Copyright The Asian Banker All rights reserved 1 Unlocking the Value Chain in Payments & Transaction Management Asian Banker Research

Copyright The Asian Banker All rights reserved 2 Key discussion notes Source: Asian Banker Research  Payments Developments by Country  Mapping Business Opportunities at the Front End  Merchant Acquiring Business and Challenges  Merchant Management – A case for outsourcing in Asia Pacific?

Copyright The Asian Banker All rights reserved 3 Source: Asian Banker Research Biggest gainers: Credit Card Management, Mortgages, Mobile Phone Banking Biggest drops: Brand Building, Employee Engagement, Wealth Management Key areas of business focus: Mortgages, Bancassurance, SME, Deposits and Payments Front line issues and CRM investments Alternate channels continue to be key focus Submission Categories in The Asian Banker Excellence Programme 2009 The front line, including payments businesses continues to be top areas of focus in consumer banking Note: < 2% of Submissions: Remittances, Channel Network Integration, Customer Advocacy/Loyalty, Islamic Finance, Internet Only Banking, Micro-financing, Business Model Innovation, Crisis Management

Copyright The Asian Banker All rights reserved 4 Greater acceptance and a broader user community in the payments landscape in Asia Pacific has not progressed with greater industry consolidation Source: Asian Banker Research Innovation in Payments Card Usage by Consumers Regulatory Developments Acquiring Business  Emergence of different electronic payment versions for small, medium and big ticket purchases  Contactless payments have gained traction  Pre-paid cards have not taken off in Asia yet  Contactless mobile phone payments the next step in the payment solutions landscape  Banks have introduced smarter, more consolidated and flexible rewards and redemption themes  Remittance payments business offers huge potential  Online cards payments have stayed low in Asia  2009 has seen some negative impact on the volume business  Continues to be motivated by convenience, short term loans, cash backs and interest free installments funded by merchants  Growing portion of debit card usage in some markets (Hong Kong, Singapore, India and China)  New card usage through expanded functionality and growth in untapped markets (e.g.unbanked, low income )  Growing number of interest rate/multiple income ceilings in the credit card industry  Central banks have indicated plans to strengthen banks’ risk management standards in the payments business  Off shore transaction processing is gaining acceptance by regulators  Critical mass, volume, service levels, payment solutions and pricing are key  Acquiring business is highly concentrated (70% of market share in the hands of 2-3 banks)  Banks realise that acquiring business is not profitable any longer and shift business model  Banks are slowly beginning to view acquiring as non- core business

Copyright The Asian Banker All rights reserved 5 The Banks we like in Asia Pacific have gained strong position through a combination of factors Excellence in Credit Cards Mgmt: UOB, Singapore Citibank Taiwan Chinatrust Taiwan China Merchants Bank, China Bank of Communications, China HSBC, Hong Kong ICICI Bank, India Bangkok Bank, Thailand CIMB Malaysia Shinhan Bank, Korea Rapid Growth in Cardholder Base Excellence Strong Processing Capabilities Excellence in Cards Business Rapid Development of Merchant Network High Growth in Card Base Keeping Cost of Acquisition Down Keeping Cost of Card Acceptance Low Strong Cross Sell Capabilities Single Platform for Systems Reporting and Compliance Effective Risk Management Manage card unit almost semi - independently Source: Asian Banker Research

Copyright The Asian Banker All rights reserved 6 Some mature markets have made the transition into high value credit card transactions 6 Source: Asian Banker Research Low value transactions High value card usage Low value transactions, due to high penetration Credit card penetration, transaction value per card, total value transactions (2008)

Copyright The Asian Banker All rights reserved 7 Emerging countries merely grow at a balanced rate between value and volume of card payments 7 Payment card growth trends (2004 – 2008, Nominal) Source: Asian Banker Research Thailand Singapore Malaysia India Value-Led Growth -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0% 10.0% 12.0% 14.0% 16.0% -5.0%0.0%5.0%10.0%15.0%20.0%25.0% Credit and Debit Card Value CAGR Growth Credit and Debit Card Volume CAGR Growth Regulatory Push on Debit Cards; 2011 & Beyond Japan Hong Kong Taiwan Market Stagnation Volume-Led Growth High Balanced Growth

Copyright The Asian Banker All rights reserved 8 Winning at the front line requires an analytical approach to the consumer and acquiring business 8 Acquire new Customers Current Customer Spend Incentives to Increase Spend Spend Analysis Acquire new Merchants Current Merchant Turnover Target offers to attract and retain Buying Analysis Profiling and Targeting Retain merchants and customers by providing quality service and enhancing the value of the relationship Merchant Acquiring Income as a Percentage of Total Income Card Issuance Income as a Percentage of Total Income Source: Asian Banker Research

Copyright The Asian Banker All rights reserved 9 Source: Asian Banker Research Mapping business opportunities at the front end in the payments & transaction management value chain Issuing Banks Acquirer / Processor Merchant Gateway Schemes 9 POS Client Front End Back End  Outsourcing, partnerships and joint ventures between acquirers, processors and issuers  Merchant acquiring and payment processing is a volume business  Heavy competition for transaction volumes drive aggressive pricing and reduce profit margins  For banks merchant acquiring is often seen as an enabler for value-add merchant services.  Differentiation on the processing capabilities not longer seen as differentiator  System reliability and 24-hour servicing capability are industry standard  In building loyalty, the key to profitability, banks actively manage its credit card customer acquisition and activation cycle  Usage of POS terminals as convenience points, not transaction device  Dynamic Currency Conversion Capabilities  Contactless payment in its early stage of industry cycle (e.g. small payment business & merchant acquiring)  Although banks like premium cards for their high interchange rates, Merchants don’t like premium cards for the same reason  Clients expect a variety of payment schemes available at the merchant

Copyright The Asian Banker All rights reserved 10 Fierce competition and depressed margins will see markets of interest undergo even more consolidation 10 Source: Asian Banker Research Industry Concentration of the Acquiring Business in Asia Taiwan India Singapore Hong Kong Thailand Malaysia Macau Taiwan Industry Concentration Index Credit &Debit Card Transaction Value ( US$ Billion) Fragmented Highly Concentrated Market Moderately Concentrated Singapore Hong Kong India Taiwan Macau Malaysia Thailand

Copyright The Asian Banker All rights reserved 11 In spite of declining profitability, Asian banks have been generally reluctant to embrace the outsourcing model In-house Activities Bank Merchant recruitment Account setup & maintenance Terminal maintenance Transaction processing Basic office / operational services Bank X (HK) √√NA√√ Bank Y (HK) √√NA√√ Bank Z (HK) √√NA√√ NCCC (Taiwan) √√NA√√ Bank A (Taiwan) √√NA√√ Bank A (Thailand) √√X√√ Bank B (Thailand) √√√√√ Bank C (Thailand) √√X√√ Bank D (Thailand) √√√√√ Bank A (Malaysia) √√√√√ Bank B (Malaysia) √√X√√ Bank C (Malaysia) √√√√√ Bank D (Malaysia) √√√√√ Bank A (Singapore) √√X√√ Bank A (India) √√√√√ Breakdown of Merchant Acquiring Related Activities Handled In-House Source: Asian Banker Research

Copyright The Asian Banker All rights reserved 12 Bringing down infrastructure cost presents the biggest challenge to banks Challenges in the Merchant Acquiring Business 12 Source: Asian Banker Research Outsourcing and partnerships can help to reduce maintenance and expansion cost. What is the core business in payments for banks? A redundant infrastructure keeps maintenance costs high, time to market slow, affects bank’s adaptability and ability to provide new services. Near field communication technology GSM-based terminals, will play an increasing role in countries with hard- to-communicate peripheries, such as Philippines and Indonesia Banks did not find solutions behind customising products to customers and merchants, such as discounts, cash management, loyalty bonuses, etc. Banks increasingly try to enter the small payment space. This requires cheap, easy and convenient payment solutions (contactless) Bank’s in Asia Pacific increasingly counter risk of card fraud with EMV migration. About 27% (1H09) of Visa cards in Asia Pacific are chip-enabled. Main concerns for merchants is the reliability of the service providers:  Does the terminal work efficiently and reliably?  Do settlements take place in a timely manner?  How are disputes resolved? Challenges Solution

Copyright The Asian Banker All rights reserved 13 Conclusion 13  If the payments industry wants to redefine the payments experience and view payments as service, it will require that traditional players will become participants with ALL other links in the payment chain  Besides contactless payments, remittances and online shopping offering new opportunities  In light of thinning margins, banks are beginning to look at the processing business from a cost-efficiency perspective  No significant industry consolidation/outsourcing for credit cards processing/switching expected in the next 2 years  Fierce competition and depressed margins will see markets of interest undergo even more consolidation in the merchants acquiring business  A winning strategy in the acquiring business for banks is not solely based on pricing but critical mass and packaged solutions to merchants both as POS and SME client Source: Asian Banker Research

Copyright The Asian Banker All rights reserved 14 “The banks we like” Standard Chartered Bank  Has a transaction banking head for consumer payments  Leverages capabilities in the wholesale payment division into the consumer transaction channels by taking advantage of relationships that touch both wholesale banking and consumer banking.  This could mean any retail business that would have transaction banking needs in its back office, and consumer payment needs in its front office. Citi  Going down a similar route conceptually in its mobile phone-based remittance programme.  Normally, these operations would be handled by the retail banking division, but Citi's Global Transaction Services handles this business in markets like India.  Convergence made possible because of agnostic application of technology

Copyright The Asian Banker All rights reserved 15 The Questions We Ask 1.How do we measure revenue per dollar transaction in our bank? 2.How do we build a payments distribution network in a commercially sustainable manner, instead of just assuming it will work? 3.The sticky transactions that keeps our core customers with us are not the transactions that give us the market share or profitability – so what do we do? (European numbers: 24% revenue: 9% profit: 90% CIR: pushing industry CIR from 59% to 64%) 4.What is the benefit of making Payments a part of an overall transaction banking infrastructure, and what models are there out there that can show us how to do it?

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