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German instant payments & SCT Inst adoption


Real-time payments (RTP) are a hot topic in Europe due to the recent launch of the single euro payments area (SEPA) instant credit transfer (SCT Inst) scheme but the biggest market, Germany, is not leading the adoption path says Leo Lipis, an InstaPay Advisory Board member and head of Lipis Advisors. Ubiquity isn’t expected until 2019 or the year after.

The lack of widespread volume uptake of instant payments in Germany so far is due to the present lack of a domestic champion clearing and settlement mechanism (CSM) and the non-migration so far of its largest banks in Deutsche and Commerzbank.

Despite more than 500 payment service providers (PSPs) signing the adherence agreement with SCT Inst scheme organisers, the European Payments Council (EPC) to migrate, all but a handful of these are savings banks, with lower volumes. In addition, these Sparkassen (savings banks) don’t expect to actually ‘go live’ until July 2018 anyway when they will collectively migrate to the SCT Inst scheme parameters of:

  • 10 second delivery,
  • 24×7 constant availability & so on.

The exception is Hypovereinsbank (HVB), part of the UniCredit Group, who were a large bank early adopter, allowing some of its customers to make and receive real-time payments from day one [as evidenced by InstaPay’s recent German IP webinar with HVB’s Corrina Lauer -Ed.], but they are an outlier.

How banks, consumers, and businesses in Germany will react to the still relatively new SCT Inst payment type is a moot point, as uptake is yet to scale up. Germany has historically not been at the forefront of payment innovation anyway and is unlikely to lead the Euro area in the adoption of instant payments for a variety of reasons.

Firstly, the German payments landscape is one of Europe’s most complex. While there are two global players in Deutsche Bank and Commerzbank, their position in the domestic market is not as dominant as one might think. Cooperative and savings banks collectively have about 70% of deposits. For example, Germany’s roughly 1,500 cooperative banks have more than 30 million customers – in a country of just over 80 million. They are likely to wait until 2019 to migrate. The aforementioned Sparkassen (savings banks, which number about 500) have almost 50% of all retail deposits and aren’t due ‘on stream’ until the summer.

This does not leave much room, in terms of market share and volume, for the other commercial banks and international subsidiaries in Germany – such as HVB, Targobank, and ING-DiBa – to have a major impact. They simply don’t have a comparable share of national retail deposits, in comparison to their equivalents in other large European markets. And none of this even mentions challenger banks, which could further fragment the market. While new on the scene, they are threatening to upend the banking market in Germany, as elsewhere in Europe.

Clearing and settlement mechanisms (CSMs) & TIPS
While many countries in the Euro area such as Spain, Portugal, and France have a domestic champion providing a clearing and settlement mechanism (CSM), Germany does not. The big German banks with an international presence use EBA Clearing’s STEP2 to process SEPA Credit Transfers (SCTs) and SEPA Direct Debits (SDDs). They are likely to choose EBA Clearing’s RT1 platform for processing the real-time payments now being introduced under the SCT Inst scheme. Other smaller banks clear bilaterally, use STEP2, or the German central bank’s SEPA Clearer. Some of these banks will almost certainly wait and go with the Frankfurt-based European Central Bank’s (ECB) pan-European TARGET Instant Payment Settlement (TIPS) solution that goes live in November 2018.

This varied use of different CSMs in Germany hides an even more complex picture of the German banking market’s embrace of real-time payments, as described above by the different migration speeds of cooperative, savings and large banks. Deutsche Bank, for instance, aren’t planning to go live until November 2018 and Commerzbank sometime in 2019. This lack of uniform adoption will initially inhibit SCT Inst usage in Europe’s largest market.

Even when the banks do begin accepting instant SCT Inst-compliant payments, this does not necessarily mean that all customers will necessarily have access to real-time payments. Some banks may only allow customers to receive real-time, for example, and not allow for consumer initiation; others will only allow corporate customers to initiate RTP as they slowly ramp up their provision.

Most Germans are as yet unaware of what real-time payments are, or of their impending ability to make them. Only a small percentage of consumers and businesses are able to make them at the moment. Many experts don’t expect instant payments to take off until 2019 or 2020 at the earliest – certainly not before TIPS is launched, expanding the SCT Inst scheme’s critical mass and volume uptake. The advent of TIPS may increase the pressure on financial institutions (FIs), however, to allow for all types of customers to initiate and receive fast sub-10 second payments.

Adoption obstacles
Looking forward to the future, there are a number of hurdles – some small, some not so small – that need to be overcome before real-time payments and operations can secure a foothold in the complicated German market.

One such hurdle will solve itself simply, as more and more banks introduce new connectivity and refresh their internal IT, enabling systems to receive RTP more easily and accommodate the move away from batch processing. This slow trend negates the issue of high rejection rates due to incompatible legacy IT back-office processing systems that are incapable of handling real-time payments.

However, there is an issue away from the consumer-facing retail side of the bank that needs overcoming and that is the fact that many corporate clients want to receive consolidated batch reports of payment transactions because that is what their systems are set up to process. They don’t necessarily want to incur IT update expenses or receive hundreds or thousands of individual line-by-line account postings. Indeed, many expect the bank to sort these kinds of problems out for them.

Corporate customers are hoping that the problem can be solved by banks offering application program interfaces (APIs) and batch solutions that still allow corporates to send and receive batch files. While these issues should not be exaggerated, they will take some time to work out. The issues are likely to be solved by 2019 or 2020, which is also when the volume of real-time payments is predicted to expected to dramatically increase.

Cash-heavy & card-centric country
How do I expect real-time payments to be used in Germany once volume begins to grow dramatically around 2020? Well, Germany is notoriously a cash-heavy country, and that is unlikely to change in the short-to-medium term. German consumers and corporates have much higher levels of non-cash payments than their southern European counterparts, so many of these payments are not likely to move to real-time. A perfect example of this is the beloved SDD: many Germans make recurring SEPA direct debit bill payments via SDD, a type of payment that benefits little from moving to real-time because it is known well in advance, happens on a regular basis, and, crucially, is initiated by the creditor, not the debtor. Last but not least, the law requires creditors to notify the debtor one day before the SDD is made.

Another type of payment not likely to move to real-time in Germany is the Point-of-Sale (PoS) transaction – either at the physical PoS, or for online e-commerce purchases. For physical payments, Germans often pay with cash, especially for low-value everyday transactions. For online purchases, SCT Inst may make some headway, especially in the context of schemes like Giropay or Sofortüberweisung, but cards and SDDs have a large incumbent advantage that will be difficult to overcome in the short term.

P2P, B2B & B2C transactions
This leaves peer-to-peer (P2P), business-to-business (B2B) and business-to-consumer (B2C) transactions. While current SCT Inst payments have an average transaction value in the low four digits – implying that a healthy number are of a B2B nature – the increasing amount of mobile banking apps, which allow users to split bills or send friends money, increases the likelihood that consumers will adopt these systems and change the nature of payment flows. Through such mobile apps many consumers will learn about the ability to make real-time payments.

Many B2C transactions share similarities with SDDs. For example, salaries, which in Germany are typically paid out on a monthly basis, are known well in advance; are made regularly; and are usually for the same amount. The same is true for other types of B2C payments, such as dividend payments. While there would seem to be some value-added in insurance payouts or employee expense reimbursements being made in real-time, it is rarely the case that the actual processing of the payment is the bottleneck. Real-time surely has a role to play in B2C – such as payments to freelancers and some types of insurance payouts – but these are likely to be niches and will not represent high volume initially.

Future opportunities
This is not to say that real-time has no future in Germany – or in SEPA – it does of course. But rather that it will take a few years before instant payments enjoy the success seen in other markets such as Denmark, Sweden, or the UK, which moved unilaterally before the advent of SCT Inst. There are opportunities out there, but it will take time for mass migration and uptake to take hold in the German, and some other, markets.

This relates to the diversity and specific nature of the payments market in Germany. The ‘cash-heaviness’ of German payment habits and the large incumbency advantage enjoyed by other non-cash payment methods, like cards, will take time to change.



Author: Neil Ainger