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
Merchant
ATM

• France
• CB defines rules of card payment industry but
  dont process, clear, settle or switch
  transaction, dont acquire merchant and dont
  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
Merchant
ATM
Card-holder
Merchant
ATM

• 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
Merchant
ATM
Card-holder
Merchant
ATM
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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

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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 banks 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,)

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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!

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But have we made the right decision?

• Lets 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!!

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A few challenges going forward A new model in
a new context

• 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

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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