An Introduction to Cards Business - A Complex Business of Many Moving Parts

1. An Introduction to Cards Business- A Complex Business of Many Moving Parts Pradeep Pant Cards Business Director Citibank N.A., Taiwan March 22, 2005

2. Note-The data used in this presentation is indicative to explain the concepts of Card Business and may not be accurate.

3. “As regulation falls away & competition intensifies, management talent & insight... will become critical success factors.”- The McKinsey Quarterly, 1997

4. What is this session about? • Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business? • P&L Dynamics of Cards Business? • What are the Key Functions in Cards Business? • What about kind of skills & people needed in this business? • A Few Case Studies

5. Asian Economies are growing at a Fast pace Consumer Credit Outstanding – US$ Bn Gross National Income Growth • Expanding middle class and relatively young age structure • Visa reported 42% growth in purchase volumes for the Asia-Pacific regions in 2003 compared with 12% globally. • Cards to be a key component of the development of consumer credit markets as household incomes increase • Low penetration in key markets

6. There is a Large Potential for Usage PCE Penetration by Country RSV/PCE % US AP Average

7. ….And Penetration Credit Card per Adult Credit Card per Adult US = 5.7 per Adult

8. Cash Dominates PCE spending Accelerate Migration from Cash to Cards

9. Hyper Competitive Environment Global Players Fragmented market- Future Opportunity for Consolidation • Similar Business model • Committed to deliver service, quality • Strong expertise in Analytics • Corporate hurdles for Credit & Profitability • Limited Pricing appetite • Focus on top-end- predictable & profitable segments Source Visa Regional Players Single-Country Players • Present in few countries • Strong market-specific alliances • Focus on building strong Cards business • Reasonably strong Brand image • Strong goodwill • Good delivery infrastructure but low expertise on Cards • Focus on building Cards business • Strong mid-segment presence • Resort to aggressive pricing • Strong presence, multi product player • Recognized, trusted brand • Relatively less experience in Cards business • Considerably lower hurdles • Highly focused on building market share • Willing to disrupt market structure • May resort to short term irrational pricing

10. What is this session about? • Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business? • P&L Dynamics of Cards Business? • What are the Key Functions in Cards Business? • What about kind of skills & people needed in this business? • A Few Case Studies

11. Taiwan Market • Strong economic recovery in 2004 led to GDP growth of 5.9% in 2004 (est) • General improvement in Consumer Confidence- Private Consumption growth also picks up (3.0%) • Some slowdown expected in 2005- GDP growth at 4.5% and PCE at 2.9% • Taiwan dollar has appreciated significantly versus US$ over the last 12 months • High Employment levels with 10.2MM labor force • Per Capita GNP- $14,961 • Unemployment rate at 4.5%

12. Market Background- Regulatory • Regulators very active with the goals of – • Consumer protections, • Stable credit environment & • Fair competition in Cards Industry • Also Bankers’ Association plays an active self regulatory role • Card Businesses need to report independent financial statement by 3Q05

13. Market Scenario • Developed Credit Cards market with 90% of eligible population holding Cards • 2.4 Cards/ person and 4.4 Cards in every eligible person’s wallet • Penetration of Cards & Sales has grown aggressively • PCE Penetration trends during 1999-2004 are below • Currently over 22% of PCE is on Cards Source: Directorate-General of Budget, Accounting & Statistics, Executive Yuan, FSC

14. Market Growth - CIF As of Dec. 2004, Taiwan Credit Card Market CIF: 44 MM, with growth rate of 17%

15. Market Growth - Sales As of Dec. 2004, Sales for all credit card brands in Taiwan: NT$1,460BN，with growth rate of :24% Focus shifting from Issuance to Usage

16. Competitive Environment • Over 60 Card Issuers, many may be unprofitable • “Free-for-Life Platinum” Market • Intense competition for Place-in-wallet and Share-of-wallet • High Advertising spend • Regular usage promotions • Large number of Cobrands • Citibank is #2 in Market Share Card Sales in Taiwan

17. What is this session about? • Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business? • P&L Dynamics of Cards Business? • What are the Key Functions in Cards Business? • What about kind of skills & people needed in this business? • A Few Case Studies

18. Geographic Reach Korea Current Countries Future Flags China Taiwan Guam Hong Kong Philippines Thailand Vietnam India Malaysia Singapore Indonesia Australia Citi Cards- Asia Pacific

19. Strong Leadership in Marketplace, Consistent Financial Performance Citibank Card- The Main Card in Wallet Spend per Card (US $) #1 Pan-region Card Issuer in AP • Over 13 MM Cards in 11 countries • #1 or #2 in 9 markets • China- recently launched 12th market • Award for the best Internet website in 4 countries (2003) • Singapore website rated the best in Asia for 3 consecutive years- 2002, 03 & 04 • Rated best in Korea, Indonesia, Malaysia, Thailand, Philippines & Guam in 2004 • Card businesses in all markets recognized for outstanding products & service • Several external Awards, e.g., India (2002), Indonesia (2003), Thailand (2004), Singapore (2004)

20. Mission • Leadership in Payment Products category in Asia Pacific through- • The best products, Customer Service & technology • Maximizing Risk-Reward balance by using Credit and Analytical tools • And make a significant contribution- • To the bottom line of the corporation • To the customer base of the corporation

21. What is this session about? • Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business? • P&L Dynamics of Cards Business? • What are the Key Functions in Cards Business? • What about kind of skills & people needed in this business? • A Few Case Studies

22. A Business of Many Moving Parts Market Leadership Financial Performance Risk Management Market Knowledge Customer Service Strong Product Data Management

23. SECURED UNSECURED Open-ended credit in the form of a credit card is the most flexible type of consumer credit. Once the line is approved, the cardmember can choose when and how much to use it. Open End Allows the use of property to secure an open-ended line of credit and enables the borrower to tap the line whenever desired and to repay it over time. Usually a small down payment, has a signed contract spelling out schedule of payments, is secured by collateral and has a specific start and end date. Same as Secured Closed-End except credit is granted on the strength of the borrower’s credit-worthiness alone and does not include collateral. Closed End Consumer Credit Products

24. Key Players • Issuers: Financial institutions who issue credit cards • Consumers: Individuals who use the cards • Merchants: Points of sales where the cards are used • Acquirers: Financial institutions who process (acquire) transactions performed at the merchant sites • Associations: Organizations that provide networks to facilitate transactions between Acquirers and Issuers (Visa, MasterCard & Diners) • Others: Regulatory bodies, consumer right groups, third party service providers, credit agencies, etc.

25. Transaction Flow 1. Credit card 2. Goods or services Merchants Cardholder 8. Payment 3. Transaction Info 7. Billing 4. Settle transaction (Less discount) Issuing Bank Acquiring Bank Visa or MasterCard 6. Debit issuing bank and transfer information 5. Credit acquiring bank and transfer information

26. Transaction Flow - Example $100 Charge $100 worth of merchandise MERCHANTS CARDHOLDER Pay $100 Bill $100 Receives $97 $100 Charge ISSUING BANK $2 $1 ACQUIRING BANK VISA or MasterCard $100 Charge, Pays $97 $100 Charge, Pays $98

27. Cards P&L Structure A INTEREST B ADJUSTMENT C INTEREST REVERSAL D COST OF FUNDS E NRFF = A - B - C - D F INTERCHANGE G ANNUAL FEES H OTHER FEES I FEES = F + G + H J CUSTOMER NET REVENUE = E + I KCREDIT COST (NCL/LLR) L NET CREDIT MARGIN = J – K MEXPENSES N EBIT = L - M O TAXES P NET INCOME = N - O

28. Revenue Components NET REVENUE FROM FUNDS (NRFF) • Interest Revenues • Interest Reversal • (Cost of Funds) FEES & COMMISSIONS • Interchange (Net of Settlement Fee) • Annual Fee • FX Fee • Cash Advance Fee • Over-Limit Fee • Late Fee • Insurance Fee • (Reward Cost) • (Acquisition Cost Amortization)

29. Revenue Components - Detail NET REVENUE FROM FUNDS (NRFF) Transactors: ANR x Cost of funds Revolvers: ANR x (Gross interest - COF) FEES & COMMISSIONS Interchange: Annual Fee: FX Fee: C/Advance Fee: Over-Limit Fee: Late Fee: Insurance Fee: Reward Cost: Acquisition Cost:

30. Credit Cost • MEASURED AS A PERCENTAGE OF: Sales for a charge card product ANR for a credit card product • NET CREDIT LOSSES (NCL): Gross Write-Off (GWO) - Interest & Fee Reversal = Gross Credit Loss - Recoveries = Net Credit Loss (NCL) GWO is a function of bucket-wise outstanding, flow rates and new cardholder spend Recoveries are a function of written-off volume and success rate on collection

31. Net Credit Margin Dynamics Economic Competitive Regulatory External Environment Restraining Forces APR Sales Payments Account Delinquencies Internal Triggers Stable Net Credit Margin Risk Management Portfolio Mgmt. NIM Fee Mgmt. Customer Account Policies • Sales Stimulation and Activation Programs • Enhanced Wallet Share Growth • Credit Line Increases • Portfolio Acquisitions • Segment Mgmt • New Initiatives • Product / Value Differentiation Business Initiatives • Risk Adjusted Pricing Policies • Tiered Fees • Enhanced Funding Strategies • Revenue Services • Re-engineered Acq/ Balcon Offers • Customer Performance Data • Seamless Customer Identification • Data Enhancement / Promotional History/ Common Bureau • Business Leverage • Implicit Differentiation • Explicit Differentiation • Channel Product Optimization Driving Forces • Collections Strategies • Authorizations and Balance Control Techniques • Credit Line Management • Acquisition Strategies • Risk Tools & Infrastructure

32. # New Accounts # Avg Open Accounts Expenses • ACQUISITION: Sales & marketing, credit initiation and card issuance. Driven by # of new accounts/channel mix and approval rate. • SERVICING: Customer (citiphone, collection) & Non-Customer (payment/transaction processing, authorization, settlement). Driven by # of open accounts and level of automation/centralization. • MARKETING: Advertising, product & portfolio management (activation, upgrades). Driven by scale and depth of communication/program. • TECHNOLOGY: Telecommunication, data centre, enhancement, maintenance and production services. Driven by extent of functionality and level of centralization. • INFRASTRUCTURE: Business management, support functions, fraud losses and corporate allocations. Driven by sales volume (fraud) and level of efficiency.

33. Accounts • Cardholder fees • Acquisition costs • Servicing costs Sales • Interchange fees • Cash advance fees • Reward costs • Transaction costs ANR • Gross interest • Cost of funds • Net credit losses • Collections costs • New accounts • Attrition • Revolving • Usage Business Drivers

34. Vintage P&L EBIT (US$MM) 600 500 400 300 200 100 0 -100 -200 Year 1 Year 2 Year 3 -104 Vin=3 -102 57 Vin=2 -71 47 77 Vin=1 445 539 552 Vin<=0

35. What is this session about? • Cards market in Asia Pacific • Market Scenario in Taiwan market • Citibank Cards business • What is Cards business? • P&L Dynamics of Cards Business? • What are the Key Functions in Cards Business? • What about kind of skills & people needed in this business? • A Few Case Studies

36. Operational Framework • Marketing • Cardholder Acquisition • Portfolio Management • Branding & Advertising • New Product Dev. & Partner Mgmt • Research & Planning • Risk Management • MIS • Credit / Risk Management • Risk Policies • Collections • Fraud Security • Operations • Credit Initiation/ Appl. Processing • Authorization • Transaction Service • Front End Collections • Customer Service • Technology • Front end distribution System • Host System • System development & maintenance • Others • Financial Control, Human Resources, Legal/Compliance, Treasury

37. The Marketing Cycle Environmental Analysis Consumer research & target identification/ segmentation Branding & Advertising Product, program & channel developments Cardholder acquisition Portfolio management Customer retention management Customer, product, program & channel evaluation

38. Understanding Customers-- What are characteristics of Taiwan society? • Highly Competitive • Fast Moving & Dynamic • Entrepreneurial & Achievement / Goal Oriented • Flexible to Changing Situations

39. Understanding Customers-- Major Consumer Segments • Identity Builders • Career Builders 3. Family Builders 4. New Life Builders Target Groups ! !

40. Understanding Customers-- Where do Customers Spend? Leisure Spending Implications • Coffee • Cigarette • KTV • Taxi • Shopping • Phone Bill • Night Life • Total • 1,000 • 1,500 • 4,000 • 1,000 • 10,500 • 2,000 • 2,000 • 22,000 • Total spending on leisure is NT$ 22,000. Out of these, spending on dinning and entertainment is the highest, followed by shopping. Therefore, focus on these segments may be considerate, especially for promotion purpose.

41. The Credit Cycle Strategy & Program Development Write-Off Program Implementation & Analysis MIS Control & Policy Scoring Performance Measurement Collections & Fraud Security Servicing the Customer

42. Application Processing • Receive & process applications & credit-line increase requests, and related offers in a timely and cost-efficient manner. • Develop & maintain a rational, automated, consistent methodology for scoring the information. • Review declines cases to determine if consolidation, credit-line reduction or “Down-Sell” will address the needs of the applicant.

43. Application Processing • Key Volume Statistics • Total Applications Received/Processed • Total Month-end Pending • Total Expense • Total FTE • Effectiveness • Approval Rate

44. Application Processing • Efficiency • Deviation rates • Incomplete Apps • Quality • Data Entry • Verification • Credit Decision

45. Authorization • Crucial process in controlling delinquency and fraud while providing exceptional service and increasing sales • Good authorization process can • Prevent further credit exposure • Prevent use of lost or stolen cards • Provide opportunity to confiscate cards being used fraudulently • Detect patterns of card usage suggesting fraudulent use • Establish validity of the transaction • Managing portfolio through appropriate authorization policy

46. Authorization • Criteria • Outstanding Balance / Available Limit • Delinquency • Length and Depth of relationship • Type of purchase • Validation of purchase • Behavior Score

47. Collections • Collection is a Balancing act • Cost vs. Return • Customer relationship (retention) vs. Asset Protection • Customer contact is important • “If you don’t make contact, you don’t collect” • People • Training & performance coaching & monitoring • Collection agency • Process & System • Technology • Performance MIS

48. Collections Strategy Front End Mid Range Hard Core Charge Off Balance Control Recovery Bankruptcy / Deceased

49. Fraud - Mission • Protect the franchise against fraudulent activities while maintaining customer convenience & service

50. Fraud - Types • Traditional Types • Lost / Stolen • Never Receive Issuance (NRI) • Fraudulent Application • Mail / Telephone Order (MOTO) • Account Take Over (ATO) • Emerging Types • Manual Counterfeit (White Plastic, Altered, etc) • Electronic Counterfeit (Skimming) • Merchant Fraud • Internet / E-Commerce