Retailer Financial Services in Asia Pacific and the Middle East 2007

Table of Contents

0.0 EXECUTIVE SUMMARY

• The research is based on a survey of 1,310 major retail brands across 20 countries
• Department stores are the most likely to be operating their own co-branded or store card
• Well over a third of retailer card schemes are affiliated to more than one payment network
• Four card issuing groups account for almost one quarter of all retailer payment cards identified
• Almost three quarters of the Chinese retailers surveyed have introduced their own loyalty card
• Multi-partner loyalty schemes constitute an important aspect of the market in several territories
• Only around one in ten retailers have organised stand-alone consumer finance facilities
• Retailer bank. initiatives are currently thin on the ground in the Asia Pacific and Middle East zones
• A significant proportion of Japanese retailers have diversified into the distribution of insurance
• The prospects for retailer finance are strongly influenced by trends in underlying retail markets
• … in which a number of major internat' l and local retailing groups are consolidating their position
• Underlying credit card markets are growing rapidly in a number of the countries surveyed
• Store cards can be internationalised and loyalty cards can be converted into payment cards
• Retailers partnerships represent an important strategic option for banking and insurance entities

1.0 INTRODUCTION

• Finaccord
• Rationale
• Retailer financial services can be broken down between ' traditional' and ' non-traditional' services
• Retailers can take advantage of rapid growth in consumer finance and credit card markets
• Consolidation among conventional banks provides justification for the entry of retailer banks
• The evolution of the retailing market itself is also favourable to the integration of financial services
• Methodology
• Finaccord' s research covers 1,310 major retail brands in the Asia Pacific and Middle East regions
• Product definitions

2.0 REGIONAL OVERVIEW

• Introduction
• Retailer payment cards
• Retailers in Taiwan, Japan, South Korea and Bahrain are most likely to have introduced a card
• A number of major retailers operate payment cards through captive entities
• Well over 50% of department stores have introduced their own co-branded or store card
• Visa is the dominant player in the region' s retailer card market
• … although over a third of cards are linked to more than one of the main networks
• The strength of the main international card networks varies substantially by country
• Aeon Credit Service, Citibank, GE Capital and HSBC account for almost 25% of programs
• … with most other issuers focusing solely on their domestic market
• Retailer loyalty cards
• Almost a half of major retailers in the Asia Pacific / Middle East regions possess a loyalty card
• … with department stores the most likely to have introduced such a program
• Almost three quarters of loyalty cards do not run in parallel to a fully-fledged retailer pay. card
• Consumer finance / personal loans
• Japan is the market with the highest proportion of retailers offering point-of-sale finance
• … although in a number of countries, there is little or no precedent for retailer activity in this field
• Penetration rates for point-of-sale finance do not exceed 40% in any retailing categories
• Most retailers have chosen to partner with single financial institutions
• Captives and joint ventures
• Captive retailer finance arms can constitute attractive acquisition targets for mainstream lenders
• Insurance
• With the exception of Japan, retailer ins. has been subject to limited development thus far
• … a feature of the market that is due to a variety of consumer, market and regulatory factors
• Schemes for life insurance and motor insurance account for almost half of the total identified
• Supermarkets and department stores benefit from high ' footfall' and burgeoning e-commerce
• The example of UK retailers offers a lead for their counterparts in Asia Pacific / Middle East
• The share of supermarkets in sales of pet insurance is in excess of 25% of the market total
• Top 100 retail groups in the Asia Pacific region
• Rankings by sales revenues and growth, 2006
• Well over a half of the region' s leading 100 retail groups are based in Japan
• … although the most rapidly growing are typically those in markets such as China

3.0 AUSTRALIA

• Introduction
• Retailer payment cards
• Slightly over 20% of Australian retailers operate their own store or co-branded payment cards
• … with GE Money having established itself as the preferred partner of a majority of brands
• The David Jones department store chain will launch a new co-branded credit card in 2008
• Retailer loyalty cards
• FlyBuys, offered by Coles, is identifiable as the leading loyalty scheme in Australia
• Consumer finance / personal loans
• GE Money and RentSmart are most commonly used as partners for point-of-sale finance
• Elders Rural Bank was launched in 2000 as a joint venture serving Australia' s rural communities
• Banking products
• Retailers have yet to develop banking products as a part of their financial services activity
• Insurance
• Both organizations in Australia providing insurance at the point of sale are agri-business giants
• … with Coles having discontinued its Source insurance program with CGU in May 2007

4.0 CHINA

• Introduction
• Retailer payment cards
• Less than a quarter of major Chinese retailers have launched their own credit or debit card
• … although a substantial number have developed pre-paid cards
• Retail sales have grown at an average rate of almost 15% during the last 20 years
• … with the involvement of foreign retailers having increased in the wake of market liberalisation
• Foreign card issuers are playing a key role in China' s fast-growing credit card sector
• … undeterred by modest levels of profitability and the regulatory influence of the PBoC
• A number of factors point to continuing growth in the Chinese credit card market
• Retailer loyalty cards
• Loyalty cards have been developed by the vast majority of major retailers in China
• … although it is uncertain whether many maximise the data mining and direct mailing potential
• A variety of multi-retailer discount and loyalty schemes have been established in China
• … including the OK Card and SmartClub programs
• Consumer finance / personal loans
• Stand-alone schemes for point-of-sale finance offered by retailers barely exist in China
• … although some merchants maintain agreements with card issuers for deferred debit facilities
• Banking products / insurance
• Chinese retailers have yet to diversify into either mainstream banking or insurance products

5.0 HONG KONG

• Introduction
• Retailer payment cards
• Both Jusco and Wing On fund and manage retailer cards through captive entities
• HSBC is the leading issuer of retailer cards in Hong Kong and is responsible for the Code Card
• … although it faces competition from the likes of Citibank and Standard Chartered
• Retailer loyalty cards
• Loyalty cards are offered by over 60% of major retailers in Hong Kong
• … although the schemes of individual brands face tough competition from Octopus Rewards
• Consumer finance / personal loans
• As in mainland China, provision of stand-alone consumer finance by retailers is uncommon
• Banking products / insurance
• Hong Kong' s retailers have yet to diversify into either mainstream banking or insurance products

6.0 INDIA

• Introduction
• Retailer payment cards
• ICICI Bank has developed retailer payment cards in association with four major brands
• Rising demand for credit cards should encourage the launch of further retailer payment cards
• … and the increasing influence of major overseas rets. will also help to change the landscape
• Retailer loyalty cards
• Well over a third of major retailers in India have introduced their own loyalty cards
• … with Tata Group' s Empower multi-partner loyalty program among the most successful
• Consumer finance / personal loans
• Citibank has forged relationships for point-of-sale finance with Hypercity, Magna and Metro
• Banking products
• India' s major retailers have no need to expand into mainstream bank. for the foreseeable future
• Insurance
• To date, only Apolllo Pharmacy has attempted to try to sell insurance to shoppers

7.0 INDONESIA

• Introduction
• Retailer payment cards
• Only two major retailers in Indonesia operate fully-fledged payment cards at present
• Foreign retailers now account for around 38.9% of total sales in the formal retailing market
• Retailer loyalty cards
• Almost a half of major retailers in Indonesia have developed loyalty card schemes
• Consumer finance / personal loans
• Local finance house Adira and Citibank are involved in consumer finance initiatives
• Banking products
• Indonesian retailers have yet to expand into the provision of mainstream banking products
• Insurance
• Cigna is attempting to increase its penetration rate through a distribution deal with Carrefour

8.0 JAPAN

• Introduction
• Retailer payment cards
• Over a quarter of retailer cards in Japan are funded by captive finance entities
• … among which Aeon Credit Service is the largest and most internationally diversified firm
• … with around 2.67 million cardholders outside of Japan, including 950,000 in Hong Kong
• Mitsubishi UFJ Nicos is the most commonly used external provider of retailer cards
• … with the newly-merged company having disclosed ambitious targets for future growth
• … although the market fragments rapidly among other captive and non-captive partners
• The vast majority of retailer cards in Japan are linked to more than one payment network
• Retailer loyalty cards
• Over a half of major retailers in Japan have a loyalty card scheme up and running
• Consumer finance / personal loans
• Provision of point-of-sale finance in Japan extends to almost a third of retailers surveyed
• Banking products
• Japan' s major retailers have yet to diversify into mainstream banking services
• Insurance
• … although a significant number intermediate insurance products of one sort or another
• … with a majority of propositions sourced through a panel of two or more underwriters

9.0 MALAYSIA

• Introduction
• Retailer payment cards
• Alliance Bank and RHB Bank each account for a pair of major retailer payment cards
• Malaysia' s retailing sector, worth almost RM59 billion in 2006, is modernising rapidly
• … with restrictions designed to curtail the expansion of foreign entrants having been relaxed
• … thereby, encouraging international retailers, such as Tesco, to expand more aggressively
• Retailer loyalty cards
• Multi-merchant loyalty schemes, such as BonusLink, are a key feature of the market
• … and The Store is now able to issue loyalty cards to customers at the point of application
• Consumer finance / personal loans
• Maybank lays claim to an important relationship for point-of-sale finance with Carrefour
• Banking products / insurance
• Malaysia' s retailers have yet to diversify into either mainstream banking or insurance products

10.0 MIDDLE EAST

• Introduction
• Retailer payment cards
• Bahrain enjoys the highest penetration rate in the region for retailer payment cards
• … with Jawad' s card issued through the National Bank of Bahrain among the most popular
• Elsewhere in the region, initiatives for retailer payment cards are relatively thin on the ground
• Retailer loyalty cards
• More than one in five major retail brands in the Middle East operates a loyalty card scheme
• … and a number of local banks also offer loyalty programs for the benefit of their cardholders
• Consumer finance / personal loans
• Point-of-sale finance is offered by a handful of major retail brands in the Middle East
• Banking products / insurance
• Middle Eastern retailers have yet to diversify into either mainstream bank. or insurance products

11.0 NEW ZEALAND

• Introduction
• Retailer payment cards
• The majority of retailer cards in New Zealand are classifiable as private label schemes
• … although Fisher & Paykel Finance acquired the finance business of Farmers in 2003
• Retailer loyalty cards
• Not one retailer loyalty card is offered in parallel to a fully-fledged payment card
• Consumer finance / personal loans
• New Zealand' s dominant providers of point-of-sale credit are independent finance houses
• …including Five Star Consumer Finance, which is the favoured supplier of the NZRA
• ... and Gilrose Finance although Finance NOW is owned by the Southland Building Society
• The GE CreditLine card and Q Card are viable alternatives to point-of-sale finance for shoppers
• Banking products
• Traditional banking products are not offered by any retailers in New Zealand at present
• Insurance
• The Warehouse department store has initiated brandassurance activities with two insurers

12.0 PHILIPPINES

• Introduction
• Retailer payment cards
• Payment cards have been developed by only a small minority of retailers in the Philippines
• … and much of the local market remains dominated by individually owned sari-sari stores
• … and major foreign retailers have been comparatively slow to expand into the country
• Retailer loyalty cards
• Loyalty cards have been launched by a clear majority of the country' s leading retailers
• Consumer finance / personal loans
• Stand-alone schemes for point-of-sale finance have not been established by retailers thus far
• Banking products / insurance
• Filipino retailers have yet to diversify into either mainstream banking or insurance products

13.0 SINGAPORE

• Introduction
• Retailer payment cards
• As in Japan and Thailand, Isetan utilises a captive finance arm for its private label card
• HSBC benefits from its status as the issuer of Dairy Farm International' s Choice Card
• … although it faces competition from the likes of Citibank, DBS, OCBC and Standard Chartered
• Retailer loyalty cards
• The Courts Guest Club had amassed close to 320,000 members by the end of 2006
• … and a number of retailers adhere to multi-partner schemes such as Genting World
• Consumer finance / personal loans
• Few retailers have entered into arrangements for the provision of stand-alone cons. finance
• … although many maintain deals with card issuers to offer deferred debit facilities to shoppers
• Banking products
• NTUC FairPrice and OCBC launched a retailer banking service in the second quarter of 2007
• … with the aim of targeting consumers preferring uncomplicated, value for money products
• … and with the venture' s brand vals. having been defined as simplicity, transparency and value
• Insurance
• Singapore' s retailers have yet to diversify into the provision of mainstream insurance products

14.0 SOUTH KOREA

• Introduction
• Retailer payment cards
• Over a third of major retailers in South Korea have launched co-branded or private label cards
• LG Card maintains exclusive or shared links with 14 retailers, including Tesco' s local operation
• Other issuers competing for retailer mandates include Hyundai Card and Samsung Card
• Most retailer card schemes in South Korea are linked to more than one payment network
• South Korea has one of the highest pen. rates for credit cards of any market in the world
• … with an average figure of three credit cards per capita and over 92 million cards in circulation
• Retailer loyalty cards
• South Korea' s market is characterised by a high number of multi-partner loyalty schemes
• … including the successful OK Cashbag program which has signed up over 20 million members
• Consumer finance / personal loans
• The widespread use of credit cards in South Korea limits interest in stand-alone credit facilities
• Banking products
• South Korean retailers have yet to branch out into the provision of mortgages or savings deps.
• Insurance
• Dong Bu and Kum Ho Life benefit from relationships with Homeplus and Lotte Mart, respectively

15.0 TAIWAN

• Introduction
• Retailer payment cards
• Over a half of the leading retailers surveyed in Taiwan have launched co-branded cards
• … all of which have been endowed with an international payment functionality
• Chinatrust Commercial Bank is the most prolific partner of retailers in this domain
• … although Taiwan' s fragmented banking sector results in lively competition for mandates
• Taiwan' s credit card market has reached maturity following several years of rapid growth
• … with the vast majority of pay. cards in circulation incorporating a deferred payment option
• Retailer loyalty cards
• The enthusiasm of Taiwanese retailers for loyalty cards lags only to that of mainland China
• … with Far Eastern Group' s Happy Go scheme having grown strongly since January 2005
• Consumer finance / personal loans
• The widespread use of credit cards in Taiwan limits interest in stand-alone credit facilities
• Banking products / insurance
• Taiwanese retailers have yet to diversify into either mainstream banking or insurance products

16.0 THAILAND

• Introduction
• Retailer payment cards
• GE Money has been instrumental in driving Thailand' s retailer payment card market
• … with other competitors including Aeon Credit Service, Cetelem, Citibank and Kasikorn Bank
• 7-Eleven is one of the investors behind the launch of the Thai Smart Card Company
• The co-branded card launched by Citibank and The Mall Group was introduced in July 2007
• Retailer loyalty cards
• Almost two thirds of leading retailers in Thailand have already introduced a loyalty card
• Consumer finance / personal loans
• Aeon Credit Service has linked for point-of-sale finance with both Carrefour and Office Depot
• … with Cetelem also having made progress since its entry into the Thai market in 2000
• Banking products / insurance
• Thailand' s retailers have yet to diversify into either mainstream banking or insurance products

17.0 VIETNAM

• Introduction
• Retailer payment cards
• Asia Commercial Bank has established itself as Vietnam' s leading issuer of co-branded cards
• Rapid growth rates make Vietnam one of the most attractive retailing opps. in the world
• … with consumer expenditure patterns shifting quickly in favour of organised retailing formats
• Retailer loyalty cards
• Over 40% of the country' s leading retail brands have introduced loyalty card programs
• Consumer finance / personal loans
• Carings, Vietnam' s largest electronics chain, is formulating plans to launch consumer finance
• Banking products / insurance
• Vietnamese retailers have yet to diversify into either mainstream banking or insurance products