v3 01/02/06

Analysis of European Debit Card MSC Differences

TARJETAS DE PAGO Y TASAS DE INTERCAMBIO

Madrid, 2nd February 2006

Explaining Differing European MSC Levels2v3 01/02/06

Objectives

Test the hypothesis:

“That the level of debit MSC in any market is substantially linked to the maturity of its domestic EftPos payments infrastructure and

the effectiveness of its national displacement strategy”.

Specifically to:

Identify the sources of Merchant Service Charge (MSC) differences within Europe

Explore the relationship between Europe’s varied MSC levels and the level of debit usage

Identify potential causes of differences between national debit markets

Support PSE’s position that imposing a common European debit interchange could have unforeseen impacts, and that a lengthy convergence period would be required.

Explaining Differing European MSC Levels3v3 01/02/06

Scope and Methodology

Scope:

Major EU Cards Markets (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Netherlands, Norway, Portugal, Spain, Switzerland, and the UK)

National data from Eastern European nations on historical and current card and cash usage was not yet regarded as sufficiently reliable, or comparable, to allow inclusion.

Step Logic

1. A MSC simple normalisation approach

Enables a more accurate comparison of MSCs across Western Europe

2. A simple Debit Cash Displacement (DCD) metric

Links consumers’ propensity to use cash versus plastic cards at the Point of Sale (POS), to show the effectiveness of each nations cash displacement strategies.

3. The correlation of normalised debit MSCs with DCD

Demonstrates the link between the level of MSC and the maturity of plastic cards payment infrastructure.

Explaining Differing European MSC Levels4v3 01/02/06

Headline European MSC Rates

Current MSC Rates in Europe

Acquired Volumes/

Values

Cross Border

Transactions

Settlement/ Float

Costs

Terminal/ Merchant

Support Costs

HEADLINE MSC

Rates

NORMALISED MSC

Rates

Current Headline Rates are Currently Non-Comparable Current Headline Rates are Currently Non-Comparable

PSE Normalisation Approach

Current Credit and Debit MSC Rates for 2005

0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0%

Finland

Norway

DenmarkNetherlands

Switzerland

BelgiumUK

Ireland

GermanyItaly

France

AustriaPortugal

Spain

Greece

Current Credit MSC Current Debit MSC

Explaining Differing European MSC Levels5v3 01/02/06

Rate Variation within the EU

Country Terminals TerminalMaintenance

Telecoms Consumables Settlement Period

Austria N N N Y T + 2

Belgium N N N Y T + 3

Denmark N N N N T + 1

Finland N N N Y T + 6

France N N Y (60%) N T + 1

Germany N N N N T + 3

Greece Y Y Y Y T + 3

Ireland N N N Y T + 1

Italy Y (25%) Y (25%) N N T + 1

Netherlands N N N Y T + 2

Norway - - - - T + 2

Portugal Y (60%) Y (60%) Y (10%) Y (60%) T + 1

Spain Y Y Y Y T + 1

Switzerland N N N N T + 2

UK N N Y (50%) N T + 2

Source: PSE Surveys in 2002 and 2005

Substantial Variations Still Exist in the MSC Rate Structures Substantial Variations Still Exist in the MSC Rate Structures

Explaining Differing European MSC Levels6v3 01/02/06

Impact of Normalisation

Normalised Debit MSC Rates for 2005

0.00% 0.50% 1.00% 1.50% 2.00%

Finland

Norway

Denmark

Netherlands

Switzerland

Belgium

UK

Ireland

Germany

Italy

France

Austria

Portugal

Spain

Greece

Current Debit MSC Normalised Debit MSC

Normalised MSC Rates in Europe Impact of Debit Card MSC Normalisation (% change from Base MSC)

-30% -20% -10% 0% 10%

Austria

Belgium

Finland

France

Germany

Greece

Ireland

Italy

Portugal

Spain

Denmark

UK

Norway

Switzerland

Impact of Normalisation

Average MSCs drop by 5% following Normalisation, with Spanish Rates falling by 25%

Average MSCs drop by 5% following Normalisation, with Spanish Rates falling by 25%

Explaining Differing European MSC Levels7v3 01/02/06

Usage and Maturity Variation in the EU

Wide range of Maturity Levels within the Western European Market for POS usage

Wide range of Maturity Levels within the Western European Market for POS usage

Total Value of Debit POS(per annum per capita)

Volume of Debit POS Transactions (per annum per capita)

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

NorwaySwitzerland

DenmarkFrance

UK

SwedenNetherlands

Finland

LuxembourgBelgiumAustriaIreland

PortugalItaly

GermanySpainGreece

Value (€)

0

20

40

60

80

100

120

140

NorwayDenmarkFranceFinland

UK

NetherlandsSwedenBelgium

LuxembourgSwitzerlandPortugalAustriaIrelandSpain Italy

GermanyGreece

Number of Transactions per annum

Explaining Differing European MSC Levels8v3 01/02/06

The Debit Cash Displacement Metric

Debit Cash Displacement

=

The total value of debit POS expenditure per head per annum

The total value of ATM withdrawals per head per

annum

The total value of debit POS expenditure per head per

annum( )+

Metric Logic

Debit POS expenditure value per capita per annum

This indicates, for each national market, the value of domestic debit POS expenditure per capita per annum (debit has been used rather than credit due to the European propensity to use debit for domestic transactions – c.79% of plastic card transactions in Western Europe are debit).

ATM Withdrawal value per capita per annum

This indicates the total value of cash acquired from ATMs per capita per annum. Again, this is a proxy for cash spending based on the assumption that a high proportion of cash spent at merchants is acquired through the ATM

Explaining Differing European MSC Levels9v3 01/02/06

The DCD Metric in the EU

Country DCD Score (2005)

Austria 44%

Belgium 53%

Denmark 66%

Finland 49%

France 60%

Germany 19%

Greece 1%

Ireland 27%

Italy 35%

Netherlands 50%

Norway 69%

Portugal 40%

Spain 27%

Switzerland 66%

UK 55%

DCD For Major European Countries 1996-2005

0%

10%

20%

30%

40%

50%

60%

70%

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

DCD Value

France

Germany

Italy

Netherlands

Spain

UK

DCD Scores 1996-2005

• Scores range from 1% to 69%

• Majority of countries have experienced increases in their DCD metrics over the past ten years, a reflection of their maturing debit card market

Explaining Differing European MSC Levels10v3 01/02/06

The MSC DCD RelationshipDebit MSC and Debit Card Cash Displacement

(2005)

Austria

BelgiumDenmarkFinland

FranceGermany

Greece

Ireland

Italy

NetherlandsNorway

PortugalSpain

SwitzerlandUK

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

0% 10% 20% 30% 40% 50% 60% 70%

Debit Card Cash Displacement Value

Debit Unit MSC Rate (€)

The MSC DCD Relationship (2005)

Data Points Correlation

All Western European Markets -0.74

Western Europe, with no Germany or Ireland -0.88

Western Europe with no Greece -0.72

Analysis indicates a relationship between the DCD score and the level of MSCs

Analysis indicates a relationship between the DCD score and the level of MSCs

Explaining Differing European MSC Levels11v3 01/02/06

Answer to the most frequently asked question…

“…this analysis proves the hypothesis that countries with very low or no MSCs have successful EftPOS strategies”

Country comparisons show that this is not so:

Germany has a debit MSC of c.€0.3 but has one of the lowest card transactions per head of population per annum

France also has a debit MSC of c.€0.3 but has one of the highest card transactions per head of population per annum (also has high card/ bank accounting fees)

The MSC Debit Usage Relationship (2005)Comparison of Debit Usage and MSC

FranceGermany

Netherlands

Ireland

Belgium

-

0.05

0.10

0.15

0.20

0.25

0.30

0.35

0 20 40 60 80 100 120

Volume of Debit POS Transactions per annum per capita

…lower MSCs do not reflect successful cash displacement or EftPOS strategies

…lower MSCs do not reflect successful cash displacement or EftPOS strategies

Explaining Differing European MSC Levels12v3 01/02/06

Characteristics of More Developed Card Markets

Causal Link Characteristics of More Developed Card Markets

National Consensus and Funding:

National consensus over the benefits of cash (and cheque) displacement

Strong and well funded interbank bodies

Worked closely with large merchants and merchant associations

Cohesive structure and a commercial frameworks

Competition: Merchants are more likely to have a greater choice of acquirers

Competition squeezes acquirer’s profit margins, reducing MSCs but also encouraging unbundling

Strong merchant pressure for banks to reduce or minimise rates

Cardholder Perceptions and Incentives:

Issuers use share of card income (interchange revenues) to fund cardholder behaviour change campaigns.

Mature markets consumers no longer require further education or substantial incentives to encourage usage

Merchant Perceptions and Benefits:

More successful in persuading merchants of the benefits of cards and in particularly the value of the funds guarantee

Persuaded merchants that they can achieve substantial benefits through improved customer service and cost savings through cash (and cheque) displacement

Explaining Differing European MSC Levels13v3 01/02/06

Characteristics of Less Developed Countries

Lack of a coherent national cash displacement strategy and strong central leadership. This results in a fragmented approach to EftPos.

Difficulty in building early support for debit card EftPos amongst the largest merchants and supermarkets.

Business models that vary substantially from those of successful countries, such as:

Three party structures which eliminate the use of an acquiring bank and operate without a MIF generating insufficient revenues to incentivise consumers and deliver merchant benefits.

Bundled MSC structures, complex MIF formulae and merchant contracts.

Fragmented and complex acquiring structures which result in multiple terminal placement, loss-making acquiring and insufficient funds to change consumer behaviour.

Strong consumer cultural propensity to use cash

Explaining Differing European MSC Levels14v3 01/02/06

Summary and Conclusions

1. There is a negative correlation between the simple DCD metric and the level of normalised debit MSC

2. These differences are necessary and that inappropriate intervention may have undesirable consequences on the development of domestic payment infrastructure.

3. If working effectively, card markets will converge over time around lower debit MSC levels as card payments displace cash usage.

4. Successful cash displacement strategies reflect clear national direction, strong competitive commercial frameworks, and good incentives to invest in infrastructures, change consumer behaviour and deliver merchant benefits.

Explaining Differing European MSC Levels15v3 01/02/06

Peter JonesManaging Director

Chris Jones Senior Consultant

+44 (0) 20 8891 6244

info@pseconsulting.com