CLEARIT The Swiss professional journal for payment traffic Edition 45 | September 2010

> Edging out cash due to state-of-the-art card infrastructure Interview with Visa Europe’s Jörg Metzelaers

> The future of SEPA direct debit is now

> Cover payments in euro via SWIFT 2 INHALT / CLEARIT | September 2010

Interview Page 4 Products & Services Page 14 Europe leads the way in providing the The future of SEPA direct debit is now state-of-the-art card infrastructure At the end of 2009, SIX Group launched its SEPA Direct All card business service providers compete with one Debit Service for the European market. Thus far, banks another, from the institutions as issuers and the card or- from , Luxembourg, Monaco, Germany and ganizations, to the acquirers and payment processors, to Spain have become users of the offering, which enables the payment service providers and merchants. The card to collect pan-European standardized SEPA direct debits. industry as a whole also has a powerful common competi- The growth potential is considerable. tor: cash. Jörg Metzelaers from Visa Europe is upbeat over a constructive cooperation between the parties involved Products & Services Page 15 and sees a great deal of growth potential still existing in Cover payments in euro via SWIFT cashless payment transactions. As of November 22, 2010, the Swiss payment system euroSIC will be able to process the message type MT202COV. Compliance Page 10 Two years ago, at its launch by SWIFT, the Swiss financial MIF – The EU Commission’s perspective center voiced opposition to the introduction. But demand Following the European Commission’s retail banking from the financial institutions has caused reconsideration. sector inquiry published in early 2007, the Commission has conducted a number of high-priority investigations in the payments sector. The timeliness of such actions was underlined by the banking industry's self-regulatory SEPA project, which is aimed at creating an integrated payments market.

Business & Partners Page 11 Economies of scale in the card business The propagation of payment cards has been conquering the world for the last 60 years thanks to their various usage possibilities, flexibility and convenience. In Switzerland alone, more than 600 million transactions are generated at 150,000 acceptance points by more than 10 million cards. The annual industry growth rate is higher than 8%. Editorial / CLEARIT | September 2010 3

Dear readers, Nothing can stop the explosive surge of plastic money – card at every possible opportunity. But then again, I’m not not a financial crisis, a recession, or burst bubbles. your average Swiss as far as my payment behavior is Transaction volumes keep growing relentlessly for all types concerned. And that’s why I would be very surprised, of cards: credit and debit cards, merchant, prepaid, co- indeed, if during my lifetime plastic would overtake coins branding and affinity cards. At first glance, the market and paper money. < potential is enormous. But, “Cash is king”, meaning that cash payments are still the predominate means of settling Michael Montoya, UBS AG retail transactions. Last year, there was a 50 million CHF SIX Interbank Clearing Board of Directors Member turnover from card payments, which amounts to slightly less than 20% of the entire purchase volume. Which strategy promises the most growth potential? What role do the financial institutions play in their efforts to replace cash with electronic payments? Read the answers to these questions from the perspective of the credit card industry, represented here by the head of Visa Switzerland.

Although it is obvious that cards have become an integral part of everyday life, the coordination of all parties involved in a payment card system is based on a number of supremely complex processes. By introducing the reader to business models in acquiring and issuing cards, efforts in card fraud protection and the economy of the interbank fees, this issue of CLEARIT will demonstrate that this business is far more multi-faceted than the simplicity of the payment process might lead to believe. The entire situation gets more complex when we take a closer look at international standards and regulators, like the PCI reg- ulations, for instance, which define data security standards and are supported by all important credit card organiza- tions. Or take the EU Commission which, for reasons of competition, watches vigilantly to make sure that there is no possible price-fixing for the multilateral interchange fees for cross-border payments within the SEPA. Over the past few years, these interbank fees have also attracted the attention of the international antitrust authorities. Thus, the Swiss Competition Commission (COMCO) felt compelled to set a maximum amount per transaction.

Mr. and Mrs. Swiss own an average of approximately CHF 5,000 in cash at the end of each year. Just as a result of Christmas shopping alone, you wouldn’t find that much in my wallet, aside from the fact that I prefer to use my 4 INHALTInterv ie/ CLEARw / CLEARIT | SeptemberIT | DSeptemberezember 2010 2009 2010

Europe leads the way in providing the state-of-the-art card infrastructure

All card business service providers compete with one another, from the institutions as issuers and the card organizations, to the acquirers and payment processors, to the payment service providers and merchants. The card industry as a whole also has a powerful common competitor: cash. Jörg Metzelaers from Visa Europe is upbeat over a constructive cooperation between the parties involved and sees a great deal of growth potential still existing in cashless payment transactions.

CLEARIT: How is your V PAY debit card developing in Eu- meet the requirements of the former EC countries. Visa debit rope, particularly in Switzerland? What strategy is Visa cards are particularly issued in the countries in which Visa is pursuing in the debit card sector? What are the banks’ inter- known as a credit and debit brand. Why this focusing with ests? V PAY on Europe? In the V PAY target markets, which also Jörg Metzelaers: We are very well represented with our debit include Switzerland, customers use their debit cards 90% products, Visa Debit and Vise Electron, in most European of the time domestically to purchase goods at the POS, and countries, including France, the UK, Spain, Portugal and also the remaining transactions are predominantly conducted in Eastern Europe. However, in the former EC countries, such within Europe. Transactions outside Europe comprise only as Germany, Austria, Italy, Benelux and Switzerland, we have a very small portion and for such trips we recommend never managed to gain market share. Based on the feedback that customer use a Visa credit card due to the excellent from many banks, we determined relatively quickly that we worldwide acceptance. In this sense, V PAY fits within the needed a product that matches these markets better, which landscape very well: purchasing of goods and cash with- is better adapted to the respective infrastructure. As a result, drawals throughout Europe – cash withdrawals worldwide. several years ago we developed a concept for a new debit But, and this is very important for customers: V PAY is con- product that is specially adapted to meet the needs of these sistently based on chip & PIN technology, the most secure former EC countries. In terms of strategy, this essentially standard available today. The risk of fraud associated with means three things: There was the clear wish expressed magnetic stripe solutions is thereby minimized. We simply to have a separate brand with V PAY, since the Visa brand eliminated the weakest link in the chain from the product, is associated with credit card products in these countries. the magnetic stripe. Customer surveys conducted in the V Secondly, it was also very important that the new product PAY target markets also support this: When it comes to debit be based on the EMV standard, in order to combat the cards, security far exceeds worldwide acceptance in impor- growing threat of fraud. And third, one issue grew increas- tance, and customers who frequently travel internationally, ingly important: governance. Visa Europe is an organization have confirmed to us that while abroad they would prefer to of European member banks just for Europe, while Visa Inc. pay using their credit card at the POS. is active outside Europe. This split was completed back in 2007. We also set up an internal steering committee for V Regarding magnetic stripes: When will they be a thing of the PAY. This makes V PAY a product of the European banks past and what are the conditions for their discontinuation for the European banks that is completely controlled by the from the perspective of the card industry? European banks. In Europe we now have nearly complete EMV acceptance penetration at all POS terminals and ATMs. This makes Europe the world leader and I would venture to say that it “Chip & PIN technology, the most secure will be the first region in the world to complete the conver- standard available today.” sion to an EMV infrastructure in the next year or two. As long as this modern infrastructure is not comprehensive through- out the rest of the world, cards will continue to be equipped What is the difference between Visa and V PAY? with magnetic stripes. There are essentially two differences. V PAY is purely chip & PIN based, designed for the EMV standard, and it is also What does the time line look like for an all-encompassing a purely European product that was specially developed to EMV infrastructure elsewhere? InterEditovrialiew / CLEARIT | September 2010 5

Short biography

Jörg Metzelaers has held the position of Vice President Jörg Metzelaers has gathered comprehensive expe- Relationship Management for Switzerland, Austria and rience in the financial sector. After completing his Hungary for Visa Europe since May 2008. As such he is business studies at the University of Karlsruhe in responsible for the strategic orientation and implemen- Germany and at The University of Berkeley in Cali- tation of the business plan. His goal is to strengthen fornia, USA, between 2000 and 2003 he worked as a the positioning of Visa Europe in these markets, both strategic consultant at Accenture, where he special- by introducing new products and technologies, such ized in the card business and projects in the online as V PAY, and through close cooperation with the Visa banking sector. From 2003 to 2005, Jörg Metzelaers member banks in these markets. Between 2005 and was a manager in the card business for Citibank in 2007, he was Country Manager for Switzerland at Visa Germany. His responsibilities there included the de- Europe. velopment of co-branding products and the building up of sales partnerships for credit cards. 6 INHALTInterv ie/ CLEARw / CLEARIT | ITSeptember | September 2010 2010

I think that some regions are still holding back with the How is it about competition in the SEPA market? To building of a modern EMV infrastructure, or are not what degree do the multilateral interchange fees play a promoting the EMV rollout as strongly as we are doing role in regard to the EU Commission’s competition policy here in Europe. What makes Europe so special are the demands? efforts being made here through the SEPA initiative, I would not mix up the two issues. If, for example, I take a which sets binding deadliness and which seeks to facili- look at the credit card business, we have several hundred tate payments transactions with a standard infrastructure. card products in Switzerland, three to four different brands The EMV standard – chip & PIN – is being used towards and numerous issuers and acquirers that are active in the this end. However, this is not the case in all other regions. market – so you could say that there is active competi- tion. Throughout Europe, duality exists in practically every country and we would also like to create that in the debit “Because it is also a matter of living card market in Switzerland with V PAY. In April this year, SEPA.” Visa Europe welcomed the agreement with the European Commission regarding the multilateral interchange fees for cross-border debit card payments in the European We in Europe are ahead of the rest of the world in terms economic area. Included in the agreement is that Visa of standardization. Are there still other hurdles on the path Europe shall set the weighted average cross-border MIF to a practiced, single euro payments area for cards? for debit card transactions at 0.2% for four years. In my opinion, a major advantage of SEPA was that banks and all essential market participants were involved in the How has 3-D Secure proven itself so far? How is the accept- process early on. That means that some countries – Swit- ance among cardholders? How much was the security of zerland played a pioneering role here – decided early on Internet transactions increased as a result? to set up the new infrastructure by the end of 2011, while We see a very clear and significant reduction in the fraud others decided later. There are still minor gaps to be closed figures for transactions that are based on the Verified by in the EMV area in some countries. The point now is to Visa security technology. We are particularly pleased with also live SEPA, which leads us back to V PAY: We have the rollout in Switzerland, primarily because the banks the option of using this infrastructure for new products, recognize the opportunity to tangibly reduce the security whether for V PAY, contactless and mobile payments at risks for their customers. And this topic is growing ever the POS. It is now a matter of building upon what exists more important with e-commerce. 20% of all Visa transac- and to use it in regard to security and innovation; and in tions are already being conducted in this segment today. I this way, to boost competition in the former EC countries, can well imagine that in the future e-commerce transactions particularly in the debit business. in the debit scheme will also be conducted on the basis

Number of POS transactions per card* in 2008

90 80 70 60 50 40 30 20 10 0 Italy Germany Switzerland Belgium United France Netherlands Sweden Kingdom

Source: Statistics on payment and settlement systems in selected countries – Figures for 2008, BIS, December 2009 InterEditovrialiew / CLEARIT | September 2010 7

of the Verified by Visa technology. In regard to customer goal for me, if we want to talk about strategy. Take a look acceptance, there are certainly possibilities to improve at the total number of all debit and credit cards; the pen- the communication in order to make the functioning and etration today is at 1.5 cards per capita. If we compare this benefits of this technology clearer to customers. It is always data with the UK, one of Europe’s most highly developed a matter of weighing the advantages of convenience with markets, where penetration is at more than three cards per the demands of security, but we know that customers do not capita, then it is clear that plenty of potential remains. Of mind entering the additional code if that increases security. course, the two markets cannot be compared one to one, One proof of the good acceptance is the fact that increasing and the card penetration also differs greatly per product. numbers of customers are registering for Verified by Visa Whereas the debit card penetration is very high indeed, and that a large share of turnover is already being processed in the credit card field it is entirely clear that the demand in this way. Moreover, there are several further develop- for additional cards is there. In comparison to 2005, we ments in this area. The Visa CodeSure card is currently in have more than 650,000 additional Visa cards in Switzer- pilot operation; this is a card with a little calculator on the land today, and I believe that this market will also continue back, which generates a secure one-time code on a tiny to grow in the coming years. This applies to business and display once the PIN has been entered. The transaction corporate cards as well. The product currently growing the security here is nearly that of a chip & PIN solution. The pilot best today, even if it still is at a comparably low level, is the results from more than five countries, among them Switzer- prepaid card. A lot of people want a card for their children land, have been very satisfactory. Naturally, we will not be or for use on the Internet. implementing this technology overnight as a standard on all cards, but it does represent a very promising next gen- In addition to card penetration, the main potential remains eration for convenient and secure payment on the Internet. in increasing card turnover. Particularly for debit cards, there is still a great deal of leeway here, since 40–50% of turnover still consists of cash withdrawals. In compari- “The security of card payments is a very son: Among credit cards, cash withdrawals only comprise high priority for us and our member 10% of the total per card turnover. There is still room for us to increase the number of POS transactions. There are banks.” 40–50 transactions per card and year in Switzerland. In this regard, countries such as France, Finland, Norway, With so much security, are there any more risks? Denmark and Sweden tally over 150 transactions per card If you take a look at the developments of the past 30 years and year. I think that the goal of all parties involved must in this field, there really has been a permanent improvement be to further increase the share of cashless transactions, of the security standards, and this process continues. The and as mentioned previously, the potential to do so is there. greatest risk is not that someone finds my card and uses it for a single payment transaction. The real danger is that organized fraudsters copy a large quantity of card data, es- “Through a stronger partnership between pecially magnetic stripe data, by manipulating terminals. card issuers, acquirers and merchants, we Thanks to the nearly nationwide EMV rollout in Switzerland, we have certainly made great progress towards making can get the wheels of cashless payment payments safer. With V PAY we have taken product de- traffic moving a bit faster.” velopment even a step further and removed the account information entirely from the magnetic stripe; payment is always made using chip & PIN. With more than eight million That is also the goal of the EU Commission, which has es- V PAY cards in Europe, we have not been confronted with a timated that the costs of cash to the European economy single case of fraud based on skimming. The PCI standard amount to EUR 84 billion, which corresponds to 0.60% of is also important when it comes to the security of card European GDP. What measures are needed to replace paper payments; it regulates the storing of card data in a secure money in the retail sector with card payments? What roles environment. Here too, Switzerland is among the leaders in do the banks have to play in the process? terms of implementation of this standard. As you can see, This is actually my favorite subject. After five years in the there is a steady investment being made in the security of Swiss market, you might say that I feel somewhat like a card payments and this topic is treated with the very high local, and my greatest challenge is to contribute to the priority by us and our member banks. formation of a win-win situation between the banks and commerce. In my opinion, there is still room for improve- This is also important so that customers can continue to ment. If we would all pull together we could achieve a change their payment habits from cash to cashless. great deal more. If we manage to establish a stronger part- That’s right. The cash rate in Switzerland remains at nership between card issuers, acquirers and merchants, 70–80% today, so surely we still have enormous potential we can get the wheels of cashless payment traffic moving for cashless payments there. This is also a very important a bit faster. Lately I have been feeling for the first time 8 INHALTInterv ie/ CLEARw / CLEARIT | ITSeptember | September 2010 2010

that things are moving in this direction and that we can Who has the lead in this four-party system? make it happen. In my experience, the tendency in Switzerland is to sit everyone down at the same table. We do not necessarily What's the source of your confidence? need someone to take charge. Communication and the It is not as if we were starting from zero. If we take a look at blending of various points of view are important in this the topic of EMV, the Swiss industry developed a particu- regard and certainly all parties can make do their part to larly good solution in the area and that is already proof that make this successful. < things function well when the partners cooperate. There are also joint task forces for the topics of contactless and Interview: Gabriel Juri, SIX Interbank Clearing mobile payment. But I believe that we should not just limit [email protected] the cooperation to technical matters, but also to find joint solution approaches for cross-industry, strategic issues. This especially makes sense when it comes to the intro- duction of new products and innovations, as well as the common goal of reducing the use of cash. The leverage will simply be greater if all the stakeholders work together even more closely.

Average value per card transaction in USD for 2008

180 160 140 120 100 80 60 40 20 0 Sweden Netherlands France Belgium United Germany Italy Switzerland Kingdom

Source: Statistics on payment and settlement systems in selected countries – Figures for 2008, BIS, December 2009 InterEditovrialiew / CLEARIT | September 2010 9

The ABC of the card business

Acquirer A company contracted to process card-based transactions on behalf of acceptance locations.

Chip und PIN Refers to any card transaction which is protected by a combination of a chip card and a personal identification number. The term can also be used as a description of the un- derlying technology involved.

EC countries European countries that participated in the cross-border Eurocheque system. The cheque-based payment instrument phased out by 2002.

EMV/ep2 A standard providing a higher level of card payment security, thus helping to prevent card misuse. It was developed jointly by MasterCard and Visa. ep2 is the Swiss national process- ing protocol for EMV-enabled transactions. Transactions processed on ep2 payment terminals are handled even faster and more securely.

Issuer An organization issuing credit, debit or prepaid cards. Financial institutions are the only issuers of such cards in Switzerland.

PCI DSS (Payment Card Industry-wide common standard for confidential card data developed by the card Industry Data Se­c­urity issuers Visa and MasterCard. The standard applies to all companies engaged in the Standard) transmission, processing and storage of card data.

POS (Point of Sale) Place where sales transactions take place, such as a shop counter.

Skimming Refers to the copying of magnetic stripes, spying to detect the PIN and the duplication of cards. To accomplish this, a reading device is attached to the payment terminal’s slot, which copies the data off the card once it is inserted. The customer’s PIN code is recorded using a video camera aimed at the payment field. This data is used to duplicate the card and misuse it to the detriment of the legal owner.

V PAY The debit card from Visa that contains chip technology, which is SEPA-compatible right from the start.

3D-Secure An internationally-recognized security standard for card payments on the Internet. Visa and MasterCard have implemented this standard in their "Verified by Visa" and "Master- Card SecureCode" security programs. 10 INHALTCompliance / CLEAR / CLEARIT | SeptemberIT | September 2010 2010

MIF – The EU Commission’s perspective

Following the European Commission’s retail banking sector inquiry published in early 2007, the Commission has conducted a number of high-priority investigations in the payments sector. The timeliness of such actions was underlined by the banking industry's self-regulatory SEPA project, which is aimed at creating an integrated payments market.

The 2007 Commission decision in the MasterCard case While SEPA is intended to encourage competition, it may found that MasterCard's collectively agreed cross-border in fact lead to the disappearance of domestic payment interbank fees ("intra-EEA Multilateral Interchange Fees schemes that do not comply with interoperability or MIFs") inflated the base on which acquiring banks set standards. Market entry is therefore essential if we are to charges to merchants by creating a major common cost avoid a duopoly situation in which only Visa and Master- element. The MIFs were not found objectively necessary Card remain. In this respect, MasterCard's undertakings for the proper functioning of the scheme and did not meet and Visa’s commitments set important benchmarks for the criteria to receive an exemption under Article 101(3) potential new entrants. Nevertheless, the application of of the EC Treaty competition rules. However, at the same the competition rules to MIF arrangements has to be done time, it was not ruled out that a MIF might be needed to on a case-by-case basis. One element that is taken into create efficiencies, the benefits of which may outweigh account is market position and so new entrants may be in the restriction of competition. a special position in some regards, but it would be up to the parties to provide convincing arguments and evidence To comply with the decision, MasterCard offered under- to that effect. takings to the Commission in April 2009, among which was a substantial lowering of cross-border MIFs in line New payment card schemes can flourish under open with the so-called "merchant indifference test". This test markets conditions and free competition, in which indicates the MIF level that represents the point at which payment services are chosen on their own merits. The merchants are indifferent about the choice between Commission will strive to make this vision of a competi- accepting cash or cards. Since this benchmark allows tive European payment cards market a reality. < banks to charge merchants only for the actual benefits received from the acceptance of cards, it can stimulate Joaquin Almunia, EU Commission Vice President in charge the use of efficient payment instruments, while prevent- of Competition policy ing disproportionate hidden merchant fees, which are generally passed on to consumers. Among the transpar- ency measures introduced is that now merchants will be offered and charged different rates according to the type of debit and credit card used.

In May 2010, Visa Europe offered commitments on debit card MIFs also based on the merchant indifference test and transparency measures similar to MasterCard's. These commitments have been market tested. To achieve a truly level playing field, Visa credit and deferred debit card MIFs will continue to be vigorously pursued.

Ultimately, competition authorities are essentially "reluctant interveners" who prefer to allow fees and con- ditions to be determined by competition. To this end, merchants and consumers need to know when they pay and how much they pay for payments. Greater market transparency and merchant empowerment are important, because they enable merchants to give effective price signals to consumers. Compliance / Business & PartnerEditorials / CLEARIT | September 2010 11

latter case, the fee is referred to as the multilateral The economics of interchange fees interchange fee (MIF). The optimum interchange fee allocates the total costs of the card system across The interchange fee serves as an equalization all parties in such a way that the volume of card mechanism in the four-party system and enables transactions is maximized. Outside this optimum, utility to be spread between all the parties involved the interchange fee may result in a reduction in the in the Card Value Chain. It is an interbank charge that volume of transactions. Too low an interchange fee the acquirer pays to the issuer. It can be negotiated would result in issuers replacing the lost income bilaterally between the two parties or multilaterally through other channels – in particular by increas- between a number of issuers and acquirers. In the ing card fees, cutting reward scheme points or dispensing with extra services (observable, for example, after the statutorily imposed reduction in The four-party system the interchange fee in Australia). As a result, these effects would reduce the incentives for consumers to hold cards. However, if interchange fees were to be set too high, they would be passed on quite Licence fee Licence fee visibly to merchants through the merchant charges. The merchants would then be inclined to dissuade customers from using credit cards, to issue their Interchange Fee own merchant cards or not to participate in credit card systems at all. Acquirer Sale price Issuer charge Sale price Sale price Cardholder fees Merchant service

Merchant Goods/Services Cardholder

Source: Maurer, David, 2009. "An examination of the economics of payment card systems". Available at www.snb.ch.

Economies of scale in the card business

The propagation of payment cards has been conquering the world for the last 60 years thanks to their various usage possibilities, flexibility and convenience. In Switzerland alone, more than 600 million transactions are generated at 150,000 acceptance points by more than 10 million cards. The annual industry growth rate is higher than 8%.

Just like any other industry, the card industry has contin- it’s a few cents – regardless of the ever-increasing fixed ually automated manual processes. Wherever machines costs for increasingly complex, efficient and secure card or computers could improve upon human labor, or payment systems. enable a process altogether, automation was introduced. Thus, ever-higher transaction volumes are needed in order Nowadays, both cardholders and merchants expect to cover the payment processors’ rising fixed costs and to payment processing without a hitch in seconds. When, remain competitive at the same time. Accordingly, there previously, due to exclusivity and low market saturation, a is a need for an ongoing larger critical mass in process- transaction used to cost up to several Swiss francs, today, ing (see graph): 12 INHALTBusine ss/ CLEAR & PartnerIT | Septembers / CLEAR 2010IT | September 2010

thus irrelevant. Since these systems are proprietary, they Unit costs are difficult to combine, fragmenting the current European Economy processing landscape. With SEPA, interoperability among of Scale national systems should become possible and the degree of standardization should be extended beyond the national borders. As a result, we will see an accelerated decrease of the number of regional and global payment processors. Nonetheless, there are limits to economies of scale. Aspects such as flexibility and agility when it comes to Small Oritical Volume changes and processing security must be taken into con- processor mass sideration, since failures in increasingly growing processing centers can have devastating impacts on everyday life. Besides, the card business processes are far from identical. It’s necessary to differentiate between debit and credit On the one hand, there are highly automated processes, cards, as well as between issuing processing and acquiring such as the authorization of a payment, where incremen- processing. For debit card processing (both in number tal costs are very low and the existing infrastructure is, of cards and in transaction volume) the critical size is a accordingly, broadly scalable. On the other hand, those multiple of that of credit cards, since there are so many processes requiring human interaction, such as in fraud fewer manual processes in the former (see chart). management, monitoring of payment flows or specifically in customer service, are far less scalable, since they can be only partially system supported. Among all participants Issuing Acquiring in the card industry, this predominately affects issuers and Processing Processing acquirers. < >3 Billion Debit cards 10 million cards transactions Frank Iller, SIX Card Solutions [email protected] 1 Billion Credit cards 2 million cards transactions

Large volumes are processed by proprietary national payment systems (e.g., Carte Bancaire in France or Girocard in Germany), which are highly standardized, have a modest service level and, accordingly, process at very low costs. The portion of cross-border transactions is very small and

Processing credit card transactions - roles and data flow The following chart shows the various participants and the simplified data flow of a credit card transaction.

8) Authorization Credit card organizations 9) Authorization 10) Clearing & Visa, MasterCard, American Express etc. 11) Clearing & Acquirer Settlement Settlement Issuer 6) Authorization 7) Transaction 3D-Secure

5) 3D-Secure verification prozess 14) Statement PSP 15) Payment 4) Online purchase Web-Shop via Internet 12) Statement 13) Credit

2) Authorization Point Of Sale 1) Purchase 3) Transaction Merchant Cardholder StandarEddiitzatiorialon / CLEARIT | September 2010 13

Cardholder Acquirer By inserting the card into a merchant’s point-of-sale card The acquirer is licensed by the credit card organization, reader the cardholder activates an electronic transaction accepts the merchants’ authorization data (2, 6) and (1). If the purchase is made on the Internet (4) the card- forwards it (8) to the corresponding credit card organi- holder submits the card data on the merchant’s website zation (Visa, MasterCard, AMEX, Diners Club, etc.) in shop. After confirmation of the submitted data, the trans- the appropriate format. The positive or negative replies action is activated. received are forwarded to the merchant/PSP. Generally on a daily basis, the transactions settled by the merchant Merchant (3, 7) are settled in a batch process within the framework The merchant is bound by contract to the acquirer. of the clearing and settlement process (10). The acquirer This contract stipulates card acceptance, transaction is credited the credited amount, minus commissions processing, conditions (commission), infrastructure and fees. Periodically, the acquirer compiles a merchant and responsibilities. Usually, there are varying contracts statement and credits it, minus a commission. depending on payment type, such as payment at the point of sale or distance payments (e-commerce, mail/ Credit card organizations phone order). The point-of-sale terminal is linked with The credit card organizations issue the card licenses, the acquirer and, in a first step, initiates an online au- provide the international technical infrastructure, and thorization request (2) to verify card status as well as the regulate and secure the payment traffic. They forward financial purchase authorization from the cardholder’s authorization questions (8) to the issuers (9) and settle account-holding bank, the issuer. Positively authorized the transactions between the acquirers and the issuers transactions (3) are settled with the acquirer. Generally (10 and 11) on a daily basis. speaking, this occurs within the framework of daily set- tlement processing. In the case of an Internet purchase Issuer (4), the merchant’s e-shop application is usually linked Issuers are banks or financial service providers licensed with the Payment Service Provider (PSP) and forwards by credit card organizations. They are responsible for the corresponding transaction data to the PSP gateway. actually issuing the credit cards and offer their customers (cardholders) services (payment conditions, revolving Payment Service Provider credit, insurance, bonus systems, etc.) pertaining to The PSP provides the e-shop operator technical access credit cards. The issuer accepts authorization requests to various payment systems (e.g., credit card acquirers, (9), performs security verifications (PIN code, CVV PayPal, Moneybookers) while adhering to the current code) and verifies the card status as well as the online security standards. In addition, a PSP offers various credit standing of the cardholder. Ultimately, the issuer services, both in a technical environment and as they approves the cardholder’s purchase. The issuer receives pertain to payment processes. As a measure to lower its cardholders’ transactions, settled worldwide on a daily the risk of fraud, the PSP initiates the 3D-Secure verifica- basis (11), and is charged by the credit card organiza- tion process (5). After the security data (password) has tions, minus a commission, within the framework of the been entered correctly by the cardholder, an online au- clearing and settlement processes. The individual card thorization request is sent to the acquirer (6). Positively transactions are booked on the customers’ accounts. authorized transactions (3) are settled with the appropri- The issuer compiles a statement for the customer (14), ate acquirer. The PSP thereby supports the merchant in which is then paid by the cardholder (15). the settlement process.

3D-Secure Daniel Vuilleumier, Enterprise Services AG 3D-Secure is a protocol based on XML that is used for [email protected] additional security in online credit card transactions. It was developed by Visa and is provided under the name “Verified by Visa.” MasterCard offers this service under the label “SecureCode”. With the use of 3D-Secure the risk of fraud and payment failure due to card abuse should be reduced. Additionally, payment receipt is guaranteed to merchants using 3D-Secure. The 3D-Secure code, which isn’t saved or noted anywhere on the card itself, has an additional authentication effect. The function is generally offered by the issuers. 14 INHALTProduct / CLEARs & SerITv |ice Septembers | September 2010 2010

The future of SEPA direct debit is now

At the end of 2009, SIX Group launched its SEPA Direct Debit Service for the European market. Thus far, banks from Switzerland, Luxembourg, Monaco, Germany and Spain have become users of the offering, which enables to collect pan-European standardized SEPA direct debits. The growth potential is considerable.

In addition to five Swiss and four Luxembourg financial in- Trial offer stitutions, Swiss bank subsidiaries in Frankfurt, Madrid, and Financial institutions can take advantage of a free and non- Monaco, are users of this service, and the trend is continu- binding trial offer to become familiar with the convenient ing, both for the expansion into new countries and for the handling of the processes – editing collections, triggering number of service participants. transactions, displaying, approving, canceling orders, etc. The Internet-based service is structured in such a way that European service it can be flexibly and continually enhanced and adapted SIX Group’s SEPA Direct Debit Service is an offering according to the increasing individual automation needs managed from Switzerland though cooperation between of the banks. Each institution decides how much manual SIX Paynet and SIX Interbank Clearing, by Cetrel in Luxem- effort and how much investment in its applications is ap- bourg and by SECB in Germany. A truly European service, propriate. Basically, a costly adaptation of the institutes’ enabling the processing of direct debits within the entire own payment infrastructure is not required, because the euro payment zone of the 32 SEPA countries. processing of direct debits can be completely outsourced to the joint service package of the Swiss financial market.

Data exchange Data can be submitted either by the beneficiary via the proven SIX Interbank Clearing and Cetrel software solutions, or by the beneficiary bank via a Web application interface or via SWIFTNet FileAct. The latter has been recently intro- duced to provide further process automation, specifically for larger volumes. <

Gabriel Juri, SIX Interbank Clearing [email protected]

Dexia BIL, one of the Luxembourg banks participating in the SEPA Direct Debit Service.

SIX Paynet, Cetrel and SECB conclude the service contracts; SIX Interbank Clearing and SECB ensure that the direct debits can be processed according to SEPA regulations, simply and without costly investments by the banks. The service is rounded off with uniform processes, central data management and storage, central operations and support in Switzerland, as well as with a tried-and-true Internet solution that allows financial institutions to intui- tively manage transactions. Both SEPA core and SEPA B2B direct debits can be processed, the latter exclusively for payments between firms. PrEdoduitctorials & Ser/ CLEARviceITs | September 2010 15

Cover payments in euro via SWIFT

As of November 22, 2010, the Swiss payment system euroSIC will be able to process the message type MT202COV. Two years ago, at its launch by SWIFT, the Swiss financial center voiced opposition to the introduction. But demand from the financial institutions has caused reconsideration.

The reason for the original skepticism was the projected Beneficiary engineering costs, which seemed to have no relationship MT202COV to the expected messaging volumes. In the meantime, bank (SWIFT FIN) because of a growing need, SIX Interbank Clearing, together Conver- sion with the system manager SECB, has been able to come up with an efficient solution. All euroSIC participants can Meta format Ordering submit MT202COV without needing to update their existing MT202COV euroSIC bank SECB interface software. (Meta format) (SWIFT FIN) Meta format Solution Conver- Today, euroSIC is even more customizable than in years past B11 sion and is able to process various formats, not in the least due Beneficiary bank to the impact of SEPA and ISO 20022. In addition, format (euroSIC-Interface) conversions are also possible, such as from FIN into SIC or XML messages. The delivery channels into euroSIC have become more varied in the meantime. Financial institutions If and when the use of MT202COV will be admitted in Swiss can submit messages not only through Finance IPNet but francs too via the SIC system is undetermined at this point. < also via SWIFTNet. The combination of these options allows for a simple, but highly efficient, new solution. This applies Bruno Kudermann, SIX Interbank Clearing especially to institutions with a euroSIC interface. [email protected]

Process A cover payment is addressed by the ordering bank to Additional services available via SWIFT the SIX Interbank Clearing BIC. Communication runs over • Financial institutions are able to reconciliate SWIFTNet and thus via the existing SWIFT infrastructure between SIC and euroSIC using MT950. of the financial institution. SIX Interbank Clearing receives • In addition to MT202COV, SWIFT can be used for the cover payments via SWIFT Alliance Workstation and other outgoing payments such as cross-border euro converts the message into an internal meta format. After credit transfers using MT103. that the transaction is settled in euroSIC and reconverted – the format is different and depends on the respective ben- eficiary bank’s interface.

The SECB receives the cover payment from euroSIC. Cross- border cover payments are left unchanged; i.e., forwarded inclusive of ”Sequence B“. Hence it is possible, for example, to send direct MT103 orders with MT202COV via the SECB to beneficiary banks. Cover payments in favor of euroSIC participants are also forwarded unchanged via remoteGATE.

For payments in favor of institutions with the euroSIC interface, the system converts the MT202COV into a B11 message. These transactions are marked with a code for identification purposes. If needed, the original data can be requested, since in this case not all payment data is trans- ferred online. Impressum

Publisher SIX Interbank Clearing Ltd Hardturmstrasse 201 CH-8021 , Switzerland

Ordering/Feedback [email protected]

Edition Edition 45 – September 2010 Published regularly, also online at www.CLEARIT.ch. Circu- lation German (1300 copies), French (400 copies) and English (available in electronic format only on www.CLEARIT.ch).

Council Patrick Bürki, PostFinance, Boris Brunner, UBS Ltd, Susanne Eis, SECB, Oliver Buob, SNB, Martin Frick, SIX Interbank Clearing Ltd, Andreas Galle, SIX Interbank Clearing Ltd, André Gsponer (Head), Enterprise Services Ltd, Gabriel Juri, SIX Interbank Clearing Ltd, Roger Mettier, Ltd, Christoph Weder, Liechtensteinischer Bankenverband, Jean-Jacques Maillard, BCV

Editorial Team André Gsponer, Enterprise Services AG, Andreas Galle, Gabriel Juri (Head) und Christian Schwinghammer, SIX Interbank Clearing Ltd

Translation French: Word + Image, English: HTS

Layout Felber, Kristofori Group, Advertising agency

Printer Binkert Druck Ltd, Laufenburg

Contacts Product Management SIX Interbank Clearing Ltd Joining SIX Interbank Clearing for Sibos in T +41 44 279 4747 Amsterdam, 25–29 October 2010: Customer Service Swiss Euro Clearing Bank GmbH www.six-interbank-clearing.com/Sibos T +49 69 97 98 98 35

Additional information about the Swiss payment traffic systems can be found on the Internet at www.six-interbank-clearing.com