EU Card Legislation Update and impact

Ludovic Espitalier-Noël Vice-President – Head of Public AffairsBaltics Benelux France EU CardLegislationUpdate and impact HearingatBudgetandFinanceCommittee June 4, 2014

EU CardLegislation • What MasterCard does and does not • How the card system works and itsbenefits • The trends in general • The Latvianpaymentmarket • The EU legislativeproposal • Our key concerns • Statementsbeyond MasterCard • Q&A

What MasterCard does… and does not • 3 activities: • Licensing • Processing transactions • Advisingbanks • Whatwe do not do: • Earn money frominterchange • Set the price of terminals, cards and card-related services • Issue cards, and rent or sellterminals • Have direct relationshipswithmerchants and cardholders • Our slogan: being at the heart of commerce

How the 4-party system currently works Acquiring Bank Issuing Bank Merchant Service Charges Cardholderfees Cardholder Merchant

How the 4-party system currently works Acquiring Bank Issuing Bank Merchant Service Charges = Bank Fees + Interchange Cardholderfees Interchange Cardholder Merchant

Some benefits brought to merchants, consumers and governments by cards • Convenience, flexibility and physical security • Less tax evasion and shadow economy • Payment guarantees • Against fraud (merchant and consumer’s benefit) • Against cardholders’ default (merchant’s benefit) • Incremental sales • Increased transaction value (28 € more for debit vs cash; 46 € for credit) • Increased transaction value within the credit card category (23€ more for premium vs standard credit) • More clients for SMEs, as more opportunities to compete with big retailers • Savings (cash on average 3x more expensive than debit cards) • Time to count; going to bank; payment delays; ATM surcharges; black market; production and transportation; counterfeited money; etc • More time dedicated to core business, less accounting mistakes

The card market A fragile ecosystem… …as everyone depends on the other… …and as we all win if the market is efficient… …but we all lose if one is unhappy

Electronic payments: the trends • More e-commerce transactions • Key obstacles are consumer rights and logistics, not payment costs • More innovation and payment solutions • More players • Better understanding of the benefits (especially by merchants and governments) • More transparency pressure • Cash still king: around 70% of all payment transactions in Europe • 95% of card transactions still domestic transactions • Domestic card schemes still dominant in most EU countries • MasterCard processes only 40% of its own card transactions • Evolution of fraud (from physical attacks to phishing, etc.)

Source: European Innovation Academy – Based in Tallinn

ECB Slide - 2012

In brief: the Latvianmarket (2013) • Paymentswithcardsincreased by 18.5% in 2013

In brief: the Latvianmarket • The shadoweconomy (% of GDP)

Consumersurveyby LNACP, 2013 1/2 Payment method used most often Do payment cards play a significant role in fighting shadow economy?

Consumersurveyby LNACP, 2013 2/2 Would use more cash if costs of using cards went up Would merchants lower the prices if paid less IC fee?

The EC legislative proposal A package of 2 proposalson payments services, including a review of the PSD and a draft regulation, for all countries in Europe, presented by the European Commission on 24 July 2013

The EC legislative proposal: objectives More competition More innovation More transparency More harmonisation Lesscosts

The EC objectives in the Latvianmarket • Competition • 11acquirershttp://www.mastercard.com/lv/merchants/becoming-a-mastercard-merchant.html • 1 key player on the processingside (not MasterCard) • Innovation • Contactlesspayments - PrePaidcards - PaySafe card – SecureCode - iZettle • Transparency • Interchangelevelspubliclyavailable on MasterCard websitehttp://www.mastercard.com/us/wce/PDF/Latvia.pdf • Detailsprovided to merchantswhen transactions processed by MasterCard • Harmonisation • developedmarket, high cardpenetration • SEPA • Acceptancecosts (interchange) • MC Interchangearound or below the EU average (0.5% for debit; 0.9% for credit)

The Card Regulation Legislative Process European Commission European Council (28 Member States) Law Proposal amendments negotiations European Parliament European Commission 28 EU Member States Not a lawNot bindingCan be modified Law directly applicable throughout EU EP First Reading today 3 April 2014 24 Jul 2013 Long and complex decision making process – can take months or even years to complete

Some details about the timing 1 2 3 4 5 Current EP closes 1 2 3 4 5

Our key concerns, in brief • Card players having the same type of business would not be treated the same way (especially the most expensive and the less transparent)… • Merchants’ contribution to the card system would be arbitrarily reduced at the expense of consumers… • Consumers and merchants would experience higher prices for the same level of services and products… • Payment delays would be longer for companies being paid with commercial cards, and the same companies would have less cash-flow facilities… • Consumers would no longer be sure all their categories of cards would be accepted by merchants… Cash usage will be encouraged Innovation and investments will be discouraged Only big retailers would benefit Some consequences have not been assessed

Our key concerns • Card players having the same type of business would not be treated the same way (especially the most expensive and the less transparent)…

How the 4-party system currently works Acquiring Bank Issuing Bank Merchant Service Charges = Bank Fees + Interchange Cardholderfees Interchange Cardholder Merchant

How the 3-party system works Internaltransfer Merchant Fees Issuingside Acquiringside Cardholderfees Cardholder Merchant

How the 3-party system works IncentiveFee Issuing Bank Merchant Fees Cardholderfees Cardholder Merchant

Our key concerns • Merchants’ contribution to the card system would be arbitrarily reduced at the expense of consumers…

Acquiring Bank Issuing Bank Merchant Service Charges = Bank Fees + Interchange Cardholderfees Interchange Cardholder Merchant

Our key concerns • Payment delays would be longer for companies being paid with commercial cards, and the same companies would have less cash-flow facilities…

Acquiring Bank Issuing Bank Merchant Services Charges : Bank Fees + Interchange Cardholderfees Interchange + Interchange Merchant Corporate card users

Our key concerns • Consumers would no longer be sure all their categories of cards would be accepted by merchants…

Our key concerns • Consumers and merchants would experience higher prices for the same level of services and products…

Before Acquiring Bank Issuing Bank Licensing Merchant Service Processing Cardholderfees Cardholder Merchant

After Licensing Increasedcosts Increasedcosts Acquiring Bank Issuing Bank Merchant Service Charges Cardholderfees Processing Cardholder Merchant Increasedprices Increasedprices

Some comments beyond MasterCard 1/5 • Latvian National Association of Consumer Protection (LNACP): «Weareconcerned aboutthe potentially damaging effects of these legislative propositions since they would, if voted, lead to higher card fees and harm the interests of consumers, particularly socially unsecure ones.»/ « Compared to EU average, even the smallest price rises in Latvia may have an extremely adverse effect on consumers, particularly on socially less protected groups, by forcing them to refuse using payment cards and making them return to cash, which in turn is less secure for consumers as related to larger risks of fraud and theft. In the modern world, the system of electronic card payments is a basic need, alleviating consumers' life in several aspects. Indeed, the representatives of the Latvian National Association for Consumer Protection are convinced that the merchants benefit from the payment card system at least as much, if not even more, than the consumers do, and the latter should not suffer at the expense of the former.” • LatvijasTirgotajs (Latvian SME organisation): «Any forced harmonisation and regulation, if the national market specifications are ignored, is likely to impair the fragile balance in the card market and posts a threat to its existence. […]. The EC has not explained so far what would be the gains from such an intervention in the market. The situation demands a thorough appraisal of consequences by all involved parties. Nobody likes to join the club of losers! But alas! The EC seems unwilling to listen to customers and small entrepreneurs. Even worse, the Commission is not committed to analyse the evidence and experience of other countries.» • Association of Commercial Banks of Latvia :«If income is capped but expenditure remains the same, other alternative ways must be found to get the income. In this case the alternative way, in fact, is the individual who does not pay the higher commission fee at the shop but then his card’s annual fee will probably be increased...» / «In case of messy situations when the consumer does not understand which shop accepts credit cards and which debit cards, ultimately, the consumer will choose to pay in cash.»

Some comments beyond MasterCard 2/5 • AmericanChamberofCommerceinLatvia: «The goal of the regulation was to harmonize European Union market of payment cards, plus, enhance innovation and to use payment cards in more efficient way and provide higher security, however wesee that some of the provisions might harm ecosystem of payment cards and hinder the fight with shadow economy.We believe that there is no need to change system that works well and does not detect any market failures. Arbitrary intervention, for instance through the EC regulation, may hinder further development of Latvian payment card market.» • Alliance of Lithuanian Consumer Organizations: «We would welcome any initiative which might result in benefit to the consumer, but in this case we see very different intentions. It is not by chance that major European merchants' associated organisations are actively pursuing the fee limiting. Unaccountably, it is thought that the regulation will also benefit to consumers, because after the reduction in the fee burden for merchants the price of the goods sold by them will purportedly decrease. Unfortunately, the regulation in no event would reduce maintenance costs of the payment system; there is merely an intention to divide them otherwise. Experience and economic theory say that in such cases a consumer is always the final payer.» • Estonian Consumer Protection Association: “Considering the fact that in Estonia the monthly card fees, for example, are differentiated and the fees for seniors, children and youth are smaller, the planned regulation will bring an increase in prices to all consumers, but will especially limit purchasing power among the consumers with the smallest incomes. It can also be expected that the development of new payment options and safety functions (i.e. mobile payments) will be slowed down and the risks of economic environment will be increased. Neither does the regulation take into account the local characteristics of each member state.”

Some comments beyond MasterCard 3/5 • Moovcard (French innovativecompany): “As an online merchant, I am worried about the European Commission’s plans. I should be the first one to be satisfied since I should theoretically anticipate a decrease of my bank fees. But, in fact, the whole model would be damaged while e-commerce has been able to develop in France and in Europe precisely because of its components (e.g. confidence in payment cards; efforts made to secure and generalize online payments).” • Polish Consumers’ Federation:“The rules designated by the legislator will surely have a positive impact on the merchants' market, but it is difficult to predict how the other market participants will react. The simplest consequence may be an increase in fees for using cards or keeping bank accounts. Great precaution must also be taken regarding another privilege of merchants – the Honor All Cards rule. When we decide on a subsequent lowering of interchange fees, it seems unjustified to add another priviledge to sellers, especially if this comes at a cost – of both confort and payment security – to the consumers.” • Czech Association of Enterpreneurs and Employers: “The entire legislative process is a result of pressure from supermarket chains for whom – unlike for small businesses – interchange fees constitute the largest cost linked to accepting payment cards. Our Association opposes the MIF regulation. We deem European Commission's approach (absence of impact assessment on consumers) as totally undue even in case it was beneficial for the customers. […] As banks and card issuers play a significant role in trade policy, problems can be solved by the market and not by European regulation...I understand that it could be confusing that various countries pay different levels of fees, however at the same time, different countries have different tax burden. If we wanted to downplay it a bit, subway tickets or fuel prices are also different in different countries and they won't get regulated, even though it might not be beneficial for the consumers."

Some comments beyond MasterCard 4/5 • Negative consequences - Estonia On 17 January 2014, the Estonian Parliament required the Government to oppose the interchange capping provisions of the European Commission, and their vote is binding: • “The committee does not support capping interchange fees on card payments, as this can restrict free competition and prevent new participants from entering the market.” • We do not support administratively set caps on interchange fees, as this does not encourage competition in the market and can endanger the security and development of services.” • The Estonian Government also “supports equal treatment of card payment systems” and considers that three-party schemes (as well as hybrid schemes) should be treated as four-party schemes

Some comments beyond MasterCard 5/5 • Subsidiarity and lack of data - France On 28 November 2013, the French Senate (France represents 1/3 of all card transactions in the EU) stated that the EC has not respected the subsidiarity principle, and criticized the EC on various items: • The impact assessment misses many data and information • The underlying methodology (MIT) to set interchange rates is not consistent enough • The EC fails to show what would be the predominant consequence(s) of its proposed measures • There are not enough elements from the EC to explain why and how it has correctly defined the appropriate level of actions • There are not enough elements from the EC to explain why and how any action from Member States would not be able to better achieve the objectives set by the EC

Some arguments in favour of the regulation “The aim of the regulation is to promote competition and innovation, and to strengthen the market.” • How can the EC promotecompetition if not players are not regulated the sameway? • How can the marketbestrenghtened if the less transparent players are not regulated? • Why has the consequences of some measures not been assessed at all? • What are concretely the market failures in Latvia, and in each country? • Why does the EC consider that forced harmonisation will work, although all countries are not the same, and one solution cannot fit all? • Why does the EC never mention the Monet Project which was abandoned in 2012 because of the upcoming card legislation? • Why does the EC say there is not enough competition and innovation, whereas it proposed a revision of the PSD to regulate “the growing number of payment institutions”? • Where are the data and studiesshowingthatwhatseveralacademicsstudieswillneverhappen, and that all the fearsexpressedabove are vain? • How can the EC foster innovation if itweakenscertainty about cardacceptance and if itmakesconsumerspay more?

Some arguments in favour of the regulation “The IC regulation will lower prices for consumers” • Why do merchants (EuroCommerce; ERRT) lobby somuch for thisregulation, if theyactuallywant to transfer all their new savings to consumers? • 6 billion euro will be saved by European merchants every year. Why do not we have any exact figure for consumers? Why does the EC only “trust” retailers? • Why is the EC so sure that merchants will reduce prices in shops, whereas we have no evidence of price reductions in other markets (rather the opposite) and in countries where VAT was reduced? • Does the EC ignore that several banking associations warned they would increase cardholder fees (France, Latvia, UK, etc.) in other markets (for instance Spain, in 2005, i.e. before the crisis; or Poland, last year?) • Whydoes the EC ignore somany consumer organisations in Europe (includingLatvia) which express regularlytheirconcerns? • Where are the data and analysiswhich show thatsimilarregulationsconcretelybenefitedconsumers and merchants?

Some arguments in favour of the regulation “The payment card market in the EU is controlled by two players, MasterCard and VISA, limiting the competition and innovation” • How can MasterCard be a dominant playerwhenitprocessesnearly none of the transactions in the Baltics, and only 40% of transactions made on itsowncards in Europe? • How can MasterCard be a dominant playerwhenmost of the transactions in Latvia are processed by one competingcompany? • How can MasterCard be a dominant playerfor e-commerce transactions whenmost of them are processed by PayPal? • How can MasterCard be a dominant player in varioussectorwhenAmericanExpress has at least two-third of thesemarkets (e.g. tourism industries, hotels, airlines, luxuryproducts, etc.?) • Cards in Europe must be SEPA compliant, whichis possible thanks to international brands • How can MasterCard bring people using cash and chèques to electronicpayments, if not developping innovation? • Whydoes MasterCard partnersomuchwith Public Authorities to innovate(e.g. Greece, Nigeria, etc.)

EU Card Legislation Update and impact