German payment services in transition: Technological innovation, PSD2 and new competitors

Introduction

The payment services landscape is currently overshadowed by the scandal around Wirecard. Unfortunately, this is distracting the focus from technological innovation and the increasing digitisation of daily life, which have significantly changed the payment landscape in Europe and, in particular, Germany in recent years. Gone are the days where Germany, in comparison to its other European neighbours, was perceived as a somehow exotic “cash-is-king dinosaur” in the payment services universe.

In particular, the strong and continuous growth of eCommerce has promoted the rapid development of technical solutions for the digital initiation and processing of payments. The increasing number of innovative German payments services providers, including numerous FinTechs, gives strong evidence to this. Furthermore, global players in the payment sector are increasingly focussing on Germany seeking to profit from the ongoing growth potential. This has resulted in strong and continued M&A activity in the payments sector in Germany with landmark transactions such as the sale of Concardis, Heidelpay, Payone.

This will result in traditional structures in the German payments landscape being further put to the test:

• The pressure on the margins of established, smaller domestic German payments services providers is likely to increase.
• The pressure on margins is likely to propel consolidation and the creation of larger, Pan-European payment services providers (as recently evidenced through the merger of Worldline and Ingenico) that are capable of competing with successful global players (mainly from the US and China).
• The structural changes in the European and German payment sectors also pose a challenge to central banks, supervisory authorities and the legislator. The internationalisation of payment transactions has an impact on supervisory mandates as well as on the required common competition and data protection standards. The Wirecard scandal has highlighted how important efficient supervisory oversight is – for the benefit of all market participants.

The influence of technological developments on payment habits

Only in 2018 and for the first time ever, the share of cash payments in Germany fell below the aggregated share of card and digital payments. In particular, the following technological developments have contributed to this:

• The widespread use of smartphones and mobile internet led to changes in shopping habits of German private consumers in a move away from brick and mortar shops to eMarket places.
• eMarket places established a variety of alternative payment methods being offered to customers such as digital wallet solutions and payment through crypto currencies.
• The meanwhile widely spread "Near Field Communication (NFC)" technology, which enables contactless payment with a card and smartphone.

The introduction of easy-to-use mobile payment technology (for instance, Apple Pay, Google Pay and Samsung Pay) and the still increasing use of smartphones for payment will further promote cashless payments in Germany and Europe in the coming years both at the point of sale (POS) as well as for mobile online retail, which also includes in-app purchases.

New competitors in the payment sector

New technologies are changing the competitive environment in payment transactions. It turned out that established players in the German payments sector, in particular traditional German banks, were only partially able to cope with the rapidly advancing technological progress and the changes in payment methods. In addition to competition from numerous innovative FinTechs competition is also stemming from large international technology groups, so-called BigTechs, which are increasingly gaining market shares in the payment sector in Germany. The BigTechs (mainly from the US and China) are primarily technology companies that have become dominant players with digital business models as platform providers that combine various services on one platform, thus creating so-called platform-based ecosystems. Some have entered the European payments market already and have successfully offered their payment services also in Germany, including by making use of the European passport.

Access of third-party providers to payment accounts under PSD2

The described developments and innovations also had an impact on the regulatory framework for payment services. At the European level, the Second Payment Services Directive (PSD2) was intended to reflect the progressive digitalisation of payment transactions in the legal framework. The comprehensive European reform aimed at improving the security of payment transactions, enhancing consumer protection, fostering innovation and increasing competition on the market.

The transposition of PSD2 into national German law required changes of various German statutory acts. Most notably, the regulatory aspects were implemented in the German Payment Services Supervision Act (Zahlungsdiensteaufsichtsgesetz – ZAG), whereas the civil law provisions were included in the German Civil Code (Bürgerliches Gesetzbuch – BGB). PSD2 was implemented in two phases with the first phase beginning on January 13, 2018 and the second and final phase on September 14, 2019.

As an essential aspect of PSD2, the reform opens account interfaces for third-party payment service providers in order to enhance competition. This right of access is meant to open the door to the development and establishment of innovative business models. PSD2 covers these new models by introducing two new regulated payment services – “payment initiation services” and “account information services”. Payment initiation services (Zahlungsauslösungsdienste) are defined as services to initiate a payment order at the request of the user with respect to a payment account held at another payment service provider. Account information services (Kontoinformationsdienste) are defined as online services to provide consolidated information on payment accounts held with another payment service provider.

Access of third-party providers to technical infrastructure under “Lex Apple Pay”

While the European reform under PSD2 has opened the platforms of account banks to third-party providers, it has at the same time also become important for these account bank themselves to gain access to the platforms and ecosystems of BigTechs given the increasingly dominating role of these international technology companies. Germany has taken a leading role in the regulation of access to such platforms.

As a unilateral national reform not driven by European law, Germany has introduced a right of payment service providers and eMoney issuers to access “technical infrastructure” that contributes to payment services and eMoney business in Germany under certain conditions and limitations pursuant to the new Sec. 58a of the ZAG. This provision entered into force on January 1, 2020 and has been dubbed “Lex Apple Pay” as it was motivated by the objective to grant payment service providers access to the NFC interfaces of Apple’s mobile devices. The right of access is intended to promote technological innovation and competition by allowing consumers to choose among payment services. While the wording of the new provision is relatively broad, it is intended to only cover “system undertakings” (Systemunternehmen) that enjoy a “gatekeeper position” regarding the access to the consumer. The provision is expected to generate indirect pressure on the relevant BigTechs to open their platforms even without the direct enforcement of the right of access.