Cash is Still King In Germany

  The German card market is unlike any other in Europe. In contrast to the other large European economies, cards form a relatively small part of the overall payments landscape in Germany, representing just 17% of all electronic payments, or a little over half the EU-15 average, according to the European Central Bank. Instead, credit transfers and direct debits are the favored payment instruments.
  Within the card transactions' segment of the market, automated teller machine cash withdrawals are by far the most common use of cards. Indeed, cash withdrawals in Germany, which were estimated until 2002, seem to have been under-recorded in the past.
  Latest figures compiled by the Bank for International Settlements indicate that with more complete data, the number of ATM withdrawals in 2003 was almost double the estimated figure for 2002, while the value of cash withdrawn was more than double the estimates. Average value of a withdrawal was found to have risen from 159 euros in 2002 to 177 euros in 2003.
  In relation to ATM withdrawals, the use of debit cards for point-of-sale payments is comparatively small in Germany. Although most cards can be used for payments as well as at ATMs, the number of payments was half the number of cash withdrawals, while the value of payments was less than one-fifth of the volume of cash withdrawals. The average value of POS debit payments in Germany was 67 euros in 2002 and 65 euros in 2003.
  The two most important debit payment types are ec cash and ELV, or Electronisches Lastschriftverfahren. With ec cash, banks recognize the transactions under the rules of ZKA, or Zentraller Kreditausschuss, which coordinates the activities of the five main banking associations. Because they are 100% authorized online with personal-identification number entry at the point of sale, the transactions are both official and guaranteed.
  ELV is cheaper to merchants but carries higher levels of risk. The POS terminal captures data from the card's magnetic stripe, including branch sort code and account number. Transactions are cleared through the German clearing system, which is free of charge to German banks, and appear on the cardholder's account as a direct debit.
  There is no interchange on ELV, and fees are low for terminals and the collection of transactions, which are handled by 'Netzbetreiber,' or network, service providers. These NSPs, instead of credit card merchant acquirers, are the main terminal suppliers in Germany, though larger merchants may have their own POS infrastructure.
  Thomas Fischer, managing director of LBBW (Landesbank Baden-Wurttemberg), estimates that in 2003, ec cash transactions totaled 38 billion euros compared with 65 billion euros for ELV transactions. "Three store groups recently opted for ec cash and added 100 million euros of sales per year," Fischer says.
  Fraud attacks on ELV transactions have increased, and the cost of insuring against fraud, according to banking sources, is higher than the cost merchants could expect to pay for an interchange-based payment guarantee. Aldi and Lidl, two of the renowned German cost-cutter store groups, recently said they would only accept cash and ec cash transactions in the future.
  "(Europay/MasterCard/Visa) implementation will shift transactions from ELV to ec cash because not all the data required in an EMV transaction is contained on the mag stripe," says Friedhelm K?nemund, head of bank relations at TeleCash, the NSP owned by First Data Corp. "There's already increasing use of ec cash because of the rising fraud on ELV," though fraud overall remains low in Germany by international standards.
  Against the background of low retail banking profitability, complex debit procedures and the national predilection for cash, Germany's EMV migration is a particularly difficult case, further complicated by the perceived need for ultra-high security.
  Though German EMV chip cards will be accepted in other countries, and EMV cards from other countries will be accepted within Germany, "EMV in Germany is, unfortunately, a German implementation, not the Visa/ MasterCard implementation," says smart card consultant Lutz Martiny.
  To ensure that transactions on existing mag-stripe cards in Germany cannot be repudiated by the cardholder, the cards incorporate a feature called 'MM,' a machine-readable code embedded in the plastic. Some variation of this will be built in to German EMV chip cards, Martiny adds. "The German EMV implementation will contain additional security features," he says.
  Multiple Applications
  The official specifications call for German EMV cards to include four applications. These are a debit or credit-payment application; an electronic-purse application for GeldKarte, the e-purse scheme; a digital signature; and a TAN (random number) generator for home-banking purposes.
  Consequently, German EMV cards will need 32 kilobytes of EEPROM memory as well as sophisticated processing capability. They are expected to cost about three times as much as the single-application (debit or credit) cards being issued in the U.K., with 2k or 4k of EEPROM.
  There is no regulation from ZKA requiring banks to implement EMV by a specific date, so most will go at their own pace. About a quarter of German debit cards are estimated to have been upgraded to the EMV chip standard by the end of 2004, but hardly any EMV-compliant POS terminals have yet been rolled out.
  According to sources familiar with the situation, a meeting between all the interested parties was held in mid-December. It was agreed that EMV terminalization would begin in October 2005 and that although the liability shift mandated by MasterCard and Visa began on Jan. 1, it will be deferred for German transactions within Germany to Jan. 1, 2006.
  In the meantime, as the non-chip-compliant parties, German acquirers will be responsible for fraud on foreign-issued cards used in Germany.
  Part of the reason for the delayed rollout of POS terminals is the exceptionally complex certification process. Though terminals are tested and certified by the ZKA and banking associations, their operations have to be additionally certified with acquirers. "NSPs have to go to every acquirer with every terminal," says K?nemund. "In the case of TeleCash, that's 50 acquirers."
  Some acquirers are competitors of NSPs, he adds, "so our competitor makes the rules for the football game, and he's also the referee."
  Because of the delays and uncertainty over the number of terminals to be upgraded, the entire POS infrastructure is unlikely to be EMV-compliant until 2008. When rollout begins, high-risk merchants will be first to be EMV-enabled, says K?nemund. "We have told acquirers, 'if you have a problem with a merchant, he can have an EMV terminal. Otherwise, he can continue.'"
  Business Case
  On the issuing side, banks admit to struggling to find a business case for implementing EMV on charge/credit cards in Germany, as outlined last year by Landesbank Berlin. Stadtsparkasse M?nchen is the latest bank to say that, while it will make its 400,000 ec cash cards EMV-compliant when it reissues in December 2005, it has no EMV plans for its 40,000 charge/credit cards.
  Not only is the ec cash system secure, but banks also limit potential fraud losses by placing daily limits on use of the cards, typically in a range from 1,000 euros to 2,500 euros, which cover cash withdrawals and payments.
  Because fraud savings from EMV chip are negligible on ec cash, issuers need to generate new revenue streams from the other applications on German cards-GeldKarte, TAN and digital signature. Of these, perhaps surprisingly, Stadtsparkasse M?nchen believes GeldKarte is the most promising, though the overall figures are weak.