Presenter Name, Department April 11, 2007 Delivering on SEPA Review of Key Current Components of SEPA Compliance and Some of the Challenges

Multiple Initiatives with a Common Goal – Develop a true Single Market for Payments in Europe April 11, 2007

Key European Institutions Active in Reviewing and Advising on Card Payments Card Payments Possible Objective Activity Outcome DG Competition Objective : Determine Competitive Nature of Card Payment Schemes Scope: EU 27 +4 Objective: Identify barriers and incentives (legislation) necessary for a Single Payments Area Scope: EU 27 + 4 Objective: Single euro payments area (e-payments) Scope: EU 27 + 4 for euro payments (13+1 focus) Objective: Deliver on SEPA Card Payments Sector Inquiry Proposal for Directive on Payment Services ECOFIN approval of final PSD text for approval by Parliament (likely mid/end April 07) Annual Report on Progress SEPA Cards Framework Review of competition in national markets Possible legislation of MIF Possible implementation of Directive supporting SEPA (focus on consumer/ merchant rights; clearing times of payments) Generally supportive for current EPC SEPA moves; desire for greater standardization and single MIF Self-regulating effort of banks to deliver on SEPA DG Internal Markt European Central Bank European Payments Council April 11, 2007

DG Competition Retail Banking Sector Inquiry

Sector Inquiry – Background Initiated in June 2005 covering cards and current accounts Interim report on cards published in April 2006 followed by public consultation Final report in January 2007 Commission Communication 173-page Commission Staff Working Document Frequently Asked questions The most comprehensive evaluation yet made of the structure of the card industry April 11, 2007

Sector Inquiry – Main Findings Payment card industry operates on a national basis Card issuing is highly profitable Large variations in merchant service charges (MSCs) Portugal, Czech republic versus Finland and Italy Credit MSC MC/Visa on average 1.8% (compared to 3.1% for Amex) Domestic Debit MSC of 1.2% (compared to 1.6% for Maestro/Visa) Credit/charge cards more profitable than debit cards Issuing more profitable than acquiring Credit card issuing in 20 Member States would remain profitable absent IF April 11, 2007

Sector Inquiry – Main Findings Smaller merchants pay more Blending may lead to higher MSCs Significant variations in interchange fees (IF) IF levels raise competition concerns Not intrinsic to the operation of card scheme Report does not state that IF should be abolished No relationship between cardholder charges and interchange fees 24/23€ for MC/Visa card; 10/11€ for Maestro/Visa Electron only 1/4th of IF increase is passed on by issuers in terms of lower cardholder fees Smaller merchants pay more Greater disparities for credit than debit cards Differences not based on transaction volumes or merchant risk Blending may lead to higher MSCs Practiced by acquirers in majority of Member States Results in distorted price signals, weakened inter-scheme competition and higher MSCs April 11, 2007

Sector Inquiry – Main Findings Other barriers to competition identified Sole acquirer joint ventures Access/governance & requirement of local branch/subsidiary Prohibition on co-branding Ban on surcharging ‘On-us’ IF practices ‘High joining fees’ Divergent technical standards April 11, 2007

Potential Remedies - Impact of Sector Inquiry Range of measures to strengthen competition Specific market failures to be dealt with on a ‘case-by-case’ basis Anti-trust law enforcement by Commission and National Competition Authorities Access barriers, discriminatory rules IF and MSCs Voluntary actions (e.g. Austria and Portugal) Self-regulatory actions (e.g. SEPA) Regulation PSD (on access restrictions) Proposed Consumer Credit Directive National legislation April 11, 2007

DG Internal Market Payment Services Directive

Draft Payment Services Directive (PSD) Legislative proposal published by the European Commission on 1 December 2005 for a Directive on Payment Services in the Internal Market. ECOFIN has come to an agreement on a revised proposal at the end March, 2007 Expected to be proposed week of April 20, 2007 to European Parliament for approval The Directive is not expected to be implemented by Member States before end 2008. Ultimate goal of the PSD is to improve competitiveness of the EU by integrating national payment markets and creating a Single Payments Market, leading to improved economies of scale and competition, thereby increasing efficiency and reduce total cost of payments in the EU. April 11, 2007

PSD – Three main objectives To enhance competition between national payment markets by opening up markets and ensuring a level playing field between the different participants in the payments market To increase market transparency for both payment providers and users through increased provision of information To standardize the rights and obligations of providers and users of payment services in the EU, with a strong emphasis on consumer protection Link with the creation of a Single Euro Payments Area (SEPA) by removing both the legal barriers and creating a common legal framework April 11, 2007

PSD - Areas of concern identified by the Commission High costs of making/receiving payments (differences between Member States demonstrate market inefficiencies) Deficiencies in EU payment infrastructure as essentially national based Large differences in the efficiency of payment services across the EU Lack of efficient competition and level playing field in the payments market Fragmented legal framework April 11, 2007

PSD – Key Potential Card Business Impacts New “Payment Institution” The PSD establishes a licensing regime for a new and third category of payment service provider referred to as Payment Institutions (PI). entitled to operate across the EU on the basis of a single license obtained in any one of the EU Member States 2. Consumer/Merchant Rights Article 41 on ‘Consent and withdrawal of consent’ Article 43 on blocking cards Article 52 on ‘Refunds’ Article 56 on ‘Irrevocability of a payment order’; Article 56a must ensure that chargebacks are not impacted Article 71 on data protection and fraud prevention April 11, 2007

Key Take Aways – Sector Inquiry and PSD Combination of industry pressures, SCF, Sector Inquiry and PSD will have major, irreversible impact on European payments landscape National payment schemes will become much looser and several will cease to have rationale to exist International card schemes will be more ubiquitous but possible less powerful Deploying multi-country operations will be easier in both regulatory and technical terms Marketing and customer service will primarily remain national April 11, 2007

Key Take Aways Large retailers will have pan-European acquiring relationships Card processing will become highly consolidated and prices will decline Access of non-banks to ACH systems may create new payment services The process will not be smooth April 11, 2007

EPC SEPA Cards Framework

EPC has outlined an aggressive timeline to achieve SEPA March 06 8 Approval by EPC of SEPA Cards Framework. Q1 2006 End of Banks and national Schemes in euro 13 + opt in currency (Swedish Krone) and international Schemes presented finalised SCF migration plans by end Q1, 2006 Jan 08 01 SEPA compliant products must be made available by banks/providers to consumers/merchants. Dec 2010 31 No non-SCF compliant schemes may be in operation. MasterCard SCF and Bank SEPA Compliance Implementation The European payments business is still, contrary to many people’s belief, extremely underdeveloped, with cash representing still the overwhelming majority of retail transactions, costing European society over 50 billion euro per annum, according to the European Central Bank. Indeed, while the euro currency has been in circulation now for nearly 5 years, debit cards today are still effectively plastic Guilders, plastic Francs or plastic Marks. To address this disparity, the ECB and DG Internal Markt laid out their objectives for a Single Payments Area for consumers, and more generally, for service providers and schemes. In response, the European Payments Council, or EPC, has set a series of milestones to achieve SEPA, as defined in the SEPA Cards Framework or “SCF” The EPC asks banks to issue SCF compliant cards as from January 1st 2008, and to have all their current card schemes migrated to SCF compliant schemes no later than end 2010. This timing is very aggressive, but we believe the goals are achievable in this timeframe. April 11, 2007

MasterCard will be SEPA Cards Framework Compliant from January MasterCard’s has undertaken all of the necessary enhancements to be SCF Compliant MasterCard will be SEPA Cards Framework Compliant from January 1, 2007 well ahead of Deadline Product All products (MasterCard, Maestro) SCF compliant; EMV Mandate by end 2010; liability shift already in place Acceptance Maestro SEPA compliant scheme with over 90% debit Card merchants accepting Maestro in the EU Processing SEPA compliance testing for existing members kicked off Sept. 2006 to be completed end 2007 MasterCard Pricing SEPA Pricing implemented in April 2006 Rules and Licenses - SEPA revisions to MasterCard rules shared with MasterCard Board October, 2006; effective Jan 1 07. - SEPA License under EU law available in November 07 Business Model And Interchange Maestro SEPA Fall-back Interchange Rates announced December, 2006; Effective January 1, 2008 April 11, 2007

Current MC Understanding Of SCF Compliance Plans MasterCard has developed bespoke plans and proposals for banks based upon their expected SCF Migration Plans Option 1 Austria Currently Maestro Domestic Belgium Migration to Maestro (phase out of bcmc tbc) Germany (Sparda) Migration to Maestro Slovenia Currently Maestro Domestic NL Likely migration to international schemes Finland Migration to international schemes Greece Currently Maestro and Electron domestic Ireland Migration to international schemes Spain Currently MC/Maestro and Visa domestic Sweden Currently MC/Maestro and Visa domestic Portugal Migration to International Schemes likely Lux Migration to international schemes likely Option 3* France Cobrand and introduction of intl schemes Germany Cobrand and introduction of intl schemes Italy Cobrand and introduction of intl schemes Cobrand Intl Schemes Current MC Understanding Of SCF Compliance Plans Such an implementation requires that MasterCard be sensitive to local requirements and therefore our plans are bespoke not only at a national level but also at a bank level . . . To date, the majority of Europe will be or already has begun migration to global debit card solutions. Crucial in this decision process is, as I said before, that one size does not fit all . . . Nor should it. Having the same constraints on the primary retail bank relationship token, the debit card, restrains competition and from there, competitiveness. So, while we can probably expect several national community decisions like for example in Belgium, Mastercard will deliver on banks needs, with an eye to the increasing cosmopolitan nature of the business * Existing national or new market entrants may migrate to international brands exclusively April 11, 2007

Existing and Migrating MasterCard and Maestro only banks will achieve SCF compliance through MasterCard’s SCF Compliance Over 40 million cards in the SEPA zone already committed to Maestro and MasterCard as their SCF Scheme Recent Decisions: Germany 3 mio. Electronic cash cards to Maestro only Sweden 1mio. Maestro 700k Debit MC Cards SCF Compliant Switzerland 5.8 mio. Maestro only Cards SCF Compliant Austria 6.7 mio. Maestro only Cards Slovenia 2.5 mio. Maestro only Cards Italy 5.5 mio. Maestro only Cards Spain 8.3 mio Maestro cards 5.5 mio MC cards Greece 3.8 mio. Maestro only Cards April 11, 2007

SEPA is part of a longer term trend in card payments in Europe from national to international schemes 1995 UK – Access to MasterCard 1998 Austria – Bankomat to Maestro Sweden - Bancomat to MasterCard and Maestro 2002 UK Switch to Maestro 2005 Switzerland ec Karte to Maestro 2006 Sparda German electronic cash to Maestro . . . April 11, 2007

Pagobancomat/Maestro 1.2 Multibanco/Maestro Cards Banks co-branding with MasterCard and Maestro will also achieve SCF Compliance Over 150 million cards co-branded Maestro and MasterCard will achieve SCF Compliance from Jan. 1 Ireland 1.1 mio. Maestro/Laser Cards Netherlands 18.7 mio. Maestro/PIN Cards Germany 88 mio. Co-brand electronic cash/Maestro Belgium 13 mio. BC/MC To Maestro Luxembourg 400k Bancomat/Maestro France All Banks 7.6 mio. Debit MC 3.3 mio. Maestro Italy 17 mio. Pagobancomat/Maestro Cards Portugal 1.2 Multibanco/Maestro Cards April 11, 2007

MasterCard’s Commitment to Poland and the Introduction of SEPA MasterCard actively engaged with the Poland SEPA Work Group Critical to ensure alignment across the banks on key non-competitive issues Joint MasterCard-SEPA PL review and agreement on final interpretation of SEPA Cards Framework completed Support for EMV, ongoing support for changing environment as other areas gain more clarity (impact of PSD, DG Competition etc…) April 11, 2007

Thank you.