Online Retail

Germany's PayPal Envy

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German banks are desperate to keep a share of online payments.
  • Why it matters

    Why it matters

    The battle over digital payments systems is only just getting started. German banks are in danger of missing the boat.

  • Facts

    Facts

    • German banks hope to get a rival to Paypal up and running by the end of this year. Critics say the system will already be outdated.
    • German banks will not just be competing with Paypal. Apple, Facebook, Google and Samsung are all looking at entering the digital payments market.
    • Paypal controls about 20 percent of the online payment transactions in Germany. An existing German rival “Sofortüberweisung” has 3 percent.
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    Audio

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The impatience of Theodor Weimer was clearly palpable. The chief executive of German bank Hypovereinsbank, a subsidiary of Italy’s Unicredit, warned in October that Germany has wantonly neglected the online payments market for far too long.

The lack of urgency among financial firms had left the playing field open to competitors such as PayPal without so much as a fight, he argued. Apple, Google and Facebook are also looking at smartphone options and setting up “digital wallets” for consumers.

“Do we begin only after the others have captured 45 percent of the market share? Wake up!” thundered Mr. Weimer.

His comments did provide a jolt. German banks now hope to have their own payment service for online sales up and running by the end of 2015. The trouble is it may already be old when it finally reaches the market.

“Pay Direkt” is the name of the system that a group of German banks hope will provide some level of competition for the industry leader PayPal, a U.S.-based eBay subsidiary that already has 16 million German customers.

Internal documents obtained by Handelsblatt from DZ Bank, one of the cooperating partners, offer the first details about the long-running German project. The closer look doesn’t provide much hope for success.

“The banks should not duplicate Paypal, but rather the companies that are challenging Paypal.”

Jochen Siegert, Finleap

“The system functions like a clone of PayPal, albeit like PayPal from three years ago,” said Jochen Siegert from Finleap, a provider of digital services in the financial services market.

“Pay Direkt” is indeed expected to operate very similarly to PayPal. Registered online shoppers will type in a username and a password, after which their payment will be deducted from their account. As with PayPal, there are consumer protections, with customers receiving their money back if there are problems with the delivery.

But many of PayPal’s newest innovations will be lacking, said Mr. Siegert. According to the internal presentation, they include the possibility to pay by invoice, or, as is common in the United States, to pay by installment.

Also missing are the possibility of making payments between private individuals, or an application for a smartphone so that customers can also pay using their mobile phone at a store’s checkout.

“A new system should be oriented to the needs of tomorrow,” said Mr. Siegert. “The banks should not duplicate PayPal, but rather the companies that are challenging PayPal.”

Payment by phone in particular is considered a trend of the future. The battle for digital payment options is only just beginning – IT giants Apple, Facebook, Google and Samsung are only just getting in on the act.

“The banks would have the opportunity to shine with innovation here, but there is already cutthroat competition in e-commerce,” said Bernd Richter of the IT data acquisition firm Capgo.

Instead, the banks hope customers will take the leap of faith with the new system because it will allow them to make payments directly through their own, trusted bank rather than via a third party like PayPal.

But is that enough to penetrate this growing market?

“The customers will not use a PayPal clone if they do not see additional value,” said Horst Rüter from the retail institute EHI.

It is true that banks are still held in high regard in Germany. But Mr. Siegert points out that PayPal has also become a trusted and secure brand in itself. He suggests the banks may be “overestimating the power of their brand.”

A study released last year by the consultancy Cofinpro found that young people between the ages of 18 and 34 trust PayPal today even more than private banks.

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Online retailers are calmly eyeing the efforts of the banking industry. For them, there’s no real hurry.

“Internet merchants have survived this long without a payment service offered by German banks,” said Mr. Rüter.

Building a new system into online shops costs money, he said, and the merchants will only do this if they believe the system will actually be used. “In the end, the customer decides if a system takes root, and not the merchants,” said Mr. Rüter.

Germany’s private banks already offer a smaller, more limited alternative to PayPal known as “Sofortüberweisung” or “instant transfers,” which is used in about 3 percent of all online transfers at the moment.

Setting up a more comprehensive alternative has taken time. Germany’s private banks had to start by inquiring with the German Federal Cartel Office whether such a joint banking venture is even possible.

The path is now clear. There have been no objections from the agency, a spokesman told Handelsblatt. “It is understandable that such a project should be jointly operated,” the spokesman said.

Instead, the obstacle might lie with the banks themselves. While hundreds of cooperative banks in Germany quickly agreed to team up, Germany’s more than 400 savings banks are still wrestling internally with how to divide up the costs.

The plan now is for “Pay Direkt” to start by the end of 2015, regardless of whether the savings banks participate or not.

U.S.-based PayPal is a thorn in the side of the banks. Not only is it taking away online transactions market share, but the company could one day become a bank in its own right in Germany.

Those consumers who use it allow PayPal to move the amount of the purchase from their checking account to a virtual account. That money remains outside of the bank for as long as the merchants do not put the money into their checking accounts.

The banks are also losing an overview of the payment behavior of their private and commercial customers. On top of that, PayPal has obtained a banking license and is already offering installment credits and loans to merchants in the United States and Britain.

Germany’s “Pay Direkt” will have an in-between account similar to PayPal’s, but it will belong to a sort of central bank. Technically, customers will transfer their money there and the merchants will debit the amount from it, not disturbing the flow of money. This is good for banks.

“The system solves a problem of the banks, but not of the merchants and customers,” said Mr. Siegert.

Private and cooperative banks as well as their associations declined to comment for this story. Instead, the Federal Association of German Banks (BdB) on Thursday confirmed only that the payment system would be ready by the end of 2015, after the reporting by Handelsblatt.

“The new system will be available to millions of banking customers who do online shopping,” the statement

One more possible difficulty in Germany is that each customer who wants to use “Pay Direkt” must first actively register for online banking at his or her financial institution. That requires a convincing marketing campaign.

 

Laura de la Motte covers banks and the financial industry for Handelsblatt in Frankfurt. To contact the author: delamotte@handelsblatt.com 

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