Plastic Cards

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Plastic Cards

• Industry Update

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• What is happening with the Players
• Some of the Driving Forces
• Future Implications

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The Players are Morphing
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• Largest US Credit Card Network (50)
• Spearheaded Signature Debit Cards
• Purchased Interlink PIN Debit Network
• Worldwide Single Mark / Product Offering
• Debit Transactions Surpassed Credit Last Year
• Recent Restructuring
• New Board Make up Outside Directors
• Divided into Separate Corporations by
  Geographical Areas
• Product Offering May Vary by Geographical Area

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• Major US Credit Card Issuer (27)
• Single International Corporate Structure
• Lagged VISA in Debit Offerings
• Purchased EuroCard Maestro Pin Based
• Now 45 of Cards In Europe
• Changed from Bank Owned to Public Corporation.
  IPO May 25 2006 2.39 Billion Retained 659
  Million.

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• One of the First Convenience (TE) Cards
• 17 Market Share
• Single Issuer/Acquirer System
• Expanded into Credit (Fly Sign / Blue)
• Co-branding with Financial Institutions

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• Outgrowth of Sears Credit
• Single Issuer/Acquirer System
• 6 Market Share
• Co-branding with WalMart
• Expansion into Debit
• Purchased the Pulse Debit Network
• Offering Co-branded Debit Product to Financial
  Institutions

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PIN Based Debit Networks

• Started as ATM Sharing Agreement
• Mergers and Acquisitions
• From 40 Networks to less than 12
• Expanded into POS in the 1990s
• Debit POS Transactions Exceed ATM Transactions

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Driving Forces

• POS Debit Card Acceptance
• Consolidation
• Technology

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Debit POS
1985 - 1995
1995
1. VISA Heavily Promotes Signature Debit 2. EBT
Programs Convert to PIN Debit
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The 2005-2006 Consumer Payments Usage Study,
conducted by First Data Corp.s Star Network,
says debit is the fastest growing payment method
in the United States.
The average total number of debit POS
transactions made monthly has increased 21
percent in the last year, from 15 to 18
transactions per month.
The study, released Aug. 1, included responses
from nearly 14,000 consumers in 35 states.
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Current State
Penetration and Activation rates are strong, yet
HALF of all DDA customers are not using Debit
Cards for Purchases.
debit
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debit
purchases
debit
debit
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Data represents the approximation of an average
portfolio
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Consumer Finance Data Federal Reserve Study
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Other Card Expansion

• Prepaid / Gift Cards
• The Latest Payment Option study, conducted by
  Tower Group and released July 2006, asserts that
  consumer awareness of stored-value cards, more
  commonly referred to in the market as prepaid or
  gift cards, has increased 16 percent over the
  past five years, and the market has the potential
  to hit the 3 trillion mark by 2010.

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Five Year TrackingAmerican Consumers Year-round
Gift Card Purchases Use
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Other Card Expansion

• Benefit Distribution

FEMA
States
The child-support check is becoming a thing of
the past in Missouri, giving way to payments
delivered directly to debit cards. The state of
Indiana said Wednesday it plans to begin issuing
the cards in place of unemployment checks by the
end of the year, saving a projected 1.8 million
annually by discontinuing printing and mailing of
weekly unemployment checks. The Tennessee
Electronic Access Card, which is a VISA debit
card, can be issued to access child support
payments.
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Google Unveils E-Payment Service 06/29/2006
Internet search engine Google is finally
launching its long-awaited online payment
service. Called Google Checkout, the system
allows customers to make purchases from Internet
retailers without having to repeatedly enter
credit card details.
PayPal to Roll Out Virtual Debit Card The online
payments business of electronic auction house
eBay is set to roll out a new virtual debit card
system to millions of account holders. The
virtual card will function like a regular debit
card and enable customers to shop online with the
funds in their PayPal accounts at any e-merchant
that accepts MasterCard.
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• More Bank Windfall Interchange Earnings Announced
  (via PR Newswire)
• Wachovia earns record 1.88 billion EPS up 13
  to 1.17 in 2nd quarter 2006
• 20 percent increase in fee and other income, with
  growth in nearly every category.
• Results reflected strength in ... record consumer
  service charges and strong interchange income.
• Earnings of 1.2 billion on record revenue of
  3.7 billion, driven by ... higher debit card
  interchange fee income.
• 25 percent growth in fee and other income
  included 23 percent growth in debit card
  interchange income.

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Retail Groups File Antitrust Case Against Visa,
MasterCard and Major U.S. Banks
Retailers Sue Visa, Seek Lower Credit Card
Interchange Fees
Credit card price fixing suit could cost industry
over 100 billion, experts say (Banking Business
Review)
Merchants Seek Congressional Action on
Interchange Fees
The U.S. is the only major market where
Interchange Fees are increasing. Canada, for
example, has a zero Interchange Fee for debit
cards their PIN Network is the most popular way
to transact business. U.S. Interchange Fees are
three-times higher than in Australia and
two-times higher than in the UK .
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Europe Attacks Debit Interchange

• The European Commission (EC) is accusing
  MasterCard of restricting competition by setting
  minimum rates for cross-border debit and credit
  interchange rates. Looking at Visa, also.
• The ECs Competition Commissioner has threatened
  Visa and MasterCard with antitrust penalties for
  setting what she describes as excessive
  cross-border and domestic rates 40 higher than
  domestic network transactions.
• Driven by SEPA (Single Euro Payment Area) 2008
  -2010 elimination of domestic networks.

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Consolidations

• Financial Institutions
• Processors and Networks

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Financial Institution Consolidation

• Banks, and now Credit Unions, continue to merge
  to form larger, more competitive organizations
• 3,300 Bank Mergers between 1990 - 2002 2.7
  Trillion in Assets
• Number of banks declined 30 between 1990 2002,
  from 9,000 to 6,000

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Financial Institution Consolidation

• The number of Credit Card Issuers continues to
  shrink
• The top 10 Issuers control 90 of the market,
  compared to 56 in 1994
• The top 3 Issuers control 55-60 of the market
• Bank of America, JP Morgan Chase, Citigroup

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Financial Institution Consolidation

• Forced VISA and MasterCard to look beyond Credit
  Cards
• Forced the merger of many regional debit networks
  to accommodate the larger geographical access
  required by the merged institutions

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Processors and Networks

• Networks Add Processing Capability
• VISA ? VISA DPS
• MasterCard ? "Debit Processing Alliance" (eFunds)
• Processors Add Networks
• First Data ?
• Metavante ?
• FiServ ?

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Processors and Networks

• Control Transaction Routing
• Priority routing
• Competitive pricing by combining
  Network/Processor Costs as transaction processing
  pricing becomes commoditized
• Better Institution contract lock
• Providing more services
• More information on activity

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Technology

• Consumer Adoption
• Lowering of Costs
• Standardization
• Improved Processing
• Continuing Innovations

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Technology

• Consumer Adoption
• Computers at Work Home
• Cell Phones
• PDAs
• IPODs
• Satellite Radio, Movies on Demand
• Familiarization, Dependence

Immediacy Expectation (I want - what I want
NOW)
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Technology

• Consumer Adoption
• Lowering of Costs
• Hardware
• Lower Costs with Improved Capabilities
• Communications
• Traditional, Cellular, Broadband

Cost Effective Devices can be deployed at almost
any location
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Technology

• Consumer Adoption
• Lowering of Costs
• Standardization
• Internet Protocols
• Windows
• Interfaces Message Formats
• Process Definition

Easier to develop, use, deploy new advances
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Technology

• Consumer Adoption
• Lowering of Costs
• Standardization
• Improved Processing
• Batch to Online Processing
• Expanded Fraud Detection Systems

Improved Cardholder Knowledge and Control - More
cards, more usage
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Technology

• Consumer Adoption
• Lowering of Costs
• Standardization
• Improved Processing
• Continuing Innovations
• Consumer I.D.
• Card Stripe, Chip, Fobs, Phones, Biometric
• Accepting Devices
• Vending, Touch Go

Improved Cardholder Convenience-New Markets
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Future Implications
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Future Implications

• More Transactions
• Electronic transactions are not just replacing
  paper, but are starting to impact cash
• Fewer ATM transactions, more POS

Upgrades to Processing Data Storage Systems
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Future Implications

• More Transactions
• Lower Per Transaction Income
• Lower Interchange Income
• Higher Paper Item Costs

Offset by More Income-Producing Transactions
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Future Implications

• More Transactions
• Lower Per Transaction Income
• Increased Investment in Card Replacement
• RFI Cards 2 - 4 times existing card technology
• Multiple devices Card, Fob, Phone
• Upgrade cycles

12 - 24 months away Competition Driven
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Future Implications

• More Transactions
• Lower Per Transaction Income
• Increased Investment in Card Replacement
• Increased Competition
• Google / PayPal
• Prepaid / Gift Card - Navy Cash
• Retailer Systems Debitman / Pay by Touch
• Other Providers Cell Phone

New Non-traditional Players
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Future Implications

• More Transactions
• Lower Per Transaction Income
• Increased Investment in Card Replacement
• Increased Competition
• Increased Consumer Expectations
• Technology-confident move up the age ladder
• Convenience-Oriented / Time-compressed
• Users of many services
• Information Explosion

Hybrid Products may be required behind the Card
Access Prepaid / Debit / Credit
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Whats in your Wallet? will continue to be a
very Important Question !!
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Thank you