Dropping out of Germany's benchmark DAX stock index after 30 years is the end of an era for Commerzbank AG, but also signals a reshuffling of the power structure in retail payments, according to market observers.
The second-largest German private bank, which was a founding member of the DAX in 1988, will be replaced by digital payments firm Wirecard AG on Sept. 24.
"At the moment it is obviously the case that the market values fintechs more highly than traditional banks," Commerzbank CEO Martin Zielke said in an emailed comment.
But he stressed that nothing would change for customers and that Commerzbank continues to be the leading bank for Germany's Mittelstand — the country's core tranche of smaller businesses. The bank will also continue with its strategic transformation into a digital enterprise, he said.
Munich-based Wirecard has seen its share price rise amid a boom in fintech payments services. At €22.50 billion, its market capitalization was more than twice Commerzbank's €10.53 billion on Sept. 5, and also that of rival Deutsche Bank AG's, whose market cap stands at around €19 billion.
European bank stocks have taken a battering this year amid geopolitical worries, and the German banks have also contended with worries about their multiyear restructurings, low profitability and high costs. Deutsche Bank itself is set to drop out of the Euro Stoxx 50 index on Sept. 24.
Fintechs to rule payments
Fintech companies have been chipping away at the market share of traditional banks in retail payments for some time. While this space is still very much driven by the banks, payments fintechs will eventually rule the market globally, according to Syed Anil Akbar, securities research analyst at merchant bank Kempen & Co.
"It will happen in a long drawn-out phase but we do expect this to happen," he said in an interview. As the share of electronic payments increases, fintechs will expand their merchant acquirer business or just handle a bigger share of the payments for large global corporates and e-commerce platforms, he said.
Banks can barely compete with tech payments providers, especially at a time when low interest rates coupled with ever-increasing regulatory costs chokes off any chance of generating meaningful returns.
"Across the banking sector, the biggest theme is cost cutting," Akbar said. In this environment expanding in research and development and IT, especially in retail payments, which is not a very high-margin business for banks, is very difficult for them, he said.
Meanwhile, unburdened by high regulatory capital requirements, and operating on a lower cost base and far smaller balance sheets, fintech firms are much more flexible and better-placed to handle retail payments, Akbar said.
This comes with higher expertise in new technologies and rapid growth. Payment providers currently generate revenue growth of between 30% and 40%, something unheard of in the banking sector at the moment, he added.
Wirecard growth potential
Payment services providers were winners in the first-half earnings season, with online sales growth of 15% to 20% and EBITDA margins of 30% to 35% in the online segment, Richard-Maxime Beaudoux, an equity analyst at Bryan, Garnier & Co, said in a Sept. 6 research note.
Wirecard, on which Beaudoux has a "buy" stock recommendation, recorded a first-half revenue increase of 45.8% year over year and a 27.3% EBITDA margin. New signings over the period signal a potential new annual volume of some €30 billion, representing a 178% jump year over year, the analyst said.
A "substantial" increase in new customer transactions suggests that EBITDA growth will keep accelerating, Knut Woller, director equity research at the software & IT services unit of Baader Bank, said in an email.
Wirecard generates half its revenues from Asia and works with Alipay — China-based retail giant Alibaba's online payments arm — to offer Chinese customers the Alipay service when they shop in Europe, Robin Brass, equity research analyst at Hauck & Aufhäuser Privatbankiers KGaA, said in an email.
In Germany, it will have to wait to reap real benefits, as Germans still overwhelmingly use cash and the government does not support digital payments like the Nordics do, for example, according to Brass. The pace of adoption will be slower than in Asian countries, he said.
Cash still accounted for a 48% share of all payments settled by German consumers at the end of 2017, according to Bundesbank data.
But Wirecard's reputation will be burnished by its inclusion in the prestigious DAX index of leading German companies.
"Finally a real new tech company is entering this index [at a time when] there are barely any larger tech companies in Germany," Brass said. "This should also help the company to achieve higher credibility with larger companies [and] attract more attention from international investors."
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