Overview of Business Models in Retail Payments

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1 Overview of Business Models in Retail Payments EDC Council Frankfurt November 2012 Edgar, Dunn & Company, 2012

2 Edgar Dunn Deep Experience with Global Reach Management consultancy focused on payments since 1978 San Francisco Atlanta London Paris Frankfurt Deep expertise in over 30 countries including Germany, France, Spain, Italy, Benelux, UK, USA, Asia Pacific Singapore We help providers to develop their payment business Sydney We help merchants to optimize payment costs and revenues Confidential 2

3 Why is a bank / payment service provider in retail payments? Role of Payments: Philosophical Continuum Cost of Business Profit Generation Relationship Building Operational function Necessary evil to support lending and deposit taking for retail banks Own Services Own P&L Stand-alone profitability* Others Services Distribution channel Defensive Retention of broader relationship Offensive Account acquisition Cross-selling to existing customers *There are different manners to evaluate profitability for products such as debit cards: (1) stand-alone profitability (as a «stand-alone product») (2) and/or cash and cheque substitution economics (3) and/or current account economics Confidential 3 3

Assuming that most banks / providers want to increase payments-related

Value chain role Profits driven by the role played in the value chain

Focus / niche Profits driven by a focus on specific segments (who?) D.

4 Assuming that most banks / providers want to increase payments-related profitability, it is important to understand successful profit models A. Value chain role Profits driven by the role played in the value chain (where?) B. Product set Profits driven by the types of offering (what?) C. Focus / niche Profits driven by a focus on specific segments (who?) D. Business processes Profits driven by internal processes (how?) Confidential 4 4

There are 3 profit models related to value chain role where?

and of sellers and benefit from «network effect» (each new connection makes the whole network more valuable) MasterCard, Visa Profit Model

IBM Payment Systems, positioned as «solution integrator» Profit Model A3 Value Chain Position In payments, most profits are typically

5 There are 3 profit models related to value chain role where? Profit Model A1 Network Profits Central intermediary that switches communications from multiple end points Connect large numbers of buyers and of sellers and benefit from «network effect» (each new connection makes the whole network more valuable) MasterCard, Visa Profit Model A2 Provider of customized solutions Upfront investment to develop a customer-specific solution Ensuring long-lasting and sticky relationship IBM Payment Systems, positioned as «solution integrator» Profit Model A3 Value Chain Position In payments, most profits are typically derived from distribution / managing the customer relationship and not from production Woolworths (large Australian retailer) set up a Joint Venture with a retail bank (Commonwealth Bank of Australia and then HSBC) Confidential

A1. Network profits International card schemes play a central role and benefit from network effects International Schemes Value proposition Sources of revenue Connect large numbers of

sellers Domestic assessment fees: Fees charged to issuers and acquirers Based primarily on the domestic volume of activity of cards Cross-border volume fees: Fees charged to issuers and

6 A1. Network profits International card schemes play a central role and benefit from network effects International Schemes Value proposition Sources of revenue Connect large numbers of buyers and of sellers and benefit from «network effect» (each new connection makes the whole network more valuable) Offer global acceptance to cardholders and a large number of users to sellers Domestic assessment fees: Fees charged to issuers and acquirers Based primarily on the domestic volume of activity of cards Cross-border volume fees: Fees charged to issuers and acquirers Based on the inter-country volume of activity of cards Transaction processing fees: Fees charged for both domestic and cross-border Based on the number of transactions Confidential 6

Provides «payment sub-ledged» / accounting (ERP-like) package integrated with payment gateway

7 A2. Customized solutions provider IBM provides services and integration options around the core service of a payment gateway IBM Payment system Positioned as «solution integrator» focused on large corporations Provides «payment sub-ledged» / accounting (ERP-like) package integrated with payment gateway functionalities Provides integration tools and consulting support for integration across multiple channels Confidential 7

8 A3. Value Chain Position Woolworths focuses on payment distribution, one of the most profitable parts of the value chain Gift Cards A large Australian retailer set up a Joint Venture with HSBC Prepaid cards Credit cards Confidential 8

9 There are 3 profit models related to product sets - what? Profit Model B1 Value Added Services No or limited profit from «base» products but higher profits from ancillary services Google Wallet strategy (see next slides) Other example: CyberSource charge a low basic txn fee, plus fees for optional services such as tax calculation, delivery address verification, etc. Profit Model B2 After-sales profit Limited profit from initial sale and higher profits from follow-on product sales Acquirers that enable services beyond card acceptance via the installed POS terminal Amazon sells its tablet (Kindle) at cost, and users can then buy digital content on Amazon s website Profit Model B3 Product portfolio Portfolio of products including mass-market / lowmargin products and niche / high-margin products Banks in countries like Australia or USA have started issuing Amex (e.g. companion card) to specific segments of existing customers to obtain higher share of wallet and higher margins Confidential 9

10 B1. Value Added Services Google does not focus on payment revenues but is trying to pursue value added services Mobile Contactless / Proximity Mobile Money Transfers & Bill Payments Mobile Online Payments (Goods & Services) $ Mobile as POS Mobile Online Payments (Digital Goods) Loyalty Couponing & Offers Transit & Access Value Added Services Confidential 10

11 B2. After-sales profit ANZ is enabling Extra Services via its installed POS terminals and a partnership with Touch Networks Confidential 11

12 B3. Product portfolio Australian banks offer American Express cards as Companion cards Australian banks analyzed their card portfolio profitability to identify segments requiring pricing / product initiatives, and decided to offer American Express cards as Companion cards Confidential 12

13 There are tw0 profit models related to a targeted focus on specific segments Profit Model C1 Specialisation profits Profits driven by a focus on specific customer segments that have unique needs Therefore requiring sectorspecific knowledge and products Wright Express (WEX) focused on niche B2B products (e.g. fuel cards, virtual cards for travel) Acquirer Chase Paymentech developed a leading CNP platform, and got a 50% market share in US e-commerce Profit Model D2 Cross-sell into installed base Primary focus on crossselling more products to existing customers (as opposed to recruiting new customers) Wells Fargo has had a single minded focus for many years to increase its number of products (debit cards, credit cards, etc.) from 4 to 8 per customer Confidential 13

C1. Specialisation profits Wright Express

specific industries Wright Express (renamed

solutions Investors Fleet cards Single-use

14 C1. Specialisation profits Wright Express offers niche B2B payment solutions for specific industries Wright Express (renamed WEX), an American issuer focused on niche B2B products About WEX Fleet cards Travel solutions Hospital solutions Education solutions Investors Fleet cards Single-use virtual cards for travel industry E-payments in healthcare Confidential 14

C2. Cross-sell into installed base Wells Fargo s single-minded

Kovacevich) in 1992 and updated in 2003, including a list of 10

focus on cross-selling from 4 to 8 products per customer.

15 C2. Cross-sell into installed base Wells Fargo s single-minded focuses on cross-selling Vision developed by their CEO (Richard Kovacevich) in 1992 and updated in 2003, including a list of 10 strategic initiatives Most important initiative: single-minded focus on cross-selling from 4 to 8 products per customer. Results (end of 2010): achieved 6.1 products per customer Confidential 15

Three profit models related to business processes Profit Model D1 Transaction scale Profits driven by higher volumes of transactions that generate economies of scale Processors like First Data pursue

lower comparative costs Intuit provides integration between payments and business softwares BillMeLater (credit at POS) delivered convenient processes for consumers and for merchants Profit Model D3

16 Three profit models related to business processes Profit Model D1 Transaction scale Profits driven by higher volumes of transactions that generate economies of scale Processors like First Data pursue transaction volume across multiple geographies in order to obtain economies of scale Profit Model D2 Process Innovation Profits driven by innovative processes that generate value for buyers and/or lower comparative costs Intuit provides integration between payments and business softwares BillMeLater (credit at POS) delivered convenient processes for consumers and for merchants Profit Model D3 Low-cost Internal Structure Profits driven by a structural difference (e.g. single plane type for RyanAir, direct marketing for Dell) creating a sustainable cost advantage Players like ING or Boursorama only use remote channels (no or very limited branch network) to market and service their customers Confidential 16

D1. Transaction scale First Data s company size gives it a critical edge against smaller processors First Data Key figures in 2011 First Data has business operations in 34 countries and 6 continents

2 million merchant locations, over 2,000 card issuers and their customers and approximately 24,000 employees Manages over 56 billion transactions worldwide Supports 4000 financial institutions Key

17 D1. Transaction scale First Data s company size gives it a critical edge against smaller processors First Data Key figures in 2011 First Data has business operations in 34 countries and 6 continents Serves over 6.2 million merchant locations, over 2,000 card issuers and their customers and approximately 24,000 employees Manages over 56 billion transactions worldwide Supports 4000 financial institutions Key Observations Processors are experiencing margin pressure due to the cost of multiple technology platforms and industry consolidation First Data has set a strategic focus on profit and growth drivers: international expansion and merchant services First Data maintains several gateways and more than seven merchant acquiring platforms Thanks to its global expansion, First Data is still very competitive Debit and credit cards Loyalty Payment processing M-commerce Reporting tools Fraud management E-commerce Confidential 17

with invoicing accounting software and reporting tools 4.

18 D2. Process Innovation Intuit integrates payment acceptance with invoicing and accounting software Pay employees (Payroll services) Payment acceptance Accounting software Intuit has created an innovative ecosystem integrating payment acceptance with invoicing accounting software and reporting tools 4.5 million active QuickBooks customers Reporting software Global net revenues reached $4 billion with $350 million from payment solutions (equivalent to 9% of total revenues) Confidential 18

D3. Low-cost internal Structure ING Direct as one example of low cost online bank offering attractive consumer pricing ING Direct is an example

(under the condition of users deposit 700 per month) Innovative services: Comprehensive mobile banking app User-friendly expenditure management

19 D3. Low-cost internal Structure ING Direct as one example of low cost online bank offering attractive consumer pricing ING Direct is an example of online low-cost bank without local branches (except ING café) ING Direct offers a current account and a Mastercard gold card free of charge (under the condition of users deposit 700 per month) Innovative services: Comprehensive mobile banking app User-friendly expenditure management tool (Budgetizer application) ING Direct Café: check your bank accounts via Ipads in a pleasant environment (coffee place with sofa ) Confidential 19

Can bank / payment service provider make a profit

Yes, if there is a clear focus on specific business

limousine services) Do you want to focus on a

20 Can bank / payment service provider make a profit in retail payments? Yes, if there is a clear focus on specific business model(s) Value chain Do you want to be a full service provider like Lufthansa? Product Do you want to sell more services around your core activity like Virgin? (e.g. limousine services) Do you want to focus on a profitable niche like Heli - Air (Nice Monaco by helicopter)? Do you want to «reinvent» industry processes like Ryanair (low cost airline)? JetBlue Niche Process Confidential 20

Contact us Edgar, Dunn & Company 42 rue Vignon 75009 Paris France Pascal Burg

21 Contact us Edgar, Dunn & Company 42 rue Vignon Paris France Pascal Burg Associé France Tel Mobile

DR. MARKUS BRAUN CEO, CTO

DR. MARKUS BRAUN CEO, CTO TO OUR SHAREHOLDERS LETTER FROM THE CEO Letter from the CEO Dear ladies and gentlemen, Dear shareholders, Wirecard AG was able to report a successful 2014 fiscal year. Transaction