Modern Money

Banks Lagging Behind in the Mobile World

If banks don't get mobile, they will become increasingly irrelevant in the future.
  • Why it matters

    Why it matters

    Aggressive new players including PayPal, Apple Pay, Google Wallet and Yapital are grabbing customers by offering fast, safe mobile payment transactions, leaving Germany’s financial institutions in the dust and seemingly without a cohesive plan on how to catch up.

  • Facts


    • PayPal is cutting loose from Ebay, which will free them up to develop additional market services.
    • With 15 million customers and a high level of consumer confidence in Germany, Paypal is outstripping many of the country’s largest banks.
    • Most payment transactions in German still happen by credit and debit cards, online debit card transactions via banks still rely on the use of security codes.
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Theodor Weimer, the management board spokesperson of Bavarian bank HypoVereinsbank, clearly identified the enemy at a meeting in Frankfurt recently. “The real battle will not be fought between the banks,” said Mr. Weimer. “The danger is the non- banks and near-banks.”

He specifically named PayPal in his remarks, but he might well have been referring to the rapidly growing numbers of new service providers such as Apple Pay, Google Wallet or Yapital.

While banks understand the threat these new services pose, the industry has not reacted with any cohesive strategy for meeting the challenge. PayPal has long outperformed them in online trading. If the banks don’t change their thinking and soon, the same will happen to them with mobile payments.

The fact that PayPal is breaking loose from Ebay and plans to go public is the final wakeup call for banks. Once PayPal is independent of the online auction house, it will be much more flexible, since Ebay was an impediment to its growth. Some online shops, including Amazon, refused to integrate PayPal as a method of payment because of its connection to Ebay.

If the card swiping pilot project begins in April, it’s likely to take a year to be ready. Everything the banks are doing is taking too much time while powerful rivals are on the march.

The U.S. service provider, which has been around since 1999, already has 15 million customers in Germany – more than the Postbank, Commerzbank, or HypoVereinsbank. All PayPal customers still have bank connections in the “old world,” but for how long will that be necessary?

The company already has a banking license in Luxemburg and the way Paypal works is already a problem for banks because its transactions run over an interim account. Money received through PayPal is placed in this interim account and can be used for new purchases. Transferring money to a bank account requires a separate application that takes a few days to complete. This means part of the payment transaction occurs outside the banking world. What’s more, the financial institutions know less about their customers.

Consumers use PayPal because it is so practical. Payment requires only an email address and a password, not the cumbersome TAN identification codes used to verify account transactions in Germany, for example. In addition, PayPal offers a customer protection function that allows users to demand their money back if merchandise never arrives or is defective. It doesn’t always work smoothly, but the function is a unique selling point that gives the customer a sense of security. Why has no bank copied this idea?

Having revolutionized online trading, PayPal is now focusing on payment by smart phone. Credit card companies, cell phone makers and a range of new players from Google and Apple to lightning-fast startups are jumping on the bandwagon as well, though currently there is no standard.

Banks have remained relatively calm until now, since most of the transactions in Germany are still completed by credit card, or even classical money transfers. Every time a card is used, banks earn as licensor of the card. And since the credit card is not as popular in Germany as the EC (electronic cash) Card – the debit card system of the German Banking Industry Committee – it’s a clever move for banks to explore ways to make the EC Card mobile. A pilot project by credit unions and banks scheduled for spring will modernize payment terminals to accommodate card swiping. Savings and loan institutions are following a different path. Their cards are already mobile, but must be loaded with credit before a purchase.

If the card swiping pilot project begins in April, it’s likely to take a year or so to be ready for a wider market rollout. And even then, the EC Card still won’t be on a cellphone. Everything the banks are doing is taking too much time while powerful rivals are on the march.

PayPal also is working on mobile payment identification through face recognition, which would be available as a downloaded app. If this effort works well, PayPal could quickly overtake all the competition and the banks could be left out in the cold.

Let’s be realistic. There is no need for cards in the world of mobile payment. Even ATMs can be used with an app. Why don’t banks take all the money they’re investing in plastic cards and develop a good, secure app with it? It may be the only chance left to catch up with PayPal.


Laura de la Motte is a correspondent in Frankfurt. To contact the author:

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