Banks and retail: the way forward Xavier Durieu Secretary General Direct Response Forum Europe Basle 26 April 2006

Agenda 1. EuroCommerce and the commerce sector 2. The payment systems market in Europe 3. Retailers objections and expectations on cards 4. National and international court decisions 5. How to get a fair deal for payments

1. EuroCommerce and the commerce sector The interface between industry and 450 million consumers in Europe 13% of EU’s GDP 5.5 million enterprises Over 27 million people employed Fast growing e-commerce EuroCommerce = Represents Retail, Wholesale and International trade Members in 28 countries

2. The payment systems market in Europe 3 main problems: Lack of competition Lack of transparency Unfair distribution of costs A sustainable system? 1. Lack of competition : Duopoly: Visa and MasterCard represent over 95% of the credit market in Europe Note that the 3 conditions have to be present to have a really fair system (cfr. The speech of McFarlane, governor of the Reserve Bank of Australia). The problem is that the “user pays principle” is not respected distortion in the price signals sent to the consumers (the issuers trying to attract more cardholders)  Perverse effect of the 4 party system: more competition leads to higher prices!

2. The payment systems market in Europe (2) No single and cost-based fee structure Fees vary from country to country and from sector to sector Different fees for domestic and cross-border transactions Is Portugal really 5 times less efficient than France?

New Legal Framework for Payments Sectoral inquiry Long term projects Regulation 2560 SEPA New Legal Framework for Payments Sectoral inquiry Scope: has been reduced drastically since the project started. The scope was first the 28 European countries, then the 25, now the 12 euro-zone countries. The date seems to have changed as well: first it was 2008 (sepa for citizens cfr Speech of Gertrude Tumpel-Gugerell in Septembre 2004 in Durbuy), now it seems to be 2010… Supervision: officials documents from the European commission and the ECB recognise that self-regulation has not worked properly in the PS area. SEPA is an initiative from the banks, on which we have finally been consulted in 2005. But who will supervise if the banks finally do well? Information: Commerce sector would really like a SEPA but would like to know what is in the project!!!! (the EPC is really publishing not much detail about it) Risks: pan-european debit cards. A document from the EPC says that national debit systems should disappear… The example of Maestro in the UK should not be followed! We want: real competition and less barriers to entry, which will allow SEPA initatives, alternatives (Berlin group) and national systems to compete To the benefice of all (lower prices, more alternatives) Sectoral Inquiry has shown that banks do not respect European competition rules in the card payment market. Fees for Visa can vary up to 500% and MasterCard fee up to 650% from one country to another. Profit Margins are as high as 70%.

3. Retailers objections and expectations on cards Honour all cards rule Restrictions on cross-border acquiring The non-discrimination rule The Multilateral Interchange Fee (MIF) Against the interests of consumers and merchants

The 4 party system

Why is the deal not fair? Merchant fees: are not negotiable are bundled are not transparent pay for services that benefit to cardholders pay for banks’ problems are levied anti-competitively

A fair and efficient deal What do we want? Competition + Transparency User pays principle = A fair and efficient deal Transparent fee structure ‘Unbundling’ of the MIF allowing retailers to select which services they purchase through the MIF Competition between services providers Obtain real cross-border acquiring Expectations: To get a fair deal on card payments to the benefit of all stakeholders To move to a transparent fee structure for both cross-border and domestic payments in which : Competition works effectively to the benefit of all actors All actors should pay only for those services from which they benefit

4. National and international court decisions EU Decision on Visa US anti-trust cases Australian decision Dutch decision Spanish decision OFT decision The EU Decision on Visa 1. The MIF: was found to be anti-competitive should be cost-based will be capped at maximum 0.7% for credit and 28 cents for debit by 2007 Visa may no longer forbid banks from revealing the costs of services to merchants Corporate cards are to be dealt with in a separate decision Why it has not worked: The decision has not allowed any improvement in terms of: Competition Negotiation Benefit to users  Voir le dossier cas nationaux

The OFT decision The MIF is a “tax on retail transactions that is paid by all consumers” “The MMF MIF could have satisfied all exemption conditions if set at a level no greater than the cost of the payment transmission services (…) incurred by issuers”. 6 September 2005 MMF = MasterCard Members’ Forum Other quote: The recovery of extraneous costs through the MMF MIF generated extra interchange revenue for issuers (including major banks) each time a transaction was made using their cards, and gave them an incentive to fund inducements for cardholders (such as loyalty schemes and interest-free periods), to use masterCard cards instead of other payment means. Distortion of competition between 1. issuers 2. Acquirers 3. Payment means « higher retail prices resulting from an inflated MMF MIF », « extraneous costs », « transfer of money from merchants to issuers via acquirers »

5. How to get a fair deal for payments Transparent fee structure on both cross-border and national payments Competition between services providers Real cross-border acquiring Abolition of the NDR for both Visa and MasterCard Respect of the user pays principle and unbundling ‘Unbundling’ of the MIF allowing retailers to select which services they purchase through the MIF

Conclusion Retailers want to pay a fair price for a fair service. The purchasing power of consumers and merchants is unjustifiably reduced. Regulators across the world are acting against the card schemes to limit their anti-competitive rules– and each one seems to go further in dismantling the unjustifiable elements.

The way forward Competition  More opportunities Dynamic Market oriented banks Market driven prices Trust dynamic on track New markets for cards New business opportunities and products