A PERSPECTIVE ON GERMAN PAYMENTS - WHAT IS THE LONG-TERM RELEVANCE FOR BANKS, CASH, AND CARDS? - MCKINSEY
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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 1Exhibit 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 67 >90%
Cards
of banks’
Transfer
165 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 2012-17 2017-22
27
24 25
22
-4% 1%
Current accounts 19 132
15 12
2% 2%
Transactions3 6
Credit cards 6 2% 3%
5
5 2 0% 5%
Debit cards 2
1
Alternative payments4 1 0 0 2 0 3 1 20% 16%
1 2
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 paymentsExhibit 3
Germany falls into the current account-related-liquidity-driven country archetype.
Payments revenue drivers for different country archetypes in 2017, share in %, total in € billion
28 57 78 40 60
12 7 7
5 12 2
14 Retail Revenues from
29 30 11 payments1 payment type
24 11
12
10 9 7 Cross-border
26 8 transactions
11 15 23 Current
24
13 6 12 Business accounts
22 12 payments1
22 13 Transactions
9 26
9 5 11 8 5 5
6 3 6
Cards
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 3However, 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 significantly,
but in the midterm future, we expect this number to decline.
> 50
> 15 ?
>5
1990 2005 2020E 2025-30
Examples Plus Plus
Cash1 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 T-Pay7 BarPay bluecode
ClickandBuy8 RatePAY Payback Pay
Paysafecard MyBank Paymorrow
Sofortüber-weisung4 Skrill Barzahlen
… BillPay5 …
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 paymentsuse the same PIN and password credentials online Cash usage in Germany today is like that of Sweden
and on mobile. PayPal has significantly updated in 2003, Italy and Poland in 2015, and Europe
its mobile payments app; Visa and Mastercard overall in 2006 (Exhibit 5). Cash remains a major
are facilitating connectivity to multiple channels value proposition for most banks: ATMs are a key
including third-party digital wallets; and Alipay is customer touchpoint and major reason for charging
working with acquirers to offer an omnichannel current-account fees.
experience (so far focused on Chinese tourists).
The trend in cash usage in these markets has been
Admittedly, banks have not yet been able to
a steady decline. In some countries (for example,
translate their relevance in POS transactions to the
the Netherlands, Poland, and Sweden), this decline
online and mobile arena. Still, girocard as a national
accelerated in recent years. Germany will likely
debit system has around 58 percent of noncash
follow the same trend with an acceleration of
transaction volumes, and banks have led several
noncash usage within the next three to five years.
initiatives to upgrade girocard (for example, by
allowing contactless payments) and their digital As cash becomes less relevant, so too do the
assets such as paydirekt. existing cash/ATM value propositions, particularly
at a time when supermarkets are offering free
The future of cash in Germany cash withdrawals. According to McKinsey analysis,
banks in Germany currently spend about €2
Although the number of cards per capita in Germany
billion on services to support cash transactions:
is comparable with that of other European countries,
a combination of setup and maintenance of ATM
domestic card usage is comparatively low, with 75
networks, cash logistics, and other related costs. It
transactions per capita per year, versus 84 in Spain,
is likely, therefore, that banks will cut cash-related
173 in France, 279 in the United Kingdom, and
401 in Norway.
Exhibit 5
Strongly declining cash usage in Germany expected given experience from other
European countries.
Cash usage in selected European countries, in % of card and cash consumer-to-business transactions
100
90
For Germany, cash usage in
80 2022 will be ~ 30-50% if
70 development follows that of
other European countries.
60
50
Germany
40 Italy
30
Poland
20 Europe overall1
10 Netherlands
France
0 Sweden
2004 2006 2008 2010 2012 2014 2016 2018 2020 2022
1
Includes Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Netherlands, Norway, Poland, Portugal,
Romania, Russia, Slovakia, Slovenia, Spain, Sweden, Switzerland, and the UK.
Source: McKinsey Global Payments Map
A perspective on German payments 5costs aggressively while actively managing potential A value chain of specialists: Are banks
public reactions. While market forces may prefer falling behind?
no use of cash at all, this seems unlikely, as there
Germany has mirrored European trends toward
are some groups (tourists and senior citizens,
a non-bank-driven consolidation in payments as
for example) who lack easy access to noncash
banks’ value chain share has steadily decreased
payments methods, and access to ATMs is often
over the past decade (Exhibit 6). This is particularly
seen as a public good.
the case in digital payments and non-customer-
Germany’s banks will therefore need to address the facing areas:
costs of running the roughly 50,000 ATMs in the
—— Issuing revenue shares are dominated by
country. The number has been relatively stable, as
bank-related entities and nonbanks. In debit
falling usage is counteracted by branch substitution
cards, girocard—the national debit card
(ATMs replacing bank branches). Banks could follow
run by the banks—is the market leader, with
the example of payments markets in Sweden and
cards held by around 95 percent of the adult
the Netherlands and pool their existing networks.
population. However, girocard has very limited
This approach could likely start with banks’ non-
online and mobile capabilities, which constrains
customer-facing, back-office areas, and potentially
its contributions to related bank-internal
result in a model like the Dutch Geldmaat, in
revenue growth. Germany has low credit card
which all banks pooled their cash/ATM activities
penetration, serving around 36 percent of
in 2015 and rebranded all ATMs under a common
the adult population. International schemes
brand in 2019.
(Mastercard, Visa) have focused on their debit
solutions (for example, Debit Mastercard) and
Exhibit 6
German banks’ share of revenue generation in payments is declining.
Revenues,1 € billion Contribution to revenues, by channel, %
100% = 27 24 22 252
61 Banks
67
82 77
Bank-related entities (revenues of bank-related
22 entities; ie, subsidiaries or near-bank utilities;
18 eg, FinanzInformatik, paydirekt, BCB)
14
11 Nonbanks and external third parties (eg, First
15 17 Data, Mastercard, Concardis)
7 9
2007 2012 2017 2022E
1
Excluding cross-border business.
2
In the event of rising interest rates 2017-2022, total revenues reach €29 billion (67% banks, 19% near-bank, 14% non-bank).
Source: McKinsey analysis
6 A perspective on German paymentsstarted to add online/mobile capabilities that beneficial to banks, providing them with customer
were originally developed for credit cards. and data access.
Digital and mobile payments are growing
rapidly from a low base, with only small market What should market participants do?
shares for bank-based solutions.
As cash loses relevance, cards and digital
—— Acquiring is mainly performed by nonbanks, payments expand, regulation fuels competition, and
which account for more than 80 percent of these consolidation looms, firms need a clear strategy for
revenues. It has not been a focus for banks of strengthening their value proposition. While German
late, either in Germany or across Europe. The banks are struggling to generate returns on equity
bank-owned Concardis was divested in 2017, (ROEs) of more than 5 to 10 percent and losing their
and currently only the Sparkassen continue share in the payments value chain, the valuation
to own a significant (albeit minority) share in and total shareholder returns (TRS) of payments
Ingenico’s German operations after Ingenico’s specialists have been high. For example, Wirecard’s
acquisition of BS PAYONE. price-to-earnings ratio is about 43 (as of September
6, 2019), with a 21 percent ROE in 2018, and the
—— Payments processing in Germany is still
overall payments TRS since 2010 is more than 20
relatively fragmented, mainly between
percent per year. Given that payments-related
bank-related entities and nonbanks. While
activities are a primary customer touchpoint and a
Commerzbank and the cooperative banks
key to cross-selling, payments should be a central
have partially outsourced processing to larger
theme for almost everyone.
European nonbank players, the market-leading
Sparkassen still run their own system (i.e., near- Individually, banks should decide on their payments
bank), as do some of the private banks, such as strategy and whether they will be a differentiator—
Deutsche Bank. that is, play for a competitive advantage—or aim
to just keep pace with market developments.
—— Current accounts, cash supply, and logistics
Independent of the strategy, for most banks a
have remained firmly in the hands of banks,
significant share of their banking revenues will still
with the help of their contractors; related
be payments related, and banks should make sure
revenues are mainly earned by banks and
to have clear management responsibility. Similarly,
bank-related entities. Unlike in other European
all banks should focus on achieving operational
countries, such as the Netherlands, the United
excellence, particularly pricing power (for example,
Kingdom, Sweden, and Finland, cash supply and
considering fees for cash usage by businesses), the
logistics utilities across sectors have so far not
ability to accelerate sales, new product and service
emerged at scale.
propositions, and further digitization.
Overall, the trend toward specialists and utilities
A more ambitious differentiation will require
in noncustomer areas is set to continue; scale
strengthening the bank’s current position
effects in processing and cash, as well as regulation
through integrated offers, ecosystem plays, and
(such as PSD2) and security remain important. In
partnerships with fintechs and—selectively—big
customer-facing areas (cards and digital payments,
technology firms. Regulation such as PSD2 and
for example), the picture is complex. Specialists
the proliferation of APIs may support such moves
such as PayPal are focusing heavily on digital
but will also put pressure on laggards as third
payments but have not achieved broad market
parties can more easily gain access. As advances
leadership. Banks clearly aim to strengthen and
in technology and the accelerated growth of digital
defend their customer touchpoints. They have an
commerce rapidly reduce the viability of legacy
asset in girocard, a significant stake in credit cards,
systems, banks should consider divestment or
and at least a foothold in digital payments with
outsourcing of assets where scale or differentiation
paydirekt, giropay, and other methods. Customers
cannot be achieved. An example is payments
seem to trust banks with sensitive payments data,
processing, where leading European players (such
but so far banks have not significantly benefited
as Worldline) generated an estimated €2.2 billion
from this advantage. Card schemes are both their
in revenue, compared with €5.7 billion in revenue
allies and competitors; their networks act in direct
in Germany for transactions overall. Nonetheless,
competition to girocard and may siphon significant
selective insourcing of assets appears possible,
value away from banks. They may, however, still be
when they may play into a differentiation strategy.
A perspective on German payments 7Moreover, for certain players, such as small private- a provider’s services to less penetrated markets.
banking players, a complete exit from offering Specialists should continuously evaluate technology
payments services may be advantageous. architecture and options for integrating systems
as part of any deal. This consideration should
Banks as a group need to acknowledge the
also encompass evaluation of the strategic focus,
threats inherent in industry trends but also grasp
whether to partner up or compete with other
the opportunities, such as where they may want to
specialists in the market. Specialists may also
cooperate to enable superior propositions vis-à-vis
extend their payments offers to leverage into
payments specialists and new market entrants. They
cash management, corporate accounts, and even
should give industry utilities serious consideration,
other areas such as leasing and factoring for large
given successful examples such as TWINT for digital
merchants. Some specialists (e.g., Adyen) have
payments in Switzerland aiming at the customer
already obtained a banking license and are offering
interface and Geldmaat for ATMs in the Netherlands
services such as cash management and foreign
aiming at cost efficiency.
exchange. Similarly, credit card schemes may want
For customers, banks need to accelerate the to focus on enriching their omnichannel offers to
development of payments solutions and create solidify and expand their business in both the offline
highly convenient, omnichannel offers. With (particularly in debit) and digital channels.
girocard, banks have an asset, but compared with
So far, big technology firms have not treated
their peers in other European countries, German
German payments as a core target and have
banks’ response to non-cash-related payments
generally been agnostic toward payments methods
has been fragmented. Offers focus on separate
used on their platforms. Most digital wallets,
solutions, such as girocard (offline), paydirekt and
for example, have been open to what payments
giropay (e-commerce), and Kwitt (peer-to-peer).
methods they consider to work with. Some big
Banks could also link their current accounts more
tech firms look at payments methods in terms
directly with the digital world (for example, by
of control of the customer interface. Others see
making online banking credentials/apps usable for
payments as a value driver from a sales funnel
e-commerce payments).
management perspective, meaning they favor the
Banks may want to consider acting on statements methods that will increase the number of consumers
by European politicians on the development of a who click, buy, and pay while minimizing risk and
European consumer-to-business/business-to- complexity. Of course, they may still try to introduce
consumer scheme (potentially involving girocard, their own payments methods, which could lead
Europe’s largest domestic scheme). They might to a marginalization of banks. An example of this
even reach into payments issues around mobile-to- might be an overarching customer interface for
mobile payments and the Internet of Things, with payments where all scheme/interchange as well
applications to, for example, machinery, automotive, as transaction fees are captured. However, if truly
and insurance. distinctive, omnichannel offers emerge from banks
With regard to cost, banks need to collectively or specialists, tech players are likely to integrate
improve their structure, ensuring that cash stays them into their platforms.
affordable, through cross-industry consolidation Merchants should take a more holistic view of the
and optimization of cash infrastructure and by cashless trend and focus on the effects of payments
redistributing the true costs of cash between all complexity on buying behavior, data generation,
users (banks, consumers, and merchants). This and costs. The growth of digital payments opens
means banks will almost certainly need to develop possibilities for creating transparency on revenues
new value propositions without cash. Indeed, and actively using payments data to manage
withdrawals may even become free for customers of sales funnels. These advantages are also more
all banks, as they are in many other EU markets, to and more accessible for smaller retailers. Larger
compete against payments specialists. merchants may also opt to actively push selective
Specialists should be cognizant of what leads payments methods.
to success: mainly convenience and scale. In conclusion, all players, and banks in particular,
Further consolidation might be a smart strategy. need to decide whether payments is a differentiator;
Acquisitions—often of payments assets divested they can play for a competitive advantage or just
by banks—can deliver cost synergies or extend keep pace with market developments. Playing for
8 A perspective on German paymentscompetitive advantage requires a flexible approach always essential. On the other hand, a fast-follower that can deliver superior value propositions to strategy will rely on third-party providers and may customers. Here technology is important but not be more cost-efficient. In each case, customers decisive, whereas keeping pace with changing can continue to expect more convenient payments customer needs, as well as a sharp focus on creating offers and more tailored solutions. scale at selected points along the value chain is A perspective on German payments 9
September 2019 Copyright © McKinsey & Company www.mckinsey.com/industries/ financial-services/our-insights @McKBanking
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