The Germans' traditional fondness for cash is quickly waning amid the coronavirus pandemic, putting banks under time pressure to choose a clear payments strategy and unify their offering to keep customers close, market observers say.
Germany's transition to noncash payments has been slower than elsewhere in Europe, and banks have not been in a hurry to expand into digital products for a long time as customers traditionally used cash or current accounts for most of their shopping needs. In the past few years, however, the tide has turned with card transactions overtaking cash for the first time in retail and big mobile payments players such as Apple Inc.'s Apple Pay and Google LLC's Google Pay entering the German market.
Fragmentation slows change
This has brought more urgency for the fragmented German banking sector to come up with a joint digital offering that carries users seamlessly across payment channels, and COVID-19 has only made it more critical, market observers said. Split into three groups — public, cooperative and private commercial banks — that often compete with each other for customers, the German banking system's response to the rise in digital payments has been patchy, allowing foreign players such as PayPal Holdings Inc. to quickly gain market share.
Even before the health crisis hit, experts saw a need for a strategy change. "Germany is in the middle of a cash-to-electronic payments transition and there is limited time for banks to react," Reinhard Höll, a partner at consultancy McKinsey & Co., said in a February interview. Customers develop habits and tend to stick with products they know, he said. "Although it has not been easy to get Germans off cash, it seems even harder to get them off alternative payment methods they are already used to," Höll added.
Without unified solutions, banks run the risk of being relegated to the role of "high-cost providers of cash, cards and infrastructure" and could lose their direct connection to customers as well as revenues, McKinsey & Co. said in a September 2019 market analysis.
Rooted in traditional payments, German banks are yet to find a strong strategic position in the digital space while fintech and big tech providers are on the advance, German financial services consultancy Zeb said in an April 2 report.
Therefore, banks need to choose whether to seek a competitive edge or just follow the trends in the changing payments landscape and in any case have a clear strategy in that segment, according to both Zeb and McKinsey & Co.
Payments revenues fall
With current account payments dominating most transactions, banks have had the upper hand in competition for years but the share of their payments revenues has been falling since 2007 as digital payment methods were becoming more popular, McKinsey & Co. data shows.
Although it is unlikely to happen overnight, the shift to digital payments is bound to accelerate, with cash usage expected to fall to as much as 50% over the next three to five years, McKinsey & Co. said. If banks are not quick enough to meet consumers' demand for "highly convenient, omnichannel offers," they will be left with the costly upkeep of a cash transaction infrastructure and none of the revenue benefits that a popular digital platform could provide, it said. McKinsey & Co. estimated that German banks currently spend roughly €2 billion per year on services to support cash transactions, including the maintenance of roughly 50,000 ATMs in the country.
Banks' lead challenged
Banks dominate the market as most payment revenues are still generated through current accounts but their online payments products pale in comparison to the popularity of PayPal's digital wallet offering. Some 68% of German consumers who were asked to list their favorite payment products for online purchases named PayPal, just shy of the 69% who voted for current accounts, a Bundesbank survey conducted in April to July 2019 shows. The German banking sector's Giropay GmbH and Paydirekt GmbH products were favored by only 10% and 8% of the polled consumers, respectively.
Paydirekt was launched in 2014 with the goal to become a key competitor of PayPal, which entered Germany in 2004. Backed by about 1,400 private commercial and public savings banks in Germany, Paydirekt has almost complete coverage of the domestic market with 50 million active accounts. Nevertheless, it currently has only 3.5 million customers compared to PayPal's 25.6 million customers.
A major reason for Paydirekt's meager uptake in the market was that the service was 10 years too late, Hugo Godschalk, managing director and founder of German payments sector-focused PaySys Consultancy, said in an interview.
Consumers were already used to PayPal when Paydirekt came along, he said. Furthermore, German banking services require customers to switch between different products with separate login details, while PayPal's digital wallet allows them to add all of their cards and other payment apps onto one platform, Godschalk noted. People like PayPal because it is much more convenient, "two clicks and the payment is completed," he said. On its own, Paydirekt will likely remain a small player in the payments market, according to Godschalk.
The German banking sector has a plan to bundle all of its main payments services into one system. The project, dubbed X-Pay, has been in the works for over a year with not much progress made so far. Despite the pandemic, the industry continues talks about the potential merger of Paydirekt and Giropay, which is seen as a first step to completing X-Pay, but no decisions have been made yet, Handelsblatt reported May 18.
X-Pay will also include Girocard — the main debit card system in Germany, which is currently not enabled for online use — and the savings banks mobile-to-mobile payment app Kwitt. Bundling those services makes sense but there are legal issues in terms of competition and distribution networks, which make the whole discussion on the project difficult, Florian Forst, a partner at Zeb specialized in retail and commercial banking, said in an interview.