Jens Baumgarten, Harald Ziegler, Simon-Kucher: M-payments in Germany- Warming up for Round 2

It looks like things are finally taking off in the German payments market: small, nimble start-ups and global giants such as Google, Apple and PayPal are successfully pushing innovative mobile payments solutions into the German market, changing the way customers make payments. For example, PayPal has already acquired around 15 million customers in Germany, more than many established German banks such as Germany’s Commerzbank. Moreover, more than 20% of German online sales are already paid for via PayPal.

Considering these numbers, one has to wonder if the newcomers have finally won the battle on payment methods against the traditional German banks or, as developments suggest, if mobile payments and Germany still don’t mesh well.

Too many players
There are numerous reasons for the slow market adaption. First, it is often claimed that too many players are trying to impose their own products and services on the market and, as a consequence, there is no common standard. Credit card companies like Visa and MasterCard have joined forces with telecom operators such as T-Mobile and Vodafone to put their cards on NFC chips integrated into smartphones. PayPal is working on mobile payment solutions and has started a cooperation with the German DKB bank in order to enhance the reputation of its products. Of course, high-tech giants such as Google and Apple are extending their reach into mobile payments. Likewise, the established German banks want to play a major role in this area; they’re just struggling to get things moving.

Cash is king
Secondly, it is not only the absence of a mobile payment standard that hampers the broad adoption of this alternative payment method among German consumers. There are several market-specific particularities that do not support the usage of mobile payments. Cash is still king for German customers. In 2013, 54% of all retail purchases were still paid for in cash. This Germany-specific nostalgia for cash is also reflected in the relatively low credit card penetration rates compared to other highly developed countries. Only 1 in 3 Germans owns a credit card. Yet, credit cards are key components in many mobile payment solutions and are, thus, important to make such a breakthrough.

Use of debit cards
Thirdly, mobile payment services such as M-Pesa have been particularly relevant and successful in countries with large rural areas with few banks or ATMs, i.e. countries where many people don’t have access to traditional banking services. In such countries, mobile payments make it possible for people to use their mobile phone to send and receive money and pay bills. Yet, the German market is characterized by an excellent infrastructure regarding ATMs and alternative cashless payment methods. With the debit card (called EC card in Germany), for example, a standard for cashless payments is already in place that is equally accepted by customers and retailers. Most of these debit cards are even equipped with NFC chips that support contactless payments just like mobile payment methods. However, only EUR 118 million worth were paid for this way in 2013.

Clients show low interest
In summary, it seems like even with NFC technology emerging as a technical standard, the German public still does not appear to be hugely interested in mobile payment technology. As a result, retailers are only reluctantly providing the required point of sale infrastructure which, in return, does not help increase the attractiveness of mobile payments for customers, a classic vicious circle.

Despite all these barriers outlined above, with increasingly more mobile services being introduced, the German mobile payments market will continue to grow in the upcoming years, albeit fairly slowly. The key question will be who is going to win the race of gaining new clients by offering the best services that are appealing and are offering a real alternative for customers?

Customized packages are key
To win this race, banks and non-banks need to understand quickly which (mobile) services customers really want and how these services can be packed into attractive offerings. They need to understand which factors hamper and trigger adoption, including what drives customer value and willingness to pay. In the end, investments into mobile payments need to pay off, either through direct revenues or longer term benefits in the form of increased customer loyalty and relationship breadth and depth.

Chance not (yet) taken
All in all, it seems natural that the established German banks should have a legitimate claim on the mobile payments market. Especially the two retail giants, the Sparkassen and Volks-/Raiffeisenbanken associations, should be able to leverage their close relationships with customers to integrate mobile payment services into their broad payments and banking product portfolio. Together they account for about 75%of the German retail banking market and, therefore, they should be able to leverage their brand recognition as stable, reliable institutions for introducing new mobile services that align with German consumers’ needs on secure, safe payments with real value add. Yet, thus far, even they seem to lack the innovation skills and initiatives to successfully develop and implement their own mobile payment services.

However, there are international best practices like that undergone by Canadian Interac Association which has successfully shown that financial institutions can team up with and set up an integrated banking network while minimizing dependencies on third parties.

Time to play along
It is now the time to act, before companies like Apple, Google or PayPal can finally succeed in grabbing massive payment volume and client relationships from established German banks. Once these presumably younger, tech savvy and active clients are lost on the payments side, it will be extremely hard to reach them with other margin-stronger retail products such as mortgages or investments. In short: Don’t leave the field to other players and develop mobile payments now or risk losing your future customer base.

About the authors:
Jens Baumgarten is a Partner with Simon-Kucher & Partners in Frankfurt and New York and responsible for payments innovations. His consulting work focuses primarily on Value Management, Strategic Pricing and Sales Optimisation. He has carried out national as well as international projects for clients in the US, Europe and Asia. Besides financial services, his industry experience covers telecommunications, automotive and utilities. He has published numerous articles on strategy, marketing, sales and pricing in the financial services sector in Germany, the US and the UK. Jens is a frequent speaker at conferences and seminars where he covers topics in the areas of strategy, marketing and pricing.

Harald Ziegler is a Consultant in the competence center Banking & Financial Services at Simon-Kucher.

About Simon-Kucher & Partners, Strategy & Marketing Consultants:
Simon-Kucher & Partners is a global consulting firm with 720 professionals in 28 offices worldwide focusing on Smart Profit Growth. Founded in 1985, the company has almost 30 years of experience providing strategy and marketing consulting and is regarded as the world’s leading pricing advisor.