Checking out the bottom line: Boosting SME productivity through digital payments

Introduction

Amid a backdrop of slowing global growth, many countries, like Germany, face a critical choice: accept weaker economic performance or find ways to get more output from factors of production. This article argues a powerful and sustainable path forward lies in boosting labor productivity, especially among the country’s small and medium‑sized enterprises (SMEs). In this piece, we illustrate how investments in digital payments technologies can lead to improved labor productivity which, in turn, can lift profit margins for merchants and support long-term growth.

The productivity imperative

The International Monetary Fund (IMF) projects in its World Economic Outlook that global real GDP growth will reach 3.3 percent in 2026 before easing slightly to 3.2 percent in 2027. Although growth rates differ across advanced and emerging economies, the overall trend points to a gradual slowdown over the next two years.¹ For countries experiencing weaker GDP growth, enhancing labor productivity may offer a path to stronger economic performance. In general, labor productivity is defined as how much output workers produce for each hour they work. By improving productivity, economies can generate more goods and services without increasing input. However, some nations, such as Germany, have seen productivity levels stagnate in recent years (see Figure 1).²

Figure 1: Germany labor productivity index (hours worked, index: 2020 = 100)

The reasons for Germany’s labor productivity levels are complex. In its most recent report, the German Council of Economic Experts (GCEE) highlights aspects of structural that could account for these levels. Specifically, it cites that there has been an overall shift from economic sectors with higher productivity growth to areas with lower productivity growth.³ The situation becomes more urgent as demographic pressures intensify. One of these demographic pressures is the fact that Germany's aging population will reduce the working-age population substantially. Analysis shows that the country’s working age population has declined faster than the same metric for the rest of Europe since 2000 and is forecasted to reduce from 62 percent to 57 percent of the total population between 2025 and 2050 (see Figure 2).⁴ As a result, Germany essentially faces two levers to offset an aging workforce: (1) significantly increase labor input (i.e., people working for more years or more hours per week) or (2) increase output per worker. The latter seems to present a more sustainable route.

Figure 2: German demographic trends

From imperative to opportunity

As former European Central Bank (ECB) President Mario Draghi put it, “raising productivity is fundamental,” it is the key to unlocking higher living standards when labor supply is stagnating and an antidote to the economic pressures of an aging society. By boosting output per worker, productivity growth can act as a “vital counterweight to demographic changes” allowing economies like those in Europe to continue growing even as the workforce shrinks.⁵

SMEs present a key focus area for improving productivity. In general, this segment of businesses is crucial because they are central for employment and support a large share of total value added, so when they thrive, entire communities and economies do too. Germany’s SME sector (the famed “Mittelstand”) contributes about 56 percent of value added in the country.⁶ Such figures underscore that meaningful economic growth in Germany may hinge on increasing labor productivity in the SME sector.

Improving labor productivity for SMEs in Germany also presents an opportunity. SME productivity in Germany is approximately 39 percent lower than that of large enterprises.⁷ If German SMEs could even partly close this gap the payoff would be sizeable. For example, McKinsey estimates that bringing German SME productivity closer to large-firm levels would be equivalent to adding approximately 2.6 percent of GDP to Germany’s economy.⁸

On the margins

Recent research demonstrates that investments in technology, particularly digital payments technology, can boost labor productivity for SMEs. Specifically, a 10 percent increase in point-of-sale terminals per employee leads to roughly a 0.5 percent rise in labor productivity, meaning workers can handle more transactions or customers without additional labor hours.⁹ In general, digital payments speed up checkout lines, reduce manual cash handling, and enable self-checkout—all of which allow staff to serve more customers in the same amount of time.¹⁰ In other words, labor becomes more efficient because technology supports faster, smoother workflows.

As stated earlier, increasing labor productivity boosts overall economic growth. At the merchant level, it can raise profit margins by lowering the cost per unit of output. This is possible because the connection between labor productivity and profitability flows directly from the cost structure of a business. Each business has fixed costs that stay the same with additional output (rent, salaried labor, management, software systems, etc.) and variable costs that rise as output rises (inventory, shipping, sales commissions, etc.). When productivity increases, a company can generate more revenue using the same cost structure. That means a larger share of revenue drops to the bottom line.

Let’s use an example to illustrate this concept. Consider a German SME with a 26 percent gross margin, a profit margin of 2 precent, and selling, general, and administrative (SG&A) cost structure split 50 percent fixed and 50 percent variable. For every extra €100 of revenue, €74 goes to cost of goods sold (COGS) with €26 remaining as gross profit. Since net profit margin is 2 percent, then €2 of each incremental €100 revenue is net profit. This implies that the remaining SG&A costs are about 24 percent of revenue. Of this amount, 12 percent varies with sales, while the other 12 percent is fixed and does not change with increased revenue. In our example, the variable SG&A costs increase by €12, but the fixed SG&A costs do not increase with the incremental sales. After covering the costs that are scaled with revenue, the company earns €14 of incremental profit. As a result, improvements in labor productivity translate into a 14 percent incremental profit margin for the SME.

Figure 3: SME incremental profit example

If workers can handle more customers, transactions, or output per hour because technology helps to streamline their tasks, the business does not need to add costs at the same rate that revenue grows. In other words, when labor productivity increases more of the additional revenue falls into this incremental category, where fixed costs are already covered. We should acknowledge that every SME and industry sector in Germany has different cost structures, so the incremental profit margin can vary. Notwithstanding, if productivity rises by even a small amount, the same workforce generates more revenue. That means fixed costs represent a smaller percentage of total revenue, improving both incremental and overall margins over time.

The bottom line

Modern payment technologies offer tangible, measurable productivity improvements, translating directly into improved profitability.¹² Even modest productivity gains compound over time, improving individual business outcomes and cumulatively strengthening the economy. For German SMEs, productivity growth is a potential path to sustained prosperity.

The future Mittelstand can be digitally empowered, efficient, and competitive—capable of doing more with limited labor, adapting to evolving customer needs, and thriving amid demographic and economic challenges. This vision requires business to treat payment technology as strategic investments. This imperative could, in turn, be potentially amplified by policymakers that provide the right incentives and supportive frameworks to encourage investment in digital payment technologies. Productivity through payments is not merely a slogan, it is a practical pathway to profitability and long-term sustainable growth for a country like Germany.

Footnotes:

1. World Economic Outlook Update, January 2026: Global Economy: Steady amid Divergent Forces
2. VEEI analysis of ECB labor productivity data
3. Structural Change in Germany: Productivity, Regional Aspects and the Labour Market. National Productivity Report 2025
4. VEEI analysis of United Nations World Population Projections (UN WPP) 2024 data; the geographical region of “Europe” is defined in the UN WPP 2024 data by using “Standard Country or Areas Codes for Statistical Use” (UNSD — Methodology) which includes the following countries: Åland Islands, Channel Islands (Guernsey, Jersey), Denmark, Estonia, Finland, Iceland, Ireland, Isle of Man, Latvia, Lithuania, Norway, Sweden, United Kingdom, Austria, Belgium, France, Germany, Liechtenstein, Luxembourg, Monaco, Netherlands, Switzerland, Belarus, Bulgaria, Czechia, Hungary, Poland, Republic of Moldova, Romania, Russian Federation, Slovakia, Ukraine, Albania, Andorra, Bosnia and Herzegovina, Croatia, Greece, Holy See, Italy, Malta, Montenegro, North Macedonia, Portugal, San Marino, Serbia, Slovenia, and Spain.
5. Bengtsson, J., Heimes, H., Heuss, R., Marcus, I. (2025, September). To unleash productivity in Europe, rewire your operations. McKinsey & Company.
6. The economic contribution of small and medium-sized enterprises remains high despite the current crises - Institut für Mittelstandsforschung Bonn
7. McKinsey Global Institute. (2024, May). A microscope on small businesses: data snapshot for Germany.
8. McKinsey Global Institute (2024)
9. Cormier, M., Diniz, G., Garcia-Swartz, D., Latham, O., and Tzanetaki, C. (2025, October). Digital payments, output, and productivity: an empirical exploration. Social Sciences Research Network.
10. Cormier, M., Diniz, G., Garcia-Swartz, D., Latham, O., and Tzanetaki, C. (2024). The Social Value of Innovation in Payments. Social Sciences Research Network.
11. VEEI Analysis of EUKLEMS data
12. Brodsky, D. (2025, December). Do digital payments increase productivity? Visa Economic Empowerment Institute.

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