v3.0 18/07/06 SEPA – ONE YEAR ON VendorCom 18 th July 2006

SEPA – Vendorcom July 2006 v3.0 18/07/06 2  What did we say this time last year?  What has happened in the past year?  What does the market think will happen next? SEPA One Year On - What we are going to cover today

SEPA – Vendorcom July 2006 v3.0 18/07/06 3 WHAT DID WE SAY THIS TIME LAST YEAR?

SEPA – Vendorcom July 2006 v3.0 18/07/06 4  Not clear who owns the SEPA vision – EC or ECB  Scope 12 or 28 countries?  Over focus on payments - -payment silos. Insufficient attention to the current account – links not clear  Over focus on consumer benefits when immediate problems are bank to bank - wholesale  Confusion over final SEPA outcomes. Is it all or some of these?  simple intra eurozone inter-operability  common methods, processes, standards  removal of barriers, improved efficiency and competition  total inter-operability of personal/corporate current account ECB - need to clarify “SEPA Vision” Scope, Outcomes, Territory

SEPA – Vendorcom July 2006 v3.0 18/07/06 5 Our Summary and Conclusions  Banks and schemes must accept responsibility  SEPA will create open and competitive market  Many players/those impacted – defensive  Large bank winners – small banks losers  SCF excellent concept – but needs more detail  Essential for EPC credibility to deliver framework  Processor sector due for consolidation  Major opportunities for supplier sector – but when? Time for voluntary change running out!

SEPA – Vendorcom July 2006 v3.0 18/07/06 6 SO WHAT HAS HAPPENED IN THE PAST YEAR?

SEPA – Vendorcom July 2006 v3.0 18/07/06 7 ‘Making SEPA a Reality’ Doc: EPC June 2006 (Version 1.0) EPC 'Making SEPA a Reality' Implementing the Single Euro Payments Area Date of Issue: 28 June 2006 Reason for Issue: To support wide communication of SEPA objectives and activities Produced by:PSE Consulting Ltd and EPC Secretariat Authorised by: European Payments Council Circulation:Public domain

SEPA – Vendorcom July 2006 v3.0 18/07/06 8 SEPA Vision for tomorrow SEPA is the most significant change in EU’s payments in the past 20 years Today – Different Country Implementations Tomorrow – Harmonised SEPA National / local solutionsCommon “local” solutions with additional optional services Difference schemes, experiences, standards, consumer protection laws Common core payment instruments and experiences, consistent standards, application of harmonised consumer protection laws No inter-operability of national schemesImproved inter-operability Different country implementationsHarmonisation and consolidation Cross-border complexity and riskReduced complexity, improved efficiency

SEPA – Vendorcom July 2006 v3.0 18/07/06 9 SEPA Scope

SEPA – Vendorcom July 2006 v3.0 18/07/06 10 NATIONAL IMPLEMENTATION EU LEVEL MONITORING Consumer Bodies Consumer Bodies Retailer Associations Retailer Associations Public Administration Public Administration Corporate Associations Corporate Associations National Governments National Governments European Payments Council European Payments Council National Central Banks National Central Banks National Banking Associations National Banking Associations European Central Bank European Central Bank European Commission European Commission Payment Services Directive Payment Services Directive Implementation Plans Implementation Plans Schemes and Frameworks Schemes and Frameworks SEPA Implementation Co-Ordinating Bodies Banks Consumers Merchants Corporates Stakeholders SEPA – Who is involved

SEPA – Vendorcom July 2006 v3.0 18/07/06 11 Major SEPA Components Plus… The New Legal Framework (NLF)/ Payment Services Directive (PSD) SEPA Common Payments FrameworkComponent The single euro Cash Area (SECA) FrameworkCash The SEPA Cards Framework (SCF) as an ‘adaptationenabler to Europe ‘s card schemes to become SEPA compliant:    Network Interoperability Credit Cards Two new‘replacement’Electronic Transfer Schemes (ETS):  SEPA Credit Transfer Scheme (SCT)  SEPA Direct Debit Scheme (SDD) Payment Transfers SEPA Common Payments FrameworkComponent The single euro Cash Area (SECA) Framework Cash The SEPA Cards Framework (SCF) as an ‘adaptation’enabler to Europe to become SEPA compliant:  Implementation of EMV  Separation of Scheme from Infrastructure  Cards Two new‘replacement’Electronic Transfer Schemes (ETS) and common operational services:  SEPA Credit Transfer Scheme (SCT)  SEPA Direct Debit Scheme (SDD) Payment Transfers

SEPA – Vendorcom July 2006 v3.0 18/07/06 12 SEPA Timeframe The ECB has required that the launch of the core SEPA payment instruments begins in 2008 and that national migration is complete by end 2010……. SEPA Programme Phases Phase 1 – Design and Preparation The design of the two new ETS and the Cards Framework took place during will focus on the development of standards and the specification of the technical detail and security. Phase 2 – Implementation and Deployment Overlaps standards and specification with implementation, piloting and launch by the end of 2007 for the two new ETS. Phase 3 – Co-existence and Migration A transitional period in which there will be a co- existence of national and SEPA schemes and a gradual migration to the latter from 2008 to 2010.

SEPA – Vendorcom July 2006 v3.0 18/07/06 13 SEPA Bank Propositions - A Lesson in Mathematics 1 Account = 29 Nations

SEPA – Vendorcom July 2006 v3.0 18/07/06 14 Banks - The ‘Single European Payment Account’ Corporate Proposition Powerful Offer - attractive to utilities, major/small corporates, public bodies 1 29 = Product FeatureCorporate Benefit BankSingle domestic relationship for all nations – lower costs AccountAll 29 nations reach – domestic account Legal FrameworkCommon framework, reduces risk, improves certainty Credit TransferDomestic and cross border - transparency of fees – IBAN/STP – better data Direct DebitDomestic and cross border - standard scheme/SLA – reduces risk, improves cash flow FileOne file submission/receipts – pooling and lower costs PlatformOne delivery platform for all Europe – major savings

SEPA – Vendorcom July 2006 v3.0 18/07/06 15 Changes required by SEPA Cards Framework (SCF) SEPA Cards Framework – Section 3  Open Membership Licensing  Common Scheme Rules  Separation of Scheme & Processing  Common Interchange Setting  Open Scheme Fees  Network Interoperability  Fraud Provision / EMV Compliance  Security Certification  Common Cash Withdrawal Experience

SEPA – Vendorcom July 2006 v3.0 18/07/06 16 SEPA – Impact on Domestic ACH, Debit Card, ATM Schemes Bank/Processor Impacts  Survival in the new competitive SEPA domestic market – fear of extinction  Loss of national debit and ACH schemes  Open membership – any bank/player  New SEPA scheme rule books/frameworks – complex compliance  Separation of schemes from processor – owners strategies unclear  Reduced revenues / resources  Increased transparency and regulation (EU and domestic)  Migration to four party card model (eg. Germany) Bank/Processor Opportunities  Potential to become pan-EU schemes and PEACHes  More efficient, lower cost operations, new products/services  Membership of Berlin Group/Euro Alliance type schemes  Alliances and partnerships – many essential to enable SEPA Many threats and challenges – only strongest will survive

SEPA – Vendorcom July 2006 v3.0 18/07/06 17 SEPA – Impacts and Benefits Commercial Processors  Market consolidation through M&A already occurring – but prices still high  New customers and revenues as barriers removed  Single common platform results in lower processing cost  Growth of ISO/on-risk acquiring displacing banks  Major investments required to build/modify platforms to SEPA  New pan-EU products and services – ICS debit brands Major consolidation already taking place – FDI dominant player

SEPA – Vendorcom July 2006 v3.0 18/07/06 18 SEPA – Impacts & Benefits Merchants and Corporates  Rapid growth of pan-EU acquirers/processors – increased competition – lower prices  Major changes to card acceptance, terminal applications, bank interfaces – cost of implementation  Fewer bank relationships, pooling single file submissions and increased remittance data – lower costs  Lower merchant service charges and common interchange – lower costs  Common ACH schemes for direct debit, credit transfers – domestic and cross border – improved efficiency  M&A and consolidation in ACH/processor/ vendor sector – lower prices, increased competition Potentially high cost of change, but lower operational costs

SEPA – Vendorcom July 2006 v3.0 18/07/06 19 SEPA - Impacts and Benefits Supplier Sector  Few have SEPA strategies – many “vapourware” products  No business/technical specifications or standards yet - what has to be done?  Major opportunity for new software products and systems integration contracts  Lower cost common products – old multi country solutions become obsolete  Potential surge in demand for new switches, back office clearing/settlement platforms  Potential for interim interface adaptors/ boxes  Increased M&A in supplier sector Of €10bn cost – significant share to supplier sector

SEPA – Vendorcom July 2006 v3.0 18/07/06 20  Very substantial impact on all players – already happening – deadlines will slip for cards – ACH should meet dates  SEPA & PSD will create open, competitive market, new standards and processes  Bank winners – build new compelling propositions. Losers “sit on their hands”  Major benefits for large merchants, corporates – some benefits for consumers/SMEs  Schemes losers, domestic debit – ACH schemes disappear – very significant change – ICS duopoly  M&A will rapidly consolidate interbank and commercial processor sector – 25 to around 7  Processors, suppliers, vendors will gain– many new and lower cost products/services SEPA Impacts - Summary and Conclusions Major change – much fall out – eventual outcome uncertain for many players

SEPA – Vendorcom July 2006 v3.0 18/07/06 21 WHAT DOES THE MARKET THINK WILL HAPPEN NEXT

SEPA – Vendorcom July 2006 v3.0 18/07/06 22 SEPA European Change - SEPA is the catalyst Payments Change Drivers 1. Regulation and Compliance 2. Cash and Paper Displacement 3. Changing Role of Processors 4. Industry Consolidation (banks, processors, schemes) 5. Cross Border Service Provision 6. Platform Renewal and Re-sourcing 7. Product Innovation 8. Scheme Evolution SEPA is accelerating internal and external change drivers towards a new market equilibrium within Europe, it’s happening now….  New Players  New Business Models  New Products …… but with  Margin Pressure  Increased Competition

SEPA – Vendorcom July 2006 v3.0 18/07/06 23 But, the Size of the SEPA Change will be massive  Year 2000………  The euro………..  SEPA………………………………… €8-13bn* ….. and customers will be looking for all types of solutions to help digest it How do you eat an elephant?……… one piece at a time * Tower Group estimate

SEPA – Vendorcom July 2006 v3.0 18/07/06 24 SEPA Infrastructure Impacts  “…integrating fragmented national payment systems will involve significant investments from the participants:  8,000 banks will have to adapt their operating systems to handle new products and services (Source: Charlie McCreevy, 20 September 2005, Paris)  2 million enterprises will have to prepare themselves to interact with these new payment systems ”. (Source: Charlie McCreevy, 20 September 2005, Paris) Commissioner McCreevy:

SEPA – Vendorcom July 2006 v3.0 18/07/06 25 This year’s PSE SEPA crystal ball….. SEPA We don’t have a SEPA crystal ball, but we do have the opinions and predictions from over 75 senior European bankers and payment system executives from two recent SEPA surveys carried out by PSE…..

SEPA – Vendorcom July 2006 v3.0 18/07/ % prefer the current regime of self-regulation 70% believe that self-regulation is sufficient (surprising given progress to date) 73% believe that the EC will legislate to enforce compliance anyway SEPA Understanding and Communication The SEPA message still needs to be communicated more effectively Self-regulation is preferred, but many see legislation as inevitable Only 54% understand the detail, 46% the general and broad principles Only 30% understand the detail of the NLF/PSD Confusion over the role of the EPC – only 22% believe that they are responsible for Communications (EC 18%, ECB 12%) Some banks perceive SEPA as a cross-border project not a domestic harmonisation project Source: PSE FDI Pan European SEPA Survey 2006

SEPA – Vendorcom July 2006 v3.0 18/07/06 27 Only 30% see SEPA impacts to be of importance to consumers Over 75% see significant benefits to merchants and corporates Banks struggle to build new SEPA consumer offer, but see major opportunity in corporate sector SEPA Impact on Banks & their Customers 72% believe that the costs will outweigh the benefits A high proportion see revenue losses as a result Many domestic banks believe that they will be pushed out of local markets by pan European or global players who will take advantage of SEPA Although banks see SEPA as a key enabler, they also see the high cost of compliance and short term threats……. with opportunities only arising later Source: PSE FDI Pan European SEPA Survey 2006

SEPA – Vendorcom July 2006 v3.0 18/07/ % do not yet know the costs Technology cost will be larger than business related cost: 20% expect technology costs of between €21m- €75m 15% expect technology costs up to €10m 45% expect business cost to be up to €5m Large and medium banks anticipate high costs of SEPA implementation, however many still do not know the costs SEPA Costs & Preparations for Banks Only 46% have a dedicated SEPA Tsar or team in place, while 27% are leaving business units to assess how to comply without central co-ordination The majority of banks are still evaluating requirements 50% of non Eurozone respondents did not expect to be ready by 2010 Banks are only just starting to prepare for SEPA Source: PSE FDI Pan European SEPA Survey 2006

SEPA – Vendorcom July 2006 v3.0 18/07/06 29 Only 17% expect domestic brands to survive and become SEPA compliant 17% are already with ICS and 66% expect to migrate/co-brand with an ICS brand Banks foresee ICS duopoly for Europe – the majority of domestic debit schemes to migrate to ICS brands SEPA Impact on Card Schemes 34% expect schemes to minimise separation 13% expect that schemes will shrink and become support operations 25% expect schemes to form separate processors 28% perceive a Eurozone only solution Banks expect that scheme separation will not be clean 61% believe in the need for an alternative network But only 33% believed that the Euro Alliance would succeed 25% believe that both Visa and MasterCard will create separate competitive processing businesses Banks want alternative networks to VisaNet and BankNet – but many believe that the Euro Alliance will not succeed Source: PSE FDI Pan European SEPA Survey 2006

SEPA – Vendorcom July 2006 v3.0 18/07/06 30 For ACH, 46% SEPA expect impact to be across Eurozone only For ACH, 32% expect impact to be across whole of EU For cards, 25% expect impact to be across Eurozone only For cards, 17% expect impact to be across whole of EU Banks expect SEPA to be wider than just the Eurozone SEPA Outcomes Many banks believe that, because domestic debit schemes will be replaced by those of the ICS, the ICS schemes will become key enablers for delivery of the SCF mandates – and an effective ICS duopoly This could result in those local debit schemes that are currently ICS branded making only minimal changes to their national market scheme rules Source: PSE FDI Pan European SEPA Survey 2006

SEPA – Vendorcom July 2006 v3.0 18/07/06 31 PSE Conclusions  SEPA happening in all markets – however, more SEPA sceptics than supporters  Many expect minimal compliance and mini-SEPA work arounds  Initial focus is on SEPA ACH/ETS changes until cards SCF position clarifies  Little joint co-ordination of ACH and cards business – they still operate as silos, convergence not yet in evidence  Large banks are generally positive about SEPA  Medium/small banks, mutuals, co-ops/savings banks are largely negative  Large and medium size bank spend on SEPA will be greater than expected  Initial customer focus in on corporate propositions/products – less on consumer What we do know however, is that SEPA is a tremendous opportunity for vendors and suppliers as banks look for SEPA solutions which minimise the cost of compliance SEPA

SEPA – Vendorcom July 2006 v3.0 18/07/06 32 Doug West Chris Jones +44 (0)