The Electronic Money Directive Mobile Payment Systems 30 th October 2001 Oliver Steeley Managing Consultant, Strategy and Due Diligence Mb: Tel: EFax: Where people, networks and money come together Consult Hyperion®

Agenda The Directives The UK interpretation of it Definitions, Waivers, Timescales What it actually means Who does it apply to? Big hairy things to worry about Mobile Payments Issues } } Don’t worry, this bit will be over quickly The interesting part (hopefully!) } What happens next

The Directives and UK Consultation Paper Directive 2000/46/EC On the taking up pursuit and supervision of the business of Electronic Money Institutions Directive 2000/28/EC Amends the banking consolidation directive (2000/12/EC) to include electronic money institutions in the definition of “Credit Institutions” UK Government Consultation Paper Inviting comments on Proposed Statutory Instruments and Draft Regulatory Impact Assessment by 8 th January

What is E-Money?? Monetary value stored on an electronic device, accepted by undertakings other than the issuer. Becomes Law 27 th April Requirements: Redemption at par 1 Million euro or 102% Must have “sound and prudent operations” (FSA) Some Waivers possible Passporting to other EU states

UK Government Position Generally Positive Encourage new entrants into a sector dominated by retail banks Foster innovation in the e-money industry and encourage its development “Light” touch with regard to Regulation

Waivers If the max. amount stored <150 euro..and one of the following apply:- Total issued is less than 6 million euro If the e-money is accepted only by related companies (subsidiaries or sister companies) If acceptance limited by number (less than 100), or geography (4 square KM)

Transitional Arrangements Those already operating are presumed “authorised” and given a six month exclusion. This applies equally to regulated and non- regulated issuers. Need to comply with Part iii, section 3 of FSMA for passporting after the six months. With no FSMA authorisation or waiver, issuing e-money becomes illegal after October 2002

So….what does it all mean???

So Who’s Exempt??? Well…….almost everyone actually 300,000 customers and 100 shops?? National scope?? True Payment Scheme?? Let’s look at a few Case Studies……..

Case Studies Has less than 100 shops Doesn’t need to take deposits in EU Not E-Money Less than 300,000 customers and 6M euros The Regulation is hardly onerous…with one exception..

The Big Hairy thing Money Laundering Regulations 1993 Even for waived e- money schemes !! “Obligation to deter, detect and report Money Laundering Activities” What does this mean for anonymous pre-pay?????

Consult Hyperion Views Nothing to be terrified of, unlikely to stifle the market for Digital Money Good framework for bank / telco partnerships Most e-money schemes will fail before they exceed waiver criteria Legislation is the smallest part of the problem

Some Mobile Payment Issues The Market – a reality check! Phone Calls and Payments Vision for the future

Western Europe: m-commerce market US$ billion Datamonitor, 2000 Durlacher Durlacher (realistic and interpreted) Forrester, 2000 Frost & Sullivan, 1999 Jupiter, 2000 (advertising deducted) Net Profit, 2000 Consult Hyperion, 2001 (7 countries)

Western Europe: market segmentation US$ billion Information Multimedia Location based services Entertainment Enhanced communications Commerce

Western Europe: payment structure US$ billion M-commerce macro payments M-commerce micro payments Total

Making sense of the numbers NowFuture Lots Not Much } Both of these are feasible, one just needs an open network for payments

Transaction Processing is about: Investment and Scale Merchant Acceptance and User Base Consumer Experience Security Reconciliation and Fraud Despite what is often said, clearing and settling a phone call is very different from clearing and settling a payment

Mobile call billing involves complex transactions customer merchant Goods/services Payment caller Payment recipient operator service partners Call connection

The “walled garden” model fails to tap the full market potential for mobile services… Operator A Operator B Operator C Operator D Subscriber Base A Subscriber Base B Subscriber Base C Subscriber Base D ‘A’ mobile services ‘B’ mobile services ‘C’ mobile services ‘D’ mobile services

Mobile operators … but the bilateral model is complex and inefficient …

Mobile Payment thingy Mobile operators ….leaving an opportunity in the market

…and transactions come from opening up networks Global text message volumes Global SMS billions per month

Summary and Conclusions Open networks drive transaction volumes and profit for everyone (ref: Roaming, SMS) Operators need a new approach to mobile payments (both between national operators and international subsidiaries) As with payments, shared infrastructure is both inevitable and desirable EMI legislation is relatively insignificant in this context