1

Modernization and growth in card payments:A holistic cooperative effort of financial and

non-financial stakeholders

FIMPE

Exploring Frontiers in Payments Systems Development

May 31st, 2007

2

Bank cards: 9.4 Million credit cards. 32.2 Million debit cards.

POS network: 146,029 POS.

Cash withdrawals at ATMs made up 87% of all bank card transactions (Vs. 13% at POS).

High market concentration.

Segmented, non-uniform network.

Magnetic stripe-only capability.

Mexico’s Retail Electronic Payment Systems in 2003

3

To increase electronic payments usage to raise tax revenues.

To create a universal network to aid the execution of government programs.

To create proper incentives for private agents to participate in such an effort.

Concept

4

What is FIMPE?

Presidential decree.

Private organization aimed at promoting electronic methods of payment.

15 financial institutions.

5

To promote the usage of electronic methods of payment among the population.

To increase the POS network.

To standardize the technological platform.

Objectives

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Setting FIMPE’s goals.

Setting standards for network development.

Evaluation of FIMPE’s actions, progress and goal completion.

Tax incentives subject to completion of FIMPE’s goals.

Taking advantage of FIMPE’s network to execute government programs.

The Mexican government’s role

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Go

als

2004 - 2005 2006 2007

Demand Generation

Supply generation:MerchantsBanks

New payment platforms

Small businesses modernization program

Strategy

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Creation of incentives for bank card usage at POS.

Lotteries awarding cards among bank card transactions at POS.

Focus on debit cards.

More than 3,100 cars given away.

Demand generation

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96% knows the brand Boletazo.

1 out of 5 says he’s/she’s increased his/her card usage.

The communication has a unique and constant message:

Demand generation

Paga con tu tarjeta y gana de

10

Source: Banco de México, Domestic operations of domestic accounts.

Transactions at POS(millions)

200.2242.2

361.5

534.4

2003 2004 2005 2006

166.9%

Results: Demand generation

11Source: Banco de México, Domestic operations of domestic accounts.

Sales volume at POS(US$ billion)

11.113.3

20.6

32.2

2003 2004 2005 2006

190.8%

Results: Demand generation

12Source: Banco de México, Domestic operations of domestic accounts.

Share of bank card transactions

13% 15% 16%25%

32%

87% 85% 84%75%

68%

2002 2003 2004 2005 2006

Purchases at POS Cash withdrawals at ATMs

Results: Demand generation

13Source: Banco de México, Domestic operations of domestic accounts.

Sales volume at POS(Share of GDP)

1.7%1.9%

2.7%

3.8%

2003 2004 2005 2006

2.1 pp

Results: Demand generation

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Transactions at POS(annual growth rate)

12% 14% 13% 12%

18%

49% 48%

10%12% 13%

13% 13%15%14%

18%

27%24% 24%

11%

21%

2002 2003 2004 2005 2006*

US Europe Latin America (exc. Mexico) México

Source: Nilson Report, Banco de México (Domestic operations of domestic accounts).

Recent growth exceeds regional average.

Results: Demand generation

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Results: supply generation

Any merchant can acquire a POS terminal, regardless of its sales volume.

Initial single fixed monthly payment of about US$ 8 for up to US$ 4,000 in bank card transactions.

The program comprises: Advertisement of the benefits of card acceptance for merchants. Incentive program and special promotions for merchants. POP material.

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Results: POS network

Source: Banco de México.

Mexico POS network(thousands)

146.0160.3

201.9

286.7

2003 2004 2005 2006

96.3%

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Universal network

FIMPE has made the first step towards the creation of a universal electronic transactions network, making it possible for the arrival of new payment schemes and platforms.

FIMPE’s infrastructure is designed to be open to third parties (both public and private).

Such a network will greatly reduce transaction costs.

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Technology

POS

• Wireless technologies (GPRS, CDMA, Wi-Max, Ethernet, ADSL, Edge, EvDO)

• Smart card (chip) ready.

• EMV-compliant.

• Multi-application ready.

• Multi e-purse ready.

• Contact-less transactions.

• Biometric readers.

• IP-based terminals.

Switch

CRM.

Multi-carrier network.

IP-based.

Multiple applications processing.

Multi e-purse processor.

Data Warehouse.

Links to third parties’ networks.

19POS network

Multi-carrier communications network

Government programs

Other third parties

Third party Microfinance (non banks)

Third party payments

Health programs

Subsidies

Bank

Switch

Bank Bank

Switch

Debit/

Credit

Bank FIMPE

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Personalized card issuance to program beneficiaries; PIN authentication may further prevent fraud and assure proper delivery.

Current subsidy dispersion outlets can be complemented with private ones: no need to maintain costly branches or inventory.

Trustworthy, information-rich transaction registry: Immediate tracking of transactions and valuable statistics and data mining possibilities.

Significant cost advantages: No need for government to invest heavily in network development. Transaction costs savings of up to 90%. Theft, loss and abuse greatly diminished due to direct delivery to

users, private channel usage, transaction tracking and reduced need for inventory.

Subsidies dispersion

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Health care programs:Drug supply (e.g. Seguro Popular, currently running).Medical history registry.

Social assistance programs.Discount foodstuffs and direct supply. Identification and registry of public program usage (e.g. daycare).

Housing and construction assistance programs:Construction material discounts and direct supply (e.g. SHF).

Agricultural subsidies:Input discounts and dircet supply (e.g. SAGARPA diesel, currently running).

Monetary subsidies.

Examples of suitable subsidies

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Cardholders increasingly use their cards to purchase goods: 2006 POS transactions accounted for 32% of total bank card transactions, up from 13% in 2003,

It’s become easier to find card-accepting businesses: Mexicos POS Network has doubled since 2003, reaching about 290,000 terminals in 2006.

A universal network for transaction processing is available for third parties, incluiding government agencies.

Next steps:Increasing the number of third parties using FIMPE’s network.

Conclusions