How e-commerce can grow in Germany's cash-heavy economy

May 3, 2021 9:57 AM

While German consumers prefer using cash in stores and are accustomed to paying for products after delivery, the global nature of e-commerce is sparking a change in payment habits.

This trend creates opportunities to convert more payments to card or digital options, as bank ownership and internet penetration are high while card adoption is on par or above many other European nations.

In a country with over 83 million consumers and the world’s fourth-largest economy based on World Bank data, at $3.86 trillion, Germany’s e-commerce activity represents over 16% of the country’s total retail sales (based on PPRO data), making it a strong opportunity on which payment firms can capitalize.

E-commerce in Germany had been growing at a steady clip before the pandemic and is expected to continue growing through 2023 at an annual rate of roughly 9% per year, according to JPMorgan Chase’s 2020 E-commerce Payment Trends – Global Insights Report. Chase noted that one of the factors driving the steady growth is that the market is drawing in an increasing number of consumers ages 60 and older. By expanding the prospect pool to an older audience, this market is less susceptible to swings in recessions and job losses, which tend to disproportionately affect younger consumers.

The German B2B e-commerce market is estimated to have reached over €102 billion (about US$123 billion) in 2020, making it the third largest in Europe behind France and the U.K., based on Chase's data. It is also projected to be valued at over €130 billion (about US$156 billion) in 2023.

In a bid to fuel further growth into the German e-commerce market, Barclaycard partnered with Amazon Germany to offer installment lending in November to overcome the country’s low credit card ownership rates. The Barclaycard-Amazon partnership will offer installment financing for eligible purchases made over €100 (about US$120).

One notable feature of the German e-commerce market is the preponderance of mobile shopping. Fifty percent of e-commerce sales are made through mobile devices such as smartphones and tablets, based on data from the PPRO Payments Almanac.

While this below world-leading mobile commerce countries such as Sweden (59%), China (59%) and Norway (57%), it’s ahead of many of their European brethren such as Finland (49%), Spain (48%) and France (39%), as well as ahead of the U.S., which comes in at 39%.

In terms of smartphone penetration, PPRO data shows Germany near the upper tier of European adoption with 79% of adults owning a device. In comparison, frontrunners Sweden, Norway and the U.K. each have 85% adoption levels, while France (76%), Italy (76%) and Spain (73%) come in at lower levels.

Cross-border e-commerce in Germany is lower than the rest of Europe, with only 35% of consumers shopping from overseas websites compared to the European average of about 46%, based on Chase's data. However, when German consumers shop overseas, their top destination country market is China, at almost half the cross-border volume (43%). Tied for second place are the U.K. and U.S., at 13% each.

One potential factor behind the lower cross-border e-commerce volume has to do with the invoice system, where an invoice is issued to the consumer along with the goods. If the consumer likes the product received, they can pay for it with a variety of methods, yet mostly settled through bank transfers. If the consumer doesn’t like the goods received, then they can be returned to the merchant.

The invoicing practice poses a barrier for foreign sellers, which typically demand payment at time of shipment. It does, however, favor local sellers (or foreign companies with local operations, such as Amazon Germany).

Bank transfers are an integral part of the German e-commerce landscape, handling just over half (52%) of the payments volume, based on PPRO data. The second-largest method of payment is e-wallets, at 25%, with PayPal a major player. Payment cards make up about one tenth (11%) of the payment volume with cash, at 4%, coming in fourth place.

Chase noted that most invoice-based shipments are settled through bank transfers, and that invoiced e-commerce shipments account for roughly one third of the market’s payment volume. It’s also a segment that is expected to gain share through 2023 at the expense of cash. An opportunity also exists for buy now/pay later solutions as a means of both expanding the market overall and taking share from the bank-transfer segment.

PPRO data shows that penetration of credit cards in Germany is 53%. In fact, it’s on par with or exceeds a number of its peer countries. In Europe, only the U.K. has a demonstrably higher level of credit card penetration, at 65%. This is just below the U.S. level of 66%.

As a reference, in France where only 41% of adults own a credit card and the country is the second largest e-commerce market in Europe, over half (55%) of e-commerce payment volume is made on payment cards.

In the U.K., where credit card penetration is about two thirds of adults (65%), and the largest e-commerce market in Europe, over half (56%) of payments are made using payment cards, 25% are made with e-wallets and only 8% are made using bank transfers.