SEPA: A European Ambition Card Payments

1. SEPA: A European AmbitionCard Payments Pierre Orban Global Head Cards, ATM & POS Fortis Operations

2. AGENDA • Current Market Situation • Self industry regulation: the SEPA Card Framework • The Belgian Banks decision • Challenges going forward

3. Current Debit Card Landscape – Illustrative (EMEA region) Example of Belgian bank retail geographies - Six very different landscapes • Turkey • Banks are issuing, acquiring merchant and acquiring ATM • ATMs are not interoperable • BKM is the clearing & settlement centre for domestic transaction • Mainly credit in POS • Non interoperability of ATMs (competitive issue) and POS terminal (loyalty issue) • System of ‘salary payment’ issuing • Belgium • Banksys acquires merchant (100% in debit), process, switch, authorize, clears and settles transactions • Banksys manages domestic scheme (Bancontact/MisterCash) • Banks issue cards and own ATM & Self • Maestro only issued international debit Intl Intl Banksys BKM Issuing Bank Acquiring Bank Issuing Bank Acquiring Bank Acquiring Bank Card-holder ATM Merchant Card-holder ATM Merchant • France • CB defines rules of card payment industry but don’t process, clear, settle or switch transaction, don’t acquire merchant and don’t issue cards • SIT is a common platform – owned by banks – to clear and settle transactions • The ‘Chefs de file’ process transactions • Blended debit/deferred debit cards Offering • Luxembourg • CETREL acquires merchants, authorizes transaction on behalf of banks and processes POS and ATM transactions • CETREL manages the domestic scheme (Bancomat) • Limited banks involvement in the value chain (limited to commercial issuing activity) Intl Intl CB SIT CETREL Chef de File Issuing Bank Acquiring Bank Issuing Bank Acquiring Bank Acquiring Bank Card-holder ATM Merchant Card-holder ATM Merchant • The Netherlands • Interpay processes, switches, clears and settles transactions • Banks are issuing, debit acquiring merchants (recent) and ATM • Interpay manages the domestic scheme (PIN) • Maestro only issued international debit • Poland • No domestic scheme • Banks are working with Visa or MC products • Polcard is the main third party processor (interbank organization) • Mainly credit in POS Intl Intl Products Interpay Polcard Processing Issuing Bank Acquiring Bank Acquiring Bank Issuing Bank Acquiring Bank Card-holder ATM Merchant Card-holder ATM Merchant

4. Main Market Competitive shortcomings • Mostly national infrastructures • National Schemes with associated national rules, often preventing “unbundled” use of a scheme vis-à-vis the national infrastructure, resulting in • Entry barriers for foreigners to enter the market • Lack of European economies of scale for players willing to enter several markets • Fragmented and unstandardised merchant acquiring markets… • National regulatory environment: • Consumer protection • Electronic payment framework • Co-branding rules • …

5. The SEPA Cards Framework (SCF) • An industry self regulation framework setting a number of competition principles: • Domestic European market is the only domestic scope that exists, no ‘national’ borders any more: • Any card can be used on any terminal anywhere within Europe • Any bank located in any national country can operate across Europe from a single location • Once a logo is on a card, this card can be accepted in any terminal bearing the logo (being within national borders or not…) • Unbundling of scheme and processing infrastructure • A SEPA brand can be processed via any infrastructure (e.g. Mastercard/Visa can be processed via Banksys for most transactions originated by Belgian cardholders but also via other infrastructures such as Mastercard/Visa, Eufiserv and bank’s own processing centers) • Applying the 2 above principles would imply in Belgium that: • A foreign acquirer could operate in Belgium under the Maestro/V-Pay brand in full competition for debit transactions • Anyone within Europe willing to process BC/MC (acquiring, issuing,…) could do it without necessarily pass via Banksys… • …but it would also mean that a BC/MC card should be accepted outside Belgian borders (e.g. Netherlands, Spain, Germany, France,…)

6. The SEPA Cards Framework (SCF) • … but still having a long way to go to achieve the primary objectives of the SEPA initiative (as set by the 2000 Lisbon Summit) • This will indeed only be achieved through an effective standardization framework which can be declined according to the following dimensions: • Regulatory: • harmonisation of local regulations and legal framework: the EC is working on the Directive on Payment Services in the internal market (formerly known as the “New Legal Framework”) in support to the SEPA initiative • Business: • harmonisation of the European scheme patchwork in fewer, competitive, schemes (Mastercard, Visa, EC,...): market forces under the SCF will drive this; • Technical: • like in many businesses, the most challenging to harmonize is not the ‘central platform’ but the ‘local loop’ (card to terminal interface and terminal connectivity to local host infrastructures): appropriate workgroups under the EPC and the Cards Working Group are in the process of addressing this. • In order to ensure level paying field competition, it is critical that all national markets as well as national and international schemes implement the principles of the SCF as of 1st of January 2008: opening up markets, breaking national rules and improving open competition

7. The Belgian Banks decision • March 2006: Final SEPA Cards Framework (SCF, v2.0) approved by EPC • Confirmation that Bancontact/Mister Cash (BC/MC) in its current form does not meet the conditions for SCF-compliance • 4 options for BC/MC under the SCF Competition Principles: • Invest in BC/MC to make the scheme SCF-compliant and become an international player • Connect BC/MC to the various local payment schemes and establish interoperability (Berlin Group) • Replace BC/MC by international payment schemes • Create a new European scheme (“Europin”) • All options were thoroughly analysed by the Belgian banks and Banksys • Option 3 being the sole and only sensible choice to fully support the political and economic objectives of the Lisbon Summit: • Connecting the current European patchwork would only further promote the existing clustered market infrastructures • Investing in or creating a SEPA/international brand would, for a relatively small market as Belgium, mean re-inventing the wheel which already exists in either larger markets (e.g. German EC) or at international level (Mastercard, Visa, Amex,…). This would certainly NOT contribute to making Europe more competitive!

8. But have we made the right decision? • Let’s position the Belgian decision in the context of the SCF: • Opening-up the local borders • Unbundling • Effective competition as of 1st of January 2008 for the Merchant Acquiring: • Free choice of Terminal • Free choice of Acquiring processor supplier • Free choice of international brand acquiring (with the caveat that for cards issued by Belgian banks, debit cards will initially bear the Maestro brand): in practice a merchant will have the choice between Visa, Mastercard, Maestro and Visa Electron/V-pay and, which is key, will be able to apply this choice across Europe! • Any foreign bank can enter the Belgian debit card market from abroad! (using Maestro, V-Pay, Visa debit or Visa Electron) • YES! : As of the 1st of Jan 2008 the Belgian market will be opened on the key “layers” of the card processing business: commercial acquiring, acquiring processing and card issuing!!

9. Review of the Card Industry business model by the EC and SEPA self regulatory framework Implementation by the EC of the Payment System Directive Communicating on the value of an interchange based model, i.e. on the value of cards: Guaranteed payment Continuous innovation An interoperable businessmodel since its creation An example of this value confirmed by the German market behaviour A few challenges going forward… : A new model in a new context

10. A few challenges going forward… : Re-positioning each payment instrument • SEPA will only make Europe more competitive, bring benefits customers and true cost efficiency if payment instruments are repositioned according to their value and costs: • Less Cash will truly reduce costs by cuttingmanual intensive costs and informal economy: a political agenda which could only be supported! • More electronic will reduce transaction costsas large fixed costs can be spread over larger processing volumes • Guaranteed, real-time electronic payments provide a key value to customers (cardholders and merchants)compared to instruments such as cash (which is paper based, unsafe to carry, lost float,…) Data sources used: McKinsey; Schneider 2005