J.P. Morgan Country Insights. THE CHANGING DYNAMIC OF PAYMENTS IN EUROPE Overview

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1 J.P. Morgan Country Insights THE CHANGING DYNAMIC OF PAYMENTS IN EUROPE Overview

2 Foreword Dear Readers, J.P. Morgan has produced eleven reports on European ecommerce payment trends in order to give you a timely, in-depth look at the factors driving this rapidly evolving market. 'J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe' analyses and explains shifts in the way people are shopping and paying for their purchases online across 11 key European countries.* This overview contains some of the key insights contained in our reports. Awareness of changes in consumer behaviour is essential for companies hoping to take advantage of the opportunities the European online retail market presents. Bricks-and-mortar retail sales in Europe may be relatively stagnant, but as the following country profiles make clear, the European ecommerce market is thriving. Bolstered by numerous factors - including high levels of internet connectivity, a boom in smartphone use, technological innovation and increasing regulatory support for digital payments - many of the countries we assessed are positioned for double-digit growth in online shopping over the next two years. To capitalise on this chance to attract the European online shopper, retailers must offer the right payment methods for their customers. But what is `right', as this report demonstrates, can vary from country to country. Individual markets each have their own attitudes, 1 preferences and concerns about online shopping and payments. For example, Italy has one of the smallest ecommerce markets out of all of the countries we surveyed, but is the fastest growing. Retailers who make the effort to court the country's emerging generation of tech-savvy, young shoppers, and are aware of a national preference for paying via prepaid cards, 2 take advantage of this nascent market before other businesses do. Pre-paid cards work well for merchants as they can be processed via existing processing systems such as Visa and Mastercard. The comfort with which Swiss consumers shop from foreign retailers presents a chance for international brands to make their mark there. Meanwhile, Denmark could be become a target for brands seeking higher-spending online shoppers - the average online spend there is more than twice the European average. 3 Besides our country-by-country analyses, we have also taken a broader view of the overarching themes affecting the European market. Regardless of the country in which a retailer operates, meeting customer demands for secure, safe online payments remains essential. While card payments continue to dominate the European payments market, we look at the growth of Alternative Payment Methods (APMs), such as bank transfers, direct debits, e-wallets as well as a number of smaller, smartphone-based disruptors, to help merchants quickly assess the different APM trends across Europe. In fact, the APM landscape is developing rapidly, supported by regulation at the European Union (EU) level: The Second Payments Services Directive (PSD2) aims to heighten online payment security standards and provide a framework for third party companies to initiate payments on behalf of the consumer. However, a targeted application of APMs, rather than a blanket approach, is key as these technologies are well-suited for specific payment areas. In every country we explored, it was clear that the ecommerce payments market is not static. Payment methods are constantly evolving in parallel with increasingly sophisticated consumer demands and sentiment - a positive sign of a healthy, dynamic market. We hope the findings in these reports help you and your business stay abreast of the key themes, challenges and opportunities in European ecommerce payments in Catherine Moore Managing Director and President, Europe J.P. Morgan Merchant Services [ 2 ]

3 Introduction The payments market in Europe is undergoing a period of great transformation. The continuing growth of the ecommerce sector, technological innovation and an evolving regulatory environment are combining to fundamentally change the way people pay for goods and services. Consumers are more connected and digitally integrated than ever before and this is changing their expectations. The customer of today wants fast, convenient and secure payment options, available on demand and on their device of choice. As a result, online merchants are having to expand the payment methods they work with. As Catherine Moore, European President of Merchant Services at J.P. Morgan explains: "To be successful, retailers have to find a way to continue to extend their brand into the digital space, based on consumer-defined, behavioral frameworks that are still emerging." 4 In order to gain insight into this changing landscape, J.P. Morgan Merchant Services conducted a survey of eleven different markets in Europe.* As part of our research, we took an in-depth look at how the ecommerce sector is developing across the region and also examined the changing dynamics of the payments space; this overview touches on some of the key insights, but you can see each of the eleven reports on [ 3 ]

4 The ecommerce growth story continues Although retail markets across Europe lie relatively stagnant, the ecommerce channel is in robust health and continues to grow at a prodigious rate. In fact, with the exception of Finland and Switzerland, all of the markets we surveyed are forecast to post double-digit compound annual growth rates (CAGR) in the coming years. Italy ( CAGR) 5 and the Netherlands ( CAGR) 6 are leading the way, albeit for very different reasons. Italy's ecommerce market has traditionally been underdeveloped for its size, mainly because it has one of the lowest internet penetration rates among European countries. However, from this low base, Italy's online sector is rapidly beginning to catch up, driven by a generation of young, tech-savvy consumers. In contrast, the Netherlands already has a very mature and well developed ecommerce sector and approximately 9 of the Dutch population shop online. 7 With excellent infrastructure in place, as well as wide acceptance of e-tail, strong economic growth and high consumer confidence in the Netherlands has translated into booming ecommerce sales. B2C ecommerce market value 2020 B2C ecommerce Value ( bn) Forecasted B2C ecommerce Value 2020 B2C ecommerce CAGR ( ) Source: J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData & IMRG, % 7% 8% 18% 10% 8% 0% Meanwhile, pockets of opportunity can also be found further north in the Nordics, which are all progressive and digitally advanced ecommerce markets. Denmark's average online spend per capita stands at 3,111, 8 more than twice the European average. Norway is not far behind with an average spend of 2, Sweden is developing into one of the most cashless societies in the world with only of payments coming in the form of coins and notes. 10 This bodes well for its online sector as the population is already very comfortable with electronic and alternative transaction methods. The UK remains a dominant force But, while each country in Europe offers its own specific trends and nuances, the online payments sector as a whole is dominated by the UK, which accounts for almost 30% of total European ecommerce. 11 The UK market enjoys a B2C ecommerce sector value of 156bn. 12 This is more than the combined value of France ( 72bn) 13 and Germany ( 67.3bn), 14 which stand as the second and third leading online shopping markets respectively. There are a number of reasons explaining the supremacy of the UK market. With much of the technology powering ecommerce being developed in the US, the UK often becomes the next market to assimilate such advances. US companies can use the same marketing methods and procedures to roll out products to the UK market. In addition, English is the most common second language in the world. Shoppers looking to purchase products online will often look to English language websites if they cannot find equivalent options in their own language. As a result, we expect the UK to extend its dominance in the coming years. Despite the large size of the ecommerce sector, growth rates remain very healthy. [ 4 ]

5 Cards are king in Europe... for now The expansion of ecommerce throughout Europe is in part being driven by technological developments in the payments space. As it becomes ever easier and safer to pay online, consumers are being drawn to the online channel in greater numbers. While e-wallets, banks transfers, direct debits and other alternative payment methods (APMs) hold great promise, for the time being cards remain the dominant form of payment in the European ecommerce sector. For example, in the UK 54% of online transactions are carried out using cards, 15 while in France the figure stands at Cards have an advantage in that they are already a trusted and well established system. In fact, cards are the leading online payment method in seven out of the eleven countries we surveyed. 17 However, this is looking at the payment market as a whole and there are specific segments where alternative payment methods (APMs) are prevalent, such as when paying for ancillary services at hotels and airports while travelling. 21 There are also some differences between the markets. For example, Italy is the world's largest market for prepaid cards with more than 25 million prepaid cards issued. 19 Italy's large unbanked population of an estimated 8 million people 20 makes prepaid cards a simple option for converting cash into a digital means of payment. Meanwhile, in Germany cards are under-represented because the major domestic debit card Girocard is not enabled for ecommerce. As a result, only of online shopping payments are made with cards in the country. 18 Alternative payments are growing rapidly While we expect cards to remain the leading payment option in Europe in the coming years, APMs are becoming more popular. Regulatory change is helping to support this transformation. For example, The Second Payment Services Directive (PSD2), will help boost security standards for online transactions, whilst giving merchants options that enable them to retain a frictionless payment experience for customers. In addition, PSD2 is providing a framework that will allow third party companies to initiate payments on behalf of a consumer, which will spur new innovation in the payments space. Payment method split by value (%) 20% 21% 23% 10% Card 6 Cash 18% 7% Bank Transfer 13% % 27% E Wallet 13% 2 4 Open Invoice Direct Debit Other Source: J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData & IMRG, 2016 Bank transfers have already developed a strong position in the Netherlands, Switzerland and Finland. Despite the fact they pose difficulties with reconciliation and can take a long time to clear in some markets, we believe this APM will continue to capture market share as banks throughout the region become increasingly interconnected. This is being aided by the establishment of the Single Euro Payments Area (SEPA), which has helped harmonise payment systems in the Eurozone, and includes infrastructure that will support both transfers and direct debits. One market that is already being impacted is Germany, where SEPA direct debits now account for 20% of the payment market, while bank transfers are also growing rapidly % 44% 20% 1 21% 4% 37% 4% 53% 31% 60% 20% 23% 4% 54% [ 5 ]

6 Meanwhile, e-wallets also hold great promise as they increasingly become optimised for mobile and add new functionalities such as peer-to-peer payments, which will help them gain further consumer acceptance. Spain is notable for its relatively high usage of e-wallets where they take 2 of the payments market. 23 Open invoice where a customer pays after the receipt of goods is not a widely used APM but has a loyal following in Sweden and Germany, and accounts for around a fifth of transactions in both countries. 24,25 As a result, merchants operating in these territories will have to have a well-developed system for returns. In the future we expect APMs to become increasingly integrated, giving consumers a more comprehensive and flexible payment framework. As Moore says: "Looking ahead, consumers will not differentiate between Apple Pay, Samsung Pay, their credit cards, bank transfers or cash, but rather think about their preferred forms of payment curated and used in a very personal way." 26 * J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe study includes the following countries: U.K., the Netherlands, Germany, France, Italy, Spain, Norway, Finland, Denmark, Sweden, Switzerland References [1] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, Netcomm & E-commerce Foundation, 2016 [2] Be, Think, Solve, Execute, 'Italian prepaid card market: Any room for growth?' Accessed December [3] J.P. Morgan Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services Data by E-commerce Foundation, Global B2C E-commerce Report 2016, 2016 [4] J.P. Morgan. 'The retail revolution has only just begun.' Accessed February [5] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan.Merchant Services by Edgar, Dunn and Company via GlobalData, Netcomm & E-commerce Foundation, 2016 [6] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services Data by Edgar, Dunn and Company via GlobalData, Thuiswinkel. org & E-commerce Foundation, [7] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services Data by E-commerce Foundation (in collaboration with Thuiswinkel.org), Ecommerce Report The Netherlands 2017, [8] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services Data by E-commerce Foundation, Global B2C E-commerce Report 2016, [9] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services Data by E-commerce Foundation, Global B2C E-commerce Report 2016, [10] Guardian, June Sweden leads the race to become cashless society. Accessed December [11] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData & IMRG, [12] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData & IMRG, [13] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData & FEVAD, [14] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, [15] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, [16] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, [17] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe. [18] Warrington Worldwide. The Rise of e-wallet Payments in the UK and around the Globe. Accessed February [19] Be, Think, Solve, Execute, Italian prepaid card market: Any room for growth? Accessed December [20] Be, Think, Solve, Execute, Italian prepaid card market: Any room for growth? Accessed December [21] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by EHI Retail Institute, EHI-Studie Online Payment 2016, [22] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe. [23] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services by Edgar, Dunn and Company via GlobalData, [24] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services Data by Edgar, Dunn and Company via GlobalData, 2016; EHI Retail Institute, EHI-Studie Online Payment 2016, [25] J.P. Morgan's Country Insights: The Changing Dynamic of Payments in Europe: Data has been provided to J.P. Morgan Merchant Services Data by Edgar, Dunn and Company via Global Data, [26] J.P. Morgan. The retail revolution has only just begun. Accessed February For more information please contact: Your Relationship Manager or visit Information contained in this document has been prepared by third parties or obtained from sources which are believed to be reliable; but neither Chase Paymentech Europe Limited nor any of its affiliates warrant the completeness or accuracy of the information contained herein. Chase Paymentech Europe Limited and any of its affiliates shall have no liability to the user or to third parties, for the quality, accuracy, timeliness, or for any special, indirect, incidental or consequential damages which may be experienced because of the use of or reliance on the data or statements made available herein. Third party trademarks, brand names, products and services are only referential and Chase Paymentech Europe Limited and its affiliates disclaims any sponsorship, affiliation or endorsement of or by any such third party. Chase Paymentech Europe Limited, trading as J.P. Morgan, is regulated by the Central Bank of Ireland. Registered Office: JP Morgan House, 1 George's Dock, I.F.S.C., Dublin 1, D01 W213, Ireland. Registered in Ireland with the CRO under the Registration No Directors: Catherine Moore (UK), Carin Bryans, Michael Passilla (US), Dara Quinn, Steven Beasty (US) Copyright 2018 [ 6 ]