Status Quo

The German payment card market is comparatively large, slow-growing and not yet fully mature. In terms of number of transactions and monetary volume it is the third largest payment card market in Europe, after the United Kingdom and France and second largest in terms of issued payment cards only after the United Kingdom.1 Despite stable, midsize single-digit annual growth rates in non-cash payments2, Germans still disproportionally often pay with cash in comparison to other Western countries. About one in two payments are non-cash.3 On average the national debit card scheme (girocard) is being used by far the most often. Only every fifth payment card transaction is conducted with a credit card4, which is mostly due a certain credit card aversion of Germans and the wide spread acceptance of girocard at the POS. The acquiring business in such an environment is harsh. With girocard being a 3-party scheme the majority of transactions are conducted via NSPs, without the need for an acquirer within the value chain. Hence, most acquirers also participate in the market as NSPs. Further challenges of the German acquiring market result from the strong position of the proprietary payment method ELV with almost one fifth of the total transaction volume.5 Merchants bypass the traditional payment value chain by extracting the account information of a customer from the debit card and use this information to initiate a direct debit for a fraction of the costs of a card-based method. The market is mainly split up between two dominating acquirers and around 15 others. The major part of the market is shared almost evenly between ConCardis and B+S.6 Further important participants are SIX Payment Services, Elavon, InterCard, easycash and Lufthansa AirPlus Acceptance. There are two groups of players in the German acquiring market: pure credit card acquirers like ConCardis or Elavon and those that also offer NPS services like B+S, easycash or InterCard. The competitive pressure in the German acquiring market is high. Typical acquirer P&Ls are characterized by high volumes and comparatively low margin figures. In dependence of the size and the industry segment of the merchant, the average MSC ranges around 1.8% for MasterCard and Visa transactions.7 A steadily decreasing trend in the MSC has been observable over the past years. Pressure on the profit margin is induced by merchants’ perception of payment acceptance as being a commodity and the low customer loyalty towards acquirers. A present market observation of the most recent years is an ongoing process of market consolidation in order to achieve economies of scale due to the high share of fixed costs. Noteworthy transactions comprise the acquisition of Deutsche Card Services by EVO Payments in 2013, the acquisition of First Merchant Services by ICP in 2011 and the acquisition of Montrada by Equens in 2010. In addition, the entrance and increasing market activity of foreign players has been observable in recent years. SIX Payment Services is growing foremost outside of the Swiss acquiring market and EVO Payments is continuing a fast-paced pan-European growth strategy through acquisitions and co-operations in Germany, Poland and Spain. Apart from the activities in the field of M&A and strategic partnerships, the positioning of German acquirers is relatively static. Historical examples for product innovations comprise the introduction of payment guarantees for ELV transactions, risk management via hot card files or dynamic currency conversion. These examples are however quite outdated. More recent innovations in the German payment market can be found in the area of mobile acceptance, white label loyalty programs and mobile wallets. However, these opportunities were and still are mostly not captured by the incumbent acquirers, but rather by start-ups and players from other industries, e.g. MNOs.

1 ECB: Statistical Datawarehouse
2 Deutsche Bundesbank: Zahlungsverkehrs- und Wertpapierabwicklungsstatistiken in Deutschland 2008 - 2012
3 Payments Cards and Mobile: European Payment Cards Yearbook 2012-13
4 RBR: Payment Cards Western Europe 2012
5 Payments Cards and Mobile: European Payment Cards Yearbook 2012-13
6 Innovalue Research
7 Innovalue Research

 

Quo Vadis

The first upcoming challenge will be the regulatory package of the PSD2 (Payment Service Directive 2) and MIF Regulation proposed by the European Commission in July 2013. Especially the questionable market intervention to cap the MIF of cross-border acquirers at 0.2% for debit and 0.3% for credit card transactions bears the potential to disrupt the acquirer landscape. If the regulation is adopted in its current form, foreign acquirers will have the opportunity to profit from a temporary regulatory arbitrage and will be able to offer a MSC which is up to 70% lower than that of domestic acquirers. Accordingly, major acquirers are already considering ways to bypass the regulation, e.g. through foreign subsidiaries in order to be able to offer the reduced MSC as well.8 The discussions and consultations with regard to the regulatory package are currently ongoing in Brussels. According to market opinions, this arbitrary market intervention will not be present in the final form of legislation. In this case defensive actions would not immediately be required by the domestic acquirers. The outlook would on the contrary be rather optimistic as the regulation bears the potential for additional customers and transaction volume in the medium to long term as the attractiveness of 4-party credit card payments in particular increases. The regulatory changes in the context of the PSD2 and the MIF Regulation will nevertheless further fuel pan-European competition with the creation of a level playing field for acquirers in the EU. The search for economies of scale will be taken to the next level and a process of market consolidation on a European level will eventually unfold, ultimately establishing a truly European acquiring market. This process will force German acquirers to further broaden their current market scope and consider entering acquiring markets in other European countries. Apart from the depicted challenges from the side of regulators and pan-European competition, acquirers will also be confronted with changing payment behaviour of consumers. The classical duo of cash and card at the physical POS will prospectively be supplemented by M-payments. Currently, the market is observing many different ideas to achieve this vision and users can almost exclusively be found in form of technology affine early adopters. However, as soon as viable business models are identified, it will change the payment behaviour of consumers. At this point it will be crucial for acquirers to still be part of the value chain of these new payment methods. Mobile POS payment solutions without the explicit need for acquiring solutions can be found, for instance, in Paypal QRShopping, Yapital, paij and closed-loop solutions like nettoApp. An acquirer is usually not required for these methods as the final settlement with the consumer is carried out via direct debit, credit transfers or operator billing. Acquirers can still play a role in the context of POS mobile payment if these are based on 4-party schemes. They have, however, not clearly positioned themselves yet in this respect and are endangered of not being part of the solution that finally sets the standard. These remarks also apply to E-Commerce payments as the borders between E- and certain types of M- payments are vanishing. In an E-Commerce context, the danger of losing market shares to substitute products has historically been high and will continue to increase. Payment methods like PayPal, direct debit and credit transfer are common in an E-Commerce environment and have always put pressure on the share of 4-party payment methods. All of these movements within the market confront German acquirers with challenges and opportunities. The new market reality will be a fast-paced pan-European market with multiple payment methods. Acquirers will need to actively shape the market in order to remain part of it.

8 Cf. Der Handel, 03.10.2013