J.P. Morgan Country Insights. THE CHANGING DYNAMIC OF PAYMENTS IN EUROPE Germany

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1 J.P. Morgan Country Insights THE CHANGING DYNAMIC OF PAYMENTS IN EUROPE Germany

2 Introduction Germany is expected to post solid growth in 2018: strong activity in the Eurozone is helping support Germany's exports and business investments, whilst low interest rates and healthy demand are sustaining investments in the property market. House prices are rising, especially in major cities, while private and public indebtedness levels remain modest. 1 Overall, real GDP is expected to increase at an average pace of around 2.1% per year between 2017 and Encouragingly for retailers, private consumption is also expected to increase 2.1% in 2018, and 2% in 2019, underpinned by a strong labour market, low unemployment and wage increases. 3 This information is based on projected figures and is subject to change at any time. [ 2 ]

3 Germany: At a glance Population 82.76m Average age 46.8 years GDP 3.1trn B2C ecommerce market value 67.3bn Double-digit growth for ecommerce as online channel remains buoyant Estimated to be worth 67.3bn, Germany is the third largest ecommerce market in the European Union (EU) after the UK ( 156bn) and France ( 72bn). 4 It is forecast to expand at a compound annual growth rate (CAGR) of 11.9% until 2020, making it the fastest growing market of the top three and one of the best performing in the entire region. 5 Internet penetration 88% Smartphone penetration 55% Card penetration per capita 0.47 (debit & credit) Source: World Bank, CIA (2016), Global Data, Focus Economic, Internet Live Stats 2016 Germany: Consumer spending One key driver of growth has been increased spending from male consumers as they embrace ecommerce in greater numbers. Men contributed to ecommerce sales of several product categories at rapidly rising rates, according to a February 2017 report by Bundesverband E-Commerce und Versandhandel. Their spending on clothing rose by 22.5% in 2016, outpacing a 5.9% increase in outlays on that category by women. Sales growth among men also surpassed spending gains by women for products such as shoes, home decor items, and hobby and leisure products. Conversely, ecommerce sales of household items and appliances by women surged by 62.1%, compared with a 5.2% drop in sales among men EUR Billion German ecommerce growth has also been positively influenced by an expansion in mobile retail. Smartphone penetration rates in Germany grew at a CAGR of 10.2% between 2013 and 2017, 7 and the country now has one of the highest usage rates in the EU July 2015 Source: Trading Economics 2016 July July An estimated 38% of online shopping is now completed by mobile, 9 making it a major and growing gateway for ecommerce. In Europe, only the UK has a higher penetration in this channel, with 51% of British ecommerce completed on a mobile device. 10 [ 3 ]

4 ecommerce: % of total sales by segment 100% Digital Goods 65% Accommodation/ Hotels 85% Airlines 65% Online travel agents (OTAs)/ Tour Operators Smaller percapita spend suggests greater opportunity At 1,160.67, the average annual online spend per e-shopper in Germany is 25% lower than the EU average, suggesting there is room for expansion. 11 However, ecommerce as a percentage of retail sales is comparatively high, at 13.5%. 12 The explanation may be that although Germany has a developed and mature ecommerce market, the overall retail sector is smaller than expected for a country of its size due to Germany's traditionally low consumer spending. However, this may be starting to change as the country's economy continues to perform well. 32% Fashion/ Apparel 16% Consumer Electronics 6% Department Stores J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data provided by Edgar, Dunn and Company via emarketer & ecommerce Europe, % Public Transit (metro/rail/bus) 8% Mass Merchandise 4% Grocery/ Supermarkets ecommerce penetration (%) German consumers are also relatively hesitant when it comes to cross-border ecommerce. One reason is that they are concerned about the difficulty of returning products. Germany has one of the highest return rates in Europe, with some estimates of the proportion of products sent back as high as 50%. 13 This is partly because 'try before you buy is an established ecommerce principle in Germany, with goods sent to consumers to trial before payment is demanded. As a result, cross-border merchants looking to target German consumers should make sure they offer a strong and clear policy on returns. On a positive note, German consumers have one of the lowest abandonment rates for ecommerce carts. 14 This may be due to the fact they are used to returning goods they are not happy with, so are more willing to take a risk on a purchase. [ 4 ]

5 Germany remains open for invoices Payment method split by value (%) Metric indicator Total DEBIT Debit card per capita (ecommerce enabled) 0.12 CREDIT Credit card per capita (ecommerce enabled) 0.35 TOTAL Total cards per capita (ecommerce enabled) 0.47 Source: J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe. Data provided by Edgar, Dunn and Company via GlobalData and Lafferty, % 12% 9% 23% 5% 20% 21% When it comes to alternative payment methods (APMs), Germany remains somewhat of a conservative country. In 2016, open invoices and direct debits together accounted for 41% of payments by value. 15 Open invoice, which means that the customer pays after receiving the goods, is a legacy system which enjoys high recognition in Germany. What s more, this method is not being replaced in the payment mix by new technologies. In fact, it is one of the fastest growing payment methods. In 2016, open invoices grew by 58.2% in value terms compared to the year before. 16 However, open invoices can pose challenges for merchants due to problems with reconciliation. The emergence of Swedish online bank Klarna which is now available in Germany 17 is aiding merchants in mitigating some of these difficulties by managing them on behalf of merchants. 18 Card payments are relatively small in Germany due to historically low credit and debit card penetration. German domestic debit card Girocard is not enabled for ecommerce, resulting in an extremely low level of debit cards in the online channel. Bank Transfer Card Other E Wallet Cash Direct Debit Open Invoice Source: J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe. Data provided by: Edgar, Dunn and Company via GlobalData and EHI Retail Institute, EHI-Studies Online Payment 2016 In fact in 2016, card payments fell by 41% in value terms. 19 However, both bank transfer and direct debits have been showing very strong growth. This has been partly driven by the establishment of the Single Euro Payments Area (SEPA), which has helped integrate payment systems in the Eurozone, and includes infrastructure to support both transfers and direct debits. SEPA direct debits now account for 20% of the payment market in Germany. 20 However, unbranded open invoices are still the most popular alternative payment method in Germany, accounting for 21% of the market. Despite this fondness for open invoicing, Germany has also been an early adopter for e-wallets, with this area dominated by PayPal (20%). 21 [ 5 ]

6 Higher fraud rates a feature of the market Germany is in the top four countries for card not present (CNP) fraud, out of those reviewed by J.P. Morgan for this study. 22 * However, this is beginning to decline from a 2014 peak 23 where they reached 92.5m as security measures become more sophisticated. German online customers demand a seamless, fast payment experience, so payment providers must continue to develop ways to securely achieve customer identification during the payment process. Penetration of alternative payment methods (%) PayPal 20% A major economy with room to grow Despite Germany's size and economic clout, it remains a country with significant opportunities for growth in its ecommerce market. After years of lower and more conservative spending habits than its European neighbours, German consumers are increasingly willing to shop online suggesting an evolving appetite for ecommerce, which retailers and payment providers can seize upon, especially if they are able to offer a wider range of payment options. "Unbranded Open Invoice" 21% SEPA 20% Source: J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe * J.P. Morgan's The Changing Dynamics of Alternative Payments in Europe study includes the following countries: UK, the Netherlands, Germany, France, Italy, Spain, Norway, Denmark, Sweden, Switzerland, Finland. References [1] OECD, November Germany - Economic forecast summary (November 2017). Accessed uary [2] Europa.eu, November Autumn 2017 Economic Forecast Germany. Accessed uary [3] Europa.eu, November Autumn 2017 Economic Forecast Germany. Accessed uary [4] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, [5] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data provided by Edgar, Dunn and Company via GlobalData & E-commerce Foundation, [6] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data provided by Edgar, Dunn and Company via Bundesverband E-Commerce und Versandhandel (bevh), cited in C. Annicelli, Germany s Retail Ecommerce is growing, emarketer, February 28, 2017, Accessed February [7] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, [8] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, [9] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via Statista, [10] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via Statista, [11] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via E-commerce Foundation, Global B2C E-commerce Report [12] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via Statista, [13] Essential Retail, February The ecommerce opportunity in Germany. Accessed uary [14] B2C Europe, December Lost sales at the checkout the ultimate guide to your abandoned sales. Accessed December [15] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via EHI Retail Institute, EHI-Studies Online Payment [16] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, 2016 and EHI Retail Institute, EHI-Studies Online Payment [17] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via Global Data, 2016 [18] Klarna.com. Available at: Accessed March [19] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, 2016 and EHI Retail Institute, EHI-Studies Online Payment [20] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company. [21] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe [22] US Payments Forum, March Card not present fraud around the world. Accessed December [23] FICO, Evolution of card fraud in Europe Accessed uary For more information please contact: Your Relationship Manager or visit Information contained in this document has been prepared by third parties or obtained from sources which are believed to be reliable; but neither Chase Paymentech Europe Limited nor any of its affiliates warrant the completeness or accuracy of the information contained herein. Chase Paymentech Europe Limited and any of its affiliates shall have no liability to the user or to third parties, for the quality, accuracy, timeliness, or for any special, indirect, incidental or consequential damages which may be experienced because of the use of or reliance on the data or statements made available herein. Third party trademarks, brand names, products and services are only referential and Chase Paymentech Europe Limited and its affiliates disclaims any sponsorship, affiliation or endorsement of or by any such third party. Chase Paymentech Europe Limited, trading as J.P. Morgan, is regulated by the Central Bank of Ireland. Registered Office: JP Morgan House, 1 George's Dock, I.F.S.C., Dublin 1, D01 W213, Ireland. Registered in Ireland with the CRO under the Registration No Directors: Catherine Moore (UK), Carin Bryans, Michael Passilla (US), Dara Quinn, Steven Beasty (US) Copyright 2018 [ 6 ]