Cards and Payments Processing

VRL Publishing Cards and Payments Processing Major challenges and opportunities in a changing global industry VRL Publishing Ltd A C A R D S I N T E R N A T I O N A L S U P P L E M E N T

Cards and Payments Processing www.vrlpublishing.com CONTENTS 1 Cards International London Office The Colonnades, 82 Bishop s Bridge Road, London W2 6BB, United Kingdom Tel: +44 (0)20 7563 5600 Fax: +44 (0)20 7563 5602 Asia Office 3 Philip Street #08-02 Commerce Point Singapore 048693 Tel: +65 6383 4688 Fax: +65 6383 5433 Publisher: Edward Peck Tel: +44 (0)20 7563 5670 E-mail: edward.peck@vrlpublishing.com Editorial Editorial Director: Gerard Lysaght Tel: +44 (0)20 7563 5691 E-mail: gerard.lysaght@vrlpublishing.com Asia Editorial: Titien Ahmad Tel: +65 6383 4688 E-mail: titien.ahmad@vrlpublishing.com Reporter: Victoria Conroy Tel: +44 (0)20 7563 5619 Email: victoria.conroy@vrlpublishing.com Chief sub-editor: Karen Leverington Sub-editor: Joanne Ruddock Advertising Advertising Manager: Manoj Nardani Tel: +44 (0)20 7563 5674 E-mail: manoj.nardani@vrlpublishing.com Marketing Ann Tierney Tel: +44 (0)20 7563 5667 E-mail: ann.tierney@vrlpublishing.com Customer services and subscriptions Jennifer Sturt Tel: +44 (0)20 7563 5623 E-mail: cuserv@vrlpublishing.com Head of Asia Lee Wai Ling Tel: +65 6383 4688 E-mail: wailing.lee@vrlpublishing.com For more information on VRL Publishing, visit our website at www.vrlpublishing.com As a subscriber, you are automatically entitled to online access to Cards International. Please contact customer services for more information. VRL Publishing Ltd, 2006 Registered in the UK No 02806152 ISSN 0956-5558 Unauthorised photocopying is illegal. The contents of this publication, either in whole or part, may not be reproduced, stored in a data retrieval system or transmitted by any form or means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the publishers. contents 06-07 CSC guest column 10-11 Openway guest column 16-17 SiNSYS guest column from the editor Facing up to the challenges Welcome to this Cards International supplement on the processing industry. At a time of major change in the global cards and payments sector, cards processors are at the centre of the industry s evolution as they provide solutions for a market that is increasingly international. Future perspectives for many banks and card companies now lie outside the borders of their own domestic market. Their need to drive economies of scale, export best practice and follow existing clients into new countries is placing major challenges on the processors who serve them. Not surprisingly, as the cards industry changes, so too does card processing. Consolidation is having a major impact on the number of processors active in the leading cards markets and especially in the smaller ones. At the same time, mergers, such as the recent one between Interpay and Transaktionsinstitut, are enabling many companies to offer processing solutions across continents. US-headquartered companies such as First Data have made huge inroads into many European markets, with a string of recent acquisitions allowing it to offer solutions across multiple markets. Processors with global ambitions have also been swift to invest in the major emerging markets. Witness the investment by TSYS in CUP Data, the processing subsidiary of China UnionPay, the country s national payments network. There is no question that the demands of card companies to drive costs down and at the same time to build revenues from existing or new businesses will continue to increase in intensity. Cards processors have a key service to offer banks and other cards players at this critical time in the industry s development. As a result, the publication of this supplement comes at a very appropriate time. I would like to thank all the organisations featured in the supplement for their support and co-operation and wish your business every success. Gerard Lysaght Editor, Cards International Strictly no copying permitted. For information on additional copies or syndicated online access to this newsletter, please contact Client Relations on +44 (0)20 7563 5615 or cuserv@vrlpublishing.com

2 NEWS Cards and Payments Processing www.vrlpublishing.com CARD PROCESSING ABN AMRO links up with First Data... Dutch bank ABN AMRO and global payment processor First Data International (FDI) have entered into a five-year merchant acquiring and processing relationship, under which FDI will deliver global payment processing services to worldwide merchants, and ABN AMRO will provide merchants access via its global transaction banking network to card and payment systems and banking services throughout Europe, Asia-Pacific and Latin America. The two organisations said that the service is to be rolled out from the second quarter of 2006 and will be fully implemented by 2007. The agreement covers MasterCard and Visa transactions outside the US. ABN AMRO will also provide global treasury and funds transfer services to FDI. Merchants will have access to ABN AMRO s full suite of transaction banking solutions, including payments, treasury, and investment management and trade services. An ABN AMRO spokesperson told CI: The partnership with First Data International enables ABN AMRO to extend global merchant acquiring services to its corporate clients wherever they do business. Merchants gain from First Data s processing expertise and scale, and from ABN AMRO s extensive global footprint. We will be rolling out the service in the 25 EU countries and Asia-Pacific in 2006, and in Latin America and the rest of Europe in 2007. Our roll out plan reflects where we expect to see most demand. In the run-up to the Single Euro Payments Area, the alliance is also expected to give ABN AMRO an advantage in cross-border acquiring and processing over its European rivals. We believe this alliance, together with our extensive footprint and deep knowledge of European markets, will make us an obvious choice for clients looking for a one-stop merchant acquiring agreement, the spokesperson added. CARD PROCESSING... and sets up processing joint venture in Brazil ABN AMRO s Brazilian subsidiary Banco ABN AMRO Real, the fourth-largest private retail bank in Brazil, has teamed up with US technology service provider Fidelity National Information Services (FIS) and Brazil s largest privately owned bank Banco Bradesco to form a joint venture company providing outsourced credit and prepaid card processing services to Brazilian card issuers. This is the latest major cards venture for Bradesco, which last month acquired the American Express business in Brazil. The new company, which will be named Fidelity Procesadora e Servicos, will provide a range of card processing and support services in Brazil, including call centre management, back office support, card transaction processing, risk management and collection services. FIS said it expects to convert all card portfolios over the next 24 months. Once the conversions are completed, FIS will process over 20 million cards in Brazil and over 63 million cards worldwide, based on the existing card base. The joint venture is expected to generate revenue of approximately $2 billion over the next 12 years, the companies said. Once the card portfolios are fully converted, profit margins are expected to be consistent with overall company margins. The joint venture will position FIS as the leading third-party card processor in Brazil. Banco Bradesco was the country s largest card issuer at the end of September 2005, when it had 9.2 million credit cards and 41.7 million debit cards in force. It held approximately 24 percent of the debit card and 12.8 percent of the country s credit card markets, also making it Brazil s largest credit card issuer. Marcelo Noronha, director of cards at Banco Bradesco, told CI that the main benefits of the alliance would be more scale and less processing costs. He continued: The company will be able to process cards for any market player and the joint venture has a technological partner that guarantees the experience and knowhow necessary to the business, he said. For Bradesco, the main effect expected in terms of revenue is related to the reduction of costs, however, for the processing company the revenue comes of the rendering of conventional services. An ABN AMRO spokesperson told CI: The deal with Fidelity is focused on card processing in Brazil, where ABN AMRO will benefit from access to a modern technology platform, enabling us to reduce our card processing costs and provide better levels of services to our clients. FINANCIAL RESULTS TSYS reports record revenue and earnings results Global payment processor TSYS has reported record annual results with revenues of $1.6 billion. Total revenues for the fourth quarter of 2005 increased by 35 percent to $420.7 million and fourth quarter net income rose 29 percent to reach $194.5 million. Highlights for TSYS included the extension of its processing relationships with Allied Irish Banks and Metavante, a processing agreement with Canada s Toronto-Dominion Bank, and the establishment of TSYS Managed Services, an integration of the contact centre and customer service operations of several subsidiary companies into a single business unit. TSYS also purchased a 34 percent equity interest in China UnionPay Data, expanding its reach into China. However, the results were dampened by the loss of the Citigroup Sears and Bank of America consumer processing portfolios. TSYS expects 2006 earnings will increase in the range of 21 to 23 percent, with total revenues expected to increase by 5 to 7 percent. Accounts on file at the end of 2006 will number approximately 395 million to 405 million. Philip Tomlinson, CEO of TSYS, said: The financial strength for the year was driven by the conversion of JPMorgan Chase, stronger than expected earnings growth at Vital Processing Services, good growth in our value-added products and effective crossselling of products and services. Strictly no copying permitted. For information on additional copies or syndicated online access to this newsletter, please contact Client Relations on +44 (0)20 7563 5615 or cuserv@vrlpublishing.com

Tim De Waele

INTERVIEW: CSC BLURB, INTERVIEW: EG, CSC EXPERIAN SPECIAL FEATURE 4 Technology the key to processing flexibility SC Spokesperson: Sergio Bordoni, C director, CSC Cards Competency Centre, Milan, Italy. What lessons have processors learned from the global EMV migration? One thing that processors have learned from EMV migration is that it is extremely complex both technically and strategically. The co-existence of magnetic stripe and chip compounds the problem. Benefits can be realised from proactive and early migration to EMV. Instead of viewing EMV migration as a necessary evil, much can be gained from EMV including market differentiation, increased process efficiencies, reduced fraud and a greater market reputation. A lot of energy and attention should be focused on the migration strategy, especially the rollout approaches to get the most bang. How are processors in Europe preparing for the Single Euro Payments Area, and what changes will it bring about in the processing industry? The most important impact for cards organisations of SEPA will be downward pressure on fees since payments in the Euro zone will be treated as a domestic payment. This means that cross-border ATM surcharges will disappear. To maintain income, issuers and acquirers will be forced to find the absolute lowest cost per transaction or exit the business, furthering consolidation. Cross-border issuing will continue to intensify competition. Incentive schemes, such as loyalty and cash back traditionally funded by merchant discount/interchange, also will be cut, as evidenced by the scaling back of benefits and withdrawal of several new card products. How are processors preparing for the growing popularity of new payment methods such as prepaid cards, contactless payment and mobile payments? New payment mechanisms are emerging so quickly that most processors are challenged to keep pace with the market. And to compound the problem, oftentimes the processors card management platforms are already stretched, adding to the complexity to support these new payment mechanisms. Processors that embrace technology and have a flexible processing platform will be the winners as global payments become more sophisticated. Will the trend of consolidation within the processing industry continue over the next few years? Consolidation will continue to dominate, as each processor strives to get bigger and bigger to ensure its future and achieve scale economies. Domestic debit programs still continue to create barriers to entry. SEPA and cross-border processing are also impacting consolidation. Consequently, technology will play a critical role, as processors reinvent their models to survive. Processors that implement flexible card processing platforms and related new card technologies will definitely end up on top. These same issues also hold true for processors eyeing other regions around the globe for growth. Technology will be at the forefront of these processors ability to dominate. What are the challenges and opportunities for processors in emerging markets such as China and Eastern Europe? Both markets represent opportunities for growth that are exhausted in more mature market regions. Processors face new challenges and complexities including support for more languages and unique cultural preferences. Business requirements and network integration will stretch the flexibility of some processors systems. Regulators may prohibit the fee and interest regimes that sustained the cards industry through its first periods of growth. There is also the challenge of rapidly building up a merchant acquiring infrastructure. Without an established cards infrastructure, a new payment method could always emerge, especially in China, and eclipse the payment card. Healthcare debit cards have taken off in the US recently what other new payment trends are processors noticing and how are they capitalizing on them? Healthcare debit cards including Health Reimbursement Accounts (HRAs) and the Flexible Spend Accounts (FSAs) are forms of prepaid and stored value cards that have taken off in the US. Other forms of debit cards present huge opportunities including payroll cards for unbanked workers, Electronic Benefit Transfer (EBT) cards for social and government benefits, and gift cards. Commercial cards, such as purchasing cards and fleet cards, are also taking off to reduce the cashflow timeline and payment transaction costs. S E R G I O B O R D O N I, D i re c tor, C S C C a rd s Competency Centre What initiatives are processors undertaking in the area of data security and fraud prevention, given recent headlines about data breaches? Processors are focused on data encryption and reducing the fraud exposure associated with card-not-present sales channels. Networks of organized criminals are attacking merchants with lightning-fast, multi-million dollar strikes. Fortunately, fraud detection software has become much more sophisticated, especially with features such as order screening rules, rule weighting, merchant configurable velocity checks, neural network risk scoring, international IP address location, and automated order review. Behavioral analysis software products also are easing the risk of fraud. Some issuers and processors are also bringing card processing in house for greater control over security and customer data. What will be the main challenges, trends and opportunities for processors over the next few years? Consolidation will definitely continue. And as competition for growth increases, issuers and acquirers will have more options for processing. Some companies will be positioned to negotiate shorter contracts, greater service agreements, and in some cases, lower costs from processors. Others, especially issuers with scale, will move to in-house processing to meet their strategic goals and grow their businesses. These players will realize greater control over costs, products, security and time to market. With a great ability meet the requirements of the localized markets, many will offer card processing services to smaller banks.

INTERVIEW: CSC INTERVIEW: CSC 6 CSC Cards and Payments Expert Explores Options for Cards Management SC, one of the world s leading IT C services companies, is a global leader in card management systems since 1989. Its Card Competency Centre, based in Milan, was set up in 2003 to meet the services and development needs of its card system software clients located in Italy and throughout Europe. The CSC Cards Competency Center is chartered to deliver best value software support, while maximizing the lifetime of its clients investments in CSC card system software with a series of á la carte lines of services. The centre also provides customized services and applications to issuing clients of SiNSYS, the pan- European cards processor formed in 2003. Sergio Bordoni is the director of CSC s Cards Competency Centre. Experienced in working with leading card issuers, merchant acquirers and processors including SiNSYS, Deutsche Bank, and SSB, Bordoni comments on the future of the global cards industry. Q: What are the new payment opportunities for banks to exploit? A: Debit and prepaid definitely offer the greatest growth opportunities on a global level. Europe, where six out of seven transactions are still carried out in cash, offers huge opportunities for debit cards. In the U.S., debit card usage continues to outpace credit cards. Prepaid is also a huge growth engine for card-based payments. These products touch many facets of the market, ranging from gift cards, payroll cards, health reimbursement accounts, flexible spending accounts and travel expenses. Prepaid reduces cash requirements for consumers while offering merchants access to new customers at lower handling costs. For issuers and acquirers, prepaid cards can be a new source of fee income and provide access to millions of consumers who have no traditional depository banking relationships. Q: Electronic payments are among the most competitive segments in the financial services industry, responsible for a major percentage of all banking income. What can banks do to safeguard their payments franchise? A: Technology has reshaped the playing field. Plenty of companies have failed because they were bound by old technologies that once seemed completely viable. If history teaches us anything, it s that established companies are at their greatest risk when technology and business processes are changing. New competitors come out of nowhere, establish a foothold and rapidly erode your market share. The newcomer has the freedom to tailor process changes precisely to the current market conditions, while established companies are burdened with retooling both technology and processes. The need for speed and agility is an imperative for the cards and payments industry. If you want to stay competitive if you want to survive you need end-to-end processes and software components based on your business services. With this technical framework, card issuers and merchant acquirers can monitor and continuously improve processes, achieving levels of efficiency and agility never before thought possible. The need for speed and agility is an imperative for the cards and payments industry. If you want to stay competitive if you want to survive you need end-to-end processes and software components based on your business services Sergio Bordoni Director, CSC Cards Competency Centre S E R G I O B O R D O N I, D i re c tor, C S C C a rd s Competency Centre Q: Third-party card processors continue to gain a greater share of the European cards market. As a large vendor of cards management software systems, how has this growth impacted CSC s ability to license its software? A: CSC s cards management software platform, CAMS II Card & Merchant System, is actually designed to meet the system requirements for both in-house and third-party processors. CSC has licensed CAMS II to in-house processors like Barclaycard and Deutsche Bank in Europe, as well as leading card issuers in the U.S. and Japan. Building on the success of CAMS II, SiNSYS, a leading thirdparty processor in Europe formed by SSB, Banksys and Interpay, chose CAMS II as its strategic processing platform for growth. SSB, founded in 1992 and owned by Italian Banks, had been using CAMS II since the late 1990s to process tens of millions of cards. With the formation of SiNSYS in 2003, the group knew that a single cards processing platform would be a strategic differentiator in the marketplace. CAMS II has been critical to SiNSYS success, resulting in faster processing, smoother product launches and improved card management processes. Q: SiNSYS has been shaking up the European marketplace. How well can SiNSYS compete with US-based processors trying to establish a foothold in Europe? A: SiNSYS, like SSB, is a bank-owned processor in contrast to the public shareholder structure of U.S.-based third-party processors. The SiNSYS philosophy is to serve the needs of the banks versus profit maximisation. Plus, with its history in serving European issuers and acquirers, SiNSYS understands the unique needs and culture of its clients. The SiNSYS leadership team recognised that if it was to compete successfully with global rivals and achieve its processing goals, it needed to build a new approach to card processing. International customers bring a much greater level of servicing complexity and demand for bespoke payment solutions than national customers. Card processing offerings need

to reflect multiple languages, cultures and regulatory frameworks. Their size also gives international customers great buying power. CSC s CAMS II has given SiNSYS this competitive advantage. U.S.-based processors typically force clients to change their requirements to meet system capabilities, which preclude competitive differentiation, while CAMS II offers flexibility that can be customised to meet the unique processing requirements of any country. Nicola Cordone, CEO of SiNSYS, says his company is committed to meeting the unique requirements of its customers, and the SiNSYS cards platform offers maximum flexibility for tailor-made payment solutions. The system also reduces time to market for the development of new products and services. SiNSYS s well established Pan European processing and servicing infrastructure constitutes a real differentiation for financial institutions by supporting merger and acquisition strategies and market penetration across national borders. Further contributing to SiNSYS advantage over newer European players is its strong presence in Europe, especially with the collective successes of SSB, Interpay and Banksys. SiNSYS already is processing 1 billion transactions for 23 million international payment cards. By 2013, SiNSYS plans to build up its Pan-European presence and process more than 100 million cards. This is another advantage that CAMS II offers SiNSYS the ability to scale to support tremendous volumes. CAMS II was benchmarked by IBM to scale to 100 million active credit card accounts, but realistically the system can support much greater card volumes. Q: There is a new trend in the U.S. for large issuers to process their own cards instead of outsourcing to third parties. Do you see this trend expanding to the European marketplace? A: For some issuers and acquirers, outsourcing to a third-party is the logical option. For others, especially those with scale, in-house processing can offer a strong value proposition. The top 10 U.S. issuers have the volume and resources to realize the efficiency, cost savings, speed and control associated with in-house processing. Top European issuers and acquirers with scale also can reap the benefits of bringing processing in house. One size certainly does not fit all when it comes to card processing. With processors like SiNSYS and software vendors like CSC, European issuers and acquirers now have more available options. Q: What are the global opportunities for merchant acquirers? A: Merchant acquiring has traditionally been a high-volume, low-margin business. This is all changing, as merchant acquiring becomes a global business with acquirers expanding their reach into other countries and regions. To stay competitive, acquirers must develop an international strategy that addresses the issues of global commerce including multi-currency processing, multi-language capabilities and compliance with all the regional rules imposed by Visa, MasterCard and American Express. One size certainly does not fit all when it comes to card processing. With processors like SiNSYS and software vendors like CSC, European issuers and acquirers now have more available options Most merchant acquirer systems today are proprietary developed over many years of service to the industry. Consequently, we are seeing increased interest by acquirers looking at new systems and technology to support growth, crossborder expansion, retention and revenue. Since Barclaycard licensed the CAMS II merchant acquiring platform in 2003 to support its aggressive international expansion objectives, CSC has developed distinct merchant acquiring capabilities including the ability to accept and settle card transactions in any currency. Multi-currency and dynamic currency conversion are sophisticated offerings that allow global merchants to play the foreign exchange game to their best advantage. Merchants today are also less costsensitive, opting for new features and services such as loyalty packages and fee-based value-add programmes over price alone. In-house processing gives high-volume acquirers more flexibility and options to support existing clients and attract new ones while increasing the acquirer s profitability and revenue. Like card issuers, acquirers need processing options. In some cases, outsourcing merchant acquiring to a third party such INTERVIEW: CSC as SiNSYS makes sense, while for others, in-house processing may be the logical choice. Again, there is no one-size-fits-all solution. About CSC s CAMS II Card & Merchant System CAMS II enables card issuers to manage a wide range of credit card, debit card, and stored value products, from proprietary access cards to full-function co-branded Visa, MasterCard, and American Express cards. It processes all operations for the entire card business, including automated security and authorization functions that help banks manage risk more cost effectively. The system authorizes new applicants, creates and dispatches PIN numbers and cards, and handles complete transactions every time a card is used including automatically deducting fees payable, crediting retailers with the remainder due and accumulating loyalty awards for individual accounts. CAMS II also offers banks and processors high performance and scale. The system was recently benchmarked to support 100 million active accounts and high volumes of card transactions processing more than 200 authorizations per second and over 17 million transactions per day. For more information about CSC s cards management software, visit www.csc.com/ cards. CSC distinguishes itself through its timetested ability to plan, build and operate highly reliable, efficient and secure business and IT solutions for leading financial services firms around the world. To complement its capabilities in consulting, systems integration and outsourcing, CSC brings financial services industry knowledge and experience, a comprehensive portfolio of financial services application software and an extensive network of industry and technology partners. More than 10,000 CSC employees are dedicated to serving financial services clients, including more than 1,200 major banks, insurers and investment management and securities firms. With annual revenues of $14.6 billion and approximately 80,000 employees worldwide, CSC works collaboratively with clients to develop innovative technology solutions to meet realworld business needs. 7 CSC INTERVIEW: GUEST COLUMN CSC

INTERVIEW OPENWAY INTERVIEW: OPENWAY Growing the business im Pardon, Director of Openway Belgium S.A, discusses the key issues W facing processors today. What lessons have processors learned from the global EMV migration? Many of the banks and processors have seen EMV migrations as necessary evil. Till now they may not see the full benefit of EMV technology while other new initiatives and new product development are postponed due to EMV migration. To get most out of EMV technology the current processing systems, as well as ATM and POS terminal software must evolve further, as well as smart card applications. The mere fact that substantial part of transaction business logic is now moving to chip brings well known complexities of distributed systems architecture. The challenge in the new EMV world is that new product implementation becomes more costly as the impact on the payment infrastructure is higher. OpenWay was among the EMV pioneers back in 2002 with first live Visa and MC issuing and acquiring implementations, and also prototyped early versions of MasterCard Preauthorized (MPA) on MCHIP4. How are processors in Europe preparing for the Single Euro Payments Area, and what changes will it bring about in the processing industry? SEPA is a costly project and most of local banks and processors in EU are looking for partners to share this huge investment. Only big consortiums can bear the cost of this new standard. However the banks hope that business will grow due to better acceptance. How are processors preparing for the growing popularity of new payment methods such as prepaid cards, contactless payment and mobile payments? In the 90 s, mobile payment had rapid adoption globally but success was limited due to lack of standards and limited security features available. Introduction of SIM cards with built-in set of payment security features and contactless merchant EDC will help these new payment methods enter the mainstream usage. OpenWay has recently completed a prepaid and contactless project in Thailand. While the absolute number of cards is relatively small, the rate of growth is exceptionally high. Will the trend of consolidation within the processing industry continue over the next few years? Not just consolidation buy also specialisation. Consolidation is driven primarily by cost reduction and economy of scale reasons with little need for innovation or diversification. Processors are looking for new higher-margin niche payment processing segments. They consider expansion beyond the boarders of their home markets to China, Eastern Europe, Middle East and South East Asia. In many cases we see that architectural limitations of legacy processing systems prevent processors and banks from exploring new market segments. This is where we believe our WAY4 payment processing framework can shows its full capacity. Healthcare debit cards have taken off in the US recently what other new payment trends are processors noticing and how are they capitalizing on them? Trend is to look beyond payments as usual. If there is a need to transact, there is a room for processor to provide authentication, authorization, switching, billing and accounting services. As system architects we see a lot of common patterns in the payment industry, both in banking and non-banking sectors. Once we recognize common pattern we put it in our WAY4 payment processing framework. What are the challenges and opportunities for processors in emerging markets such as China and eastern Europe? You need to look at the numbers. China has over 400 million debit cards. However the credit cards business is still in its infancy. In China there are a few challenges: 1. China banks are basically conservative and are only ready to work with committed partners. This requires to have long term view to build the business here. 2. To meet Chinese expectations, applications should be localized with clear understanding of interfaces, local processing standards and reporting requirements. 3. Local banks are looking for partnership to get experience in risk management, marketing and customer segmentation and product innovation. Major processors have already entered the market and but have limited success. We believe more in aggressive medium-size banks with strong business and IT teams being early adopters of new generation open platform inhouse solutions, such as WAY4. With unlimited pool of highly qualified IT WIM PARDON, Director, Openway Belgium S.A. resources in China and extremely competitive banking environment we feel China today is a market for in-house payment processing systems, rather than for payment outsourcing. The banks that invest in their own in-house platforms can share the costs by providing processing services to friendly affiliated banks who can not afford to have own platforms. Again keep figures in mind. We would not dare to talk to the banks there if we had no experience with 10 million card processing volumes on open platforms. What initiatives are processors undertaking in the area of data security and fraud prevention, given recent headlines about data breaches? Security is always a key concern for the payment industry. Processors are engaging external specialists to conduct reviews involving technology hardening, operation process analysis and assessment of staff awareness and diligence in security matters. What will be the main challenges, trends and opportunities for processors over the next few years? Banks are expecting faster and less costly product development lifecycle. This is putting a pressure on large processors to re-architect or replace their legacy systems. In the mean time banks are reviewing their outsourcing options and exploring new entrants as alternatives. While large processors are pressed to consolidate, re-architect or replace their legacy systems we see small, new-born processors entering the new markets with more flexible and powerful software solutions. Using open systems and clustering, lower cost hardware can now provide scalability and reliability exceeding mainframe-sized capacity. While their activity today may seem marginal, in the mid-term their ability to innovate and lower cost of operations poses a threat to the traditional processors. 8

OPENWAY GUEST COLUMN EG, EXPERIAN SPECIAL FEATURE OPENWAY GUEST COLUMN Ushering in an era of new-generation card payment systems The secret is in reliability and performance of the Oracle technology stack, power of open platforms plus efficient payment processing framework architecture that is why WAY4 solutions are there to challenge mainframe legacy systems. We have proven to run 10M cards and 3000 authorisations per second (APS) on open platforms. Next challenge is 100M cards and 15000 APS. Oracle s worldwide reputation for excellence lends us extra credence. Wim Pardon, Director of OpenWay Belgium S.A. ooking across the card industry and its cross-industries, it is L possible to identify several common trends emerging from the old market. Bank architecture for payment processing is developing along several recognisable patterns encompassing objects, models, and solutions. These architectural patterns are spreading into the telecommunications industry. At the same time, system architecture as a whole is becoming more and THE SECRET OF WAY4 S FLEXIBILITY Product Service package Account scheme Service rules Billing rules Reporting rules Customer Contract Contract is an agreement to deliver a product to a customer Personal and corporate information Individual terms Accounts more agile. Organisations are relying less and less on hard coding and basing their businesses on more soft-coded business rules and rule engines. Clusters and redundant hardware have become commodities. Even the most traditional commodity, time, has changed, with more payment-related services available in 24x7 mode. Integration with an existing back-end application ecosystem becomes more real-time than batch. Not only that, customers are expecting more control over their own accounts growing trends are ushering out the traditional customer service centre and embracing the concept of universal automated selfservice. Along with services, organisations themselves have changed. Banks tend to outsource what can be outsourced, focusing on their key offerings and clearing space for new innovative solutions. Outsourcers need to manage a diversity of bank requirements, not just leverage on economy of scale. Even non-banks these days need to set up payment processing platforms for mass-market products, such pre-paid cards, bill payment processing, and consumer credit. Can legacy systems keep up with this breathtaking pace? Far from it. Their problem is not just old technology and the excessive cost of maintaining them. The problem is far deeper they are simply not capable of adapting and reacting to new market challenges. Neither can they cope with the main challenge at hand for the industry today: time to market at realistic cost. So why not move to a new system? The long-standing argument: performance and reliability. Up until now, it was assumed that new-generation flexible and scalable card payment systems were just not capable of high production volumes. Introducing WAY4 WAY4 shatters this concept with results officially backed up by Oracle, the world s largest enterprise software company, and leading hardware platform providers such as Sun, HP and IBM. WAY4 is not just another system. It is a new-generation payment processing framework with a unique architec- 10

OPENWAY GUEST COLUMN OPENWAY GUEST COLUMN THE SECRET OF WAY4 S FLEXIBILITY WAY4 gives many companies the satisfaction of knowing that they have chosen the best in software and hardware. The result is a mature and proven product with extreme reliability and performance, as the following demonstrates: Mature product - 7 years on the market 70+ customers, 15 countries Product and transaction framework Open platform, fault tolerant clusters 10 M cards, 3000 authorisation transactions proven Mainframe migration experience WAY4 CMS solution Credit, debit and pre-paid cards MasterCard, Visa, Private Label EMV issuing, acquiring, personalisation Instant Issuing M/Chip 4 PAD & VSDC++ Fraud prevention WAY4 Switch solution Visa, MasterCard, domestic ATM, POS management Self-Service Kiosk Management WEB & mobile banking and commerce CMS Interface RBS, CRM, bill payment interfaces Risk management experience and enhance their payments business. ture built around common patterns and generic objects customers, contracts, accounts, and products. Along with this, a common transaction processing core supports a variety of solutions. WAY4 can simultaneously run prepaid cards and credit cards - it is simply a question of setting up business rules. It enables complex request exchanges in various dialects such as ISO8583, NDC/DDC, XML/IFX and others. This way, clients can access products and services from various back-office systems and billing systems through ATM, POS, Kiosk, Web, IVR, and mobile banking, as well as Visa, MasterCard, American Express payment networks, and other channels. WAY4 can react to customers behaviour to control risk and encourages spending with various loyalty incentives. A single WAY4 instance can run multiple businesses in different geographies and time-zones, making it easy for businesses and organizations to meet cross-border and cross-industry demands. Because WAY4 places power in the hands of customers, it can be adapted in-house to meet the particular requirements of the customer and their marketplace. And a single WAY4 installation can run multiple businesses in different geographies and time-zones, making it easy for businesses and organisations to meet cross-border and cross-industry demands. A mature and tested product over 7 years experience in various markets running from Oracle 8 to the latest Oracle 10g it is underpinned by the reliability of the Unix/Oracle real-time application clustered architecture. It is being run today in high-volume applications by customers achieving speeds of 3000 authorisations per second and managing over 10 million cards across 11 timezones. Who uses WAY4? The exceptional flexibility, high degree of automation, 24/7 system availability and superb productivity make WAY4 the answer for both specialised, innovative solutions and large-scale projects for leading companies. Good news for those looking for mainframe systems replacement. It has been officially confirmed that WAY4 on ORACLE 10g is capable of handling a staggering 3,000 transactions per second (TPS) and 10 million cards in realworld, high-volume conditions. This is one of the highest performance indicators for transaction switching systems run on an open platform Alan Payne, vice president, Financial Services, Oracle Asia Pacific About OpenWay Headquartered in Brussels, Belgium, with regional offices in Europe, the Middle East, and Asia Pacific, OpenWay Group was founded in 1995 to develop WAY4, an innovative payment processing framework for Banks, Processors and Telcos. WAY4 Switch, WAY4 Card & Merchant Management and WAY4 Smart Card Personalisation solutions have been selected by 70+ customers, more than 25% of which are EMV certified. Built on Oracle and high-end UNIX clusters, WAY4 is run today by highvolume customers with 10+ M cards and 3000 TPS as well as by niche players with sophisticated products. OpenWay is a member of the Visa Global Vendor Program, MasterCard Global Vendor Team, MasterCard s OneSMART Club, Oracle Certified Partner, NCR s Self-Service Switch Partner, and Diebold s PIX. For more information please visit www.openwaygroup.com Our customers are typically innovators in their markets, developing new and exciting ways to meet their customers needs. We re proud that we have had 100% customer retention throughout our history. Today, over 70 customers in 15 countries are using the WAY4 solutions family of products. They are efficiently and reliably processing many millions of transactions every day, while using the flexibility of the system to adapt to changing requirements, improve their customers 11

Cards Cards and Payments Processing www.vrlpublishing.com International RESEARCH & INTELLIGENCE SECTION: TITLE 13 2006 Credit Card Industry Workshops A series of one-day workshops that will: Help credit card issuers develop successful strategies to increase profitability Provide success stories of credit card profitability Feature global best practices and how they can be applied to your credit card business London Madrid Dubai Marketing Credit Cards for Profit Understand how to maximise the profitability of your credit card portfolio Dates City Venue Monday 5 June London The Radisson Edwardian Marlborough Hotel Tuesday 6 June Madrid Best Western Premier Hotel Santo Domingo Saturday 10 June Dubai Le Meridien Dubai www.cciworkshops.com Tel: +44 (0) 20 7563 5685

INTERVIEW: SINSYS INTERVIEW: SINSYS SEPA is next step towards a consolidated market insys Chief Commercial S Officer, Arnold Sneijers, answers questions on the card processing market. What lessons have processors learned from the global EMV migration? We have experience in implementation of EMV in multiple European countries and some key findings are: Although there is a common standard, this standard evolved over times, this evolution has lead to differences in the implementation. Each main Issuer, or group of Issuers in a country defined their own profile of implementation in order to take advantage Certification process is complex and takes time due to different chips, different versions of specs, different parameter setting and different personalization bureaus We have experience with some interesting partners who make it easier by bringing consultancy to help Issuers to define the implementation from a business perspective and deliver tools to validate the implementation. How are processors in Europe preparing for the Single Euro Payments Area, and what changes will it bring about in the processing industry? We believe that SEPA is the next step in a consolidated market for payment processing in Europe. Although SEPA is concentrating, from a technical / operational perspective, on the payment part of cards processing we believe that over time the standardization will reduce the complexity of processing in the next 5-10 years. We also believe that with SEPA and the EC initiatives to increase the competition among banks in delivering financial payment services the focus on reducing costs and increasing revenues in value added services will increase. As a consequence economy of scale by increasing volumes and investing in new features and value added service will be very important in order to remain competitive in the future. This will increase the competition among the third party processors but it will also increase the market for outsourcing payment services. More banks will reconsider their in-sourcing strategy. How are processors preparing for the growing popularity of new payment methods such as prepaid cards, contact-less payment and mobile payments? SiNSYS in close cooperation with its shareholders has already implemented successfully new payments methods such as prepaid cards and mobile payments in already 3 countries and is working on contact-less payments. Currently the domestic focus is key and requires country specific implementations. Will the trend of consolidation within the processing industry continue over the next few years? We are convinced that a consolidation in the processing market will take place, but we also believe that new initiatives could take place if the market is growing in total revenue. We believe that as part of the consolidation processors will have to address the following elements in order to remain competitive: Increase the economy of scale by increasing the volumes Serve the customers in multiple countries Partner with regional players in order to deliver specific regional services (i.e. call centre, printing, personalization) Continuously invest in innovation in functionalities and support of Issuers and Acquirers to compete and supporting the changes in rules and regulations (i.e. schemes, EC, SEPA, etc). What are the challenges and opportunities for processors in emerging markets such as China and eastern Europe? We are currently focused on the European market, which today already justifies its own strategy in order to deliver what the market requires. Healthcare debit cards have taken off in the US recently what other new payment trends are processors noticing and how are they capitalizing on them? We believe that a further diversification in payment cards will occur. Health Care Cards is one example, but we also see interesting evolutions in Petrol Fleet cards and pre-paid cards. ARNOLD SNEIJERS, Chief Commercial Officer, SiNSYS What initiatives are processors undertaking in the area of data security and fraud prevention, given recent headlines about data breaches? A processor should be a trusted partner. Security and fraud prevention is a fundamental part of the core services. We have implemented programs to further improve our offering in these two areas over the last two years to protect our leading position in the market. a) Data security We have performed an improvement program which incorporates the new schemes regulation (PCI) and industry best practices. It further improves the SiNSYS data security standards at a very high standard. b) Fraud prevention We have defined a Fraud Risk Management program, which not only applies the latest state of the art technology in order to prevent fraud but also improves the process to follow fraudulent transactions by automatic rules processor and an advanced case management system. We have furthermore also intensified the usage of European data to improve the performance of the scoring models. What will be the main challenges, trends and opportunities for processors over the next few years? It will be a challenging time for us to serve on one site the existing base of more than 21 million cards and 700.000 merchants in more than 7 countries with new innovations and increase the performance of the portfolios of our customers by further improving the usage of our services and on the other side to growth in Europe and service new customers or existing customers in new European countries. 14

SINSYS GUEST COLUMN SINSYS GUEST COLUMN Industry trends cross Europe, banks are getting A more sophisticated and many are looking for advanced business, technical and operational solutions, not just basic processing services. Outsourcing is and will become an essential part of the banking strategy for retaining customers and expanding revenue opportunities. The demands of corporations and financial institutions to outsource payment and treasury related business processes will drive business process outsourcing solutions from larger financial services providers. In embracing outsourcing for business transformation and long-term performance of their payments strategy banks mention economies of scale, network externalities, and sharing investments in central infrastructure as the main sources and drivers of value creation. According to Boston Consulting Group, each large European bank will invest an average of 60-100 millions euro up to 2010 to efficiently manage their payments systems. Large global banks that invested in payments are winning the costly battle for the business of the multinational corporation. Many of these banks are adapting to the changing payments landscape and investing in systems that can be integrated with those of large corporation in order to maintain their payment business. SiNSYS incorporation The boost of these trends and some important international tenders in the inter-banking processing sector, explained the incorporation of an international company that processes payment cards. This company, called SiNSYS, was founded in September 2003 by three companies: the Italian SSB, the Dutch Interpay and the Belgian Banksys, each one occupying a solid position in their respective national payment card processing market. According to Boston Consulting Group, each large European bank will invest an average of 60-100 millions euro up to 2010 to efficiently manage their payments systems In contrast to its principal, mainly British competitors, SiNSYS, whilst being profitoriented, gives precedence to the quality and service levels provided. This philosophy represents a strong advantage for the principal clients, large pan-european banks, who see SiNSYS as the only European partner similar to them in culture and origin but also due to its business model oriented towards the quality of the solutions offered. For this reason, the future entry of new partners or alliances with local operators (for example in Eastern Europe) should not be excluded. By combining the expertise, know how and volumes of the three shareholders, SiNSYS offers high-quality performance and secure issuing and acquiring services. Its new state-of-the-art platforms provide maximum flexibility for developing tailormade payment solutions for any new type of payment. It was developed with the goal of supporting enhanced modularity of the offer, updated solutions for issuing and acquiring and shorter time to market. The SiNSYS platform is also ready to take on any future developments, whether it would be on the Internet, mobile payments, or adapting to any new standard in the processing industry. Europe has nowadays over 80 major processing companies and the majority inter-bank owned. Many expect this structure to change as the EPC and SEPA plans to evolve and as the inter-bank sector redevelops its ageing processing infrastructure. European processors sector is dominated by a large number of inter-banking processors with the presence of few commercial processors of Anglo Saxon origin to which pan European banks are pushing for cross border solutions. The dynamics of the two types of processor are largely different, with different type of challenges to face. Commercial processors have to face a relatively static market with slow growth and request for very low costs, limited functionality and debit processing which delivers poor returns. Than facing unsatisfied banks with the Anglo Saxon model that needs to become more customer oriented, needs more country research to understand the specific market requirements. On the other side there are the inter-bank owned processors, which often have dissatisfied shareholders and are criticised for lacking the commercial culture as the US TPPs. SiNSYS Customers SiNSYS with its headquarter in Brussels, Belgium and subsidiaries in Italy, The Netherlands, is already a leading processor of credit cards in Europe. This has been an incentive to approach the market and seek new possibilities in even more European countries, to make sure we can keep our promises to grow as one of the leading 16

SINSYS GUEST COLUMN SINSYS GUEST COLUMN European service providers for cross-border card processing. Even though some commercial processors have significantly expanded in the last years, few of them seem to have the potential to grow by 2009 beyond SiNSYS target of 30 million cards, 800 thousand merchants and 1 billion transactions. SiNSYS also signed long-term contracts with two major European banking groups, i.e. KBC (regarding the majority of its subsidiaries in Central and Eastern Europe) and ING (regarding its activities of ING Card. This resulted by the end of 2005 in more than 21 million cards, 700.000 merchants and 1 billion transactions contracted with SiNSYS. By the end of 2006, the platform will be able to serve customers from seven countries (i.e. Belgium, the Netherlands, Italy, Czech Republic, Hungary, Poland and Slovakia) and the migration and/or start-up of production for debit or credit card transactions (national or international depending on the agreement) will be completed. SiNSYS Strategy In order to reach these ambitious targets SiNSYS strategy will be mainly focused to be the Leading European payments service provider by: Leverage existing customers: this means primarily to deliver the SiNSYS services to the existing customers focusing on completion of migrations and innovation of the services and operating model, and enlarge the range of the services offered. Growth in volumes: this means expand the customer base in existing and new geographies by organic growth and partnerships Invest in new advanced value added services like sms services, behavioural scoring, risk management, etc. The Key success factors in achieving the growth targets will be strong execution and efficient operations, obtained through technical platform integration, optimized operations and reduced time to market. SiNSYS believes customer Relationship Management, obtained through the right portfolio of services and product innovation, improved service delivery and competitive pricing are the strong base to build lifetime relationships with customers. Overview of SiNSYS activities SiNSYS processing platform is one of the most advanced platforms on the market today. It s offering increased efficiency, new functionalities, enhanced flexibility and reduced time-to-market in developing tailor-made payment solutions for its customers. Furthermore, the custom developed issuing (CAMS II) and acquiring (SMAC) systems are designed to manage high volumes of cards and merchants for multiple banks in different countries on a unique platform, and guarantee direct interconnections with international networks for online (e.g. authorization) and batch processes (e.g. clearing) SiNSYS processing platform is one of the most advanced platforms on the market today Operating in the complex value chain of card payment transaction processing, SiN- SYS basically concentrates on the IT intensive Back Office activities in core transaction processing and value added services like Dispute & Charge back management, Fraud, Account management and portfolio segmentation. This offer is further extended with selected partnership with regional players for activities like call centre, printing, plastic personalization, etc. The services offered includes: Consulting and service design: comprising support on the definition of specifications for new products and services, feasibility studies, development of new technologies/standards, attrition evaluation, management of relations with international networks, portfolio evaluation, etc.; Application processing: comprising evaluation of application forms, credit scoring, credit bureaux investigation, opening of accounts, management of agreements with merchants and activation of new clients and terminals; Card personalization and PIN production: including purchasing of material and inventory management, card personalization, key management, embossing, packaging, and production of PIN; Management of merchants, POS and ATMs: comprising management of installation and maintenance requests, Technical and administration support, and management of authorization routing; Management of cardholder and merchant operations: card activation, authorization, transaction clearing & settlement, cardholder & account maintenance, statement production, etc.; Front/back office services: disputes management, customer service, credit collection, risk management, loyalty programs management and behavioural scoring. Shareholder structure Banksys (24.5 %) Interpay (24,5%) SSB (51%) Board of Directors Mr Ben J. Haasdijk (Chairman) - Chairman of the Board of Directors of Interpay Mr Antoon Kuijpers - Director of Interpay Mr Vincent Roland - CEO of Banksys Mr Nicola Cordone - CEO of SiNSYS Mr Bruno Matteo Accornero - Chairman of the Board of Directors of SSB Mr Gian Bruno Mazzi - CEO & Managing Director of SSB Mr Silvio Barzi - CEO of Clarima Banca, a company of UniCredito Italiano SpA Mr Erwin Ruymaekers - Director Payments & Accounts of Dexia Bank Belgium Management Mr Nicola Cordone, Chief Executive Officer Mr Arnold F.J.M. Sneijers, Chief Commercial Officer Mr Dirk Brackenier, Chief Financial Officer Mr Santo Leonardo, Chief Operating Officer 17