Landsbankinn hf. - Company Announcement

Landsbankinn hf.: New landscape in the payment card market

In line with a settlement between Landsbankinn and the Icelandic Competition
Authority, the Bank has been working on changes to payment card operations,
intended to simplify and improve service to customers while simultaneously
ensuring the Bank's independence in this market. In so doing, the Bank actively
participates in implementing changes in the payment card market, designed to
ensure a natural competitive environment. While these changes have been in the
works for an extended period, customers will come to notice them gradually over
the coming months and years. 

  -- The changes involve the Bank's sale of its minority shareholding in both
     Valitor and Borgun and in so doing agrees with the principle set out by the
     Icelandic Competition Authority, that two or more banks should not jointly
     own a payment card company.
  -- Landsbankinn will discontinue all Mastercard products and will as of next
     spring only offer customers VISA cards.
  -- The Bank has also concluded an agreement with VISA Europe, aiming to boost
     the Bank's services with new and improved solutions for customers.
  -- Landsbankinn intends to alter the structure of its payment card products
     considerably, offer simpler and more accessible services as well as new
     solutions for customer through, for example, increased use of debit cards.
  -- Landsbankinn will be freed from the influence of competitors in Valitor and
     Borgun who have controlled the payment card market without Landsbankinn
     being able to influence matters, despite owning a considerable share in
     both payment card companies.
  -- Landsbankinn has had considerable funds tied up in the payment card
     companies and these changes will allow the Bank to put those funds to
     better use, for example, through dividend payments to owners.
  -- Landsbankinn has concluded a settlement with the Icelandic Competition
     Authority to advance these changes and has agreed to pay ISK 450 million in
     fines for issues originating in 2007.
  -- The settlement with the Authority should, all things remaining equal,
     translate into lower fees charged to retailers by transaction acquirers and
     so result in lower prices for consumers.

Landsbankinn has been working to achieve these changes over a long period, both
because of its position as regards Valitor and Borgun, but also due to
impending changes to the payment card market with regard to both technology and
pricing. Landsbankinn is taking action and promoting competition in the payment
card market by discontinuing ownership in payment card companies and through
other actions. By boosting its independence in payment card matters, the Bank
will be in a position to tender for services offered by the payment card
companies and thus reduce cost. By concentrating on VISA cards, the Bank also
improves efficiency. 



Minority shareholding in Valitor sold to Arion Bank

Landsbankinn has sold its 38% share in Valitor Holding hf. (parent of Valitor
hf.) to Arion Bank for ISK 3.6 billion. This brings the value of Valitor's
total share capital to ISK 9.5 billion. Arion Bank will pay an additional
consideration if Valitor receives payment from VISA Europe for an option in
place between VISA Europe and VISA Inc. in the US. This additional
consideration is expected to amount to a significant portion of the value of
Landsbankinn's share capital in Valitor Holding hf., should it come to
fruition. The final amount of this additional consideration is uncertain and
unclear when it might take place; the option is valid for an unlimited period.
It is of primary importance to Landsbankinn that Arion Bank is willing to
secure these additional interests of Landsbankinn for the long term. Arion Bank
is and intends to remain a majority shareholder in Valitor Holding hf.
Landsbankinn's interests are thus far more secure than through a sale to
investors purchasing a minority share in the company. For these reasons, it was
considered contrary to Landsbankinn's interests to offer the shareholding for
sale on the open market. 



Agreement with VISA Europe

Landsbankinn has signed an agreement with VISA Europe providing, inter alia,
for a direct business relationship with the company. This agreement will
facilitate the Bank's payment card operation and create a platform for
increased independence to issue cards, simplify tenders for card-related
services, both domestically and abroad, and make it easier for Landsbankinn to
introduce innovations from VISA. Furthermore, the agreement will allow the Bank
to control card services and card products better than hitherto and access to
advisors from VISA Europe will advance product development significantly. This
ensures that Landsbankinn will at any given time be able to offer customers the
best VISA products. Since nigh on 98% of Landsbankinn's customers use VISA
payment cards, the agreement is a logical step for the Bank. 



Settlement with the Icelandic Competition Authority

Landsbankinn has signed a settlement with the Icelandic Competition Authority
concerning the investigation into violations on the payment card market
involving the three large banks and the companies Valitor and Borgun. Through
this settlement, the Bank agrees to work to introduce changes to the structure
of the payment card market, designed to promote competition. 

Landsbankinn concedes that certain practices on the payment card market in
2007-2009 were in violation of Article 10 of the Competition Act and Article 53
of the EEA Agreement, agrees to pay a fine in the amount of ISK 450 million and
to take action designed to promote competition. 

Such action includes capping the so-called interchange fee on consumer cards
paid by parties who acquire transactions to payment card issuers and which are
intended to cover the cost incurred by issuers for payment guarantees,
financing of withdrawals, payment card fraud and product development.
Interchange fees will decrease as a result of the settlement which should lead
to lower prices. The settlement also stipulates that Landsbankinn not own
shares in Borgun and Valitor alongside other commercial banks. 

In the settlement, the Icelandic Competition Authority states that the Bank
contacted the Authority of its own volition and declared its willingness to
alter its payment card operations before the Authority made public its initial
findings in the matter. Furthermore, it mentions that the Bank had no direct
managerial input in the payment card companies from the year 2008. Nothing
indicates that the Bank's employees had reason to doubt the legality of the
Bank's agreements with Valitor and Borgun, providing for interchange fees. The
Authority further states in the settlement that Landsbankinn showed extensive
readiness to co-operate and complied with the investigative effort and
procedures of the Authority. This settlement concludes the investigation of
Landsbankinn by the Icelandic Competition Authority. 



Agreement with Valitor for near-term service

Landsbankinn has also in recent months re-evaluated its position on the payment
card market, including agreements on the issuing process of payment cards and
electronic money. This evaluation looked to various factors, including an
analysis of the competitive position on the payment card market and the results
of a survey of the pricing and service of payment card companies carried out by
the Bank in March 2014. Valitor and Landsbankinn later signed an agreement
whereby Valitor will continue to issue and process credit and debit cards for
Landsbankinn. This agreement does not provide for transaction acquisitions by
Valitor or the relationship between Landsbankinn and parties who acquire
transactions, in full keeping with the Icelandic Competition Authority's
settlement that stipulates a clear division between transaction acquisition and
payment card issuance. Steinþór Pálsson, CEO of Landsbankinn hf., and Viðar
Þorkelsson, CEO of Valitor hf., signed an agreement to this effect on 12
December 2014. The agreement enters into effect on 22 April 2015 and is valid
for a period of four years. 



For further information contact:

Kristján Kristjánsson, pr@landsbankinn.is, +354 410 4011/+354 899 9352