in this race, many payments providers volumes in Germany to continue to grow in the high have already started to enhance their offers with single digits. However, the number of payments omnichannel service and more seamless shopping experiences—for example, allowing consumers to Exhibit 4 The estimated number of payments methods in Germany has grown signi cantly, but in the midterm future, we expect this number to decline. > 50 > 15 > 5 ? 1990 2005 22020E 02530 Examples Plus Plus Cash Maestro/VPay6 VisaDebit/Debit Kwitt Bank transfer2 Geldkarte Mastercard Transferwise Checks OLV/ELV Masterpass ApplePay Eurocheque Cards3 giropay6 paydirekt GooglePay Mastercard/Visa/ PayPal Amazon Pay AliPay American Express TPay7 BarPay bluecode ClickandBuy8 RatePAY Payback Pay Paysafecard MyBank Paymorrow Sofortüber-weisung4 Skrill Barzahlen 5 … BillPay … Billsafe Klarna 1 Includes cash on delivery. 2 Includes payments in advance. 3 Later girocard. 4 Since 2014 part of Klarna. 5 Since 2017 part of Klarna. 6 Since 2006. 7 Until 2010. 8 Until 2016. Source: McKinsey analysis 4 A perspective on German payments use the same PIN and password credentials online Cash usage in Germany today is like that of Sweden and on mobile.