Payment Cards and InterchangeBanking Enquiry,South Africa Competition Commission

2

Agenda

• Payment Systems and Role of Interchange – Carl Munson, Associate General Counsel, MasterCard

• Economic Function of Interchange– Christian Koboldt, DotEcon

• Competition in the MasterCard scheme– Webber Wentzel Bowens

• MasterCard in South Africa– Eddie Grobler, General Manager, Africa, MasterCard

• Setting Interchange in South Africa: Status Update– Caleb Raywood, SAMEA Region Counsel, MasterCard

• Concluding Remarks

South Africa: The Card Payments

Landscape

4

Agenda

• MasterCard’s Business

• The Economy: MasterIndex

• Payment Channel Trends

• Fraud / Risk

• Product Trends

• Summary

5

Leading, globally integrated technology platform

1 billion cards in consumer pockets, useable at +25 million locations

40 years of virtuallyflawless execution One corporation

operating across 210 markets

“Priceless” global brand

Partner withover 25,000 financial

institutions worldwide

We have unsurpassed relationships, skills, and market position

Franchisor

ProcessorAdvisor

6

MasterCard’s processing solutions are global, flexible, and trusted to deliver value

• Over 16 billion clearing transactions

• 36 billion messages

• $1.2 trillion settled

• Capacity to handle 140 million transactions/hour

• 127 millisecond response time

• 99.999% network availability

7

The Economy: MasterIndex

• Research study conducted twice a year

• Banked individuals between the ages of 18-64

• The MasterIndex has a range of 0 to 100 with 50 as the mid-point

– A score of 50 denotes no change in consumer confidence or a neutral situation

– A score of above 50 indicates consumers are optimistic about quality of life over the next six months. The higher this score is, the higher the consumer confidence

– A score below 50 indicates consumers are pessimistic

8

The Economy: MasterIndex

• Geared towards providing economic signals for the future 6-month period, thus making it possible to monitor economic turning points

• Five factors evaluated:

– Employment

– Economy

– Regular income

– Stock market

– Quality of life

9

Overall South Asia Middle East Africa MasterCard MasterIndex 2005 vs 2006

98.5

78.173.1

86.5

78.2

67.671.2

90.7

59.262.3

94.597.3

65.1

80.0

0

10

20

30

40

50

60

70

80

90

100

Kuwait South Africa Saudi Arabia Egypt UAE India Lebanon

2nd Half 2005 2nd Half 2006

• Consumer in South Africa most optimistic for future 6 month period in non oil producing countries.

10

All SA categories are positive

50

55

60

65

70

75

80

85

90

95

100

REGULARINCOME

ECONOMY MASTERINDEX STOCKMARKET

QUALITY OFLIFE

EMPLOYMENT

1H2004 2H2004 1H2005 2H2005 1H2006 2H2006

11

Per Capita disposable income

Source: SARB

54 56 58 60 62 64 66 68 70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 068000

9000

10000

11000

12000

13000

14000

15000

16000

• Increase in disposable income of black majority.

• Increase in personal wealth and disposable income – trend to save less and spend more.

12

Payment Channels

‘000 Units 2004 2005 2006

POS terminals 525 568 655

ATM’s 13.2 14.0 15.2

POS: 25% growth over 2 year period

ATM: 15% growth over 2 year period

Internet: Transactions increased with more than 500% over the past 5 years (Estimated value: R9.5 billion (7,5%), 14.5 million (4,8%) transactions)

Source: Euromonitor International: 4Q, 2006

13

Fraud

R million 2001 2002 2003 2004 2005 2006

Counterfeit cards

4.9 5.8 6.5 7.5 9.4 12.2

Cards stolen 10.4 11.9 13.0 15.1 18.8 24.5

Other * 5.0 5.9 6.5 7.6 9.5 12.3

Value 20.3 23.6 25.9 30.1 37.7 49.0

* ID Fraud: New trend

Function of increased acquisition, and “fraud migration”

Source: Euromonitor International: 4Q, 2006

14

Product Trend: Transaction 2001 - 2006

Source: Euromonitor International: 4Q, 2006

0

50

100

150

200

250

300

350

2001 2002 2003 2004 2005 2006

ATM transactions Debit transactions Credit card transactions

Charge card transactions Store card transactions

Million

tra

nsacti

on

s

15

Product Trend: Value 2001 - 2006

Source: Euromonitor International: 4Q, 2006

0

50000

100000

150000

200000

250000

2001 2002 2003 2004 2005 2006

Transactions ATM transactions Debit transactions

Credit card transactions Charge card transactions Store card transactions

R m

illion

16

Product Trend: Number of Cards

Source: Euromonitor International: 4Q, 2006

0

5

10

15

20

25

30

35

2001 2002 2003 2004 2005 2006

Financial cards in circulation ATM function Debit function

Credit function Charge card function Store card

mn

Card

s

17

Cash, Charge Cards, Store Cards and Co-branded Cards

• Cash versus Card (Debit and Credit)

– Cash dominated: More than 85% of transactions

• Charge cards under performs:

– 6% decrease of number of cards in circulation

– Credit cards, debit cards and corporate cards a more attractive option

• Store Cards: Increasing unpaid debts

• Co-branded cards

– Increased focus

– Virgin Money (Absa): Low interest rates and no annual fees

– Kulula Card (FNB): Loyalty program

– Edgars (SBSA): No annual fees

– Voyager (Nedbank): Loyalty program

– Pick ‘n Pay Go Banking (Nedbank)

18

Product Trend: EMV Smart Card

• Acceptance infrastructure

– POS

– ATM

• Issuance: 2H, 2007

19

Summary

• POS channel growth (Merchant demand)

• Strong growth in debit card (transactions and value) Migration from ATM.

• Credit- and debit cards (4 party) growing faster than charge- and store cards (3 party).

• Co-brands: Attractive alternative for retailers, impact on current business model.

Thank you.