Arion Bank hf. - Company Announcement

Arion Bank and Icelandic Competition Authority reach settlement on payment card system

- Arion Bank acquires Landsbankinn's 38% stake in Valitor, a subsidiary of
Arion Bank 

Arion Bank and the Icelandic Competition Authority (ICA) have reached a
settlement concerning the structure of the payment card system. The system was
established more than 30 years ago and was based on a European model. The time
period under consideration was from 2007 to 2009. The central issue in the
settlement concerns changes to the way in which interchange fees, which card
companies pay to the banks, are decided and the awarding of customer loyalty
points. Under the settlement changes will also be made to the ownership
structure of card companies and Arion Bank will moreover pay a fine of ISK 450
million. 

Arion Bank has already implemented the agreed changes

Arion Bank has made changes to its agreements with Valitor and interchange fees
are now decided in bilateral agreements between the companies. Arion Bank has
also amended its agreements on customer loyalty points. Arion Bank has thus
responded to the ICA's criticisms and made the appropriate changes to its
business agreements. 

Arion Bank acquires Landsbankinn's 38% stake in Valitor

Arion Bank has also signed a purchase agreement with Landsbankinn hf. on the
acquisition of Landsbankinn's 38% stake in Valitor Holding hf, the parent
company of Valitor hf. The acquisition price is ISK 3.6 billion. An additional
payment by Arion Bank may be made at a later date in connection with Visa
Europe's option on Visa Inc. The decision to exercise the option rests not with
Arion Bank but with Visa Europe, and it is therefore uncertain if and when such
a payment would be made and how much it would be. 

Following this transaction Arion Bank owns 98% of Valitor Holding hf. while
Landsbankinn is no longer a shareholder in the company. 

Valitor a vital part of Arion Bank's strategy and future vision

Valitor has been a subsidiary of Arion Bank for many years and is a vital part
of the Bank's strategy and future vision. Offering a wide range of card
services is an important part of Arion Bank's business and the Bank will
continue to focus on payment cards from Visa as well as MasterCard, both in
partnership with Valitor. 

Arion Bank has great confidence in Valitor, which has been a driving force
behind the development of a strong and reliable payment card system in Iceland.
Valitor has also established itself internationally and the future is therefore
exciting for the company. 

Similar changes to the system abroad - fines generally not issued

The Icelandic payment card was set up according to a European model around 30
years ago. The system has been open to scrutiny for 30 years, and the way in
which interchange fees are determined has not attracted any formal criticism
from the authorities until now. The competition authorities in many countries
are resolving cases in a similar way as in this country, i.e. concerning
changes to payment card systems and the lowering of interchange fees. The
European Union has also made proposals aimed at establishing maximum
interchange fees. Arion Bank can understand the criticism made of the way the
system is organized. The system in some ways reflects the time when it was
developed and a lot has changed since it was set up in terms of technology, the
distribution and use of cards and the size of the companies issuing them. 

In Iceland the people who developed the system, in banks and card companies,
did so in good faith, believing that they were working in accordance with laws
and regulations, and Arion Bank would have preferred to have negotiated changes
to the system without fines being issued. It was hoped that this could be
achieved when the Bank approached the ICA to open discussions but this was not
to be.  The outcome in this respect differs from what has occurred in most of
Europe where parties have agreed to make largely similar changes to the payment
card system as in Iceland, without incurring fines. 

The Icelandic payment card system is efficient and widely established

The payment card system in Iceland is very well established and has been
successfully developed. In this country approximately 80% of turnover is
conducted with payment cards, a higher proportion than in other countries. The
reason for this is that in Iceland it has been possible to develop a simple and
effective system where payment cards are accepted by virtually all sellers of
goods and services. In Iceland it is generally not the custom to add a
surcharge if paying with a credit card as is the case in some places abroad.
The cost to the consumer is usually included in the price of the goods, in the
same way as the handling cost of notes and coins. Cardholders also enjoy
interest-free credit for up to 40 days. The great flexibility of the Icelandic
system is also beneficial to merchants - special card periods spread the load
on shops. Security is general first rate, both for merchants and consumers. 

Consensus on the structure of the payment card system

With the changes introduced now to interchange fees, customer loyalty points
and the ownership structure of card companies a consensus has been reached on
the structure of the payment card system in Iceland. 



For further information please contact Haraldur Gudni Eidsson of Arion Bank's
Communications division at haraldur.eidsson@arionbanki.is, or tel. +354 856
7108.