Acquiring Alliances in Europe

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1 Acquiring Alliances in Europe Insight Report 2010 Kai-Christian Claus Berlin, February 22 nd 2011

2 Agenda I. Trends and Observations II. Acquiring Alliances in Europe: Insight Report 2010 III. Conclusion & Outlook - 2 -

3 Acquiring in Europe is in transition acquirer are repositioning around markets, products, partnerships and operations Acquiring: Trends and observations Convergence Online / POS Cross-border business & market entries M&A and Alliances Importance of Scheme relations Acquiring in Europe Value chain expansion Advanced Risk Management New Acquiring Processing Partnerships Source: Innovalue - 3 -

Cross-border business & market entries M&A and Alliances Importance of Scheme relations Acquiring

4 Choosing the right market is not trivial besides historic data analysis future market prediction is key for optimizing revenues and profit Cross-border business & market entries European market development 2008 German market development until 2015 Market size (bn EUR) 525 GB 325 FR DE IT NL ES 75 BE CH NO 50 DK FI PT 25 IE GR AT SE TR Baltics Balcan 1) PL CZ RU Market growth (CAGR 04-08) Txn. volume (bn EUR) 7% Other Maestro/ V PAY MasterCard/Visa electronic cash ELV Review market size and dynamics Develop a clear view on the growth of the schemes in focus 1): Bulgaria, Croatia, Hungary, Romania, Serbia, Slovakia and Slovenia Source: Payment Card Yearbooks , European Card Review, Deutsche Bundesbank, Innovalue market model

20 25 30 35 70 75 Market growth (CAGR 04-08) Txn.

5 M&A activity in the payment industry has remained steady during the previous 12 months with special focus on acquiring and PSPs Selected M&A transactions AMEX Revolution Money VISA Europe Carte Bleue Deutsche Telekom Click & Buy Ingenico Payzone France MasterCard DataCash Global Payments and la Caixa form Joint Venture Advent/Bain Capital RBS Worldpay American Express Revolution Money Source: Innovalue Research TSYS and FNBO form JV Barclays Bank Italian credit card business of Citibank VISA Cybersource Summit Partner Ogone Equens montrada RBS Worldpay Cardsave American Express Loyalty Partner

2010 Global Payments and la Caixa form Joint Venture 01.12.2010 Advent/Bain Capital RBS Worldpay 2010 15.01.2010 American Express Revolution Money Source: Innovalue Research 01.03.

6 Acquiring processing goes Europe several large processing contracts expire and the new RfPs include plenty of new business requirements Acquiring processing in Europe EXTRACT Processor DE AU CH BE IT ES NL FR UK PL EE RoW ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü Selected key requirements: Costs, flexibility, cross-border capabilities, convergence of POS and Card Non-Present business Source: Innovalue Research - 6 -

ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü ü Selected key requirements: Costs,

7 Risk management becomes more advanced focus is on individual risk management and portfolio diversification with improved instruments Advanced Risk Management 1% very high risk 2% high risk 5% severe risk 12% medium risk 80% standard risk Individual risk management: Individual rating according to customers risk factors Balanced risk structure standard risks have to outweigh significantly High risks call for appropriate pricing to compensate riskadjusted return on equity and increased management effort Industry diversification Portfolio diversification: Minimization of unsystematic risk through diversification over industry and regions Regular tracking of the engagement quantity and correlation in the defined industries 1) e.g. Oil and gas, Funitures, Gambling, Adultery Source: Innovalue - 7 -

risks call for appropriate pricing to compensate riskadjusted return on equity and increased management effort Industry diversification Portfolio diversification: Minimization of unsystematic risk

8 Size matters when managing schemes licences consolidation initiatives are underway, being a challenge in particular for alliances Scheme fee scale effects Scheme fees p. txn. 1) for the 10 biggest European acquirers: In EUR ConCardis Swedbank First Data Credit Mutuel Banque Populaire BNP Paribas Elavon Credit Agricole HSBC Barclays RBS Worldpay Consolidation of Scheme fees: A non-consolidated acquirer can save up to 30% of scheme fees through full consolidation under one license Growing the acquiring volume under one license is an important lever to reduce scheme fees p. txn. License strategy needed for organic growth, M&A, rent-a-bin & lend-a-bin Visa MC Annual txn. Volume (bn ) ) Assuming an average transaction value of 80,- with domestic business only and an equal Visa / MC spilt, assuming full consolidation under one license, considering only fees for service, clearing and settlement, transmission, system access, marketing and license Source: Nielsen Report 2009, Innovalue - 8 -

02 In EUR ConCardis Swedbank First Data Credit Mutuel Banque Populaire BNP Paribas Elavon Credit Agricole HSBC Barclays RBS Worldpay Consolidation of Scheme fees: A non-consolidated acquirer can save

9 Agenda I. Trends and Observations II. Acquiring Alliances in Europe: Insight Report 2010 III. Conclusion & Outlook - 9 -

10 In recent years business models in acquiring have changed dramatically today joint ventures & alliances play an important role Acquiring Business Models Starting point: Acquirer = Bank Inhouse Spin-off Joint Ventures & Alliances Private Equity Commercial Acquiring & scheme relations as core banking business Integrated Operations Processing is outsourced to a vendor or inhouse Credit Agricole Credit Mutuel Source: Innovalue Spinoff into a separate business unit / legal entity with separate p&l Processing & Operations inhouse or ousourced Citibank Card Acceptance (now Elavon) RBS WorldPay (now WorldPay) EXAMPLES between banks between banks & processors Nets CartaSi ConCardis AIB / First Data La Caixa / Global Payments First Data (KKR) WorldPay (Advent / Bain) easycash (Warburg Pincus, now ingenico)

Agricole Credit Mutuel Source: Innovalue Spinoff into a separate business unit / legal entity with separate p&l Processing & Operations inhouse or ousourced Citibank Card Acceptance (now Elavon) RBS

11 In 2009, 23 acquiring alliances ranked among the 75 largest acquirer in Europe, accounting for more than 34% of the total acquiring volume Acquiring Alliances: Market size Market volume acquiring (bn transactions in 2009) Acquiring alliances by type (bn transactions in 2009) Independent acquirer 860 (3%) Total 25bn (34%) Alliances # of companies Single bankowned acquirer (63%) Note: Data shows the top 75-acquirers of credit, debit and prepaid card systems from merchants based on Visa and MasterCard transactions in 2009 Contractual JV (bank & acquirer) Equity JV (between banks) Equity JV (bank & acquirer) Total Source: Nilson Report, Innovalue Analysis

499 (34%) Alliances 7 13 3 # of companies 8.499 461 2.062 Single bankowned acquirer 15.666 (63%) 5.

12 Access to new geographic markets and achieving scale effects have been named as the most important rationales for forming an acquiring alliance Rationale for the Alliance INSIGHT REPORT 2010 Growth Efficiency Risk & compliance (Access to) new geographic markets New sales channels New customer segments Scale effects in transaction processing Scheme fees (scale effects) Specialized sales force/ improved sales efficiency Fulfilling requirements by regulators and schemes Credit/ risk management know-how of alliance partner Sharing of credit & operating risk Cross-border expansion and ecommerce were named the most important areas of improvement over the next 1 to 3 years Margin pressure is considered to be the biggest upcoming challenge Source: Innovalue Acquiring Alliances in Europe: Insight Report

improved sales efficiency Fulfilling requirements by regulators and schemes Credit/ risk management know-how of alliance partner Sharing of credit & operating risk Cross-border expansion and

13 Most of the alliances have achieved their goals all participants would enter the alliance again Achievements of the Alliance INSIGHT REPORT 2010 Growth Efficiency Risk & compliance (Access to) new geographic markets New sales channels New customer segments Scale effects in transaction processing Scheme fees (scale effects) Specialized sales force/ improved sales efficiency Fulfilling requirements by regulators and schemes Credit/ risk management know-how of partner Sharing of credit & operating risk 88% 84% 70% 70% 76% 80% 88% 80% 80% The satisfaction of the alliance are either slightly or strongly above the expectations All participants in the survey would enter the alliance again Source: Innovalue Acquiring Alliances in Europe: Insight Report

Fulfilling requirements by regulators and schemes Credit/ risk management know-how of partner Sharing of credit & operating risk 88% 84% 70% 70% 76% 80% 88% 80% 80% The satisfaction of the

14 Agenda I. Trends and Observations II. Acquiring Alliances in Europe: Insight Report 2010 III. Conclusion & Outlook

15 Conclusion & Outlook 1 Market environment remains competitive Fazit for European acquirer even if the total market size is still growing 2 Risk management, realizing scale effects and cross-border business expansion are gaining importance 3 Alliances and partnerships remain a growth strategy for acquirer and processors 4 Evolution of acquiring in Europe indicates still a growing number banks looking for partnerships in acquiring 5 6 Alliances have proven high degrees of achievement in terms of growth, risk & compliance Acquiring Alliances are a sustainable business model on the background of future challenges in European acquiring

processors 4 Evolution of acquiring in Europe indicates still a growing number banks looking for partnerships in acquiring 5 6 Alliances have proven high degrees

16 Innovalue is one of the leading top management consulting firms in the European payment industry. Our clients encompass banks, acquirers, card schemes, processors, network operators and terminal producers. Our functional capabilities are focused on selected competency areas with high and visible value creation: Growth Go-to-Market-Strategy Market Entry & Cross-border Business Sales Force & Channel Optimization Heimhuder Straße Hamburg Germany Phone +49 (0) Fax +49 (0) Web Efficiency Performance Improvement Operational Excellence Corporate Restructuring M&A M&A & Alliance Strategy & Transaction Support Due Diligence & Valuation Post Merger Integration Innovalue is headquartered in Hamburg, Germany. Contact: Kai-Christian Claus Partner Mobile +49 (0) Mail

Our functional capabilities are focused on selected competency areas with high and visible value creation: Growth Go-to-Market-Strategy Market Entry & Cross-border Business Sales Force & Channel

The Future of EU Card Processing Revisited 2004 compared with 2010

The Future of EU Card Processing Revisited 2004 compared with 2010 Peter Jones March 2010 In mid 2004 PSE Consulting interviewed executives from 20 banks and 11 card processors and delivered a report (sponsored