Tom ScholzCMS Payments Intelligence | June 26th 2017

In this article, we focus on the important decisions merchants operating in Germany need to make. First, do international merchants actually need to accept Girocard payments at all? Second, if so, do they utilise Girocard or ELV/OLV payment rails?

Written by Tom Scholz, Business Development Manager


In the first of our new recurring series, Cross-border Payments in Europe, we focus our attention on Germany, Europe’s largest market. This special report is an essential guide for international merchants with existing cross-border arrangements or for those considering expanding their payments in Europe.

The German cards market has seen a number of market changes in recent years including regulation, increased competition and changes to technology. These changes have fundamentally altered the business
case for card payments and merchants need to make sure their arrangements are still optimised.

Market background

Card-based transactions represented approximately 21% of overall market spend in 2016, of which debit cards accounted for around 69%. The majority of these debit card transactions are processed via Girocard, Germany’s local debit card scheme. Girocard is owned and operated by Die Deutsche Kreditwirtschaft (DK), the industry association for German banks.

Figure 1: Preferred German payment type breakdown

German debit cards are usually co-badged between Girocard and VPay or Maestro (owned by global networks Visa and Mastercard respectively). As with most co-badged debit cards in Europe, the Visa/Mastercard functionality is currently there mainly so that the card can be used abroad.

Acquiring in Germany is often split - domestic debit transactions are acquired by one of 19 Network Service Providers (NSPs), the largest of whom are Ingenico and TeleCash. Meanwhile, Visa/Mastercard transactions are acquired by one of 16 acquirers, the largest of whom are Concardis and B+S. However, competition has opened up the market and many acquirers are now able to acquire both Girocard and Visa/Mastercard.

Largely as a result of the European Union’s Interchange Fee Regulation (IFR) caps that entered into force on 9th December 2015, many international merchants operating across Europe are now considering not accepting local debit schemes such as Girocard (and with it, OLV/ELV) at all.

Interchange levels comparison

Before the introduction of the IFR across Europe, there was a large disparity between debit card interchange fees (see Fig. 3). VPay and Maestro interchange was around 1.5% of the transaction value on average - much higher than Girocard fees (0.3% with a minimum of €0.08 per transaction). However, since the IFR caps entered into force, merchants’ natural preference for local schemes has reduced significantly as all debit fees have been capped at 0.2%. This presents an opportunity for international merchants to introduce a pan-European acquiring solution, even though pan-European acquirers are usually unable to accommodate local payment types such as Girocard or ELV/OLV. The attraction to these solutions is that merchants do not need to manage a number of acquiring contracts, and higher volumes with one acquirer should enable economies of scale which should be passed on to merchants in the form of more competitive pricing.

It should be noted that Girocard interchange fees can still be lower than VPay/Maestro due to a 2014 commitment from the leading German banking associations that Girocard interchange fees can be bilaterally negotiated.1 This is a positive development for merchants and, in conjunction with the threat of pan-European acquiring solutions, means that merchants should now have more leverage to negotiate Girocard fees further (i.e. below the 0.2% IFR caps) as the banks will be keen to prevent Visa and Mastercard gaining market share.

Figure 2: German card type breakdown

Domestic and International merchants - Girocard vs OLV

Should German merchants decide that they still want to accept domestic debit schemes, then they have the choice of accepting domestic debit card transactions via two methods –Girocard or direct debit. Direct debit transactions are performed via either ELV (Elektronisches Lastschriftverfahren/electronic direct debit) or OLV (Online Lastschriftverfahren/online direct debit).2 While Girocard transactions are usually authenticated via a traditional Chip & PIN transaction, OLV and ELV do not actually count as a card transactions at all. Rather, they are a direct debit using bank account details taken from swiping the card.

There are pros and cons of both methods and it is essential that merchants weigh these up when deciding how they accept transactions. Girocard is of course more secure than ELV/OLV. However, because OLV is an online version of ELV, it is able to provide fraud/risk checks on the cardholder, which should significantly reduce the rate of fraud. As a result, NSPs are often willing to offer a payment guarantee with OLV which ensures that merchants should not be liable for fraudulent transactions.
Girocard has a bilaterally negotiable interchange fee (capped at 0.2%) payable to DK, ELV has no fee aside from direct debit processing fees but merchants are liable for any fraud while OLV often has the payment guarantee. In addition to this, a processing fee (received by the NSP) is charged for all of these payment methods.

 

The current competition dynamic means that in many cases there is scope to negotiate Girocard interchange fees below 0.2%. 

 

Girocard interchange charges have been subject to fee decreases as a result of the IFR and the 2015 ruling by the German competition authority. The current competition dynamic means that in many cases there is scope to negotiate Girocard interchange fees below 0.2%. Meanwhile, merchants who have transitioned from ELV to OLV should have seen savings as the payment guarantee for OLV is likely to be lower than the rate of fraud for ELV.

In terms of cost, we have generally observed that the OLV payment guarantee is lower than Girocard interchange. Despite this, many merchants are unwilling to accommodate OLV because it can incur additional head office resource which may eliminate any transactional savings. Historically, OLV/ELV has been the most popular method for German merchants but since 2005 Girocard volumes have exceeded OLV/ELV volumes.

Figure 3: Domestic debit schemes vs global schemes

Introduction of Contactless on Girocard

Contactless in Germany is still relatively new, with only 15% of card holders claiming to have used a contactless card in the previous six months.3 There are also only a relatively small number of contactless Girocards in circulation, with the vast majority of contactless cards issued being either credit or Visa-only or Mastercard-only debit cards . In other EU jurisdictions, contactless has been successful at cannibalising cash transactions and with Germany still seeing a high volume of cash spending, it is likely that contactless uptake across Germany will likely increase over the next few years. Therefore, merchants in Germany should now begin to think about how contactless compares to cash in terms of speed, cost and security.

For more information on the savings opportunities in Germany please contact Tom Scholz at tscholz@cmspi.com

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1 www.bundeskartellamt.de/SharedDocs/Meldung/EN/
Pressemitteilungen/2014/08_04_2014_EC-Cash.html
2 It is worth noting that OLV is considered a modern, updated version of ELV
3 www.paymenteye.com/2016/05/26/is-germanys-payments-landscapechanging/

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