Digital Euro

Will the digital euro offer added value for banks and the German retail sector?

Typically, many of the topics that industry experts consider exciting are of absolutely no interest to the majority of society. This is particularly the case when it comes to nerdy payment topics that have no overlap with the banking industry. However, the digital euro, i.e. the European central bank currency or also known as the Central Bank Digital Currency (“CBDC”), is not such a niche topic, but rather the question of whether a further, legal and entirely digital means of payment should be made available in addition to cash. Of course, it is now possible to write another article on the reasons why the introduction of the digital euro makes sense or does not make sense, or to summarise the current status of the development of the regulations. However, there are already numerous publications on this subject and the content should therefore be familiar to you as a recipient in one way or another.

For this reason, we would like to take a different approach and address the question of what impact the digital euro could have on German banks, apart from the predicted liquidity problems resulting from the migration of the bank’s book money deposits to the digital euro account. In addition, we also examine the impact on the retail sector and payment service providers that are necessary for the successful introduction of the digital euro. These considerations are particularly interesting from our point of view, as the ECB and the German banking landscape have not yet formulated a solid reason for this currency. Apart from this, we consider the original intention of European legislators to distance themselves from the increasing influence of payment market leaders on the other side of the Atlantic, such as VISA or Mastercard, and the desire for a digital Europe.

Before answering this question, however, we would like to briefly introduce the topic and explain what exactly the digital euro is all about and which participants are affected by its introduction.

What is a digital euro and what isn’t?

According to the ECB, the digital euro would be an “electronic means of payment that is available to everyone free of charge. Like cash today, you could use a digital euro anywhere in the eurozone, and it would be secure and private.” Derived from this definition, the digital euro should be a legal tender analogue to today’s cash – which is particularly popular among the German population – with all its advantages and disadvantages. To fulfil this, retailers must accept the digital euro both online and offline using a wallet solution or a card, with very few exceptions (shops that do not currently accept card payments, generate less than EUR 2 million in turnover and have fewer than 10 employees).

The digital euro is not a cryptocurrency, which BaFin classifies as a digital financial instrument and can be used for payments as well as for investment and speculation. Apart from the Markets in Crypto-Assets Regulation (MiCA), cryptocurrencies have a low level of regulation, are very volatile and do not have deposit protection, which places them at the high-risk end of the scale compared to a central bank digital currency such as the digital euro. Transactions are carried out using decentralised authorisation methods by drawing on the computing power of individual users The digital euro is intended exclusively as a means of payment, which is authorised on a central platform called the digital Euro Service Platform (“DESP”) and, according to the ECB’s current plans, stored on a centralised blockchain.

Who is affected by the introduction of a digital euro?

Like the familiar four-party model in credit card acquiring, the digital euro also provides for clear participants and their tasks.

The most prominent participant in the digital euro is the European Central Bank, which defines the rules for participation in the digital euro and in this way assumes a role analogous to that of the European Payments Council (EPC) in the SEPA scheme. In addition, the ECB provides the authorisation platform (DESP) for processing transactions and the corresponding interfaces for banks and service providers.

In addition to the ECB, there are also the commercial banks of the payer and the payee. These act as intermediaries between the ECB and their own customers and, following successful registration, take over the KYC/AML process on behalf of the ECB and integrate the interfaces into their core banking systems, payment transaction logics (funding/defunding/waterfall (reverse)) and online banking applications.

On the acceptance side, the service providers, which include network operators, acquirers and payment service providers, are positioning themselves to prepare for the legally mandatory acceptance of the digital euro for merchants and to roll out acceptance to the (virtual) terminals after connection to the ECB’s authorisation platform.

However, the focus should be on the user, who should ultimately use the ECB’s solution or the ECB’s interfaces embedded in online banking to help the central bank currency succeed.

What influence does the digital euro have on participants in Germany?

As the digital euro is currently only intended as a means of payment in the retail banking segment (retail CBDC) and therefore does not take mass payment transactions (wholesale CBDC) into account, the success of the digital euro depends on consumers. Apart from the fever dreams of some internal bank PR departments, only 43% of German citizens are familiar with the term digital euro, according to the Bundesbank. Almost 80% of a representative sample of the Bundesbank do not consider the digital euro to be useful or actively oppose its use and fear dystopian scenarios reminiscent of George Orwell’s “1984” due to the supposed loss of anonymity. However, anonymity and data protection are just two symptoms that symbolise German consumers’ rejection of the digital currency and demonstrate that the desire to introduce the digital euro is more political in nature and less demanded by the actual user.

The consequences of the discrepancy between the government’s desire for use and the requirements profile of consumers are illustrated using existing solutions. Contrary to the ambitions of national central banks, established CBDCs such as the eNeira (Nigeria), the Jam-Dex (Jamaica) or the Sand Dollar (Bahamas) have a very low usage and acceptance rate. Reasons for this include a lack of trust in the government of the countries, low acceptance in trade and the widespread use of alternative payment methods, such as cryptocurrencies. Several years after the introduction of CBDCs, it can be concluded that the low uptake among the population is due to the fact that government solutions were presented for problems that were not perceived as a problem by the citizens and that actual existing and addressed needs were not taken into account at government level when designing the CBDCs. A counterexample is the Chinese e-yuan, which is becoming increasingly widespread among consumers and traders. The scope of application of the e-yuan was expanded in the summer of 2023 when the Shanghai Clearing House, a clearing house for financial services under the Chinese central bank, began clearing and settling the digital yuan for commodities trading, thus taking a further step towards the institutional introduction of the Chinese central bank’s digital currency.

In the event that the digital euro is accepted by the European population, this would have a strong impact on the banks’ business model, given that acceptance by retailers is not based on standard market criteria but on the state obligation. This could result in a possible shift in transaction figures towards the digital euro, whose transaction processing is free of charge for the consumer. In addition, the acceptance of the digital euro incurs costs that can only be refinanced proportionally via a transaction fee charged by the payment service provider.

Initially, German banks will have to come to terms with their new role as an extended arm of the ECB, as they will have to carry out the KYC and AML processes based on the master data of all customers with an existing contractual relationship. Despite the fact that the bank only carries out this process on behalf of the ECB, it will, as far as is currently known, bear the resulting investment for staff development and implementation costs. The consumer can subsequently top up the digital euro wallet by SEPA transfer from the current account and view balances via the ECB app or the information transferred to the online banking of the bank via the ECB interface. At the POS and in e-commerce, payments are made with the wallet or a card. It is currently not known who will assume the issuing obligations apart from the processing service and whether there will possibly be a co-badge as a supplement to existing cards. However, it is known that payment service providers are allowed to charge a transaction-based fee and a fee for possible transaction risks. Nevertheless, the desire for banks to participate in these transaction-based fees is foreseeable. In this context, it is worth mentioning that wero (European Payment Initiative) is set to launch as a private-sector wallet solution in 2024 and initial considerations regarding the embedding of the digital euro in the wero ecosystem are being publicly discussed. Such a partnership is particularly strategically interesting from wero’s perspective, as the spread of the wero wallet within the European currency area could be increased by integrating the digital euro as a legal tender.

It is currently not known how participating banks can refinance the costs incurred for the introduction and operation of the digital euro. As the services classified as basic services according to the ECB, which include payment transactions, customer onboarding and the operation of the wallet, are to be provided free of charge, the costs incurred can only be refinanced via a share of the merchant fee.

Questions remain unanswered not only for banks, but also for service providers who are to map the acceptance side of the digital euro. Like the banks, network operators, payment service providers and acquirers must connect to the ECB’s authorization platform and have acceptance tested and approved at (virtual) terminals before it can be rolled out to over a million physical devices. Unlike the banks, however, payment service providers are allowed to charge a standard market transaction-based fee. As acquiring processing in the traditional sense is no longer required, the investments made can certainly be compensated for with one or two cleverly implemented service fees. Nevertheless, it is questionable how service providers from the traditional acquiring world can respond to the challenges of the digital euro, such as the instant processing of transactions and an account-to-account infrastructure. Furthermore, it remains to be seen whether network operators and acquirers will be able to apply their original business model to the digital euro if transaction processing and merchant payout are the responsibility of the ECB and the payment service provider takes on the tasks of infrastructure provider and customer service center for the digital euro. In particular, the support of customers and merchants during ongoing operations and in the event of a disruption or malfunction is critical to success and the corresponding responsibilities must be conclusively clarified before the market launch. From a purely technical point of view, the introduction of wero with the digital euro as the balance on the wallet might actually be the most charming solution. After all, PayPal is also doing very well with the staged wallet approach and a little inspiration wouldn’t hurt.

Ultimately, retailers will also have to come to terms with the legally binding acceptance of the European means of payment. Even if a new means of payment initially looks like an unnecessary fragmentation of the European payment market from a retail perspective, there may also be advantages. For example, the costs for intra-European transactions could be reduced by using the digital euro instead of the established payment systems. In addition, the costs for cash handling would be reduced. Customers who still want to pay with cash can easily use this as a payment method. Retail companies could also continue to strengthen their customer loyalty by paying out cash at the point of sale. Nevertheless, it should be noted that the ECB’s current plans stipulate that the balance on each merchant wallet must always be set to €0.00 in order to comply with money laundering regulations and to ensure that the maximum holding limit is not exceeded. This can lead to an increase in accounting items on the merchant’s respective account and can become costly without a corresponding revenue pooling solution from the payment service providers. However, a closer look at the members within the Rulebook Development Group reveals that there are enough representatives of European payment service providers to ensure that these points are addressed and the relevant interests are represented. As private individuals are only allowed to hold one digital euro wallet, it is easier to check the maximum holding limit and comply with the digital euro rulebook.

By when should the relevant questions be clarified?

Following the completion of the investigation phase for the introduction of the digital euro in October 2023, which included the development of the functions, the technical requirements for the digital central bank currency and the rights and obligations of the participants, the preparatory phase will now follow. In this phase, minimum requirements for user-friendliness, relevant brand and communication standards, the process and procedure for certification, including the necessary testing and authorisation procedures, internal regulations and risk management will be included in the current draft of the regulations. With the completion of this phase, nothing stands in the way of piloting the digital euro – assuming that the EU Commission is in favour of a digital euro.

Does the digital euro represent a real alternative to existing payment methods for consumers?

Regardless of whether the digital central bank currency is introduced, the question is how consumers will react to it. The added value of the digital euro is not tangible for many consumers, as cash, debit and credit cards are perceived as sufficient for everyday use. Many people are unaware of the difference between e-money and a digital euro and, on closer inspection of everyday use, there is no real differentiator. The argument of secure deposits in central bank money also misses the reality of many people’s lives, as they have deposit protection up to a sum of €100,000 at their bank and the deposits there earn interest. In addition to this, consumers have been adjusting to the advantages of familiar payment methods and their use for years. Credit cards are often used to circumvent liquidity bottlenecks, unlawfully authorised transactions are reclaimed with the help of chargebacks and value-added services create benefits in the form of insurance, cashback solutions, loyalty programmes or discount campaigns. Cash is anonymous and is accepted without exception within the currency union in which a digital euro would be used. It is still unclear what real problem the digital euro solves and whether consumers will have to use another wallet in addition to solutions such as Apple Pay, PayPal, Klarna and others, or whether EPI will become the successful staged wallet.

From today’s perspective, a digital currency is the prototype for an experiment that could result in very interesting aspects for a more digital Europe. However, it is unclear whether the digital euro will experience the use that the ECB is currently hoping for, which use cases will dominate, which payment methods will suffer or even gain, and it will only be possible to make a final assessment after the market launch.

Banking as a Service – embedded banking, regulation and how partners become competitors

Anyone who has looked into private financial investments in recent months has often become aware of various deposit offers with attractive interest rates. High-risk investment opportunities that can be classified as “high risk & high return”, such as in cryptocurrencies, are a thing of the past, as the current trading volume within Germany shows. Consequently, it has to be decided whether there is sufficient motivation to change and take up one of the time-limited lure offers of some local or international direct banks, or whether the deposits should be managed by the German blue and red banks, despite the fact that they are not quite willing to pass on the increased deposit interest rate to their customers.

Either way, it is clear that consumers’ appetite for risk and willingness to invest has declined due to anticipated uncertainties – inflation, war, increased raw material and heating costs, interest rate rises – and the visible real erosion of savings balances (on average 5.5 %). This is undoubtedly reflected in various sectors and, has at least some influence on the adjustment of the forecast for negative growth in the German economy.

But is it only consumers who yearn for security or can this be transferred analogously to the institutional world? In addition, the question arises as to how capital-intensive companies in the payment industry are reacting to this situation and whether there are Gallic villages like in the Asterix comics which, despite the challenging economic situation, are experiencing success with a product portfolio apart from “save now, buy later” products, while others are disappearing?

Wind of change for companies in growth

In July 2022, the European key interest rate was raised by the ECB for the first time since July 2011. But even before this increase and the ten subsequent corrections to the key interest rate, it was clear to many young companies that the investment behaviour of institutional investors would adjust. This assumption materialised in a decline in investments in risky sectors, such as venture capital. Secured financing rounds fell through, formerly celebrated “unicorns” had to lay off more than ten percent of their workforce, and private equity firms and venture capital funds declared that profitability, and not the ever-popular hockey stick that indicates new customer growth, remains the most relevant metric, even if it did not seem so in the past. Despite these fundamental changes in the business reality of many FinTechs, there have been companies that grew against the trend from venture capital investments to deposit investments due to their specialisation in services that were previously provided by classic banks. These companies can differentiate themselves because they often focus on a part of the entire product and value chain range of a bank and rent it out as a service to FinTechs and companies. The attentive reader will certainly have already thought that these are companies in the Banking as a Service (BaaS) sector. Nevertheless, the question remains why a market that is widely considered to be divided between infrastructure providers – FIS, Avalog, Sopra Steria or the young star Mambu – and banking providers – Solaris, Trezoor, Modulr or Raisin – regularly creates innovations and business models derived from them.

Why is Banking as a Service so attractive?

Banking as a Service is not a completely new concept, as popular providers such as Solaris Bank, currently supervised by BaFin, Banking Circle or TrueLayer have been selling precisely this service as a core product for several years. As the name already suggests, the acronym BaaS hides the provision of banking services from a fully licensed bank to unlicensed companies. In this way, the unlicensed companies are enabled to offer their customers products that were previously reserved for banks. Besides the provision of payment transactions within and outside the European currency area as well as an account, primarily companies that specialised in issuing a credit card in the corporate segment gained popularity in the past. By “lending” the banking licence, it is possible to gain a foothold in the market as a financial company quickly, without high equity capital and with manageable personnel.

The BaaS provider profits from the use of the software, as in addition to platform fees for the provision of the software, a fee for each transaction is charged to the FinTech. If the FinTech also decides to issue loans, an additional fee is charged for the provision of equity and the issuance of the loan, also known as fronting. The sum of the individual items makes it clear that the BaaS provider does not generate serious revenue by providing access on the core banking system, but by scaling customers on a transaction basis, regardless of whether it is a credit card payment, a SEPA transaction or the issuance of a loan. From this perspective, it is understandable why ADAC (Automobile Club in Germany, largest automobile association in Europe) or Amazon are so interested in terms of issuing processing. And if they are corporate cards with a corresponding surcharge, even better. The fact that many second-generation BaaS providers are strongly technology-driven becomes clear from the fact that the consumer does not always recognise who is operating the systems from processing to settlement in the background.

Embedded Finance enables the fusion between customer and core banking system

In addition to providing regulatory permission, BaaS providers enable their clients to build the services into their own ecosystem, making them invisible to the client and seamless from a process perspective. In practice, onboarding, account management, etc. are presented in the FinTech’s front-end, but the relevant data is managed in the BaaS provider’s core banking system via appropriate interfaces. This approach is called embedded banking and goes far beyond the widely known “white label”. Despite the fact that this model has gained popularity in the German market through intelligent marketing of BaaS clients as well as the establishment of their own brand, many of the companies acting as banks have found it difficult to follow the path to profitability via participation in the generated interchange fee or a booking item. One possible explanation for this is that consumers or businesses without access to credit lines at an established bank were targeted and they generate manageable transaction volumes. Finally, it becomes clear that BaaS users have the customer contact but act as intermediaries in the value chain.

Love it, leave it, change it

According to this motto, FinTechs are more and more interested in offering services themselves. The modular approach of BaaS providers is now being misappropriately applied to regulation and its limits. In concrete terms, this means that young companies, by being authorised as payment service providers or as e-money institutions under the Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz, ZAG), themselves take a place in the value chain that they have previously rented and in this way cut out the middleman. For example, e-money institutions in Germany can offer accounts, credit interest-free deposits, issue e-money, participate in the SEPA scheme or issue short-term loans under certain conditions.

Tasks that are not in the focus of these providers, cannot be secured with sufficient own funds or are too costly are in turn outsourced to competitors. For example, it is possible for a company to provide accounts but outsource the underlying payment transactions and clearing, issuing and credit checking, including fronting, repayment and servicing, to third parties. The end customer sees only one provider through which services are obtained. This strategy is interesting from many points of view, as the companies can offer services in their core business and also assess the need for, a full banking licence for themselves. We certainly do not want to take on the role of a trend barometer, but we still find the number of payment service providers and e-money institutions that are allowed to offer their services in Germany highly interesting.

More than 390 payment service providers and 200 e-money institutions are allowed to offer their services within Germany. To put this into perspective, it must be mentioned at this point that not all of them are active in the area of banking as a service. Nevertheless, it is relevant for the 590 licence holders that are allowed to operate in Germany to continue to be positioned innovatively and to have regulatory protection. The implications for payment service providers and e-money institutions resulting from the Payment Service Directive 3 (PSD3) and the associated merger of Electronic Money Directive 2 (EMD2) and Payment Service Directive 2 (PSD2) into Payment Service Directive 3 (PSD3) and Payment Service Regulation 1 (PSR1) will pose a particular challenge.

PSD3

The draft of PSD3 published by the European Commission in June 2023 creates further exciting use cases for regulated companies. The PSD3, supplemented by the PSR1, which will be directly implemented into German law as a regulation, takes another step towards the harmonisation of European payment transactions. Based on the current draft of the PSD3, e-money services and payment services are to be merged in the future and subsumed under the term payment institution. PSR1 aims to introduce changes to the existing open banking framework, remove barriers to the provision of open banking services and ultimately stabilise and improve banking and financial services. Account Information Service Providers and Payment Initiation Service Providers will in future have the ability to create custom interfaces and use them to connect with banks and other financial institutions. This interplay of Banking as a Service services, embedded banking and innovative regulation enables existing firms to grow and gives market entrants a raison d’être. This innovative power answers the question posed at the outset as to why a few firms in technology-driven industries persist, but a large proportion disappear through insolvency or through consolidation of many non-competitive firms.

Finally, the question remains about the outlook and what it may look like. Will BaaS firms be able to exist in their current form in the future, or will FinTechs seize the opportunity to map part of the value chain themselves and use BaaS providers to outsource less strategically relevant products? The influence of regulation on these questions in particular remains to be watched with interest and will show whether today’s partners will become competitors in the future.

OSTHAVEN Practice: Optimising the eCommerce payment infrastructure for an omnichannel future

Payment processing in e-commerce is subject to constant change. Merchants are repeatedly confronted with the question of how to position themselves properly for the future. OSTHAVEN’s experts are therefore often called upon for the market analysis and tendering of payment services. Today we give you an insight into one of our exciting projects, which is exemplary for many other similar projects.

A large omni-channel retailer is faced with the challenge of putting the processing of PayPal and credit card payments on its e-commerce platform on a new footing. The client’s previous payment service provider (PSP) has taken over several competitors, including their PSP technology, in the course of market consolidation. In order to simplify the PSP’s internal processes, the interface previously used by the merchant is to be put to bed. The change to the alternative chosen by the previous PSP as future-proof is to be made palatable to the dealer with a small advertising cost subsidy (WKZ). Since system failures and errors in payment processing have occurred from time to time in the past anyway, the merchant is certainly willing to make the switch. However, after intensive testing, the alternative offered by the PSP turns out not to be 100% suitable, as important and frequently used functions cannot be covered. Consequently, the retailer decided to search for other possibilities and commissioned OSTHAVEN GmbH for the market analysis and tendering of the PSP service.

During the preparation for the project, the following points were identified as particularly relevant for the selection of the new PSP interface:

Price of the service, especially with regard to transaction prices
Coverage of all technical requirements
Future-proof technology and coverage of technical requirements
Support for the migration of stored credit cards and PayPal accounts of end customers (tokens)

In addition, internal processes between the web shop and ERP should continue to run as identically as possible, so that the need for internal adjustments in IT development and accounting processes is minimised.

Functional requirements

Particularly important for the retailer’s business model is the delayed settlement of transactions with two-step authorisation and redemption (capture) over a longer period of time. For the processing of subscription models, PayPal accounts and credit cards require the storage of the means of payment and the customer’s consent for permanent use. The storage should take place entirely at the PSP in order to ensure the lowest possible PCI requirements (the shortest questionnaire SAQ-A is the target) at the merchant.

The service provider to be selected must be able to process credit card and PayPal transactions from all of the merchant’s webshops in three countries as well as PostFinance transactions in the Swiss webshop. The merchant handles prepayments, SEPA direct debits and payments against open invoices as well as the scoring of customers and the payment type control based on this to prevent fraud.

Since omnichannel business is becoming increasingly important and is also a major priority for the retailer, the omnichannel capabilities of the potential service providers are queried in detail.

Technical requirements

Payment processing should be integrated as seamlessly as possible for customers in the merchant’s web shop. A jump via redirect as in the past is no longer desired. The look and feel should be influenced 100% by the merchant. Due to the growing popularity of e-commerce, performance guaranteed at all times (24/7) and a corresponding guarantee by means of a service level agreement (SLA) are essential. In addition, the permanent availability of a test environment is required, via which all relevant business transactions can be tested analogue to the productive environment.

Selection process

All service providers in question receive tender documents prepared by OSTHAVEN together with the dealer. This includes a detailed description of the functional and technical requirements and a questionnaire on further features in the provider’s offer which may be used in the future. All PSPs are given the opportunity to ask questions themselves. The answers to these will be made available to all providers. All payment service providers who return the tender documents in full are given the opportunity to present their offer in detail in a digital workshop.

Following the workshops, the various stakeholders on the trader side prepare their evaluations of the suppliers using a detailed evaluation matrix that was jointly developed prior to the tender. In order to make the different price components comparable, an extensive simulation of the costs for the next 5 years is created, incorporating scenarios for different business developments.

Further talks and negotiations will be held with the two best-rated companies in the following. With both of them, the technical and business requirements are examined in greater depth. IT experts from the retailer look at the interface documentation of the competitors in terms of feasibility, technologies used, effort and risks from an e-commerce and ERP point of view. Questions and problems arise at various points, but these can be solved between the experts of the retailer and the providers.

In the end, the retailer’s management decides in favour of the minimally more expensive provider, especially for the following reasons:

Technologies used and future viability
Omnichannel capabilities for seamless implementation of customer processes both in-store and online
User experience in the recurring processing of payments in the web shop

Implementation

Immediately after signing the contract, the various teams of the retailer (IT e-commerce, IT ERP, accounting, customer service, fraud prevention) start to conceptualise the interface connection. In the process, special emphasis is placed on ensuring that all changed processes are designed to be future-proof and performant. For example, the processing of the settlement files of the PSP must be adapted. Since a change is pending anyway, instead of the batch processing used in the past, the processing of individual transactions via an interface (API processing) will be changed. This leads to a higher degree of automation, accelerated processing and permanently lower load on the systems. In e-commerce, a significantly improved monitoring of customer interactions will be implemented so that problems can be detected much more quickly with the help of automated monitoring and rule-based alerts.

For customers, the process will become much simpler, as the improved use of tokenisation means that they no longer have to enter any payment data if they agree to their data being stored. For example, there is no need to enter the three-digit CVC code for credit card payments or to log-in to PayPal.

The go-live of the individual webshops, i.e. the changeover from the old to the new PSP, takes place successively starting with the smallest, which also has the lowest process complexity. This helps to identify and eliminate errors with the least possible customer impact.

Measuring success

In the end, almost all goals can be achieved. The technical requirements can be completely covered by the new service provider, the processes between web shop and ERP only have to be changed slightly and the price of the service is at a similar level as before. By switching to modern technologies and through improved processes in the interface from the webshop to the PSP, further improvements can also be achieved: PayPal and credit card transactions are processed much faster and with a higher acceptance rate of credit card payments by the acquirer. For customers with saved payment methods, the abandonment rate also decreases.

Only the internal effort is slightly higher than previously estimated, since the PayPal connection via the interface of the new PSP and the migration of the tokens from the old to the new PSP requires more coordination effort from the parties involved than assumed (Merchant, PSP and PayPal or Merchant, old and new PSP respectively). However, the slightly higher implementation costs are more than compensated for by the higher conversion and the resulting increase in turnover.

Success factors

Key success factors of the project are the development of the requirements and the preparation of the tender documents by all departments involved. Through the direct involvement of the latter, a greater commitment to the project was also achieved. It was also crucial to look at the future viability of the provider, especially with regard to technologies and processes, which facilitated the subsequent implementation.

Conclusion

E-commerce merchants are reluctant to change functioning payment processes because customers are particularly sensitive to changes and especially to errors at this critical point in the checkout process. However, with a thorough assessment of the requirements and a careful selection of the appropriate service provider, merchants can avoid problems, improve the processes for their customers and improve relevant and result-impacting key figures while making their payment processing fit for the future.

Long live the girocard…

The swan song for the most popular debit card in this country has often been sung – and now again, with the imminent discontinuation of Maestro, the traditional co-badge solution of the girocard is also facing its end. But is the girocard really doomed to die? Who benefits from this scaremongering? And what is the future of the girocard?

Where does the girocard actually come from?

Everyone in Germany knows it and probably still calls it the “ec card”: the girocard. Only the older ones among us will remember that this was issued as a cheque card and pure payment guarantee card by German banks more than 50 years ago. At that time, no one knew that this Eurocheque card would lay the foundation for later electronic payment. With the help of the magnetic strip, the card was later expanded to include a debit function and it was possible to withdraw cash from ATMs or pay at petrol stations, grocery stores or restaurants together with the PIN. At this point, it should be briefly mentioned that “ec” was originally the name for the Eurocheque system and both “electronic cash” and the logo long used for today’s girocard were derived thereof. It is interesting to note that the rights for the brand and the logo are held by Mastercard and the use by The German Banking Industry Committee (GBIC) as the governance and operator of the girocard system was based on an agreement between these two parties. This circumstance led to the development of a separate word and picture mark by GBIC for the girocard in 2007. However, it took many more years until money was spent on marketing, in order to finally break away from the brand dependency. However, it is difficult to get some firmly anchored names out of one’s head and so even today many people still call the girocard “ec-card”.

Since the beginning of the new century, cards have been successively issued with an EMV chip, which increased both security and the number of possible applications – such as the cash card or contactless payment. In the meantime, contactless payment transactions with the girocard are well over 70 percent in 2022 and it is also deposited in payment apps such as “Mobiles Bezahlen” of the savings banks, the “Pay” app of the Volks- und Raiffeisenbanken or the Apple Pay Wallet in order to be able to pay smartly and digitally at the POS. And the digital girocard has now also made it into e- and m-commerce (and much too late) thanks to the Apple Pay solution of the savings banks. The integration as a further “funding source” in the new giropay product of paydirekt is about to be launched. At this point, it should be mentioned that it was the discounter effect, i.e. the entry of Lidl (2003) and Aldi (2005), that marked the beginning of the triumphal march and thus the strong increase in girocard transactions.

The German’s favourite card…

Today, the market coverage of the girocard is comprehensive, both on the part of the cardholders and the points of acceptance. And this despite the fact that some private and new banks have degraded the product in recent years, taken it out of their portfolio or not even considered it at all, but more on that later. According to a representative Allensbach study on the use and acceptance of cashless payment methods, around 97 percent of the citizens surveyed aged 16 and over in Germany owned a girocard in 2021. In total, more than 100 million of these cards are in circulation and the Corona pandemic has ensured an unprecedented increase in acceptance points.

In the last 3 years, almost 250 thousand points of acceptance have been added. Now you can finally pay with your girocard at the bakery around the corner… And the growth in transactions and turnover is also impressive. According to EURO Kartensysteme, the 3 billion transaction mark was broken for the first time in 2022. Turnover in 2021 was 253 billion euros (134 billion euros in the first half of 2022).

Maestro is being discontinued – and what does that mean for the girocard?

So, is all that glitters gold with the girocard? Of course not, but the press articles and comments on the girocard and especially on the discontinuation of the Maestro co-badge by MasterCard in recent weeks and months border on ignorance. But perhaps the supposed end was deliberately spread on the net with the hope that many articles would simply be copied blindly from one another. Even so-called “payment experts” speak of a “near end of the girocard”. Other examples of headlines one can read lately are: “EC card on the brink of extinction”, “The classic EC card probably no longer has a future in Germany” or “Discontinued model girocard”. To get straight to the point, this is of course complete nonsense and one can ask oneself who could profit from this panic and opinion mongering?

But first, let’s deal with the facts. Mastercard has been dealing with the discontinuation of Maestro for some time. The girocard did not play a role in this, as it is a debit card system that is used worldwide and the announced end affects all countries in Europe. This step is likely to follow in other parts of the world as well. In fact, Maestro is not just a separate debit card brand, but an international payment network with a separate technical infrastructure from the Mastercard credit and debit card networks, which was launched back in 1985.

In the first place, therefore, the realisation of synergy effects and cost savings will have played the decisive role in Mastercard’s decision. Another important factor concerns the biggest disadvantage of the Maestro card, namely that it cannot be used in the growth market of e- and m-commerce. In other words, issuers were not obliged to approve them for e-commerce and that was the rule in Germany. Mastercard and Visa have been positioning their new debit card products (Debit Mastercard and Visa Debit, respectively) for the strong trend towards digitalisation and online commerce for several years. As EVP Product & Innovation Europe Mastercard, Valerie Nowak explains about the abolition of Maestro: “This is not exclusively about the ability to use a debit card more easily and smoothly in a digital environment. For example, a debit Mastercard can also be used – just like a Mastercard credit card – to guarantee travel bookings.”

Long transition period does not yet make Maestro disappear immediately

Maestro has been integrated as a co-badge and thus with its own payment function on a girocard since the 1990s. As long as the cards were used at ATMs or payment terminals in Germany, these transactions were processed via the electronic cash system (today girocard). It was only when the girocard was used abroad or at a SumUp / Zettle terminal (these are the small white payment terminals that do not accept girocard) that Maestro with its international payment network was used. In this case, the debit of the bank account behind it, corresponding to that of a girocard, basically took place on the next bank working day, so that the cardholder felt no difference to his or her dear bank card.

And what now follows directly from Mastercard’s decision regarding Maestro? Maestro cards may only be issued until the end of June 2023. The Maestro co-badge on girocard cards with a validity beyond the above-mentioned date will continue to exist. One of our employees was recently issued a new savings bank card by one of the largest savings banks in Germany because his old card had expired. The validity of this card is dated 12/2026, so in total this card will still be able to run on both the girocard and Maestro networks for over four years.

And how are the individual banking sectors preparing for the Maestro phase-out?

The validity periods of the girocard are in the range of four years for most banks and decisions regarding card portfolios are therefore always strategic in nature. For the savings banks alone, a complete replacement of the approximately 46 million savings bank cards (this is the name of the girocards in the savings bank sector) is likely to lead to costs in the small to mid three-digit million range. The savings banks therefore made a strategic decision in favour of the girocard a long time ago and expanded the savings bank card to include the option for a co-badge with Debit Mastercard (DMC) as early as 2020. Admittedly, only a few savings banks have made use of this so far, but that will change as the day for stopping the issuance of Maestro cards draws closer. And Mastercard surely hoped to put the German banks under pressure by discontinuing Maestro. They would be too happy to replace the large German market and the girocard with their own debit card brand. Payment service providers such as SumUp or Zettle, which do not accept girocard and currently rely on the co-badge Maestro, can also continue their business model, as they already accept the international debit and credit card brands of Mastercard and Visa. So what changes then in relation to the existence of the girocard? Exactly, nothing!

With regard to the Sparkassen-Finanzgruppe, it could well be that Mastercard has scored an own goal. Perhaps, in view of a Maestro co-badge share of well over 90 percent, they felt too confident to migrate it to the Debit Mastercard. There are currently rumours that Visa was able to win over 40 percent of the savings banks for Visa Debit, even though the solution is still being implemented and Mastercard enjoyed a time advantage of more than two years.

The other large banking sector, the Volks- und Raiffeisenbanken, are also preparing for the conversion of the co-badge to Debit Mastercard or Visa Debit. The cooperative sector has also decided in favour of the girocard for the long term, and it seems that the last word has not yet been said among the cooperatives with regard to their possible participation in EPI 2.0. Together, the two banking sectors account for well over two-thirds of girocard cards and even without the private banks, the girocard is not at its much-vaunted end in the medium to long term.

But the private banks are also preparing for the change of the co-badge with some delay. For these banks, too, DMC and Visa Debit are considered the primary solutions, which also ensures the continued use of the girocard abroad beyond 1 July 2023. As mentioned at the beginning, there are direct and neo-banks that have either dispensed with the girocard altogether or have downgraded it compared to the international debit card brands. At this point, a DKB, N26, Targobank, Comdirect or Santander can be mentioned. However, we always ask ourselves whether this is really about product strategy aspects (which we cannot really understand) or whether it is rather the incentives by the international credit card organisations (ICS) that are decisive. But there are also other examples of the expansion of the girocard, as shown by the plans of the major US bank J.P. Morgan Chase, which is apparently working on a licence to issue girocards in Germany.

What do customers and traders think?

It doesn’t really matter to the customer and cardholder, and as long as the card is accepted and works and the account is debited the very next bank working day, he will not complain, regardless of whether he holds a Debit Mastercard, Visa Debit or girocard in his hand or has deposited it in the digital wallet. At most, he could cite nostalgic reasons for refusing, because he has grown so fond of the girocard or because he is fundamentally critical of American companies. On the acceptance side, retail stores with POS in Germany are still firmly in favour of the girocard, not least because of the high market coverage, but especially because it is significantly cheaper than international debit cards. Some retailers still use the girocard to process guaranteed direct debits, although the loss of market share and importance of direct debits compared to the girocard has been quite significant in recent years.

We can therefore state that the girocard will continue to run after the end of Maestro card issuance and is not a discontinued model or even doomed to death. Either because the girocard initially continues to have a functioning Maestro co-badge or this co-badge has been replaced by the DMC or Visa Debit.

And where does the girocard journey go …?

So is everything OK with the girocard and we can sit down again?

Not at all! As briefly mentioned at the beginning, the girocard and thus GBIC completely missed the trend for online retail. The strong positioning of the girocard in stationary retail could not be achieved in e- and m-commerce. On the contrary, it is non-existent there. It is very difficult to understand why the girocard was not introduced as a separate payment method in the checkout many years ago. Instead of making up for this step with a long delay, a strategic decision was made to integrate the digital girocard into payment platforms or payment methods. So you will still not be able to select the girocard directly as a payment method in online shops or apps. Instead, it will now be integrated into the “new” giropay together with paydirekt, for example. Whether this further development of paydirekt with the integration of the girocard will be a success story can be doubted based on the history, especially since EPI 2.0 is probably not yet off the table and it is difficult to imagine two parallel online solutions.

In this respect, one can only welcome the efforts of EURO Kartensysteme (EKS) as a joint venture of the German banking industry and responsible for the marketing and business development of the girocard. In exchange with market participants and merchants (especially online merchants), requirements for a digital girocard as well as corresponding use cases for e-commerce are being defined. In this context, the EKS should probably play a stronger role in the operational development of the girocard at the POS, but especially in e- and m-commerce. Any improvement in the time-to-market and the strengthening of the online capability of the girocard that can be achieved in this way can only be endorsed and supported. If you then reunite the product strategy and pricing, you are not far away from a “real” scheme. However, it should not go unmentioned that the future girocard co-badge cards with the DMC or Visa are already online-capable and can be used directly in e- and m-commerce. It will be exciting to see how this competition on the card between the two payment methods develops – but that would be real competition for once.

Perhaps the double regulation will then be dealt with once again. The girocard is the only regulated payment system in Europe that is affected by two regulations. In addition to the interchange fee regulation (MIF regulation), authorisation fees must also be freely negotiated between merchants and card issuers since 1 November 2014. The separation of product and price has led to a high degree of complexity and can have a huge impact on acceptance and competitiveness in online retail compared to other alternative payment methods.

In the growth market of e- and m-commerce, the girocard is still in its infancy and we will see whether the strong positioning at the POS can be transferred to online commerce. In this market segment, far too much time has been lost and it will now depend on the right decisions. For the stationary retail, we are very sure that the future of the girocard is secured in the long term for the end customer but also for merchants. When asked in an interview with the IT-Finanzmagazin whether the girocard will still exist in 10 years, the managing director of EURO Kartensysteme Oliver Hommel answered: “Yes, the girocard will still exist in 10 years! And we can only agree with that…

Apple Pay(ment processor)

Update from 7th October below the article

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.

The (end) customer as the user
The card-issuing institution, i.e. the customer’s bank
The merchant
The acquirer, i.e. the bank or payment service provider that provides 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!

Update 07.10.2022:

4 months ago we reported on Apple’s current and future payment activities. One third of an entire iPhone product cycle is a long time for Apple. And time for us to give an update on which products are now on the market and to see how Apple has responded to the market developments of the past months.

Apple Pay

In a nutshell, Apple has now overtaken Google and is the number one for mobile payments at the point of sale in Germany. However, there is not much else to report. The development is in line with cashless as well as contactless payments and is not increasing at top speeds but constantly.

Apple Card

Things don’t look quite so rosy for the Apple Card at the moment. Instead of headlines about new market entries, there is rather news about poor customer service and delayed refunds. This has now even brought the responsible financial supervisory authority in the USA onto the scene. Whether this is the reason for the perceived standstill in the expansion of Apple’s credit card or whether Apple is cutting its teeth with the EU regulators? In any case, a few regulatory hurdles would still have to be overcome for a market launch in Europe. And that would certainly not go unnoticed by the resourceful journalists of the relevant information sources. An entry into the European market via Germany would also be unusual. So it can be said that we in this country will certainly have to be a little more patient until a corresponding offer is launched.

But why the acquisition of the British open banking company Credit Kudos, which unfortunately has not been heard from much since the acquisition? Originally, this was seen as an indication that the Apple Card might find its way to Europe via the United Kingdom. But perhaps Apple is more interested in the technology that has turned Credit Kudos into a $150 million business. Open banking technology, which is what is on offer here, would open the door of Apple’s payment services to many new services. An exciting topic, which we’ll revisit in our blog in due course.

Apple Tap to Pay

In the spirit of “attack is the best defence”, Square has now officially announced its collaboration with Apple’s Tap-to-Pay feature. Here, the transaction can be processed via the Square app on the iPhone. Additional hardware, as known from Square, is thus no longer necessary. This can already be tested in Apple Stores across the United States. Other countries will have to wait a little longer. It is questionable whether European partners like Adyen expect the service to start soon in Europe, or how the interim availability of their own Adyen terminals can be explained. But perhaps this only shows that Apple’s Tap to Pay is only expected to coexist with familiar hardware at the point of sale, at least initially, and that its usefulness is being tested depending on the retailer, volume and product/service portfolio.

Apple Pay Later

The most visible progress for us over the last few months has certainly been with Apple’s BNPL solution “Apple Pay Later”. Even though things are also delayed here. Originally, with the update to iOS 16, it was planned that every purchase via Apple Pay could be paid off in up to 4 instalments over a maximum of 6 weeks. Since this is to be possible for every transaction at every checkout, regardless of the merchant, Apple itself is acting as a lender here with a free loan. The contracting party is the company’s own finance subsidiary Apple Finance LLC. Now, however, it seems that it will not start in the autumn of 2022 as planned, but rather in the spring of 2023 in the USA. And the BNPL sector, which has been hit hard lately, could certainly use a boost in attention.

But maybe Apple is not even in a hurry to quickly enter the European and other markets, given the current economic outlook. The market is cooling, sentiment is sinking and recessions are now more than rumours. Apple is used to taking new markets by storm with new products. Since this is currently more difficult than it was a year ago, one could assume that even Apple is shifting down a gear or two and concentrating on other product developments with more immediate business success.

Crypto at war?

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”.

Unity and justice and freedom…

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.

Unity

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. “

Law

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

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:

Secure payment processing and thus primarily the protection of the payer
The equal use of payment products of all European payment service providers throughout Europe (increase in competition).

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.

Conclusion

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…