Savantor MarketEye: June 1 - 15 2007

Savantor Limited 68 Lombard St London EC3V 9LJ This is a confidential, high-level industry news and business intelligence Tel: 0870 734 6250 Fax: 0870 734 6251 update bulletin. For further information on any of the items contained email: [email protected] within the bulletin or to discuss the potential impact of these items on www.savantor.com your business, please contact Savantor on our dedicated support centre e-mail address ([email protected]). Click on the Savantor links below for more information about us and our opinions:

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Items in this issue: Savantor’s Views...... 1 IBM and Banco Sabadell form Web 2.0 agreement ...... 3 Chinese debit card market opens up...... 4 Products and Initiatives...... 2 Handelsbanken introduces card personalisation service ABN Amro adds anti-skimming device to ATMs ...... 2 in Sweden...... 2 Lloyds TSB fights insider fraud threat ...... 2 Channel management big challenge for banks ...... 4 Barclaycard signs first retail partner to contactless Banks warned on IT security ...... 4 technology...... 2 Thales secures UK faster payments network...... 5 Nordea to roll out Todos card readers to e-banking Outsourcing, Acquisitions and Deals...... 5 customers...... 2 First Data renews processing contract with Dresdner A&L lures younger customers to m-banking with £10 Bank ...... 5 sweetener...... 3 Welcome management team MBO ...... 5 Lloyds TSB sends out SMS to mortgage applicants...... 3 ABN Amro deal...... 5 Market News and Views...... 3 ABN Amro wins auction to acquire Taiwanese lender ..... 5 APACS marks 20 years of the debit card ...... 3

Savantor’s Views In the UK we know contactless is coming soon to a store near you - as long as you’re in certain parts of London – but there will be a few obstacles to overcome before it gains a real foothold in the UK market. A cost analysis of 32 British Retail Consortium retailers has shown that contactless is 8 – 10 times more expensive than cash. National retail chain Boots calculates the cost of processing a contactless payment of up to £10 is 4p plus the acquirer fee compared with 0.5p for processing a cash payment under £10. Boots say 79% of customers pay cash for their purchases which average £6. Processing costs apart there are other problems to overcome in the battle to get rid of cash: • retailers like Boots use a separate loyalty card which doesn’t fit well with the contactless model based on speed of throughput. • there is £3.5bn in cash stashed away in homes in the UK. A poll for Virgin Money found that 1 in 6 of us keeps cash at home rather than invest it somewhere. 6% say they are doing this to hide money from partners, 4% because they don’t trust banks and 1% to avoid tax. • over the last ten years the total number of cash machine withdrawals has grown from 1.6 billion in 1996 to 2.8 billion last year, with the amount of cash dispensed more than doubling from £80 billion to £180 billion • other card-based cash withdrawals (such as through debit card cashback and counter transactions) have also grown over the decade, meeting 12 per cent of personal cash needs in 2006 (compared to just 8 per cent in 1996) • research by Money Expert shows that average annual percentage rates on credit card cash withdrawals has risen from 21.27% to 23.48% since November 2006. If a cardholder takes out £100 and does not repay for a year they can be charges anything from £8.10 by Co-op to £48.69 by Vanquis Chip and PIN introduction has increased the amounts being withdrawn by credit

cards as prior to this many cardholders did not know their Credit Card RegisteredPIN. in NowEngland No. around 3420260 £750m Registered office: 8/10 South Street, Epsom, Surrey KT18 7PF VAT Registered No. 689136196

Whilst Savantor Limited (“Savantor”) has used reasonable efforts to obtain information from sources which it believes to be reliable it does not make any representations or give any warranties or guarantees that the information provided or any opinions expressed herein are accurate, reliable or complete and none should be relied upon as statements of fact. In no event, including (without limitation) negligence, and in no circumstances will Savantor be liable for any loss or damage of any kind whatsoever, including (without limitation) any direct, special indirect or consequential damages, caused by the use of or reliance upon information provided or opinions expressed herein.

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is withdrawn from ATMs each month using credit cards. So to reduce the amount of cash in circulation we need to convince cardholders that contactless is the way to pay to reduce the cash withdrawals, sort out the cost of contactless processing to attract more retailers, and find a way of tempting cardholders away from storing cash in a biscuit tin. Prepaid contactless looks like a good bet.

Products and Initiatives

ABN Amro adds anti-skimming device to ATMs ABN Amro is attaching anti-skimming devices to its 1200 outdoor cash machines across the Netherlands. The bank says that its cash machines have recently been targeted by card skimmers and as well as rolling out the anti-skimming devices ABN Amro says new safety instructions have been added on cash machines for customers. The bank also chose to act due to uncertainty over when mag- stripe cards will finally be made redundant in Europe in order to offset the negative publicity the crime generates, which damages consumer confidence in using ATMs. (Source date: 6th June, 2007)

Lloyds TSB fights insider fraud threat Lloyds TSB is installing technology at its retail banking division to help detect and prevent potential fraud committed by employees. The bank will use Actimize's new Employee Fraud prevention software to provide the analytic infrastructure and tools to monitor transactions and automate fraud detection. The system examines multiple data sources across the enterprise and mines data for suspicious patterns, and the application's analytics - such as fraud correlation - can detect complex fraud scenarios including employee collaboration with other internal and external parties. Last year the Financial Services Authority (FSA) warned that "insider fraud" - through collusion, coercion, infiltration or existing employee action - was one of the most serious fraud threats faced by banks. The watchdog has also repeatedly warned the industry that organised gangs of criminals are infiltrating British banks in order to carry out large-scale frauds. (Source date: 6th June, 2007)

Barclaycard signs first retail partner to contactless technology Barclaycard Business has announced Chop'd, the London gourmet take-out salad bar, as the first retail partner to sign up for an in-store contactless payment solution. The agreement is an industry-first and will see the retailer adopt the new technology this autumn in all three of its central London outlets with the intention to roll out additional contactless terminals in further outlets due to open later this year. The new contactless technology, delivered by Barclaycard Business, will allow cardholders to pay for low value transactions by waving their card over a contactless reader and for the retailer, with about 95 per cent of all Chop'd transactions totalling less than £10, benefits will include: • Faster transactions • No need for PIN or signature - • No customer till receipts - • Secure transactions using the same reliable and secure payment network as chip and PIN • Potential increased transaction value and repeat custom. (Source date: 7th June, 2007)

Nordea to roll out Todos card readers to e-banking customers Nordea has contracted with Swedish security vendor Todos Data System for the supply of over a million portable smart card readers which will be rolled out to its Internet banking customers. The Scandinavian bank will begin distributing the remote authentication tools to customers in Sweden in September. The devices generate one time passwords that can be used for accessing online banking accounts as well as for verifying online payments. Bank customers can connect the reader to a PC or use it as a wireless device. (Source date: 8th June, 2007)

Handelsbanken introduces card personalisation service in Sweden Handelsbanken is the first bank in Sweden to offer its customers the opportunity to choose their own image on their payment and credit cards. The service launched on 12 June for the Allkort MasterCard

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and Allkort Visa cards. The card-holder can choose one of their own digital photos, or an image from Handelsbanken's picture gallery. Customers can select or change the images simply via the Bank's online service. During the autumn, the Bank will also launch customised card images for the Bankkort MasterCard, Bankkort Visa and Bankkort Maestro cards. (Source date: 11th June, 2007)

A&L tempts younger customers to m-banking with £10 sweetener Alliance & Leicester is to pay younger customers £10 for signing up to its mobile banking services. A&L is introducing the offer to customers who have signed up to its Premier 21 current account. But the bank says only the first 20,000 customers who register for the m-banking service and use it before the end of June will receive the £10. The bank says its research shows that more than half (54%) of 16-21 year olds are willing to use their mobile phones to check balances of current accounts. But just 38% of the 2247 people surveyed were willing to check mini statements using their mobile phones and only four in ten (44%) said they were willing to use their handset to check they have enough money to make a purchase. Just over a quarter (27%) said they would use their mobiles to keep an eye on current accounts whilst abroad. (Source date: 12th June, 2007)

Lloyds TSB sends out SMS to mortgage applicants Lloyds TSB is to launch a new mobile phone text service designed to keep customers informed of the progress of mortgage applications. Customers applying for a new mortgage through a Lloyds TSB branch or the telephony channel will receive text alerts at key milestones: 'Welcome to Lloyds TSB - application received' 'Application authorised' 'Offer letter issued' 'Delighted to confirm your mortgage application has completed'. The final message includes a customer services telephone number for future use. (Source date: 13th June, 2007)

Market News and Views

APACS marks 20 years of the debit card To mark the 20th anniversary of the debit card in the UK APACS has launched its report, '20 Years of the Debit Card', reflecting on its history: • There are 41 million debit card holders in the UK today (84 per cent of the adult population) compared with 27.8 million in 1996; • There are 68 million debit cards in circulation today, compared with just 19 million debit cards in 1990, three years after their launch; • Britons made 4.5 billion purchases in 2006 - the equivalent of 143 purchases every second - and spent £194.9 billion on their debit cards, five times the amount we spent in 1996; • In 2006, each cardholder used it 166 times on average - making £4,799 worth of purchases and acquiring £3,848 in cash; • In 1987 only 38 per cent of UK adults had a plastic card - and this would have been a credit card. Today, 84 per cent (41 million) of UK adults have a debit card; • By 2016, spending on debit cards will have doubled to over £400 billion. We'll have new technologies like contactless payments, and APACS predicts that by 2011 personal spending on debit cards will have overtaken cash. (Source date: 1st June, 2007)

IBM and Banco Sabadell form Web 2.0 agreement IBM is teaming with Spain's Banco Sabadell to develop and produce Web 2.0 applications designed specifically for the financial services sector. The two parties have signed an agreement to establish an "innovation task force" which will be staffed with employees from both organisations. The task force will work on adapting Web 2.0 technologies - ranging from social networking software, Internet collaboration, blogs, RSS feeds, podcasts and Web services - for use by the financial services industry.

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Last year research group Gartner said banks should use Web 2.0 applications - such as wikis, podcasts and blogs - to create non-traditional distribution channels by dealing with customers one-to-one and for cross-enterprise collaboration. But a UK study earlier this year by IT specialist Conchango found that fears over brand damage are deterring retail banks and building societies from implementing Web 2.0 applications. (Source date: 5th June, 2007)

Chinese debit card market opens up Citigroup and Bank of East Asia are expected to be the first foreign banks to offer local currency debit cards to consumers in China. Both banks are expected to be joined by Standard Chartered and HSBC, which are anticipated to apply for licences soon. However, there is no timescale as to when the banks will be issuing the cards, and no plans for banks to be permitted to offer credit cards. China agreed to permit locally incorporated foreign banks to offer debit cards at the US-China Strategic Economic Dialogue last month. (Source date: 7th June, 2007)

Channel management – the big challenge for banks The majority of customers still prefer to do their banking and buy financial products at branches because of poor performance of Internet and telephone channels, according to a global retail banking study conducted by management consulting firm Booz Allen Hamilton. The study, which used customer research and mystery shopping to assess 100 retail banks across 17 countries, found that despite technological advances, globally customers still prefer banking in branches - with 63% saying they use branches for purchasing current and savings account products and 54% visiting branches to secure a mortgage. The study also found that call centre performance is poor, with almost half (48%) of banks scoring 'low' on time spent waiting to speak to a specialist adviser, while 43% scored 'low' on staff knowledge. Although still popular with customers, branch importance is in relative decline. For purchasing less complex products, such as credit cards, over half of customers would use another channel, with 21% purchasing online and 16% by telephone. The trend away from the branch is being lead by affluent consumers who are 30% more likely to prefer using Internet services. However, this group was found to be neglected by banks, with 72% of surveyed firms scoring 'low' on their segmented online facilities for mass affluent customers. Overall the study found that Hong Kong has the best performing retail banks, leading in three out of five channels - branches, call centres and mobile sales force. Switzerland came in second place, with strong performance in branches and in call centres, and the US was third over all but banks in the country scored as the second highest country in terms of branch performance, largely due to retail strategies such as convenient opening hours, promotions and an emphasis on customer service. The best individual performers across the 17 countries in the study are HSBC in Hong Kong, Raiffeisen in Switzerland and UBS in Switzerland. HSBC Hong Kong tops the tables for best branches and best mobile sales teams, while Citibank UK was found to provide the best call centre service. UK banking group HBOS was found to offer the best multi-channel experience. (Source date: 13th June, 2007)

Banks warned on IT security The number of vulnerabilities found in bank IT systems has risen by a fifth in the past year, according to a UK report by Internet security company NTA Monitor. Whilst improvements in overall security have been achieved by most industry sectors, NTA says results from the finance sector "have been disappointing". Tests performed on financial organisations' public facing IT systems found nearly 20% more vulnerabilities compared to the same study last year, although the volume and distribution of flaws varied 'only slightly' to the 2006 results. The average number of vulnerabilities found on bank IT systems was 19, which is close to the cross-industry average. Overall the tests found an above average number of DNS, Internet router and registry database vulnerabilities in bank systems, although the number of service specific issues was below the cross- industry average. NTA warns that the increase in vulnerabilities is a problem for organisations aiming to become PCI complaint, because they must demonstrate that they are protecting client data or risk being blacklisted by card companies. In addition, firms are also at risk of action from the Financial Services Authority (FSA), which has started to levy strong fines on banks that fail to have effective systems and controls to manage information security risks. (Source date: 14th June, 2007)

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Thales secures UK faster payments network Thales has announced that 11 of the 13 member banks involved in the first wave of the UK’s Faster Payments Scheme are implementing Thales Host Security Module (HSM) 8000 to secure their Faster Payments networks in the run-up to the November 2007 implementation launch. As the member banks use Thales HSM to securely set up their new Faster Payments networks, consideration must also be given as to how to strongly authenticate the users of online banking. As of November, the Faster Payments systems will enable a payment to be processed in a matter of seconds. As a result, the opportunity to stop a fraudulent payment is greatly reduced and adequate authentication of the transactions passing through the system becomes critical. Banks are currently working towards implementing authentication solutions that are capable of mitigating the increased risk associated with Faster Payments. (Source date: 14th June, 2007)

Outsourcing, Acquisitions and Deals

First Data renews processing contract with Dresdner Bank First Data International has renewed its credit card processing contract with Dresdner Bank, part of the Allianz Group, for a further five years. First Data will continue to process transactions until at least 2012. The portfolio comprises all Dresdner Bank's classic, gold and business cards as well as co-branding cards with Allianz. (Source date: 4th June, 2007)

Welcome management team MBO The management team of Welcome Real-time has completed a buy-out of the company with the support of AXA Private Equity. Financial terms of the deal were not disclosed. In a statement the vendor says AXA Private Equity has acquired a majority stake in its business, with the remaining shares purchased by the current management team. Welcome provides smart card loyalty systems to banks in 21 countries around the world. The vendor's technology is designed to boost revenue by enabling banks to add new applications - such as loyalty points, coupons and cask back features - to payment cards. The company employs 140 staff across its offices and R&D facilities in Aix-en-Provence, Singapore, London, Milan, Madrid, Miami, Shanghai and Sao Paulo. (Source date: 7th June, 2007)

ABN Amro deal ABN Amro is currently the subject of a bid from Barclays bank worth around $86 billion and a counter offer from a consortium led by the Royal Bank of Scotland (RBS), which totals $96 billion. The chief executive of ABN Amro has said that it is too early to tell which of the two bids for the Dutch bank offers the better deal for shareholders. The chief factor determining which bid wins out is likely to be the decision of the Dutch Supreme Court which is to decide as to whether a vote must be held by ABN Amro shareholders as to whether its American unit La Salle should be sold to Bank of America. (Source date: 7th June, 2007)

ABN Amro wins auction to acquire Taiwanese lender ABN Amro has won an auction to take over Taiwanese lender Taitung Business Bank. Under the terms of the deal agreed with the Taiwanese government, the Dutch bank will receive $209 million of state money for the deal, which will boost ABN Amro's outlets in the territory from five to 36. ABN Amro's acquisition is thought to be conceived as a way through which the firm can catch up with other investment banks which already have existing interests in the fast growing sector. (Source date: 8th June, 2007)

Lloyds TSB to sell off Abbey Life Lloyds TSB Group is to sell its Abbey Life insurance unit. The sale of the division is expected to raise up to $1.8 billion for Lloyds, with hedge funds Blackstone Group, Sun Capital and Cerebrus thought to be interested in the acquisition, along with Swiss insurers Resolution and Swiss Reinsurance. Abbey Life is estimated to contain about $23 billion of policyholder assets, but was closed to new business seven years ago. (Source date: 15th June, 2007)

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FreeStar's Subsidiary Signs Deal with Leading Finnish Point of Sale Vendor FreeStar Technology Corp. has announced that its wholly owned subsidiary Rahaxi Processing Oy (Rahaxi) has entered into a distributor and referral agreement with Suomen Kassajarjestelmat Oy (SKJ), a Point-of-Sale Software and Hardware Vendor in Finland. Under the terms of the agreement, SKJ will migrate their existing and new merchant clients to meet the requirements of the EMV and PCI-standards in Finland using Rahaxi-OTI™ (Open Terminal Interface) card payments processing software and Hypercom Optimum Point-of Sale products. SKJ has a Client Portfolio of Over 1500 Retail, Hospitality and Restaurant Merchants in the Finnish Market

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