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Analysis: VIXIO does a deep dive into Germany’s fast evolving payments landscape as experts discuss, among other things, how COVID-19 is steering this famous cash-loving nation towards digital payments.
The EU’s largest economy, much like its neighbours in Austria and Switzerland, have long maintained a reputation for their preference for cash, even as their European peers in the Nordics, UK and France have embraced cards and digital payments.
The pandemic had led to an acceleration of non-cash payments in most markets around the world, and it appears that Germany is no exception.
“The German payments market is in motion. In the past, cash was clearly the prevalent payment method and Germany was considered a cash country. However, the ratio of card payments has seen a significant increase,” said Hubertus von Poser, head of consulting payments at PPI AG.
Some 30 percent of all recorded payments at the point of sale, for recreation activities, in online commerce and in other situations were made using a card in 2020, according to the Deutsche Bundesbank.
This is nine percentage points higher than a previous 2017 payment behaviour study by the central bank.
"In recent years, mobile payments have come up to the speed that they need to be,” said Moritz Königsbüscher, a Hamburg-based payments consultant. “With contactless payments, in particular, there were still lots of stores that only accepted cash and now have switched to card payments, whether debit cards or Giro. This was accelerated because of the pandemic."
Cash payments, meanwhile, still accounted for a 60 percent share of payments in 2020, albeit well below the 74 percent in 2017.
According to payments sources in the EU’s richest member state, it is unlikely that there will be a return to pre-pandemic norms.
“A complete return to cash is not to be expected — on the contrary. People appreciate the convenience of the sometimes somewhat involuntarily learned cashless processes too much to leave the chosen path again,” said von Poser.
This has especially been the case as acceptance on the vendor side has grown: card payments or alternatives to them are now accepted even for very small amounts, he pointed out.
One way to look at the future trajectory of Germany's non-cash payments is to compare it with the UK. In 2010, the UK had similar levels of cash usage as Germany does today, or 56 percent. A decade later in 2020, cash usage in the UK had fallen to just 17 percent.
Although Germany is well behind many of its European peers in terms of non-cash usage, a continued trajectory along its current path could quickly see the country reach parity.
The rise Of Girocard
"Stores that were cash only have now come round to accepting cards,” pointed out Königsbüscher. “Visa and Mastercard are pushing hard for their own debit schemes, and we have seen some banks opt to use those schemes instead of Girocard.”
Considering this, there is a sense that the so-called European Payments Initiative (EPI) would have a hard time competing if it was rolled out in Germany, as this has been the case with the Girocard compared to the international schemes, he continued.
The ambitious and political idea of forming a European alternative in payment transactions is currently a long way off, and the recent news that Commerzbank has withdrawn from the project will not improve this situation.
Yet, Girocard does seem to be one of the major winners from the changing payments culture in Germany.
The most recent figures released by Deutsche Kreditwirtschaft, which oversees the Girocard scheme, show that contactless usage is continuing to increase.
In the first half of 2021, for example, transactions using Girocard increased by 4.7 percent year-on-year to €2.71bn, representing a turnover of €114bn.
In the same period, contactless usage on Girocard increased to 64 percent of all transactions across the card scheme, from 46 percent in the first half of 2020.
What is also a significant step forward for the domestic card scheme is that the Sparkassen savings bank has put Girocard onto Apple Pay.
“If we look at contactless payments with mobile devices like smartphones, smartwatches or similar devices, there is still considerable growth potential in Germany,” said von Poser. “Such transactions will undoubtedly increase in the coming years, even if the rates of increase will not be too high.”
BNPL
One of last year’s key payment trends was that of buy now, pay later (BNPL), and according to data from ResearchandMarkets.com, BNPL payments in Germany were expected to reach a total of $18.7bn in 2021.
Big names such as Klarna and Afterpay have all set up shop in the country too.
“It is a super attractive product for the customers and is also great for conversion. Large retailers are benefiting the most, as their established risk management and processes cover and compensate the potential losses well,” said Königsbüscher.
However, according to Johannes Wirtz, an associate at Bird & Bird, the BNPL wave has yet to be fully embraced by Germany’s consumers. “The payment sector is fragmented throughout Europe and that means that Germany is not seeing as much BNPL engagement as there has been in other countries like the UK. However, clients are still interested.”
Although momentum is brewing, Wirtz predicted that there is no regulatory intervention on the horizon for companies to be concerned about. Recently, countries like the UK and Sweden have come under pressure to enact new frameworks to deal with BNPL’s rise in success.
“Germany is a highly regulated market for credit, and local consumers aren't as interested in debt. From a market perspective, it is early days and there is no obvious need for a regulatory scheme at the German national level,” he said.
BNPL has undoubtedly been able to increase its market share in recent times, pointed out van Poser, but with regard to regulatory intervention, it is difficult to make a reliable forecast. “It probably depends on the development of payment default rates for BNPL offers. If they increase, especially among younger payers, a response involving new policies is conceivable,” he said.
“However, whether it is aimed exclusively at BNPL is another question. It is more likely that the transparency rules on customer obligations towards vendors or banks as a whole will be a topic for new legal provisions.”
Germany’s biggest compliance troubles
Since 2020, Germany has experienced the hangover of the Wirecard scandal, which made headlines worldwide and put its regulatory authorities such as BaFin under huge scrutiny from politicians nationally, as well as at EU level.
Yet, in spite of reforms, BaFin is not making as much change as some had hoped, according to Königsbüscher. “Apparently, the regulator is still sticking to old processes and is not open to new thinking. There is still a lot of bureaucracy, and new companies are struggling to cope with regulatory requirements."
Although payments businesses in Germany have not been affected by the Wirecard complex itself, considering the company did not play any role, the industry will feel the effects insofar as the regulatory authorities will readjust their measures towards the supervised institutions and service providers in payments, van Poser argued.
“In the future, many more companies than in the past will certainly be subject to corresponding regulations, not least in the area of technical services,” he said. “After all, this kind of criminal machination must be prevented from remaining undetected for such a long time again.”
For van Poser, there is no question that the reputation of the business location has suffered considerably, and potential repercussions remain to be seen.
The repercussions from Wirecard are not the only headache for payments players in Germany, either.
"Stricter rules against money laundering have been and will continue to be the biggest compliance issue for payments firms,” said Elie Joseph, a payments and risk consultant. “Once something makes news in Germany, people feel the need to act and overcorrect the wrong."
At EU level, new anti-money laundering regulations are making their way through the legislative process, and there are also new compliance requirements for crypto transactions that have been introduced at a national level.
With payments rapidly shifting towards the digital sphere in Germany, there is every chance that issues such as digital payment fraud could become more prevalent in the country.
Fraud prevention and fraud detection with regard to instant payments will be a big topic for compliance staff, warned van Poser. “This may also become a challenge in the area of mobile payments if corresponding fraud methods become established there.”
