Acquiring in the Nordics and Baltic Rim Markets

Mikael MöllerCEO Swedbank Card Services

Head of AcquiringRiga, Latvia November 25th 2010

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Swedbank's acquiring business

• Overall market leader– Sweden +55%– Norway – challenger– Denmark – new entrant – Estonia +60%– Latvia +40%– Lithuania +35%

• Approximately 150,000 terminals connected

• 6th largest VISA & MasterCard acquirer in Europe– 1.2 billion transactions in acquiring

• Large client accounts with some of the leading retailers in the region

© Swedbank Group Cards 3Source: VISA/MasterCard

Swedbank Group – a large player on the European Card market

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Overall market development 2010-2015

Market Restructure & Change

OBJECTIVES• One Agenda• One Organization• Minimize Redundancies

OBJECTIVES• Best Practice Implemented• Scale efficiency fully realized• Critical knowledge secured and shared

OBJECTIVES• Enhanced product offering• Strengthen marketposition & secure role in value chain

Business Case Realization

Consolidation 2010-2011

Optimization 2010-2012

Innovation 2010 =>

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The market characteristics in broad strokes

• 90% BankAxept• BBS infrastructure "monopoly"• Standardized market• World class card usage• Multilateral interchange

• 90% Dankort• PBS infrastructure & acquiring "monopoly"• Standardized market• Multilateral interchange• Legal regulations on card business

• "100%" Visa/MC• Swedbank & CEKAB dominant acquisition points• Bank common standards• Bilateral interchange

• Pankkikortti being phased out• Luottokunta infrastructure & acquiring monopoly• Standardized market• Multilateral interchange• Luottokunta set-up is unique, cross subsidization is a market barrier

Cards are pre-dominant…

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POS and ATM transactions 2010

•3,7 mill Debitcards inc. Independent Savingsbanks

•Usage in POS has increased 9 % compared to 2009

•ATM usage decreased -10 % compared to 2009

•POSfactor = 15 (POS transactions per card and month)

55 mill pos October

9 mill ATM October

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POS and ATM usage 2010

Transaction value

•POS trans. value increased 5 % compared to 2009•ATM trans. value decreased -8 % compared to 2009•68 % trans. value on Swedbank debitcards are POS

POS 17 bill SEK October

ATM 8 bill SEK October

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The market characteristics in broad strokes

• "100%" Visa/MC/AmEx• First Data monopoly until 2010• From 2010 Swedbank started connecting terminals to own host• Market liberalisation – Point, Hansab etc..• Multi-Bank solutions = on-us acquiring• Multiple protocols in use

• "100%" Visa/MC/AmEx•Terminal’s connected to Swedbanki or PKK • NETS as common gateway to Visa & MC • standardized market – one protocol for all banks and merchants

• "100%" Visa/MC/AmEx•Terminals connected to Swedbank or FDL• BABS & First Data as Gateway’s to Visa & MC • Unstandardized market as multiple protocols used

75% of transactions in cashCash is still king…

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European payments landscape

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Trends and challenges in the region

Infrastructure control& "lock in effect"

Domestic cards will stay…

Increased competition

Technical & monopoly positions used to prevent market entry

Mergers & acquisitions

Domestic technical standards

moving in to new markets

Price pressure

Cross border solutions in focus

Competitive authorities don't engage

Product offerings vary vastly between markets

Bundling of business areas to gain advantage

Harmonization & internationalizationPSPs and processors expanding & integrating

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Combining current state and future progress…..

A quest for the wholly grail or a truth that will appear?!

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The ambition of a Single €uro Payment Area (SEPA)

The objective is to create a market for card payments without commercial, technical or practical barriers to competition and promoting full interoperability through the processing chain.

• Integrated market – erasing country boundaries A holistic grasp of your international business

• Removal of all technical, legal and commercial barriers Freedom of choice

• Increased & effective competition Increased services at a commercial price

Significant savings, benefits to all stakeholders and a wider EU economy

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New rules, new opportunities….

• Easier access to other markets

• Free choice of supplier

• Competition on quality and price

• Increased focus on value added services and tailored solutions

• A catalyst for change….

Competition

Transparent pricing

Unbundling

Interoperability

Reach ability

Time is the critical factor…

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External challenges influencing the business going forward

Scale benefits will drive consolidation through mergers/acquisitions especially in acquiring and processing

New payment technologies will be costly since payment is infra heavy

Fraud escalation will demand investment and risk profit & reputation

Commercialisation of the payments value chain middle men reduce the possibility to earn profit

The global slump and financial crisis will impact Cards in 2010 – 2011 in several ways putting pressure on the revenue streams

The regulatory environment demands change in inter-bank business model and risks depriving good part of revenue. Managing change to PSD will be a critical activity.

The creation of EU payments market will bring in x-border competition and demand investment in new technical standards

© Swedbank Group Cards 14

External challenges influencing the business going forward

Scale benefits will drive consolidation through mergers/acquisitions especially in acquiring and processing

New payment technologies will be costly since payment is infra heavy

Fraud escalation will demand investment and risk profit & reputation

Commercialisation of the payments value chain middle men reduce the possibility to earn profit

The global slump and financial crisis will impact Cards in 2010 – 2011 in several ways putting pressure on the revenue streams

The regulatory environment demands change in inter-bank business model and risks depriving good part of revenue. Managing change to PSD will be a critical activity.

The creation of EU payments market will bring in x-border competition and demand investment in new technical standards

Focus areas for the future:

•Optimize product offerings bringing value to the customers

•Retain business focus and profitable growth, scale is the key

•Consolidate processing over geographical areas to remain competitive

•Move towards international standards and eliminating unique domestic standards

•Optimize sourcing of 3rd party relationships

•Invest in competence

•Innovation power

•Master change processes with focus on regulatory demands

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Opportunities!

• Low value payments – to win war on cash• Mobile• Internet – for purchases, as a sales channel and to create

customer loyalty• Customer processes – good service is hard to find (and for our

competitors to create)• Customer value management (both issuing and acquiring)• Loyalty programs and benefits

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Similar challenges throughout the region…

1980 1990 20102000 2015

“Sow” “Harvest”“Grow”

Today

Con

solid

ate

Opt

imiz

e

Inno

vate

Har

vest

“Plow”

Managing change is the basis going forward, despite which path you chose!

© Swedbank Group Cards 16

Similar challenges throughout the region…

1980 1990 20102000 2015

“Sow” “Harvest”“Grow”

Today

Con

solid

ate

Opt

imiz

e

Inno

vate

Har

vest

“Plow”

???

Managing change is the basis going forward, despite which path you chose!

© Swedbank Group Cards 17

In summary

• Vast market pre-requisites• Extremely complex industry dynamics worldwide• Limited resources and capabilities• Many opportunities arising ahead where guidance is the key • A unique set of events converging to force change

“It is not the strongest of the species that survive, nor the most intelligent, but the one most responsive to change.”

Charles Darwin

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Thank You!

”Everything should be made as simple aspossible, but not simpler.”

A. Einstein