October 19, 2007

Kevin Carroll Senior Business LeaderDebit Channel Management

Network ATM Rules and ProtectingThe Payment System

October 19, 2007 2

Agenda

• History of ATM Rules– Issuer

– Acquirer

• Emerging Trends to be Addressed

• What’s the End Game

October 19, 2007 3

• Issuer

– Card Production

–Encoding

– PIN Generation & Issuance

– Card Expiration Dates

– 3DES

– Key Management

– EMV

– Data Storage

History of ATM Rules

October 19, 2007 4

• Acquirer

– Transactions Supported

– Transaction Flow & Chaining

– Encryption

–3DES

–Hardware

– Receipt Content

– Fees/Surcharging

– Data Storage

History of ATM Rules

October 19, 2007 5

• Acquirer

– ATM Owner Agreements

– ISO Registration

– Key Management

History of ATM Rules

October 19, 2007 6

Agenda• History of ATM Rules

– Issuer

– Acquirer

• Emerging Trends to be Addressed

• What’s the End Game

October 19, 2007 7

• Acquirer

– Transaction Velocity

–Balance Inquiry

• Chip

– Canada

– Mexico

– Globe

Emerging Trends to be Addressed

October 19, 2007 8

Chip Features and Benefits

Card AuthenticationTo Combat Counterfeit Fraud

Cardholder VerificationTo Authenticate the CardholderTo Combat Lost/stolen Fraud

Storage & Processing CapabilitiesFlexibility

for Adding New Services

Card Risk ManagementTo Improve Cardholder Risk & Reduce Costs

October 19, 2007 9

Core EMV Migration Benefits:Fraud Reduction

Chip provides powerful means of ensuring:

• That the card is the genuine item– Card Authentication Method (CAM)

– Based on data stored securely in the chip

– Protects against counterfeit fraud

• That the person using it is the true owner– Cardholder Verification Method (CVM)

– Usually based on a PIN

– Protects against lost & stolen card fraud

October 19, 2007 10

Rationale for Migrating to Chip

• The global* card payments industry is in the process of migrating its base technology from magstripe to chip

• This represents an unprecedented opportunity for banks to grow and differentiate their card business

* the USA is the only market which is yet to set a schedule for migrating to chip

October 19, 2007 11

EMV in an ATM environment

The following items should be considered when implementing EMV in an ATM environment:

• Online CAM Message Support

• Application Selection

• Offline ATM

• Offline CAM

• Offline PIN support at ATMs

• Script Processing

October 19, 2007 12

Drivers for Migration to M/Chip

• Improved Credit Control

• Operational Cost Reduction

• Value Added Opportunities and Differentiation Potential

• Fraud Reduction and Prevention

October 19, 2007 13

Chip & PIN around the world

• France: world’s lowest fraud with the highest level of offline transactions

• UK: 67% fraud decrease.

• Malaysia: reduction in counterfeit fraud of 12 basis points.

Source: MasterCard Safe Data

October 19, 2007 14

Experience in France

26

121135

153170

190204

220

107100

90817872

675849

39

0,27

0,16

0,11

0,17

0,08

0,020,020,030,030,04

0,020,030,03

0,04

0,035

0,12

0,050,04

0,00

50,00

100,00

150,00

200,00

250,00

1987198819891990199119921993199419951996199719981999200020012002200320040,00

0,05

0,10

0,15

0,20

0,25

0,30

Card Payments (Billions €) Fraud Rate on payment transactions (%)

1st CHIP MIGRATION

Billions €uro

%Fraud Rate (%) CB Card PaymentsCB Card Payments

(billion (billion €€uro)uro)

EMV MIGRATION

2005

237B237B€€

0,03%

The French experience with Chip is the deepest. They reduced their fraud from 27bps to 3bps

Source: MasterCard Safe Data

October 19, 2007 15

France – Issuing Impact of Chip/PINFraud Trends

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Total

Domestic

X-Border

Source: MasterCard Safe Data

October 19, 2007 16

Early Experience in UK

Counterfeit Index

100200300400500600700800900

10001100

1997 1998 1999 2000 2001 2002 2003

Industry

Barclays

47% CAGR

30% CAGR

Value (£m) 1997 1998 1999 2000 2001 2002 2003 SumDifference 0.0 1.3 3.1 7.5 13.9 22.7 37.3 85.6U

NIT

ED K

ING

DO

M

In 2003 Barclaycard experienced a 50% reduction compared to Industry and brought down the Industry average

Source: MasterCard Safe Data

October 19, 2007 17

United Kingdom - IssuingImpact of Chip/PIN Migration Fraud Trends

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Total

Domestic

X-Border

Chip Roll-out

Source: MasterCard Safe Data

October 19, 2007 18

UK and ATM Fraud

• UK nearing 100% Chip and PIN environment

• Significant increase in the level of ATM fraud in foreign markets without Chip and PIN infrastructure

• Since January 2007 – no fall-back to magnetic stripe at ATMs

• Attention switch to foreign ATMs

• Direct link between the level of counterfeit fraud acquired at foreign ATMs and the level of EMV introduction in these countries.

October 19, 2007 19

2005 2006

Lost and stolen fraud Down 22% Down 23%

Counterfeit fraud Down 25% Up 3%

Mail-not-received fraud Down 45% Down 62%

BUT Card Not Present fraud (CNP) Up 21% Up 16%

The overall total Down 13% Down 3%

Chip and PIN reduced losses £60m £80m

Following the introduction of Chip and PIN in the UK, there were two unexpected outcomes: cross-border counterfeit and card-not-present fraud grew.

APACS Fraud Experience Following the Introduction of Chip and PIN

October 19, 2007 20

0

2

4

6

8

10

12

14

16

18

Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug

£ M

illio

ns

0%

50%

100%

150%

200%

250%

300%

350%

400%

450%

'05

'06

Gro

wth

04-'05 05-'06 05-'06 Growth

Source: MasterCard Safe Data

Upon further investigation we discovered that the counterfeit fraud is happening in a largely preventable way. Card data is skimmed inthe UK and fake plastics are used at ATMs in non-chip locations

Cross-border Counterfeit Attacks

Best Practices to mitigate

• MasterCard has mandated a different CVC for chip and magnetic stripe

• Cut off the points of compromise

Fraud on UK Issued Cards at Overseas ATMs

October 19, 2007 21

MalaysiaIn Malaysia the Government mandated a very fast migration. The counterfeit fraud was reduced from nearly 14 bps to 1 or 2 bps

0

200000

400000

600000

800000

1000000

2003

-01

2003

-02

2003

-03

2003

-04

2003

-05

2003

-06

2003

-07

2003

-08

2003

-09

2003

-10

2003

-11

2003

-12

2004

-01

2004

-02

2004

-03

2004

-04

2004

-05

2004

-06

2004

-07

2004

-08

2004

-09

2004

-10

2004

-11

2004

-12

2005

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2005

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-08

**200

5-09

US

$

0

4.8

9.6

14.4

19.2

24

Bas

is P

oint

s

Acq Counterfeit Fraud Acq Total Fraud Acq Total BP Acq Counterfeit BP

Source: MasterCard Safe Data

October 19, 2007 22

Q1 05 Q2 05 Q3 05 Q4 05 Q1 06 Q2 06 Q3 06 Q4 06 Q1 07Card Not Present Counterfe it Lost/Stolen

Fraud in A/P Region

CNP

CFT

Other

L/S

Shift in fraud from Counterfeit (CFT) to Card Not Present (CNP) in A/P region (attributed to Malaysia and other EMV implementations)

Asia/Pacific FraudAsia/Pacific Fraud

Source: MasterCard Safe Data

October 19, 2007 23

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

CFTL/SCNP

Domestic Fraud

Chip Roll-out

Source: MasterCard Safe Data

Malaysia - IssuingImpact of Chip Migration

October 19, 2007 24

Q104

Q204

Q304

Q404

Q105

Q205

Q305

Q405

Q106

Q206

Q306

Q406

Q107

Domestic

X-Border

Source: MasterCard Safe Data

Malaysia - Issuing Impact of Chip Migration

ATM Fraud

October 19, 2007 25

Chip in the Americas

• Canada: The first INTERAC chip transactions will begin to take place in fall 2007, as part of a market trial in Kitchener-Waterloo, Ontario, being carried out in collaboration with Canada's major credit card companies.

• Mexico: About one million EMV chip cards had been issued in Mexico at end-2003 and the country’s EMV migration is to conclude by end-2007, when all cards are to be chip-based.

October 19, 2007 26

Observed Fraud Trends

• The trend in global issuing fraud indicates rising cross-border Counterfeit and domestic Card Not Present fraud

• Cross-border fraud has increased dramatically in countries that implemented chip

• In the United Kingdom, domestic Counterfeit and Lost/Stolen fraud are migrating to domestic Card Not Present fraud

• The United States is showing increasing cross-border ATM fraud trends as in the United Kingdom

• CNP trends continue unabated in Thailand, the United Kingdom, and Italy

October 19, 2007 27

What does it mean for the US?Chip Pilot in

Canada

Mexico Chip Implementation

Europe embraces

Chip

More Focus on Chip in

Asia

October 19, 2007 28

Agenda• History of ATM Rules

– Issuer

– Acquirer

• Emerging Trends to be Addressed

• What’s the End Game

October 19, 2007 29

• There isn’t one

– Fraud continues to develop new approaches

Networks will continue to develop new approaches to rules and technology to combat fraud and ensure the integrity of the global payment network

What’s the End Game

October 19, 2007 30

Thank you.