Payments – an unexpected catalyst for innovation

5 November 2018

Germany is undergoing something of a fintech renaissance with startups like challenger bank Number 26 taking advantage of the culture of innovation fostered in cities like Berlin. This spirit of innovation is being reflected in German consumers’ spending habits. Traditionally preferring cash, Germans are now moving gradually towards electronic payments.

A Deutsche Bundesbank* survey found that in terms of volume of transactions, cash has dipped below 50% for the first time. There has been an upsurge in both contactless payments and electronic payments, with 44% of people saying they use services such as PayPal. Indeed, Android Pay went live this summer and Apple Pay is due to launch at the end of 2018.

This paints a picture of a desire from German consumers – bank customers – to embrace electronic payments and all that they facilitate, a desire that banks in Germany need to respond to.

Competing against the new disruptors

A recent report from Oliver Wyman** looked at the overall picture of the German banking market and reported that banks are under severe threat from innovative new players. It commented that:

“German banks cannot escape the big drivers of our time – innovative technology, changing customer demand, regulation and socio-economic factors…The main challenge will be to find a sustainable model for both disruption and evolution.”

Competition from these new, technologically advanced rivals will drive an increasingly digital economy, whether the incumbent banks are ready or not. If, as the Oliver Wyman report suggests, they are to be positioned successfully, banks will need to either facilitate this competition or become a supplier to it.

As new cashless options become more widely accepted in Germany, significant changes may occur. The growth of contactless payments in other European markets provides a useful comparison. Few people expected contactless transactions would take off in the way that they have, with figures from UK Finance*** now showing that 10 years after their introduction in the UK, one out of every three payments is contactless and that the number of terminals accepting contactless cards has grown by 45% in the last year alone.

Faced with such pressure from challenger banks, non-banks and more innovative foreign banks operating locally, German banks need to urgently address the factors that will enable them to compete in this evolving market.

Evolution and revolution

But how can traditional banks embrace the digital economy and provide their customers with the services they want? Payments technology is one of the tools that enables this revolution and delivers innovation. Like their fintech competitors, banks need to be able to experiment, move quickly and process efficiently. It can be tempting to continually evolve legacy payment platforms, but this can have the unintended consequence of compromising key business processes such as security and service outages. Legacy payment infrastructure was designed to deliver slow, batch processing with manual intervention. In today’s instant environment of 24x7x365 service availability, trying to rebuild and update old technology simply isn’t a good commercial option. If banks are to compete with their new, technologically advanced competitors, they require a modern approach that not only levels the playing field, but uses technology to tilt it in their favour.

Responses such as Icon Solutions’ IPF, creates a payments platform that is fully geared towards an evolving digital economy, thus driving the transformation that German banks need. It is built on the latest open-source technology and is designed to complement existing back office banking systems enabling the rapid integration of new functionality without compromising existing batch payments. By using IPF, banks can be more flexible, implement with speed, operate with confidence and deliver ROI.

As consumer expectations continue to increase fueled by technology and speed, and digital-first competitors respond by increasingly encroaching on traditional bank territory, it has never been more critical for institutions to not only protect their existing payments business but to also create new and innovative alternative sources of revenue.



* Deutsche Bundesbank – Cash remains the favoured means of payment

** Oliver Wyman – Banking Report Germany 2030

*** UK Finance – Contactless 10 Year Report September 2017

Richard Dear