The crypto scene has had an eventful few weeks. Analogous to the global stock markets, but in an even more drastic form, the prices of almost all crypto stocks have crashed. Some cryptocurrencies have disappeared completely from the market (and with them a lot of investor capital) and some crypto start-ups have not survived the crash either. Consider, for example, the insolvency of Nuri “crypto revenue account” partner Celsius Network, where customers transferred their assets to Celsius Network in exchange for interest payments. It remains highly questionable whether the affected investors will see any of their capital again. In the meantime, Nuri itself has also declared insolvency, but repeatedly asserts that customer funds are safe.
According to unanimous press opinion, the harsh economic and financial sanctions have taken Russia by surprise and hit it hard after its war of aggression, which violated international law. At best, North Korea, Iran and, many years ago, Cuba can roughly imagine how Russia and its citizens are currently faring. Largely cut off from air traffic, the purchase of popular Apple products virtually impossible, the use of Visa and Mastercard strictly limited, the booking of holidays in Ibiza impossible… and so many other things that no longer function in the usual way. The expected and understandable reflex? The way out via crypto-currencies. After all, they promise anonymity and independence from the global financial system. Here, people think they are safe from the wrath of Western sanctions.
Cryptocurrencies are virtually made for a situation like this, but due to rising interest rates and economic uncertainty worldwide, they are currently under extreme pressure, just like the stock markets, and thus, while in theory suitable for circumventing classic (regulated and sanctioned) financial instruments and markets, in practice they are also correspondingly dangerous and unsafe, as they are extremely volatile.
ECB President Christine Lagarde is already observing increased evasion of carefully prepared, strict sanctions by turning to cryptocurrencies. In the first days after the start of the war, insiders observed conspicuous activity by suspected Russian “crypto whales”, i.e. investors with very high investment volumes who moved crypto assets worth millions of dollars. The suspicion is that investors are seeking to shift their assets into crypto assets in order to escape sanctions from the West. Bank balances, especially in Western banks, can be frozen, blocked and, most importantly, watched. Crypto assets and transactions are much more difficult to control and, above all, to sanction, as there is often no access or even legal basis or regulation for them. The Russian Sberbank even tried to directly launch its own cryptocurrency, the Sbercoin, on the market in order to make itself more independent of the Western-style financial system and to prepare for exclusion from SWIFT. The enormous market movements of recent months and the associated financial consequences for investors, especially private investors, are also increasingly calling regulators to the scene to protect investors. In addition to the pure movement of financial assets via blockchains, the focus is also on the mining of crypto assets. Among other things, it is suspected that Russian energy companies are switching from exporting energy sources to using this energy for crypto-mining in order to compensate for export losses with corresponding crypto-profits. North Korea, for example, is also suspected of using crypto-mining and cyber-attacks and ransomware to circumvent international sanctions and obtain foreign currency in the form of crypto-assets.
A while ago I predicted that the more important the crypto market becomes, the more politicians and financial regulators will want to regulate it. As soon as the crypto market starts to develop “systemic relevance”, the pressure to regulate or, in extreme cases, even ban this market will increase. The idea behind cryptocurrencies is precisely to be able to escape this influence of the “system” and to be independent of states and financial supervisors. At the same time, this is precisely what puts pressure on those same states and financial regulators not to lose control over a considerable part of international financial activity.
The sanctions, and in particular the circumvention of sanctions via crypto-currencies, now hold a burning glass onto precisely this situation. Recently, a ban on proof-of-work crypto-currencies in the EU was already on the table, as they are particularly energy-hungry and thus harmful to the environment. A corresponding vote was averted at short notice. The MiCa regulation will further increase regulatory pressure. It is foreseeable that the MiCa regulation will follow a similar course as the Payment Services Directive (PSD), namely it will be further refined and tightened in various iterations. The regulatory regime will have to adapt and adjust to the changing market. The circumvention of sanctions and money laundering laws by crypto markets will therefore inevitably have consequences in the form of tightening regulation. The responsible politicians will certainly take the opportunity to demonstrate the moral reprehensibility of circumventing sanctions on the basis of this war of aggression that violates international law.
For crypto enthusiasts, the current situation is both a curse and a blessing. A blessing, because the major cryptocurrencies are currently receiving increased attention again – which is normally a positive thing, because the spread typically increases through greater attention. At the moment, however, the attention is being drawn mainly by the sharp drop in prices and the destruction of capital, as well as the accusations of money laundering by politicians. But it is also a curse, because the dream of money away from any state and regulation will be increasingly destroyed.
Europe is making progress and, with the Markets in Crypto Assets (MiCA) regulation, it is primarily the platform operators who will be held liable through a licensing obligation and thus wants to bring about traceability of money flows and, in particular, combat money laundering. But climate protection requirements, the right to reclaim stable coins and the first regulatory approaches for NFTs are also part of the new regulation.
We can be very curious to see how the further evolution of cryptocurrencies will look in line with the growing regulation. The crypto pioneers will certainly not become tired of looking innovatively into the future and coming up with new ways and means to make themselves a little more independent of the “classical financial world”.
How Apple is turning the payment industry upside down and where the journey could end up…
In the relevant information sources of the payment industry, Apple appears with ever new rumours and efforts to launch new payment services (“Apple will soon no longer need a merchant payment terminal”) or even to enter the market as an independent financial institution (“Apple’s “Breakout” project – on the way to becoming an Apple Bank? “).
The birth and outstanding development of Apple Pay
But what is Apple actually up to? And why does one of today’s biggest technology companies have nothing better to do than to try to establish itself in one of the most regulated markets in the world? We try to sort the past, present and (presumably) future developments and approach the question of where the payment journey at Apple could be heading to.
Launched in Germany in November 2018, Apple Pay marked the beginning of a new era for many local payment enthusiasts. Driven by a lot of hope for a domino effect that would finally set in motion the somewhat sluggish development of electronic payments in our cash-loving country, one could read in the Finanz-Szene newsletter on 6 Nov 2018: “Thank God, Apple Pay is coming, now, actually.”
It was not only the prospect of winning 3 to 6 bottles of sparkling wine, but also the hope that the German vacuum in cashless payments would soon come to an end that probably led the author to write these lines. Since then, Apple Pay has performed excellently in Germany. According to a GfK study from the summer of 2021, one fifth of Germans now use mobile payment, of which Apple Pay is just behind Google Pay (34%) with a 32% share.
The popularity of Apple Pay is particularly high among the younger generation
Among the younger generation in particular, however, the share of Apple Pay is much higher and reflects the popularity of this payment method among younger people. These figures are likely to rise even further over the next few years. We see this as excellent for a cash-affine country like Germany. But will Apple be satisfied with this? Especially since Apple Pay is merely an additional layer and is based on adding a virtual (digitized) debit or credit card into the e-wallet. Unlike Android, which can also be used by third-party providers, Apple has not opened up the interface and therefore only Apple Pay is available for iOS fans. The reason for this, according to Apple, is to protect customer data. How long this will continue (at least in the EU) is questionable. The European Commission has been investigating this since June 2020. These have now resulted in an antitrust complaint, to which Apple must respond. The last word has certainly not yet been spoken and we will be highly interested to see when Paypal, for example, will be able to offer its tap-to-pay function, which is currently only available on Android, on iOS as well.
The classic 4-party model of Visa and MasterCard
However, the search for further services along Apple’s value chain should by no means end here. To ensure that we do not forget any aspect or party of a payment transaction, we take the classic four-party model of Visa and MasterCard as a basis to examine where Apple’s payment journey can still go. The model introduces the four parties involved in an international debit and credit card transaction and their respective roles in card acceptance.
These four roles are to be used to derive the existing features but also possible future developments with regard to Apple and payment.
The (end) customer...is king – especially at Apple
We are talking about ourselves, or rather each of us who uses an Apple smartphone, for example, but also an iPad or the Apple Watch. In Germany, in the case of the iPhone, this represents almost 30% (April 2022) of smartphone owners. Among 18 to 29-year-olds, again, Apple is ahead. And as far as Apple Pay is concerned, more than 2.5 million Sparkasse customers, for example, are already able to get by and enjoy without a purse thanks to almost universal acceptance at the POS (if it weren’t for the corner pub I trust). In e-commerce, however, the numbers are significantly lower. And since the majority of retail banks now offer at least credit cards via Apple Pay (the Sparkasse also offers the girocard), most customers can now also be served. The issue of data protection has always played a major role in Germany. And this is where Apple supposedly plays in a big way. During the payment process via Apple Pay, the customer’s actual credit card number is never sent. Rather, for each card number, a Device Account Number is stored locally on the Secure Element chip of the device used (iPhone, iPad, Apple Watch). This chip is completely isolated and therefore not part of the backup. For each transaction, only this number is transmitted to the merchant and only the associated banking network can assign the device account number to the actual card number. According to Apple, this is to provide the best possible protection for sensitive credit card data. It creates security and trust and can be an important factor, especially in Germany, but it is not always a guarantee of success. Rather, Apple has scored with Apple Pay in the user experience, i.e. the very simple and intuitive use at the POS and e-/m-commerce. How can the payment process be implemented as simply and intuitively as possible from the customer’s point of view?
2 clicks. That was the requirement that Apple set for the card-issuing institutions as a condition for digitization, i.e., to add the card to the wallet. At least that is what Mr Schmalzl, as a member of the board of the Deutscher Sparkassen- und Giroverband (DSGV) as the leading umbrella association for the German Savings Banks Group, revealed at the EHI Payment Congress in April 2022 regarding the implementation og Apple Pay with the girocard for e- and m-commerce. Everyone can certainly imagine that the savings banks’ approach envisaged a multiple of these clicks. After much back and forth, the savings bank ended up with exactly 2 clicks. Only 2 clicks and Apple Pay is ready for use – thank you Apple at this point for your perseverance! But that is only one aspect of the user experience. On an iPhone with Face ID, you only have to press the side button twice and after the very quick authentication by Face ID, you can pay immediately. So, it’s a very fast and efficient as well as customer-friendly payment that is gaining more and more followers among Apple disciples. And Apple is trying to improve this UX more and more, which is of course welcome…
The Issuer – Go Where the Money is…
Apple makes no secret of its basic strategy of consistently expanding its business where it can create significant added value for the customer in terms of convenience and user experience. This applies to both hardware and services that are offered. It is quite clear that Apple is not interested in a payment-specific hardware solution. This would not fit in with the credo of simplification for the customer. Rather, it is the transaction-based payments, e.g., a share in authorisation or service fees, that is the economically interesting aspect for Apple. Something similar can be seen in the App Store and the apps and digital services offered there, where Apple also earns good money with transaction-based payments. The logical and sensible step was the launch of Apple Pay. With Apple Pay, Apple is now the third largest mobile payment provider after Alipay and WeChat Pay. Just like the two competitors from the Far East, Apple Pay is only an additional layer or e-wallet in which payment cards from various issuers and schemes can be integrated and added. It goes without saying that Apple does not offer this service free of charge. What was interesting here was the approach of collecting these fees (allegedly corresponding to a significant share of the interchange fees) from the issuers, who are responsible for the digitisation and provisioning of the issued debit and credit cards and thus have to afford the layer and the branding Apple Pay accordingly. Good for those who enjoy the increased convenience through Apple Pay, i.e., merchants and customers. Speaking of convenience. Unfortunately, Apple is still dependent on issuers and their card deposits in Apple Pay for this. However, there are limits to the user experience and the additional functionalities and services offered. Therefore, Apple took the next logical step.
When will the Apple credit card come to Germany?
This is what will happen in the USA in August 2019 (no, this is not a remake of “Beyond Belief: Fact or Fiction”) with the launch of the Apple Card. Probably to lower the barrier to entry, Apple is cooperating with Goldman Sachs as issuer. This is also a novelty for Goldman Sachs, which has not been active in the private customer business so far. Now, more than two and a half years have passed, and outside the United States one still must be patient. If we take the rollout of Apple Pay, which was also available in Germany four years after its launch in the US, we will not have to expect a launch before summer 2023. As with Apple Pay, Apple will probably be slowed down by the European regulatory freedoms. To possibly get a grip on this, rumours of a $150 million acquisition of the up-and-coming open banking company Credit Kudos from the UK by Apple made the rounds in March of this year.
Do we see here the next strategic step towards the launch of the Apple Card in Europe? Or does Apple even want to go one step further and become active as an issuer or acquirer itself? Before we get to that, let’s take a look at another stakeholder in every card transaction.
The retailer – multiplier for Apple…
In February of this year, a solution was presented in Cupertino that is supposed to outstrip the previous solutions. With “Tap to pay”, merchants will soon be able to process card payments without having to use additional hardware. All that is needed is an iPhone XS or newer. This will be done with the help of NFC technology, which is already used for POS payments via Apple Pay. It is interesting to note here that buyers do not necessarily have to pay via Apple Pay. In addition to Apple Pay, credit and debit cards as well as mobile wallets are also accepted for contactless payment. What exactly “mobile wallets” include has not yet been further specified and only time will tell.
However, Apple does not (yet) want to take care of the processing itself. There is no way around a contract with a supporting payment service provider (PSP). Initially, the choice is between Stripe via the Shopify point-of-sale app or the payment darling from Amsterdam Adyen. Presumably, other providers are expected over the year.
Who is Apple cutting out of business with this? First and foremost, providers of integrated POS solutions for small and micro-merchants such as Square and SumUp, who will have to struggle with their hardware solutions. Which brings us to the supposed target group of the new SoftPOS solution. For small businesses with a small number of terminals and manageable transaction and turnover figures, as well as seasonal and thus strongly fluctuating usage figures of card payment processing hardware, it should be very interesting to use the iPhone that one (ideally) already owns for this purpose. An expected and comparatively high transaction fee is likely to be accepted in many cases. The high fluctuation in the corresponding sectors (above all the catering industry) should play into Apple’s hands with the initial limitation to selected payment service providers and the typical unwillingness of users to change.
Well, there are various rumors and reasons why Apple does not want to leave it alone with Apple Pay, Apple Cash (Apple’s P2P payment service in the US), the Apple Card and “Tap to pay”. If we look again at the 4-party model, we see that 3 out of 4 participants (at least currently in the US) are already served by Apple solutions. The customer through Apple Pay, his issuer or scheme through the Apple Card, the merchant, and his front end through Tap to Pay. As we know, the only thing missing is the acquirer, i.e., the merchant bank, where Apple currently does not (yet) have a foot in the door. Or maybe it does?
The acquirer – thus closing the circle…
Bloomberg reports that Apple is working with its partner Goldman Sachs on an in-house “Buy Now Pay Later” feature with the working title “Apple Pay Later” and is challenging competitors such as Paypal, Klarna and Affirm to a duel. This would also fit in with other reports that Apple also wants to offer a subscription model for its own hardware range. Cashback models are very popular in the US. It is therefore obvious that this is being promoted as one of the core features of the Apple Card.
Apple Pay vs. VISA & Co?
We hear about many services that Apple offers around the purchase of software and hardware and wants to create new purchase incentives for customers, but is it realistic that Apple will shake up the payment industry to such an extent and go toe-to-toe with big names in the industry like Visa, Mastercard, Stripe, Square, etc.? It is unlikely that Apple will rely on partners like Goldman Sachs in the long term and thus make itself dependent and vulnerable. It would only be consistent for Apple to take care of this itself sooner or (according to reports, they probably have trouble fighting their way through the regulatory jungle, so it is more likely) later and thus expand and acquire further vertically along the value chain. For Apple, it is always about making their hardware and software work hand in hand. This way, the complete check-out at the point-of-sale can be covered. Why not offer its own integrated checkout system in the style of Orderbird or Lightspeed? If an own Apple Bank for private and business customers is also founded, the circle can be closed, and a holistic payment processing can be offered.
However, a huge problem, of which Apple is certainly already aware, is acceptance by merchants. And the complexity of convincing a critical mass of merchants to use it is probably the main reason for the market power of Visa and MasterCard and the fabulous margins that the duopolists can charge for their services. This is where Apple could go the extra mile and approach merchants directly. More likely, however, is the Apple-typical approach of relying on strong regional and international partners, at least initially.
More theory than reality?
One big advantage Apple has are there loyal followers. Once you enter the Apple universe, you rarely leave. And it is precisely because of this loyalty of Apple customers that good marketing, such as bundles or simply a smart-looking card (be it virtual or physical), is sure to bring them to the people.
Another advantage is the dual use of the iPhone or iPad by the customer and the retailer. For the retailer, this means that (s)he can save him-/herself another device with monthly fees and additional contracts. However, this is only interesting until Apple takes on such a dominant position in the market and tightens the price screw on the retailer side as well.
However, we see probably the biggest advantage in the convenience, the uncompromising user experience, the all-encompassing ecosystem for both sides of a transaction business and the enormous network effect in the market. It is simply convenient to use one device for everything, both as a merchant and a customer. And the smartphone is now always with you.#
Where does Apple’s journey end up?
Despite all the advantages, we must not forget one thing. The payments industry is a very regional business. An enormous amount of work must be done per market or region, be it for the own set-up or through acquisitions, to meet the regulatory and licensing requirements. Compared to Apple Pay, this is many times greater for a fully comprehensive banking operation. The legitimate question arises as to how much staying power Apple will demonstrate here over the next few years and how far they want to move away from their actual core business.
Apple makes it difficult for us to figure out where the payment journey will go. We dare to allege that Apple itself may not yet be able to assess 100% where the most attractive product enhancements for customers will ultimately lie. What is certain is that payment has never been so important at Apple and that Apple is in a position to change the payment landscape significantly. We will see what this means for the industry and for us as customers. We will stay tuned!
Who does not know them, the proud national anthems of the individual countries of our European community of states. And not infrequently, these usually catchy melodies are also accompanied by eloquent lyrics, which are supposed to characterize the respective country and the people. We Germans, of course, also have such a “jewel” lying in the drawer and boast, despite the dark stains in the history, to document exactly this text with our liberal and peaceful view of society.
Now, however, the question immediately arises as to how far the heroic intro of our German anthem “Einigkeit und Recht und Freiheit” (“unity and justice and freedom”) has really penetrated our daily life and the processes associated with it. At this point, I do not want to shed light on the social adaptation of this maxim – which would certainly go beyond the scope of this article – but rather question our European payment landscape in the change of the last months/years against this background.
Many aspects, caused not least by the Corona pandemic, have quickly acquired a “taint”, especially with regard to payments, if one takes a deeper look at the latest decisions of various supervisory bodies and their implementation or adaptation to the current payment processes.
The European financial and payment supervisors
The EBA (“European Banking Authority”), as the supreme supervisory body for European payment serbices, has set itself the task of enabling banks and payment service providers, among others, to compete fairly within the EU. This is an ambitious goal – not at least because of the still strongly national payment preferences of European citizens. However, in order to give wings to this eagle of “cross-border payment services”, it is not enough to simply give the European payment service providers a well-known energy drink from the “Austrian Alps”, no, clearly more far-reaching measures and also their control are required in order to create truly uniform conditions and thus promote competition.
For this purpose, the EBA drafts pan-European requirements (such as the SCA – “Strong Customer Authentication” – as the last major measure), which are then to be converted into national law by the national supervisory bodies (BaFin in Germany). BaFin (or its European equivalents) is not only the national implementing body, but also the national supervisory body.
From these remarks it already becomes clear that law is supposed to produce unity. And it is also clear that control of this right always costs a little freedom. To what extent this has succeeded so far and whether it can also succeed in the future, we want to take a closer look in the following.
Unfortunately, the European payments market is far from unified. The multiple national payment methods and their operators are far from using standardized procedures (both procedural and in terms of liability law). Favoured by the mostly market-dominating position, it is then also these national (local) payment methods which usually enjoy the greatest popularity with the nationally resident user. Thus, the market power clearly lies with exactly these local payment methods. And since the hen chases the egg – or was it perhaps rather the other way round? – non-national providers have an even harder time winning the favor of those willing to pay outside their own country’s borders.
It is therefore not surprising that an internationalisation of the girocard has never taken place, although this was already foreseen in the protocols as well as in the settlement definitions (e.g. the fee calculation and settlement phase 2 of the girocard). However, this is not a purely German phenomenon, as other European examples such as iDEAL (Netherlands), Multibanco (Portugal) or Bancontact (Belgium) have also remained at national level.
We in Germany in particular have also learned from the experience of the paydirekt implementation that disagreement between the operators (banks) leads to innovations not being able to develop as desired (if paydirekt could even be described as such at the time of its introduction). On the contrary, the still ongoing disagreement e.g. on efforts like “#DK” lead to parallel initiatives on a European level such as “European Payment Initiative” (EPI) gaining more and more importance and threatening to overtake national efforts. So as long as the chef does not provide a uniform recipe for the soup, not much more than a lean porridge can emerge.
There is an undisputed consensus on the need to protect national payment methods from “hostile attacks”. And in doing so, you don’t look at the size or combat equipment of the attackers. But that’s exactly the weakness that attackers like the major credit card organizations exploit. We have seen such a fight to the detriment of a national debit card system, when in March 2011 the last Switch/Solo cards in the UK finally disappeared – and that through a clever takeover of MasterCard into their Maestro portfolio.
The national operators must therefore be warned that the disunity they themselves cause also permanently incites the wolf lurking in the bushes, just waiting for a moment to take over that is favourable for him. Sometimes this does not even require a special hunting trick. No, sometimes also the national operators are so disunited in their strategy finding among themselves that said wolf comes with a little patience automatically to his victory and/or his booty. For example, the girocard has thoroughly missed the move into e-commerce, even though the workaround via ApplePay at the savings banks has been providing quasi-e-commerce functionality since July of this year. Such failures not only weaken national payment systems, they also make them vulnerable. And in such a case, the wolf likes to tear the weakening sheep.
However, if one observes the efforts of the European nationally operated payment systems, one can unfortunately only draw one conclusion in terms of unity: “So there is still cross-border agreement to remain disunited. “
When Herr von Fallersleben wrote the “Song of the Germans” in 1841, he may have deliberately put unity before right. Perhaps also with the truly pious wish that a people living in unity must lead a community in a right way – and here “right” has nothing to do with geographical orientation! But this idea remains, from historical experience, for the majority a really “pious wish”. Especially in payments with its derivative “e-commerce” there are so many grey areas in which banks, payment service providers, merchants and also buyers “creatively live out” their freedoms that it is or was inevitable to put the law as a regulating authority before unity.
And this is where the supervisory bodies come into play, which, with their specifications and rights, want to or should enable at least an approximately uniform understanding and implementation of payment-relevant processes. These national supervisory authorities, which are orchestrated by the EBA, are the bodies that must implement the technical requirements in national law. However, history also shows that not all implementations into national law are equal. For example, the German financial and payment supervisor BaFin is considered a very restrictive institution in a European comparison, which tends to apply “thumbscrews” in addition to the “EBA handcuffs”, whereas other supervisory bodies would perhaps only apply a loose shackle instead of the “EBA handcuffs”. As we can see, law does not always create unity, especially when European law can be implemented differently or at least differently from one another at national level.
In the past, the EBA has repeatedly formulated a wide variety of requirements and justified them mostly with the protection and/or uniform/comparable use of the payment users, i.e. the purchasers. These requirements were then mostly to be implemented by the processors in the payment processing, even if the requirements themselves were directed at the payment institution providers (because only these are also regulated by the corresponding supervisory bodies). However, if we now look at the result of these requirements on the European payment’s market, we unfortunately have to conclude that, despite these “regulatory measures”, there is still a great deal of inhomogeneity, as we have also justified in the previous section. Of course, there are also positive examples of such regulations, such as the interchange regulation, which made interchange fees at the European level comparable with non-national/European payment procedures or schemes. Another positive example is the introduction of SEPA, although in this example, too, the market has again put a spanner in the works of the EBA’s timetable for the introduction date (similar to the SCA mentioned above).
In the implementation of the legal requirements, however, the scheme operators are still of decisive importance. Although they have to follow the national legal requirements, they often also retreat to their “golf club character” by trying to retreat to the “golf club” member rules defined by themselves. And those rules do not always follow the EBA rulebook 100% of the time. Last but not least, interchange regulation was only introduced across Europe in December 2015 because the major credit card organisations did not want to submit to the coercion of a European commission and took legal action against interchange caps all the way to the highest European court.
It remains to be said, then, that unity is not a good that matures by itself. It can only come about if there is a regulating body that describes and controls this agreement – at least this applies to the European payment market. It is therefore up to the legislature to keep potential room for interpretation as small as possible. And the EBA, as a central body, must fulfil precisely these tasks.
Freedom is a precious good and – as in all areas of life – it is exploited both positively and negatively. Payment service providers are and have always been very creative in the interpretation (or also “expansion”) of payment-relevant specifications. It is precisely this creativity that makes use of possible freedoms in payments to create new products as well as sometimes borderline interpretations of legal requirements, which can then provide (sometimes niche) markets with “market-friendly” solutions. The freedoms in European payments, which result intentionally or unintentionally from the legal requirements, can be used for two different motivations:
Positive use of freedom
New regulations defined by the EBA and implemented into national law via the national supervisors usually serve two objectives:
The introduction of the SCA has shown, for example, that a United Kingdom, which was still a member of the EU at the time, manifested a delayed introduction of the SCA compared to the EBA requirement in order to be able to provide the market with more and perhaps also better possibilities for SCA application in the transitional phase. Equally, when defining new products, payment service providers can also introduce new technologies that can bring a market advantage, especially regarding the first objective. A good example here is certainly Apple, which, for example, created an additional and then new identification option in the payment process with Apple Pay with Face ID in September 2017.
Negative use of freedom
Of course, freedom – just as in civil life – also offers potential that inspires the unlawful use of regulations. Often, existing law is also “stretched” in order to be able to expand freedom. And it is precisely this kind of “use of freedom” that enjoys particular popularity as well as creativity in the payment services market. Payments should provide the buyer/user with a wide range of different, secure payment methods as simply and securely as possible (and this is the aim of the EBA with all its guidelines), but let’s be honest, the product development of the payment service providers is oriented towards the merchant and his directive is: “Generate as much revenue as possible with as little risk as possible”. With this in mind, many new payment products are primarily focused on optimizing economies of scale for the merchant and only consider the risk aspect secondarily. Especially in the area of negative use of freedom, this “product strategy” naturally opens up even more potential if the payment service provider leaves the risk out of the product description and unwittingly leaves potential damage limitation or damage assumption to the merchant. Such new products usually only have a limited life span, as their providers or at least the product concerned disappear from the market with the first super-GAU of a merchant default.
The control of freedom
Freedom is always an area defined by borders, and these borders need to be controlled in order to protect freedom. However, it is precisely this control that is an essentially important part of the tasks of the national supervisory bodies. And again, these control duties are carried out in very different ways by the various national supervisory bodies. It should also be noted, however, that the supervisory bodies usually monitor payment service providers that do not hold full banking licences less closely or with less frequency than they do, for example, with companies that hold full banking licences. The Wirecard debacle is an unfortunately prominent, if not very laudable, example of this thesis here. Thus, deducing from historical truth, it is more likely that a payment service provider will “collect” a warning from a credit card organization or even be “deprived” of its license if it defies said credit card organization’s set of rules than that the supervisory body will “deprive” it of its payment service provider license for the same motivation.
Hence – what follows from this or what do we learn?
Freedom is therefore not a guarantee for an optimization of products/features. Rather, it is a guarantee for the creation of new payment methods/features. The rules and regulations of the EBA and its national supervisors are intended above all to restrict creativity in the area of the negative use of freedom without impairing the positive use of freedom. This is not always an easy process that supervisors have to make attractive to the market.
The standardisation of payment processes or systems at EU level is an ambitious idea that is not only intended to stimulate competition within the EU, but also to provide those willing to pay with a pan-European payment function or at least with products that are comparable throughout the EU. However, this project can only succeed if the supervisory authorities, promotes and uniformly regulates this project with sensible legal requirements that are, above all, adapted to the current market conditions.
The legal assessment in the conception of new European payment instructions by the EBA is certainly the basis of any change in the European payment market. However, if the aim is to achieve agreement across the various member states, special emphasis should always be placed on the established payment practice to date when designing and formulating such new payment instructions – and, as we have seen, this can vary greatly from one country to another. A purely legal approach to the implementation of a new set of rules is usually not sufficient. This has also been observed with the introduction of the SCA, where not only the market delayed the introduction, but also many details were subsequently added to the RTS (“Regulatory Technical Standards”) as comments of the EBA, which were not yet available on the introduction date of 14 September 2019 – but which inevitably arose in the course of the implementation.
If the market then succeeds in establishing such new or also amended payment innovations in agreement with the supervisory requirements, then at the latest the national supervisory body must again fulfil its obligation to monitor precisely these innovations. And in this process, the principle of “equal rights for all” must apply, which of course only works if the national legal requirements have also been manifested identically. However, it seems to me that achieving this goal is hardly achievable at the present time, or at least not lived out across the EU.
If today an “amended Mr. Fallersleben” were to write a hymn to the payment services world here in the EU, he would perhaps remember his old ideas of 1841, but then perhaps rather begin with “Equal rights create unity, which give freedom to all, but may also be protected”. And of course, there’s a rapped version of Beethoven’s 9th underneath, so as not to forget the contemporary European idea.
Now, of course, one can say that this maxim is certainly applicable to many areas of life – and that is also undeniably correct. However, a special feature of the payment market makes the implementation of exactly this maxim more difficult than in other cases of application, because in the European payment services universe the “Galaxy Patrol”, i.e. the various national supervisory bodies, is not only legislative, but also judicial and executive. And exactly the last task component is only lived in an insufficient way, which of course inspires the above-mentioned negative idea of freedom and thus counteracts homogenisation.
So, it remains to be seen how the EBA will steer the European payment services ship into a safe, international port…
Cryptocurrencies and the related purchase, custody or even investment of these assets have already arrived at the centre of the financially and technologically interested society since several years now. These assets, which initially could be described as completely unregulated and which to this day do not meet the official definition of the term currency, went through various peaks and lows. But Germany, as a member of the European Monetary Union, would not live up to its own stereotype if it had not already dared to make its own attempt to regulate these currencies before the official publication of MiCa regulation (Markets in Crypto-Assets) at the European level. Thus, a new class for the crypto value business was already defined with the fifth Anti-Money Laundering Directive, which is also reflected in the Electronic Securities Act (German eWpG). This development makes it clear that crypto assets of various kinds have found their way into the mainstream. The reproduction of already established financial products, such as the classic loan business or various (exchange-traded) funds, are emblematic for this development as well as the ingenuity of the institutional providers of the aforementioned products. The consequence of this entry into the mainstream and the accompanying “dumb money” can be identified as an explanation for the strong price fluctuations. Rising interest rates on bonds, government restrictions, pandemic and currently especially geopolitical impulses can also move investors towards classic investment options and drive the decentralised assets into a “crypto winter”.
Despite the declining prices of various cryptocurrencies, the increased interest in another initiative from the blockchain sector can be observed. This observation is called Non-Fungible Token (NFT) and promises nothing less than the digitalisation of valuable items as well as their democratisation on the blockchain. In contrast to this mission, the general public often hears about incidents of fraud (so-called scams) or astronomic prices for the certificate of authenticity of a monkey image. In this blog article, we therefore want to look beyond the supposed primary functions of a cryptocurrency, i.e. investment or payment, in order to take a look at the NFT trend.
However, before we get into the “lazy ape club” or the “minting” of a so-called non-fungible token (NFT), we would like to provide clarification on what is meant by a NFT in the first place.
What is a NFT?
Non-Fungible Token, or NFT for short, describes a digital proof of authenticity and ownership. Behind each of the abstruse-looking artworks is a unique and non-exchangeable data unit that is stored on a digital (decentralised) ledger. Proof of ownership is made possible by storing the data unit on the blockchain. Specifically, the proof of ownership is attached to the digitised value on the blockchain (mostly on Ethereum). In this way, objects receive distinctive signatures that make them unique. Essentially, a comparable technology is used as with cryptocurrencies. The difference, however, is that cryptocurrencies are “like-for-like” interchangeable, which in turn does not apply to NFTs. Even if a NFT is copied, the authenticity of the original can always be proven. Unlike a Bitcoin unit, each NFT is unique, so it cannot be exchanged for each other. There is additional information stored in the file that goes beyond just a currency and brings it into the realm of, well, anything previously known. As a result, NFTs have become collectible digital assets that hold value – just like physical art has value.
A special feature in this context is that a NFT issuer can create several NFTs of the same content (an edition like a comic book) or split a value into countless parts and sell them. The former was most recently implemented by the “Bored Ape Yacht Club“, which created and sold 10.000 NFTs with different “Bored Ape” images. The latter was demonstrated in the sale of “The Merge“. In this NFT project, 29.983 collectors bought a total of 312.686 parts of a work of art, which was sold for a total of 91,8 million US dollars and thus displaced Jeff Koon’s “Rabbit” from 2019 (91,1 million US dollars) from first place in terms of the highest proceeds.
What does Minting mean?
This term is understood to mean that a digital source file is converted into a blockchain-based token that proves ownership of an object, such as an image, video or physical object.
In this process, digital objects are stored in a decentralised database. Once added to the aforementioned database, they cannot be edited, changed or deleted. The term minting is derived from the minting of a coin, as the digital file also receives an individual and unchangeable imprint. This process is similar to the creation of fiat currency when a physical coin is minted.
An example from practice
Since the concept of NFT or the creation of such an asset may sound very theoretical at first glance, we would like to use a practical example to explain the concept behind it in more detail. As a Frankfurt-based digital agency, “Online:Digital X GmbH & Co. KG” is in contact with a wide variety of clients in order to improve the client’s digital visibility and online marketing. The “Löwen Frankfurt” ice hockey team had a similar experience. They were trying to strengthen their digital profile and set up a marketing campaign for the club and its players. To make this possible, they wanted to put players and special pictures and snapshots on the blockchain. The material for this was sought from the club’s archives and shows 30 years of history about the club. Once a sufficient amount of information could be generated, this content was digitised and stored on the Blockchain. After the digital player cards were created, they were given away to fans who left a corresponding comment on social networks. Even though this form of marketing was new territory for the time being (the “Löwen Frankfurt” were the first ice hockey club in Germany with such a campaign) and the fans first had to be educated, the campaign was ultimately a complete success, as it not only strengthened the digital marketing profile of the club, but also created real value in the form of a NFT. Currently, the first NFT of this project amounts to about one coin of the currency Ethereum. Particularly with the promotion of the “Löwen Frankfurt” from the second to the first German ice hockey league, both the club and its players hope to be able to launch further marketing campaigns and to use the “Löwen NFT” to retain fans of the club for as long as possible.
Where does the enthusiasm for NFT come from?
Despite the fact that digital assets such as cryptocurrencies or NFTs are enjoying enormous success, no fundamental analytical value, apart from the proof of authenticity of each NFT, is recognisable at first glance. The question automatically arises as to which criteria are fueling the trend. On the one hand, it may be the hope of an asset that will only materialise after widespread use of “Web 3.0” and the associated environment controlled by user decisions. Ambitions generated by the virtual worlds created by “META” can give further impetus to such a movement. Certainly, the unregulated nature of the NFT industry may also attract early-stage investors and the very ones with the “Fear of missing out” (FoMo), before the “Dumb Money” enters the market to become the eventual recipients of these trend perceptions.
Certainly, one explanation, albeit a romanticised one, is that artists want to remove the intermediary, as is already the case with cryptocurrencies, in order to receive a fair remuneration. On the other hand, there is the possibility that, analogue to exchange-traded funds, a possibility should be created to enable less financially strong (private) investors to access an emerging trend that would otherwise remain closed to them. This would to a large extent include the concept of democratisation of “decentralised finance“. Despite the fact that various positive currents seem to emerge from NFT, these must also always be viewed critically.
All that glitters is not gold
In addition to the undoubtedly positive effects of such an innovation, negative aspects should not be ignored. Both the technology and the financial products in an unregulated market have downsides, which can involve various dangers and risks. On the one hand, there is the possibility that users with little experience in the cryptocurrency sector will become victims of a “scam”. In particular, this still very young topic and the associated lack of experience increases the associated risk. Due to the promise of high returns with low stakes, inexperienced private investors in particular can easily fall for a scam. In addition, there is the problem of expiry: even if a NFT does not threaten to decay with the same half-life period as a classic work of art in a museum, there is always the possibility that the ledger or the corresponding storage location (server) is taken offline or the password for a “wallet” is lost. Processes for recovering the valuable objects are rarely established. In conclusion, there is the possibility that the hope in the future value of a NFT acquired today, will not materialise in the sense of a gold-rush atmosphere.
What is the final assessment of the movement?
In conclusion, it can be said that NFT technology holds both opportunities and risks. If one sees the application in appropriately remunerating artists for their work or ensuring the authenticity of a work of art, NFT can be seen as a positive trend. This would make forgery scandals, such as that of Wolfgang Beltracchi, and the associated immaterial damage to various auction houses a thing of the past. It also seems conclusive that the artworks purchased today represent the state of the art of the next generation, regardless of whether this generation is called “Metaverse” or not. But at the same time, it must be critically assessed that, in addition to the great areas of application, negative manifestations are also becoming visible. For example, the creation and distribution of NFT projects with questionable value and sense of purpose can be mentioned. These are advertised by more or less serious providers to a less experienced audience with the hope of capitalising on their “fear of missing out”. Especially the price increases or “bull runs” that can be explained with the phenomenon of artificial scarcity are reminiscent of the dynamics of bitcoin after a halving of the proof of work yield. All interested readers can look forward to this phenomenon in 2024 (halving from 6.25 BTC to 3.125 BTC). Although there is a different rationale behind the Wirecard case, there is at least the danger that small investors will also “bet on red” in this trend and lose everything without reinsurance. In conclusion, in my opinion, it is necessary to assess whether the crypto- winter longed for by Vitalik Buterin (co-founder of Ethereum) and the accompanying sifting out of fraudulently motivated crypto enthusiasts will also arrive in the NFT space. If risk-seeking investors and providers taking advantage of the trend disappear, the objective of the NFT mentioned at the beginning, the digitalisation and democratisation of values on the blockchain, including its guarantee of authenticity, can find a meaningful long-term application. Historically, cryptocurrencies needed about 5 years in the mainstream before they gained respectability and appeal to both institutional and non-institutional investors.
It therefore remains to be seen whether the seriousness gained so far with regard to blockchain technology will also reach the NFT market or whether it is merely a short-lived trend.
Everyone is talking about Bitcoin. Does anyone own and use them?
For some time now, it has been hard to avoid the topic of cryptocurrencies in general and Bitcoin in particular. Everyone is talking about it. The press regularly reports the latest peaks or record plummets. A few days ago, I read an article about investment advice for crypto millionaires, as if this is what the average Handelsblatt reader is interested in. So, what will I do with my money if suddenly I become a crypto millionaire?
Unfortunately, I am not (yet) a crypto-millionaire. So far, I have come into contact with the topic of crypto-currencies and the mathematical and technical background mainly through my professional background and because I studied business informatics. I wanted to know a bit more about this topic and went on my personal discovery expedition and dared to do the self-test à la Jenke von Wilmsdorff. In addition, I wanted to dig a little deeper into this subject. Everyone talks about it, but is it really relevant in our daily lives and in the everyday life of payment service providers?
How mainstream is crypto by now? My personal experience report as introduction to the topic.
In 2017, I was at the first blockchain conference in Hamburg. At that time, the topic of Bitcoin and Blockchain was still a real nerd topic. My computer science degree made it easy for me to understand the cryptographic background. At that time, however, you needed quite a bit of expert knowledge to actually participate in this system or even to purchase coins like Bitcoin yourself. Despite my deep understanding of the matter and my background as a payment consultant, it would take until the beginning of 2021 before I actually dared to try it out for myself. I wanted to know it exactly. How easy is it to buy Bitcoins and how is the experience to store them? To cut a long story short – it is extremely easy to purchase Bitcoin.
Buying bitcoins via a bank
For my experiment, I use Bitwala. I first heard about Bitwala at the blockchain conference in Hamburg I just mentioned above. If I remember correctly, Bitwala wanted to build some kind of Transferwise or WesternUnion on a blockchain basis, i.e., make foreign transfers easy by converting the amounts for the transfer from various fiat currencies to Bitcoin and back. This is an interesting approach that other players are also trying to pursue today. At the time, Bitwala was still a very young, small start-up and has since changed significantly. Today, Bitwala is more comparable to an N26 with an attached Bitcoin & Ethereum wallet, a real neo-bank with a unique selling point.
Bitwala works together with Solarisbank as a BaaS provider and offers a real German current account, protected by the Germandeposit protection fund, Bafin-monitored and with its own IBAN and Visa debit card, so really serious. For me, this means that I don’t have to move somewhere through the darknet or on some dubious coin wallets with a very unclear sense of security. So, I downloaded the app, went through the fully digital onboarding process including video-ident. In less than 30 minutes, I had opened an account with Bitwala. The next step was to activate the wallet for both Bitcoin and Ethereum in order to actually use it. This process was also as simple as can be, all I had to do was write down a lengthy list of words with pen and paper that would allow me to recover my wallet for the worst-case scenario. I credited the account with a standard SEPA transfer from my house bank with a manageable 3-digit euro amount to give the whole thing a try. This process actually took the longest, over a day. My bank doesn’t seem to support instant payment yet. At the beginning of January 2021, the time had finally come: when the money arrived in the account, I was alerted by a push message and immediately got to work – within a few seconds, I had invested half of the money in Bitcoin and half in Etherum. Out of curiosity, I’ve been checking the app very regularly since then and watching the development of my experiment. The value of my coins extremely fluctuates every day and not infrequently amounts to around +/- 10 %. As a normally very passive and long-term investor, this is a very unusual experience. You should therefore have strong nerves or, even better, have written off the money directly in your head. However, as we all know, the four months since the beginning of 2021 have been a very strong period for crypto investments and so I can currently look forward to a plus of around 100%. But I would not be surprised if this were to change dramatically at any time.
So what is my conclusion to this little crypto self-experiment?
It is extremely easy to invest in crypto coins, especially the very well-known Bitcoin and Ethereum, and there are now ways to do this via very reputable, supervised providers. However, such an investment, if you want to call it that, remains adventurous, very speculative and risky. The chances of profit seem considerable, but so are the risks of loss. For my little experiment, I have decided to wait for at least the first year of the holding period, so that I don’t have to pay tax on any profits. In addition, I am of course annoyed that I did not started this experiment, albeit with a small amount, in 2017 or earlier. As is well known, the last few years have brought extreme increases in value and my hope is that it is perhaps not completely too late to have jumped on this bandwagon. We will see what success this gimmick will bring. In any case, it feels much more like a lottery than an investment.
Paying with bitcoin in 2021?
In this self-test, I don’t perceive Bitcoin as a “cash substitute” at all, because I do have a wallet address to which I can have Bitcoin or Etherum sent and, in theory, I could also use my Bitcoin and Ehtereum for payment transactions. In practice, however, I have not yet come across the opportunity of using Bitcoin in any checkout in the real world, e.g., at amazon, PayPal (German version), Apple Pay and others. The only option I happen to know about from a speech is Lieferando. However, since I have pre-set Apple Pay as the payment method here, I am not even tempted to change this. In a thought experiment, it also seems very unnatural and impractical to pay BTC 0.0003089010442636215 for the next pizza.
After my personal experiences, I would now like to take a somewhat broader look at the relevant major players, who are also approaching this complex matter in steadily increasing numbers and trying out new things as well as questioning what exactly it is all about.
The big players get involved – an overview of approaches and backgrounds
Tesla, headed by Elon Musk from the so-called “PayPal Mafia”, recently announced in a very public way that it would invest the considerable sum of up to $1.5 billion in Bitcoin and hold cash reserves in Bitcoin accordingly. In addition, Tesla has announced that in the near future, customers will also be able to pay for their new Tesla with Bitcoins. Recently, it was revealed that Tesla made around $100 million in profit from its crypto investments in the first quarter of 2021 alone (around ¼ of total profit). This initially makes this measure look quite successful, but at the same time, one has to wonder whether Tesla is not unnecessarily adding large risks to its balance sheet due to Bitcoin’s extreme volatility. Musk is a self-confessed crypto fan and connoisseur of the matter and has recently repeatedly attracted attention with enthusiastic tweets about the “Doge Coin”, which was intended as a fun currency and has developed even more rapidly than Bitcoin in recent months. Elon Musk alone already seems to have enormous market power through tweets. His tweets regularly fire up the prices or even cause them to plummet drastically at times. One may well ask whether an investment of a company like Tesla in such a volatile financial instrument, with the simultaneously very high responsibility for the meanwhile huge car company and its thousands of employees, is not to be classified as grossly negligent or as a brilliant move. At the very least, it is extremely risky. However, if we look at it more objectively, there are logical reasons, e.g. for cash management in foreign payment transactions, which is a challenge for any global company, such as Tesla. Wire transfers and conversions to other currencies, supplier payments across the globe, and the need for a global network of accounts and banks – Bitcoin doesn’t need all that. With Bitcoin, low-cost, direct payments of any amount are possible across countries, without the need for correspondent banks and clearing cycles. This can lead to significant speed advantages and cost savings. The only question is whether these savings can really outweigh the extreme risks to the balance sheet? Especially for a company like Tesla, which is committed to environmental protection, Bitcoin is a tricky choice, as the network is known to be extremely energy-hungry. Elon Musk seems to have realized this and was forced to pull the ripcord a few days ago and suspend the acceptance of Bitcoins as a means of payment until the mining of Bitcoins has been converted to sustainable energy sources on a large scale. These days, this happens mainly in countries with low energy costs, such as China or Kazakhstan, and there typically with energy from non-renewable sources. However, the Bitcoins acquired by Tesla are not to be sold. This news was followed by a general price drop for Bitcoin and many other cryptocurrencies.
As the first of the major credit card organisations, Visa announced in February 2021 that it will directly support cryptocurrencies in the future. It wants to provide banks with a software interface through which payments with cryptocurrencies can be integrated into its own offering. The offer is to be launched within this year. Visa is relatively slow in approaching the topic. Basically, Bitcoin or cryptocurrencies in general could also mean significant cost savings and speed gains for Visa, especially in foreign payments. With Bitcoin, there would no longer be a need for clearing cycles, which could enormously speed up processing in one’s own network. To be honest, however, cryptocurrencies also mean above all that payment networks such as Visa would, in extreme cases, no longer be needed at all. In this respect, the approach to cryptocurrencies also means, above all, a confrontation with the greatest threat to one’s own existence. At present, it is primarily the lack of distribution and relative complexity for normal end users and merchants that protect Visa and other payment providers from the new digital challengers.
After Visa, Mastercard has now also announced that it will open its network for cryptocurrencies in 2021. The prerequisite is that all cryptocurrencies approved by Mastercard must comply with the laws applicable in the respective area of use. Mastercard expects stablecoins to gain acceptance among end customers. As with Visa, cryptocurrencies are generally both an opportunity and a risk for Mastercard. They are an opportunity because they can improve processing costs and speed enormously. They are a risk because they have the potential to push Mastercard into irrelevance or to eliminate the man-in-the-middle. It is understandable that Mastercard is focusing primarily on stablecoins (and this will also include the already much discussed and expected digital euro), as this means security for Mastercard as well as for merchants and consumers, and the enormous fluctuation risks as with Bitcoin do not pose a threat here. Stablecoins with a central trust centre (i.e., no distributed ledger technology) also mean above all continued control over the payment network for central banks and payment processors and clear speed advantages, i.e., also better scaling.
PayPal first started in the US by enabling its customers to hold cryptocurrencies in a crypto wallet within their PayPal account. Recently, it was announced that PayPal will also enable payment with Bitcoin as a checkout option for merchants and end customers (again, initially only within the US).
PayPal is thus experimenting with cryptocurrencies the most and can be considered as one of a few heavyweights of payment traffic. For PayPal, too, the use of e.g., Bitcoin means significant cost and speed advantages in international payment transactions. PayPal could achieve significant advantages if it manages to keep the coins as long as as possible in its own network, e.g., via sidechain technology, i.e. in such cases PayPal would no longer incur any network fees at all and could keep the monetary values permanently in a self-controlled network and would also be largely independent of banks and other payment providers such as the large credit card organisations. However, this is certainly a very extreme vision for the time being, and one that is still a long way off. However, since PayPal’s biggest cost item is the fees for banks and payment networks, it is absolutely logical to look for and find ways to reduce or, ideally, even eliminate these costs.
The rollout of software solutions for the acceptance of cryptocurrencies at classic POS terminals was recently announced by Nets/Concardis in cooperation with the Austrian software provider Salamantex. Experience has already been gained there in pilot projects in recent months and the solution is now to be rolled out throughout Austria for all merchants. The prerequisites are a corresponding contract and a crypto-capable terminal equipped with the appropriate software for this purpose.
Initially, payments using Bitcoin, Ether and Ripple will be enabled. The addition of other currencies, especially sovereign ones such as the anticipated Digital Euro are being considered. According to Nets’ press release, traders can choose whether settlement will be in euros (at prevailing conversion rates) or the cryptocurrency in question. The press release states that the trader can receive his transaction amount immediately without the risk of fluctuations in the conversion rate. In the case of settlement in cryptocurrency, it would actually be theoretically possible for the respective payment to be made directly to a wallet of the trader. In the case of a conversion into euros, a collecting by Nets would presumably have to take place with subsequent settlement. On the subject of costs, there is talk of “standard market” fees in the amount of credit card fees.
It will be interesting to see how such solutions, where a direct transfer of value between customers and merchants would actually be possible, will be monetized for payment service providers in the middle. If the payment service provider is not involved in the direct flow of money, it would also have no corresponding financial risks and thus a corresponding remuneration (such as for credit card payments) would not actually be appropriate. In such cases, the purely technical service of enabling the transaction would have to be priced. In cases where the payment service provider performs a collection and corresponding conversion into fiat currency for the merchant, on the other hand, a corresponding fee would be justified. The only question here is whether this is in the interest of the inventors of decentralized cryptocurrencies, who would like to make precisely these intermediaries superfluous. It will be interesting to see how these use cases and pricing models develop and are presented in real life.
Instant Payment, EPI and CDBC (Digital Euro)
The major players on the market are also facing increasing headwind from the growing number of European government and private initiatives. The most important of these are Instant Payment, which is intended to accelerate payment transactions in Europe, EPI, which has set itself the goal of creating a new payment procedure at European level as a counterpart to the major credit card schemes and wallet providers, and, closely related to this, the planning of the digital euro, as a digital version of the euro analogous to a centrally managed cryptocurrency. The competitive pressure in the market surrounding the dominant payment methods in Europe is therefore constantly increasing. On the one hand, it is important for the European players to create a counterweight to the dominant American corporations, and on the other hand, to counter private or even anonymous decentralized payment networks such as Bitcoin. At its core, it is about maintaining control over payments and strengthening trust in European institutions and payment providers in Europe. Each of the parties involved, whether at the private or state level, is pursuing its own particular interests here to assert itself. The keyword MiCA (Markets in Crypto-Assets), for example, conceals the idea of a European regulation of the crypto market. A corresponding regulation is expected to come into force at the end of 2022.
A look into the future
There are now several thousand cryptocurrencies and a multitude of other private and state initiatives. The market is really confusing and is constantly becoming more complex. At the same time, the barriers to entry are falling in many places, making it increasingly easy for ordinary citizens to come into contact with cryptocurrencies and to experiment. A look into the crystal ball suggests that the topic will continue to grow in relevance. Is the topic already so mainstream that my grandparents would deal with it? I would say no. Nor would my parents. Neither would most of my acquaintances. But I think the time will come soon. The topic will become more relevant and the more providers and solutions come onto the market, the more relevant the reduction of complexity for end customers will become. The big market players are watching the topic very seriously and are experimenting with the first solutions. This is understandable since they are in serious danger of becoming increasingly irrelevant due to technological advances and the progress of making intermediaries redundant. We will see a much stronger lobby that will fight against the disempowerment of state and central bodies in payment traffic. Because in a world in which payment transactions are completely decentralised and function without central trust providers, nobody needs them anymore. This dystopia of the payment traffic world may still be some time in the future, but perhaps less far away than some people would like. The topic is not yet mainstream. But a few years ago, only real nerds had a Nokia Communicator in their pocket (or better, in their backpack). Today, everyone has their e-mails in their pocket.
I am curious…also when I will finally be a crypto-millionaire.
New Year’s Day 2020. Many are struggling with the well-known late effects after a night of too much drinking and one or two are perhaps sceptical for the first time about New Year’s resolutions that they so laboriously put together the previous week. But what then happens in the spring of 2020 is something no one has or could have taken into account in their plan of action. A small virus from the far China, named “Covid-19”, was to develop into a pandemic in a very short time and hold the entire globe in a firm grip from the spring of 2020. The restrictions in public and private life that became necessary by the pandemic have greatly affected and inevitably changed people’s lifestyles worldwide. The economic and social as well as socio-economic consequences are difficult to foresee or conclusively to predict even after a year of “covid confinement”.
A collapse in economic power (due to various restrictions and/or a wide variety of lockdowns), restrictions on the freedom to travel, the special protection of risk groups, mental overkill of care personnel and much more are the effects that we all perceived at least informally in 2020. The payment industry certainly paid special attention to the resulting changes in the purchasing and payment behaviour of citizens who are so restricted.
At the same time, however, the payment world has also saved and transferred an old boil from 2019 to 2020 – the “Strong Customer Authentication” or SCA, which, according to the European Banking Authority (EBA), had to be switched on by 1 January 2021. At the beginning of 2020, every payment service provider is likely to have counted the upcoming SCA adjustments in its payment systems among the necessary evils rather than among the good resolutions for 2020.
If we look at the past 12 months, we can state with certainty that the SCA mandate, in coexistence with the pandemic, has greatly changed the payment world and even woken up old acquaintances of the payments as from a “Sleeping Beauty” sleep. Perhaps in this case it was not the fair prince who kissed these candidates awake from their “sleep of the century”, but rather the two frightening figures Covid-19 and SCA, which accelerated the awakening with their ugly grimaces.
As we are well aware, at the beginning of 2020, the region around the 11 million metropolis of Wuhan in China “exported” the virus. This then missionized the globe in the shortest possible time in an unprecedented manner. Here in Germany (as well as in many other European countries), the first peak was reached with the first lockdown on 23 March 2020. From a virological point of view, a worldwide spread in only three months can definitely be considered a success.
Compared to this, the SCA measures that were carried out in the same period were rather small, even though they were partially intensified (e.g. at the issuers). Due to the mandates of the credit card organisations, which of course defined their own milestones for 1 January 2021 in line with the EBA’s master plan, the card-issuing institutions certainly had to carry out a significantly higher implementation effort by April 2020 than was the case on the acceptance side in the same period – hence only a partial effort by the payment service provider ecosystem.
But also on the acceptance side, mandates from the credit card organisations were defined as requirements and applied into their calendar, which then hit them from the middle of the year onwards (EMV 3DS2.1+ mandate as of 01.07.2020 and the EMV 3DS 2.2 mandate for Visa as of 18.10.2020). This ecosystem on the acceptance side – consisting of acquirers, their processors, the payment service providers, the network service providers and the 3DS2 service providers – was therefore forced to technically adapt to these enhancements in due time.
Oh yes, and then there was another not entirely unimportant participant on the acceptance side, namely the merchant or payment acceptor. And this is where we recognised the weakness of the SCA definition. It cannot be said that the merchants in their very own role are a weak point for itself, but rather that the SCA by definition did not take this last link of the payment acceptance world sufficiently into account in the implementation mandate. The reason for this is once again the “chain of command” of payment surveillance, which has not been thought through conclusively and consistently to the end. Of course, the regulator and surveillance authorities (BaFin/EBA) can only regulate the regulated and supervised parties (Payment Institutions). But blindly trusting that these supervised parties will revolutionise the market on their own initiative and pass on the torment demanded of them to the “offenders behind them” was probably a little too short-sighted. The market is governed by the traditional “chicken and egg principle”. And following this principle, it was almost impossible for the payment acceptance providers to convince the merchants of the salutary benefits of the SCA if used.
Regardless of the SCA’s quarrels, the Covid-19 virus continued its success story and at an increasing pace.
On the payment acceptor side, the wheat was separated from the chaff by the middle of the year with regard to the SCA adjustments to be made. Those merchants who sold their goods via a direct sales model had quickly calculated at least a master plan that should enable them to implement the SCA in accordance with the applicable requirements by the end of the year.
Those market segments that sold their goods via indirect sales channels were much worse off. Due to the chronological separation of order reservation and payment capture, different technical service providers were sometimes entrusted with the processing of the individual tasks in the successive sub-processes of payment execution – sometimes even service providers contractually distributed over several points of payment acceptance. This sometimes made a SCA-compliant payment processing impossible.
The travel and car rental industry (T&H for “Travel and Hospitality”) was particularly affected, as reservations were often made far in advance of the use – and thus the collection of payments – for the respective services. The travel packages often booked via online travel agencies (OTA for “Online Travel Agency”) were collected by different service providers (hotel, airline, rental car, etc.) at a much later date. And for this procedure, even before SCA, these OTAs used virtual credit cards as a one-time mens of payment. With this instrument, the OTAs were able to bind the payer directly to themselves without the payment transaction being processed directly between the service provider and the cardholder. However, since it was known from the SCA definition that virtual cards were exempt from the SCA obligation, the use of virtual cards by the OTAs was thus used as means to an end. This renaissance of virtual credit cards was certainly not in the interest of the service providers, as it only alienated the cardholder even more from the service provider – especially since the OTAs did not provide this service without a corresponding contribution to the service provider.
With the SCA requirements, however, the demand for interactive data exchange between the service providers involved also became louder (use of the so-called MIT framework ). This demand in turn required extensive adjustments in the IT systems and communication protocols of the corresponding service providers. As already mentioned, the creation of this framework required a wide variety of adjustments at different service providers, which realistically made implementation at the turn of the year 2020/2021 impossible.
However, the credit card organisations recognised this shortcoming just in time and, due to the multiplexity of this service provider universe, created a possibility to bring about the affected transactions without the use of virtual cards and without the use of MIT frameworks through a corresponding MOTO labelling of the transactions. Of course, this also required adjustments in the marchant acceptance ecosystem, but it was much easier to realise because this “re-labelling” could be implemented centrally on the machines of the payment acceptance providers.
The MIT framework described above is certainly the last resort in the implementation of SCA requirements – especially if the business transaction is realised via indirect sales organisations such as OTAs. However, by definition, there are some conditions attached to the use of such a framework that need to be observed across the entire service chain. Equally, it should be noted that the acceptance channels used by these different service providers (ECOM, MOTO, POS, etc.) can sometimes be applied in one and the same MIT process.
And it is precisely at this point that an old companion that does not seem new to the payment world returns to the discussion podium: the creation of an “omnichannel solution”. The idea of using omnichannel products to collect payments that were authorised e.g. via an ECOM portal but which are later collected from the service provider via a POS device, and ideally also in compliance with the SCA – i.e. with the help of an MIT framework – is thus the logical consequence of the search for a cross-service provider and platform solution of a holistic MIT framework.
Predestined for the realisation of such a solution would be network service providers (who usually also offer ECOM and MOTO solutions) or PSPs, as both parties are already processing parts of this omnichannel solution on their platforms. It remains to be seen who will be the first to take up the baton in 2021.
In 2019 and 2020, we have already seen two renowned PSPs in Germany (Computop and Adyen) expand their ECOM/MOTO platforms to include POS business. Certainly, this move should be seen primarily in the context of the idea of expanding the service portfolio and the associated market segments. However, it also offers the perfect jumping-off point for the realisation of an omnichannel solution. Network service providers should therefore now be warned to expand their platforms in the direction of omnichannel. This is the only way their platforms can handle all business transactions in a SCA-compliant manner in the medium to long term. In addition, there is the increasing number of ECOM transactions, which, not least due to the Covid-19 pandemic, has triggered changes in the purchasing behaviour of citizens and is prompting network service providers to rethink. It remains to be seen who will be the first to take up the baton in 2021.
The bottom line is: Covid-19 and SCA in cooperation have shifted payments in the direction of digital payment transactions (this also includes the reduction of cash payments) and also demand cross-platform solutions in the sense of the omnichannel approach. Even though the SCA appears to be in full force , it will continue to have a significant impact on the development of payment transactions in 2021.
 MIT stands for “Merchant Initiated Transaction”. This transaction type is exempt from the SCA and can be used when a merchant wants to collect payments without the cardholder being present. The use of an MIT framework in connection with “indirect sales” transactions is a preferred approach of the credit card organisations for the T&H industry but requires adjustments in the systems of all affected service providers in this processing chain and also requires SCA-compliant communication between these affected service providers with additional SCA values.
 In full” here includes the EEC-wide “ramp up” plans of the national surveillance authorities, which partly provide for the 100% implementation of the SCA in monthly steps until the end of March 2021.
Contactless and cashless payment? One scenario: It is Saturday, and I am driving to town in my car. I am parking at the small market near the church. I get out my car, insert my credit card into the slot of the parking machine and select the desired parking time in 50 cent steps. My next stop is the fruit stand at the weekly market. I am picking up the small bag of bananas and kiwis, type the 10-digit number printed on a paper label in the display, into a payment app on my mobile phone and transfer the amount with a short swipe. Just before I get back into the car, I want to stop by the supermarket. As I stand in line at the cash desk and dig out a few coins in view of the small amount, the grumpy cashier points at the sign on the door: “We don’t accept cash”. So, I pull out my mobile phone again, unlock it by looking at the display and then hold the device against the terminal. I wonder if I will ever get rid of the change in my pocket again.
Telling from the “war” against cash
This story seems strange to you? Perhaps it is because what has been said did not take place in Germany, but in Sweden. Here people already live predominantly cashless. And not just since yesterday. Here, the “war on cash”, as Harald Olschock, General Manager of the Federal Association of German Money and Value Services (BDGW) puts it completely unselfishly, is already in full swing. Not to say, in the meantime, to the point where only a few insurgents persistently defend their right to use cash.
Cashless payment transactions: figures about the use in Germany
In Germany, on the other hand, the advance of the fighters for cashless payment transactions in recent years resembled a grueling positioning battle to remain in the picture. Especially the use of contactless payment methods, are considered widely as bridging technologies to a complete digital payment infrastructure. Still in 2016, 54% of Germans stated that they had never made contactless payments and would not consider doing so in the future. Only 10% of the population had already paid contactless at that time and only the smallest part of them regularly. In 2019, 3 years later, the situation already looked different. 55% had already made contactless payments last year. Half of them used the contactless function of their girocard, credit card or smartphone at least once a week.
Another victim of Corona – cash?
Now this year is different from all previous years and in many ways. Not only does it now feel strange to leave the house without a mask, even though just a few months ago we shook our heads half amused, half uncomprehendingly when an Asian travel group ran into us again dressed in all kinds of colourful face masks, but Corona (or COVID-19) has also fundamentally changed our behaviour at the checkout. Even in 2018 you still belonged to a rare species if you only held your card briefly at the terminal in the supermarket. You could be sure of the amazed looks of your fellow-square-players if you only briefly pulled out your mobile phone after the question “cash or card” and with the “ba-bing”, which in the meantime has even received some media attention through Deutsche Bank, you grabbed your shopping bags and simply disappeared without even opening your wallet.
Corona as driver for contactless payment
The pandemic is now responsible for the fact that the number of cashless and, in particular, contactless payments has increased considerably since 2019. Both parties say so, the supporters of cash and those who would like to get rid of it at last. The former complains, however, that the warning about the risk of infection with cash is only scaremongering and will only fuel fears among customers and sales staff. The latter, on the other hand, are pleased that the last necessary impulse has now apparently been given to finally clear the way for a long-slept future of digital payments in Germany.
In contactless payment the focus is on practicality and speed
Now it seems that the greatest risk of infection is probably not really due to the exchange of cash, but to fruits that has been inspected for purchase and then put back. But this must be conclusively clarified by the relevant experts elsewhere. It is also the case, however, that it is by no means the fear of an infection risk that makes people increasingly use cards or smartphones.
Current Top 3 reasons for using cashless payments
At least this is what a survey by Statista in cooperation with gdata has shown. When asked why they prefer to pay without cash, only 20.3% of participants cited fear of infection as the reason. And that puts this statement only in third place. In the first two places, on the other hand, were the reasons that, for example, the smartphone is always at hand, cash is not always available (32.5%), or that the time saved at the checkout compared to cash plays a role (31.7%).
Cash – no longer the German’s favourite child
The fact is that the love of their cash has suffered particularly badly among Germans since the outbreak of the Corona crisis, and people are even becoming bolder about “new” technologies. In the meantime, 75% have already made contactless (i.e. also cashless) payments and about 64% even do so regularly, Forsa researchers have found out on behalf of Visa. Most of them, 56% of those questioned, prefer to pay by card, an increase of 3% on last year. Only 32% still say that cash is their preferred means of payment. However, the increase for smartphones is significant. Here, 12% of respondents said that this is now their favourite form of payment. This represents a doubling of the previous year.
What is even more interesting, however, is that the basic attitude towards cash also seems to be changing, almost equally across all age groups. For example, the digital association Bitkom has found out that the vast majority of people in Germany would like to see more points of acceptance for contactless payment. In the group of 16-to-29-year olds, this is less surprisingly as high as 76%. But even among the 65-year olds and older it is still 62%. And if we continue to listen to the participants, the majority of those questioned even try to avoid paying with cash as much as possible. In the younger group, among the 16-to-29-year olds, the figure is already 84%. But it is sensational that even 68% of the oldest citizens, 65 years and older, have the same opinion.
Doesn’t anyone think about data protection? For God’s sake, data protection!Thus, one of the most frequently mentioned arguments for the usage of cash seems to lose its importance. Namely that older people could be excluded from social life if cash were abolished. Other arguments regularly address the alleged lack of control over spending and the general security of the payment process. In addition, fear of the lack of data protection must not be missing in Germany, of course. Materialistic sounding statements, such as those about the “war on cash” of the BDGW mentioned above and the diffuse fear of the “transparent citizen “, cleverly combine the German very own guilt complex with fundamental skepticism about the technological future.
Kids photos on Facebook? No problem. Pay digitally? Never!
The fact that the majority of people now publish every private detail on social networks without thinking about it, seems to be deliberately overlooked. Just the way it suits you. Quite a few parties are currently discussing the lowering of the voting age to 16 years. Under the cloak of maturity, the tendency of some people, which is very practical for them, to prescribe ideologies without checking them, is just right to open up new groups of voters. But when it comes to buying a new pair of Air Max, we don’t trust young people to be able to understand the impact of this transaction on their account balance and to make a sustainable assessment of it as long as they don’t use cash.
Every reasonable banking app now offers a corresponding overview. Even up to analysis tools that let us monitor and plan our spending behaviour in detail and even help us to avoid excessive spending, for example with certain earmarked sub-accounts or spending limits. And of course, technological solutions are always subject to a certain risk of misuse. But we dare to doubt that the inclined citizen will consciously recall the various possibilities of manipulating an ATM every time he or she withdraws cash with a PIN and then make the possibly quite long way to the next bank branch, especially in times of extensive branch deaths.
The reasons against contactless card payments are the reasons for paying with your smartphone
Quite the opposite. On the contrary, the transition to the digital payment infrastructure should be accelerated if security and privacy are to be ensured. In fact, cards can be read. Even though with Near Field Technology (NFC), which is the basis of contactless payment, a maximum of 4 cm can be bridged. So, you would have to get very close to the card to be able to read it. But even if this were to succeed, the stolen data can be used to make a one-off purchase for a maximum of €50 (€25 before the Corona crisis) or up to a total of €150 for no more than 5 consecutive transactions before a PIN is required again. However, if one really wanted to be consistent, one would warn citizens less about the risks of contactless card payment but rather try to get them interested in paying by smartphone as soon as possible.
Through tokenisation, as is usual with Apple Pay or Google Pay, no personal information or payment data is transferred here. Furthermore, the hurdle of misusing the smartphone is much higher than with girocards or international debit/credit cards. Not only would one have to overcome the protection of the smartphone, but the payment app itself would have to be tricked. And with the latest devices this would mean that you would need the victim’s face or at least a thumb. In our unshakable belief in the good in people, we hope that this will be a sufficient obstacle to the potentially small profit, at least for most of us.
No bank account is not a solution either
One point that cannot be dismissed however, is the loss of anonymity through contactless spending. In purely digital transactions, banks and service providers constantly receive information about who, when, where and for how much has been purchased. In my experience, however, in the best case this has the effect of offering more services that are personally optimised for me and in the worst case it has the effect of spamming me with additional advertising, which, in view of the supposedly very efficient evaluation of my data and the associated potential power of persuasion, may tempt me to spend more money.
Anyone who now wants to point out that this form of data protection is not so much about the economic aspect of the service providers and banks involved, but rather about the criminal law interest of the authorities, has certainly not yet experienced the effects that late payment of motor vehicle taxation or sufficiently long delays in the transfer of the so-called tv and radio broadcasting contribution in Germany can have even without digital payment methods. If one would want to avoid this, one would not even be allowed to open an account. And we are certainly not being too far off the mark when we say that the part of the population that consistently follows through on this does not really belong to our circle of readers.
Developing country Germany – also for the digital payment infrastructure
Nevertheless, the admonishers will undoubtedly not get tired of stressing the risks of cashless payment transactions and will continue to believe that cash is still the most important means of payment in Germany and will remain so (quote from the BDGW – who would have guessed it?). Meanwhile, Sweden has set itself the target of having completely switched to cashless payments by 2030. And even for Germany, our colleagues from the management consulting firm Oliver Wyman predict that by 2025 at the latest, the use of volume based cash will be just 32%. And according to Statista, the number of users who will pay at the POS with their smartphone – and thus contactless – will more than triple in the same period (from today’s 6 million users to about 19.7 million).
The increase in the amount that can be paid contactless with the girocard without a PIN (from €25 to €50) as a result of the crisis will certainly contribute to this in future. However, we estimate that in particular the further spread of payment terminals with contactless function and the changing awareness of customers to pay small and micro amounts in food retailing, together with the capping of merchant fees by the MIF regulation, will have an increasingly positive effect on the use of non-cash payment methods.
The bakery trade as a guide to the digital future
Even today, the smaller the amount to be paid, the more likely it is that cash will be used. According to Finanztest, which is a magazine published by the German Consumer Protection Agency, 70% of cash transactions take place in food retailing. In comparison, the figure is 3.1% for furniture stores, 3.2% for garden centres and DIY stores and only 4.6% for clothing or shoe shops. So, Germans are not yet prepared to pay for their buns at the baker’s on Sunday mornings using their card or smartphone. Accordingly, the willingness of retailers to offer contactless payment options in the first place is correspondingly high.
In this respect, it is good news, at least for the supporters of cashless payment transactions, that at least the Central Association of the Bakery Trade has now published a brochure aimed at explaining the advantages of “this new” technology to its members and their customers.
A few days ago it was announced that Samsung Pay, the mobile payment service of the South Korean technology manufacturer, will be launched in Germany at the end of October. Samsung has entered into a partnership with the FinTech bank Solaris and Visa and can thus bypass the local banks and savings banks. As a result, owners of a Samsung smartphone – with the exception of the Galaxy J and Galaxy M series or Smartwatch – will be able to pay at the physical point of sale (POS) in addition to the already established checkout solution for e-commerce. In addition to Apple Pay and Google Pay, another payment service with a potential of approx. 20 million end customers will be launched, which may have consequences for the business model and the still awaited digitalisation of the German debit card girocard run by the leading German banks and savings banks. This is underlined by the fact that the major international providers (GAFAs) seem to be mastering the tightrope act of merging an optimal user experience and different distribution channels, while efforts of national interest groups resemble more the timid training run over the safety net. In order to better assess the mentioned harmonisation as well as solutions in mobile payment, it is useful to classify them. For this reason, the first question to be answered is “What is mobile payment” or “How is mobile payment defined”?
What is now mobile payment?
To say it in advance, there is no single, all-encompassing definition for mobile payment. As the name implies, mobile payments are payments that are made via a consumer’s mobile device and do not involve cash nor physical debit or credit cards. Although it is possible to create vast numbers of categories with a granular classification, we have agreed on two main categories for the sake of simplicity. These are called Proximity Payments at POS and Remote Payments in E- and M-Commerce and represent all common use cases that are carried out on a mobile device. We speak of an “Omni-Channel payment method”, as these can be used at stationary retailers (Proximity Payment) and mobile or online (Remote Payment). As a synonym, mobile payment is also often used as “wallet payment”, as these e-wallets store corresponding payment data digitally, but can also contain additional applications such as loyalty, couponing, digital tickets or boarding passes.
Proximity or Wallet Payment is well known to many, especially through Apple Pay, Google Pay, PayPal Wallet and soon Samsung Pay. With this type of payment, a debit or credit card is (usually) digitised in order to use it on a mobile phone for payments. The contact between terminal and mobile phone triggers the payment with the digitised wallet. Google has been using “Host Card Emulation” (HCE) technology since the introduction of Android 4.4. The same applies to the less user-friendly but for the merchant cheaper adaptation of mobile payment, the digital girocard, as offered by the savings banks in the payment app “Mobile Payment”. Apple on the other hand controls the NFC interface with its own software. The required data is summarised and encrypted by the Secure Element. Once the digital card has been loaded into the wallet, the digital wallet can be used like a credit card at the physical POS as well as in e- and m-commerce. In addition to installation on the consumer device, all that is required for this is merchant acceptance and a contactless terminal. Especially the user-friendly payment process via touch or face ID has helped the services to spread in Germany.
Mobile payment with the smartphone: Various forms and providers
When goods and services are paid for via mobile devices in e-commerce and m-commerce, this is called remote payments, as in this case the Internet is the distribution channel. Mobile wallets such as Apple Pay, Google Pay, Samsung Pay or specialised apps can be used for in-app or app-to-app payments. The term app payment describes the provision of payment methods in the form of apps on smartphones. These can be applications which exclusively represent the functionality of the service offered or services which are connected to applications of third parties in order to enable payment functionality for them. A popular example in this context is PayPal, which is used both independently and in the checkout of different online providers.
Based on the number of different versions and the mass of different national and international providers and service providers, it is clear that mobile payment has not only existed since the introduction of Apple Pay. For this reason in particular, the question inevitably arises as to why it took so long for a fairly critical mass to make use of this technology. The answer can be summarised in one term – vested interests.
Particular interest as a brake on innovation
Originally, mobile payment was driven by the German mobile phone providers. With the introduction of premium SMS, they were able to charge for services such as the “Jamba Sparabo”, which lifted some mobile phone contracts and bills into the triple-digit range. Based on this logic, an attempt was also made to depict normal payment processes at the POS. To realise this, mobile phone providers had to cooperate with a regulated e-money institute and a credit card scheme as technology partners. For example, Vodafone and E-Plus used the e-money licence of the now insolvent payment processor Wirecard as well as payWave (Visa Card) and PayPass (Master Card) for technical processing. If there was interest in using the wallet inventory, the customer was sent a new SIM card (NFC-SIM). This card contained the Secure Element, which is still used today to secure sensitive credit card data. In addition, only mobile phones could be used, which were accepted and released by the telecommunications provider. Billing was done via the monthly mobile phone bill. Unfortunately, the product was not accepted by consumers, which led to the discontinuation of various initiatives. This may have been due to the self-positioning of the telcos in the value chain of the payment process, the low number of NFC-capable terminals due to the lack of non-contactless fees of the schemes, or the questionable selection of mobile phones offered. Only after the porting of the secure element to the phone device and the introduction of payment services by the manufacturers, including their marketing budgets, mobile payment gained attention. This, combined with customer-oriented processes from the beginning, simplified usage and the correct interpretation of the term omni-channel, has led to the introduction of mobile payment in many countries.
Paying by smartphone in Germany? A look at user behaviour
Only Germany took its time. A possible reason for this may be the often described phenomenon of the cash-loving society, but also the self-interest of German banks thatprefer to book the share of the interchange or merchant fees demanded by Apple to their own revenue accounts. This went well until the first German bank positioned itself as a pioneer and, with the launch of Apple Pay, entered the battle for the consumer.
In the meantime, it has become clear that the use of the mobile Internet is spreading through all generations in Germany. A study of the Postbank which was conducted before Corona reflects that smartphones have left all other mobile devices behind and are a constant companion of the people in this country. Almost 80 percent of citizens access the internet with their mobile phones, 71 percent via laptops and 58 and 47 percent respectively use desktop PCs and tablets when they want to access the internet. Even before the COVID19 pandemic, the younger customer segments were almost permanently online, and most of them used their smartphones. The lockdown due to Corona and the ongoing measures to restrict contact may have intensified this trend. This user behaviour also has an impact on mobile payment and according to the current Bitkom study, one third of German citizens state that they have used mobile payment by smartphone or smartwatch at least once. In the survey from 2016 this figure was only eight percent.
Catching up or already hung up?
The development of mobile payment in Germany shows that the customer acquisition as well as his interaction with an offered service is essential for survival. That German banks have also understood this becomes clear in the desperate attempt to position the current account as a core customer product. After possible implications of the PSD2 have long been incorrectly interpreted, it remains unanswered whether this is still realistic. It was only when other providers already conquered the market, dominated by banks’ own products that the self-confidence of the supposed top dogs diminished and a clear view of the actual situation became possible. The situation could be similar with the German payment market after the introduction of Samsung Pay. While the German banking industry is busy harmonising different interest groups and their respective payment methods to achieve a multi-channel-capable product and #DK may ultimately mutate from a phoenix to a paper tiger, 20 million consumers will be supplied by Samsung with a pre-installed app in the near future. In addition to customer-friendly onboarding via IBAN and qualified electronic signature, cross-channel payment for goods and services with a digital VISA card and an expenditure overview in the form of a KPI dashboard, this app also offers the possibility of creating sub-accounts and completing financing transactions. In this way, the payment service depicted by Solarisbank has the potential to take over all relevant interactions for the customer and reduce customer interaction with the main bank account to the monthly direct debit of the compensation payment. In this way, traditional German banks lose customers who, after a short confirmation of an acceptance contract, find themselves in the new customer portfolio of Solaris Bank AG. And all this is available for a bank-friendly revenue share based on the regulated interchange of 20 basis points. Samsung has understood that consumers find it difficult to deviate from a service once they have become accustomed to the amenities. It remains to be seen whether this will be accepted as a customer requirement and fact by the competing projects currently being implemented.
Cash, that’s always been there, hasn’t it?
For a large proportion of European consumers, there is no more commonplace activity than exchanging goods for money in any form. This natural behavior makes it clear that many are no longer aware of the origin of the euro, or of its journey since its creation. This is remarkable, especially since the last currency reform, which resulted in the abandonment of national currencies such as the German mark or the Dutch guilder, was only 18 years ago. Now that the ECB is discussing a no less radical reform of the European monetary area, a little refresher of our opinion is in order.
Cash and the evolution of payment
Cash or the physical value of national currencies, as well as the associated purchasing and exchange power, has undergone various stages of evolution since its introduction. After the first transactions carried out as barter deals, it quickly became clear that a value independent of the exchange interest had to be created, which would find broad acceptance. At first these were shells, later coins. The first token was created. The logistical disadvantages of a coin currency, the weight, soon became obvious and Europe became the first “Copycat” of China by introducing a paper currency. Since this introduction in the 15th century, there should be no payment innovations in the sense of Schumpeter’s creative destruction, except for the addition of plastic money.
Digital currency: Europe, a single cash country
It was not until 2019, with the launch of the digital Euro initiative, that the way in which payments are made in Europe was looked at more closely for the first time since the Monnet project was terminated in 2012. This observation was less a result of the European Central Bank’s own initiative or desire for innovation than a reaction to the introduction of a digital yuan in China. This project was gratefully adapted by America as an iterative innovator in the form of the digital dollar in 2020. Unfortunately, unlike China, Europe has not yet succeeded in getting over 90% of the population hooked up on a QR Code based payment wallet, which is as advanced as the Apple Store. This automatically raises the question of whether the blueprint of a currency reform forged in China can be applied to Europe. Especially in Germany, which uses the advantages of cash like no other in Europe, this question must be asked critically. Beyond the consumer perspective, the role of the banks as well as the retailer acceptance must also be evaluated. In order to be able to classify these developments, we have dealt with the topic of Central Bank Digital Currency (CBDC).
As mentioned at the beginning, Europe is by no means in the vanguard of discussion and strategic planning on the introduction of a digital currency. Similar to the European Payment Initiative (EPI), formerly the Pan European Payment Systems Initiative (PEPSI), one can speak from the outside rather of the embodiment of asnooze button user, who now jumps out of bed. This manifests itself in a newly formed working group, which is dealing with European implementation models consisting of the Chinese state digital currency in combination with the stable coin approach of the Libra Association. Stable Coin is defined as a block chain-based currency, which hedges monetary values by depositing Fiat money without exchange rate fluctuations. In this way, cash in its current form as a means of payment would be replaced by digital tokens, stored on a decentralized account management system and returned to the circulation of money in the form of a wallet.
To what extent are the potential users ready for a digital currency reform like CBDC?
The advantages communicated by the ECB lie not only in the constant supply of consumers and the improvement of hygiene in times of Corona, but also in the digitalisation of an aging financial instrument whose current form of existence is open to debate. It is questionable whether only the almost altruistic focus of the ECB on the end user carries weight in the decision to introduce such a stable coin or whether other reasons are no less relevant.
Even if the above-mentioned advantages for the consumer make sense, the question remains whether they are sufficient to convince German and European cash lovers. Apart from the purely psychological component, which justifies the possession of cash as a means of payment for many, there is also that of data protection, since cash is anonymous. A devaluation of the social score or the ranking of an insurance company after buying a pizza is therefore not possible. Cash can also be used to deal with the failure of technical infrastructure. Although the digital euro is to meet the same data protection criteria as the physical version in the ECB’s marketing, this is, to put it mildly, unlikely from a point of view of the Money Laundering Act and the prevention of terrorism alone.
It is also worth mentioning in this context that cash in its current form cannot experience a negative interest rate. Even before the ECB’s massive bond package was passed and the associated speed of interest rate declined, consumers knew that their €10 notes would still be worth the same in the evening. Even if we are going too far here, the question of “who guarantees that the E-Euro will not become a financial product dependent on the financial markets and similar to a demand deposit?” must be allowed, right? From the consumer’s point of view, widespread acceptance is therefore questionable.
Nevertheless, the obvious advantages are communicated to merchants. In addition to the reduction in effort – on average seven steps are required from the acceptance of cash to crediting the account – cost savings are also emphasized, since processing cash as a payment is relatively more expensive for the merchant than the fee to be paid to the acquirer / network operator. But here too, disadvantages are obvious. In addition to possible additional costs of the acceptance to be set up at the terminal, the dependence on 100% availability and the resistance of the end customer to pay virtually for all items with the E-Euro, the last cash receipt that is smuggled past the cash security regulation would also be documented in future. So, if a merchant did not see the benefits already listed as a wake-up call to convert to “card only”, the question of why remains.
Why does the ECB now seem to be pulling out into the fast lane?
Even if the German cash affinity seems less relevant at the European level, the ECB’s sudden interest is not entirely conclusive at first glance, especially since other innovations such as Alipay as a digital ecosystem have provided little momentum in Europe apart from tax advantages for the user. One obvious point is the momentum created by other nations (China) and institutions (Libra Association), which increases the pressure on market participants to act. Even classic credit card brands like Visa and MasterCard are expanding their fields of activity in this direction. A possible reorganization of the fee model in a post-card scheme fee era is certainly a pleasant side effectin this context. Furthermore, an expected cost saving in money creation may be a possible driver. Since this is financed by taxes it would certainly gain in relevance with an euro that show no sign of abrasion , is not created or destroyed and is secure against fraud. As a side issue, the reduction of anonymity, which is “exclusively useful in the fight against terrorism”, is worth mentioning. In this context, the question inevitably arises as to whether consumers will in future hold an account with the ECB and thus make the current banking structure obsolete in terms of cash supply. Besides the expected chaos when opening an account and the confusion among end customers as to why an account at the ECB now exists, the lack of customer interaction could also have implications for the up-selling strategy of financial products in the retail banking sector. Finally, questions regarding the implementation of this strategy are also being discussed. What is the maximum amount of money that can be given away for daily use? Is there a danger of treating the currency as deposits, since they are only presented on the wallet in the form of fiat money? Is there an obligation to disclose suspicious cases that fall through the grid in the current situation?
Although the working group that has been set up has most probably examined all facets of the issue at hand, there are potential stumbling blocks before the pilot project launched in France can be replaced by a regular operation in the European currency area. Contrary to the “never change a running system” doctrine of many, it is to be hoped that these will be removed in order to sharpen the EU’s digital profile in banking and payment on an international level.
The next european payment initiative
Over the last two decades, a number of well-known European companies and institutions have come together to push forward the development of a single payment system for the euro zone. Under names such as Monnet, EAPS or PayFair, banks and payment service providers in particular wanted to join forces to make the locally very heterogeneous payment infrastructure universally available and future-proof with innovative concepts. After all initiatives failed equally, a new attempt is now apparently being made under the leadership of the ECB and the European Commission, with the European Payment Initiative (EPI). Considering various comments and communications from the circle of initiators, one thing seems to be certain – not innovative payment systems are to ensure competitiveness in the future, but rather an enhanced SEPA system ought to protect Europe from it. Although a decision on how to proceed with the initiative was already expected at the end of 2019, things had become surprisingly quiet around the topic in the meantime. At the beginning of April, however, a list of questions from the European Commission has surfaced. It asks interested parties to answer questions about the future retail payments strategy of the EU. As the topic could become relevant again in the short term, it is worthwhile analyzing whether such an initiative is likely to be successful according to our current understanding.
A Pan-European Payment System? Hasn’t there been something before?
One might think, that sounds somewhat familiar, when reading the not so recent news about a new initiative for a single European payment system. How was it back in 2010? Representatives of 24 banks and European institutions are meeting in Madrid to launch the so-called “Monnet Project”. It should be designed to create a new “pan-European card scheme”. The project was launched 2 years earlier by major German and French banks with a feasibility study. This study came to the – very welcome – conclusion that a cross-border payment initiative would contribute to the standardization of the fragmented European payment market and thus to the development of innovative and sustainable concepts. Basically, however, it was simply a matter of not having to give up any further market share to the established market leaders MasterCard, Visa and the relevant FinTechs from the USA and to regain European data sovereignty. However, by 2012 the great ambitions had vanished into thin air and the project was cancelled eventually. Allegedly due to unclear circumstances regarding the regulation of card-related interchange fees.
2020: Payment systems between the dominance of credit cards and new digital currencies
Now 10 years have passed. The international credit card companies have continued to gain dominance in Europe – as early as 2016, according to the ECB, 67.5% of payments by cards, issued in the EU, have been made through the MasterCard and Visa systems. More or less innovative payment methods have sloshed over to us across the big pond and besides private consortia like Facebook, several countries are already working on future-oriented concepts for digital currencies. And what is it that you can read in the news these days? 20 European, particularly German and French, banks have joined forces in an initiative with the goal of developing a “pan-European payment system” based on the SEPA Instant Settlement Mechanism. What is striking is that almost the same institutions are represented as in the year 2010, but instead of a “card scheme”, a uniform “payment system” is now to be created. However, and let us be clear about this, the change of name does not reflect a desirable expansion of the results space. It is rather the regrettable realization that we have missed the moment until which we would have still been able to fight fire with fire (i.e. when the dominance of the card giants could have still been broken with an own innovative card offering).
The EU and the great fear of innovation
With the pan-European Payment System Initiative (short EPI, or formerly known under the working title PEPSI, until apparently a US soda company came across this abbreviation and wasn’t too happy about it), it seems that the local banks want to make a new attempt, initiated and led by the industry, towards an independent European payment solution. In fact, however, various sources suggest that it is not the banks that are the driving force here, but the ECB that is responsible for the recent push, and that the fear of overpowered credit card providers and FinTechs from overseas is once again playing the decisive role. In a commentary on EPI, former ECB board member Benoît Coeuré, for example, warned that “the European authorities see American payment providers in particular as a significant threat to financial stability in the eurozone”. And European Commission Vice-President Valdis Dombrovskis affirmed that “the European Union’s ability to develop cutting-edge innovations in certain strategic technologies will determine the degree of sovereignty of our continent”. And payment transactions count as such a technology. As no comments have been received from the banks involved to date, suspicions are growing that, similar to 2010, the current initiative does not appear to be a technologically driven but rather a politically driven venture.
In contrast, the initiative launched by the German banking industry with the working title #DK, for example, seems to be pursuing the right goal. Here, the payment assets at the POS (girocard, bluecode) as well as in M- and E-Commerce (Paydirekt, giropay, bluecode, Kwitt) are to be integrated into a consolidated system and placed under uniform corporate governance. It remains to be seen to what extent the topic will be approached objectively and in the best interests of the market and customers respectively. However, since it can be assumed that the players in EPI and #DK are the same, it will be exciting to see what dependencies and implications will arise between these two projects and if the parties are able to use them prudently or get bogged down again.
Europe’s dependence on international payment systems
One of the first questions that naturally arises here is whether the fear of losing sovereignty is justified. And there are certainly points that cannot be dismissed. For example, we can observe at the moment that the USA is increasingly seeing sanctions as a legitimate political tool. And this trend is also increasingly influencing European market participants. In the Iran conflict, technological dependencies meant that companies from Airbus to Siemens simply had to stop trading with the Islamic Republic, since the processing of payment flows is handled via the Belgium-based SWIFT messaging network and the supervisory board consists of representatives of major American banks, among others. In Russia, similar conflicts have already led to the development of the national payment system MIR, after MasterCard and Visa briefly stopped providing services to Russian banks when they annexed the Crimea. But there are also concerns in general, of course, when payment flows are processed via networks outside the eurozone. European institutions have no authority over international providers and only limited supervision. However, the issue of security could be much more serious, as a common currency area is of course much more vulnerable to attacks and disruptions from the outside.
But how dependent is Europe actually on international providers? After all, there are domestic card and payment card providers operating in this country, too, who do not depend on the infrastructure of transatlantic companies. For example, if you look at card sales in the seven largest economies in Europe, it is clear that local card systems, such as girocard in Germany or Carte Bancaire in France, dominate. Despite the coexistence of MasterCard and Visa systems in these countries, they have a considerably larger market share. Moreover, there is virtually no competition in the SEPA credit transfer or direct debit area and regional, alternative payment methods such as Klarna, Sofort or Trustly are becoming increasingly important. So, is there no reason to panic?
Well, as mentioned above, even with non-card-based payment methods, a certain transatlantic influence cannot be ruled out. For example, among others, interbank communication in SEPA transactions is handled via SWIFT. In addition, under US supervision, this service provider is also one of the official certification authorities for the global messaging standard ISO 20022, which is considered the new standard for all credit transfers via the TARGET system. The Real Time Settlement Systems of the ECB (TIPS) and the EBA (RT1) are also geared to this standard. As a result, neither traditional nor future transactions in the SEPA network are fully under European control.
And even if local card schemes dominate in the respective countries, the lack of interoperability of regional infrastructures means that the vast majority of cross-border card payments are already co-branded, i.e. made through the MasterCard or Visa system. Not to mention the fact that in the remaining European countries, which do not have their own card network, the international schemes are already leading.
Digital payment solutions will not save Europe
Now one could argue against the fact that the development in payment traffic is increasingly moving towards digital solutions and at the expense of card payments. But apart from the fact that here too the leading providers are so-called Fin- or Bigtechs from the USA, these methods are also predominantly based on the underlying card infrastructure. For example, with the wallet solution from PayPal, a Master- or Visacard is usually deposited next to the bank account, and even with ApplePay a credit card is still necessary until the savings banks have finally managed to make their girocard digitally available. However, it is much more important that, for digital payment methods, the front end is decoupled from the back end. This means that the access to the customer, which is important for every payment provider, is separated from the actual processing service. The card issuer is demoted to a pure technical service provider without access to the so important customer data. Only the original provider of the payment solution then has access to information about the type of transaction, value and individual preferences of the customer. And, as we all know, they are more likely to be located in America than in Germany, Denmark or France. Or even more so in Asia, where with the Tencent all-in-one chat solution WeChat, with integrated payment function, and AliPay, the next major competitors for market leadership in international payment transactions are already in the starting blocks.
Payments: a question of simplicity and cost efficiency, not of nationality
However, fear is and has never been a good advisor, although in the current corona crisis it seems that decision-makers are driven solely by it. This is especially true when it comes to technical innovations. In a world of global trade, it is really questionable what value market participants will attach to an initiative whose declared aim is to strengthen national identity. Don’t get us wrong. Harmonization of the fragmented payments market would be welcome. The multitude of national payment systems and methods is confusing and inefficient. But like all social and economic measures, initiatives in the payment market must be measured against their achievement of objectives. The acceptance of new forms of payment, however, is generally measured in terms of simplicity and cost efficiency rather than by the degree of isolation.
Modern problems require modern solutions, just not in the EU?
While on a global level the abandonment of entrenched paths is seen as a necessary prerequisite for innovation, the European institutions are seeking their salvation in the tried and tested SEPA Retail System with EPI. In the form of the SCT Inst. procedure, at least with the possibility of booking credit transfers and direct debits instantly and along with the commencement of the PSD2, the opportunity to transfer this concept to non-banks (keyword: open banking). But where is the added value for end customers and merchants? Once I as a customer have deposited my card with PayPal, why should I switch to a SEPA-based service? With this I can transfer money instant today and do not need to provide any additional information except an e-mail address. The transaction does not cost me anything and if necessary, my purchase is even secured by buyer protection. When transferring money via the SEPA instant settlement system, however, there is no way to protect myself against fraud. Once the money has been transferred, I can no longer retrieve it.
For merchants, on the other hand, there would certainly be advantages. A direct credit to the company account is very advantageous for them. Especially in connection with the fact that the customer cannot charge the money back. It can also already be observed that merchants are successfully circumventing the complicated and expensive cost structures of credit card providers in favor of providers with account-to-account (A2A) solutions (e.g. in the aviation industry with IATA as PISP). But ultimately, the end customer is still the decisive factor in determining which payment methods will prevail in the market and so far we have not been able to identify any solution in the market or on the horizon that can compete, for example, in terms of simplicity and speed with contactless payment at the POS to avoid the “party at the checkout”. It is therefore at least bold to assume that merchants will give preference to alternative, locally limited payment methods due to protectionist considerations of the European Commission.
Instant payment systems as a special challenge for banks
And even for the banks, the effects are anything but clear. With SCT Inst. they are moving back into the focus of the transaction. They can offer their customers a payment procedure that is attractive not only in stationary trade but also in e-commerce. But the SCT Inst. procedure also presents them with much greater challenges. For example, although the rules and regulations stipulate the speed of message transmission, the maximum amount of a transaction and the reachability, they do not cover the clearing and settlement mechanisms (CSM). Thus, the provision of the transfer amount on the recipient account regularly coincides with the actual receipt of the money. Depending on the transaction volume, however, delayed and guarantee-based settlement places considerable demands on the bank’s liquidity management. This means that banks must first develop their own approaches in order to be able to offer customers attractive instant payment solutions without taking too much risk of their own.
EPI: The initiative that nobody asked about?
Given the different needs and challenges, the question ultimately arises as to whether individual interests are at least adequately represented in the group of initiators. From the point of view that EPI does not appear to be a technological but a political initiative, it is probably understandable that in none of the reports that have been read on the subject so far do the names MasterCard or Visa appear as partner companies. It is certainly understandable to the extent that one wants to defend oneself against the market power of the companies mentioned. But in terms of creating a new European payment system, it is rather difficult to understand. One would think that the German banks in particular have learned from their mistakes with Paydirekt. Here the implementation of a quite good idea failed because of the inability of the initiators to really involve all relevant market participants in the product development from the beginning. However, neither the key companies of the successful “four-party system” of banks, acquirers, cardholders and merchants are included, nor does it appear that there are any plans to involve well-known European payment service providers. Yet it is precisely companies such as Adyen, Worldline or Nets that ultimately guarantee access to the merchants
But as already described at the beginning, this time the banks can probably not be blamed. Obviously, it is the European Commission and the ECB, united in common cognitive dissonance, who are shouting: “now more than ever”, while the rest of the world is actually already working on innovative concepts. Perhaps one should just listen to the institutions that one is supposed to be representing. An example is the association of over 200 banks and FinTechs in Germany under the umbrella of the Bankenverband. As early as 2019, the members explicitly stated that they see “programmable digital money” as an innovation with the greatest potential to become the decisive key component in the next step of digital evolution. This is particularly true in terms of cost efficiency, simplicity and (listen closely European Commission) competitiveness. In the age of the “Internet of Things” and with 5G in the starting blocks, the fast transmission of XML messages limited to Europe is unlikely to be a competitive advantage in the long term. Then we will talk about payment processes that do not play a role at all today. For example, when an autonomous e-car drives to a charging station and pays for the amount of fuel directly using crypto or digital currency in the future. Perhaps, a bank will then no longer be needed. The money is booked from the payer’s wallet directly into the recipient’s wallet on the basis of a corresponding digital transmission technology.
Regulatory frameworks: the be-all and end-all for a competitive environment for innovative payment systems
However, „this requires the creation of the appropriate regulatory framework,” says Gilbert Fridgen, founder and head of the Fraunhofer Blockchain Laboratory. And the companies of the banking association express the same opinion. According to them, the legislators and regulators should create the necessary basis for digital innovations and the private institutions would already be doing their part to develop a sustainable and innovative currency system. It remains to be seen to what extent the banks are actually prepared to continue sawing on their own branch. However, especially with regard to technical innovations, the creation of a competitive environment that is favored by regulation is probably more conducive to achieving the goal than the cementing of market structures that are not very future-oriented, due to the alleged loss of national sovereignty.