Credit Card & Merchant Businesses Positioned for the future - PowerPoint PPT Presentation

Credit Card & Merchant Businesses “Positioned for the future environment” Nicholas L.A. Kennett Executive General Manager 22 March 2002

Disclaimer 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.

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 400 350 300 Number in Thousands 250 200 150 100 50 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 at end June Source: RBA Bulletin - Table C.5

Debit & Credit Card Transactions 100 90 80 70 millions per month 60 50 40 30 20 10 0 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 Credit Card Txns Debit Card Txns Source: RBA Bulletin - Table C.3

Value of Debit & Credit Card Transactions 12000 10000 8000 $millions per month 6000 4000 2000 0 4 5 6 7 8 9 0 1 4 5 6 7 8 9 0 1 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 - - - - - - - - - - - - - - - - y v y v y v y v y v y v y v y v o o o o o o o o a a a a a a a a N N N N N N N N M M M M M M M M Credit Card Debit Card Source: RBA Bulletin - Table C.3

Credit Card Balances Outstanding 70000 60000 50000 40000 $ Millions 30000 20000 10000 0 4 5 6 7 8 9 0 1 4 5 6 7 8 9 0 1 9 9 9 9 9 9 9 9 9 9 9 9 0 0 0 0 - - - - - - - - - - - - - - - - y v y v y v y v y v y v y v y v o o o o o o o o a a a a a a a a N N N N N N N N M M M M M M M M Advances Outstanding Limits Outstanding Source: RBA Bulletin - Table C.1

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

Closed versus open loyalty schemes  Interchange  Cardholder Fees  Loyalty  MSF Merchants express Consumers commence dissatisfaction with AMEX MSF migration to AMEX Overtime, AMEX MSF  AMEX Response / Impact “a long and uncertain time” after open scheme  AMEX Profit or higher fees / impact  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 Issuing • Revolve rate • Margin and fees • Number of merchants • Number of ATMs Acquiring • Merchant turnover • MSF • “On - us” transactions • Loss/Fraud rates

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. Kennett Executive General Manager 22 March 2002