Credit Card & Merchant Businesses

“Positioned for the future environment”

Nicholas L.A. KennettExecutive General Manager

22 March 2002

The material that follows is a presentation of

general background information about the Bank‟s

activities current at the date of the presentation,

22 March 2002. It is information given in summary

form and does not purport to be complete. It is

not intended to be relied upon as advice to

investors or potential investors and does not take

into account the investment objectives, financial

situation or needs of any particular investor.

These should be considered, with or without

professional advice when deciding if an

investment is appropriate.

Disclaimer

Outline

• Cards Environment in Australia

• Regulatory Environment

• CBA Response

• CBA Cards - Strategy and Vision

• The Future

Cards Environment in Australia

• Highly competitive

• Significant growth

• Key players and market share

• Consumers seeking convenience and security

• Sophisticated payments environment

• Re-regulation/competitve dis-equilibrium

Growth in EFTPOS Terminals

0

50

100

150

200

250

300

350

400

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

Nu

mb

er

in T

ho

usa

nd

s

at end JuneSource: RBA Bulletin - Table C.5

Debit & Credit Card Transactions

Source: RBA Bulletin - Table C.3

0

10

20

30

40

50

60

70

80

90

100

May

-94

Nov

-94

May

-95

Nov

-95

May

-96

Nov

-96

May

-97

Nov

-97

May

-98

Nov

-98

May

-99

Nov

-99

May

-00

Nov

-00

May

-01

Nov

-01

millio

ns

pe

r m

on

th

Credit Card Txns Debit Card Txns

Value of Debit & Credit Card Transactions

Source: RBA Bulletin - Table C.3

0

2000

4000

6000

8000

10000

12000

May-

94

Nov

-94

May-

95

Nov

-95

May-

96

Nov

-96

May-

97

Nov

-97

May-

98

Nov

-98

May-

99

Nov

-99

May-

00

Nov

-00

May-

01

Nov

-01

$m

illio

ns p

er

mo

nth

Credit Card Debit Card

Credit Card Balances Outstanding

Source: RBA Bulletin - Table C.1

0

10000

20000

30000

40000

50000

60000

70000

May-

94

Nov

-94

May-

95

Nov

-95

May-

96

Nov

-96

May-

97

Nov

-97

May-

98

Nov

-98

May-

99

Nov

-99

May-

00

Nov

-00

May-

01

Nov

-01

$ M

illio

ns

Advances Outstanding Limits Outstanding

Regulatory Environment

• Worldwide focus

• RBA concerns

– “collective setting of interchange fees - rigidity, lack of

transparency and absence of formal methodologies”

– “inefficiency of credit card pricing to cardholders, reinforced by

„no surcharge‟ rules”

– “lack of competition in credit card market and between payment

networks more generally”

RBA‟s position

• RBA proposed reforms

– cost based methodology for interchange fees

– abolition of „no surcharge‟ rules

– new category of participants

• Submissions to RBA closed 15 March 2002

• Three month consultation process

• Final decisions mid 2002 (indicative)

• Implementation late 2002 / early 2003 (indicative)

CBA‟s response

• RBA‟s proposals will not result in net public benefits

• RBA‟s interchange fee cost categories are unjustifiably

narrow and should include:

– interest free period

– costs that are common to „on-us‟ and „not-on-us‟ transactions

– portion of statementing, remittance processing and collections

costs

– return on capital

– cost of implementation and compliance

– GST on interchange fee itself

CBA‟s response (cont.)

• Abolition of „no surcharge‟ rules unnecessary -

regulated competitive disadvantage

• New participant proposals are incomplete - draft

prudential standards are yet to be developed

Regression of Australia towards a cash based society??

Possible impacts of regulatory reviews

• Reduced interchange income to issuers

• Reduced interchange expense to acquirers

• Potential risk of „contamination‟ of payments system

• Higher cardholder fees

• Reduced investment

• Less funding for loyalty

• Regulated competitive disadvantage with “closed”

schemes

• Pressure on commercial cards

Consumers commence

migration to AMEX

Interchange

Closed versus open loyalty schemes

MSF

Merchants express

dissatisfaction with AMEX MSF

Overtime, AMEX

MSF

AMEX Profit or higher fees /

Loyalty

AMEX Response / Impact

“a long and uncertain

time” after open scheme

impact

Cardholder Fees Loyalty

Winners in the new regulatory environment

• Winners will have:

– scale

– balanced issuing and acquiring profile

– high ratio of interest/interchange income

– low cost rewards programme

– broad portfolio of merchants

Profitability Drivers

• Card numbers

• Spend/spend per card

• Revolve rate

• Margin and fees

• Number of merchants

• Number of ATMs

• Merchant turnover

• MSF

• “On-us” transactions

• Loss/Fraud rates

Issuing

Acquiring

CBA Cards - Vision and Strategy

• Market share of profit

• Leverage customer base, distribution channels & scale

• Mono-line discipline with multi-product relationship

• Sustainable business model

• Packaged offerings

• Focus on ROTE, service and alliances

CBA Cards - a scale business

• 10m+ CBA Customers

• #1 in cardholders

• #1 in merchant relationships

• #1 in ATM terminals

• True Awards

• Woolworth's Ezy Banking alliance

• Partner relationships

Issuing strategy

• Focus on sustainable market share of profit:

– acquisition, retention and activation programmes

– usage as a credit tool

– usage as a relationship tool

– NIM

– loss management

– loyalty costs

– convergent business models

• CRM/relationship packaging

• Service

• Distribution management

Acquiring Strategy

• Leverage scale

• Leverage low capital requirement

• Convergent opportunities

• Leverage corporate relationships

• New markets

• Support customer move to online

• Drive down losses

The Future

• Consumer - convenience and security

• Merchant - convenience, security and price

• Regulation - ongoing

• Technology - Pin@POS, 3DES, 3D Secure/SPA, Chip

Positioning for the future...

The winner will have a sustainable business model,

options, strong distribution and scale

Credit Card & Merchant Businesses

“Positioned for the future environment”

Nicholas L.A. KennettExecutive General Manager

22 March 2002