2017 Annual Report - mercury payment services · 3 Corporate data Mercury Payment Services S.p.A....

(Translation from the Italian original which remains the definitive version)

2017 Annual Report

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Contents

Corporate data Company bodies Directors’ report Income statement highlights Statement of financial position highlights Other disclosures

Financial statements Statement of financial position Income statement Statement of comprehensive income Statement of changes in equity Statement of cash flows

Independent auditors’ report Board of statutory auditors’ report

Notes to the financial statements - part A: accounting policies - part B: notes to the statement of financial position - part C: notes to the income statement - part D: other disclosures

Annexes Reconciliation of the income statement prepared for management and financial statements purposes

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Corporate data Mercury Payment Services S.p.A. Registered and operating office: Viale Giulio Richard 7 - 20143 Milan - Italy Share capital €7,108,000.00 Milan company registration no. 08449660581 Number 19312.8 in the Register of Payment Institutes as per article 114-septies of the Consolidated Banking Act Single-member company The company is not managed or coordinated by another company or body (articles 2497-sexties and 2497-septies of the Italian Civil Code). Parent: Latino Italy S.r.l. (single-member company limited by quotas) Registered office in Via Vittor Pisani 20, Milan Tax code and Milan company registration no.: 09489670969 Percentage held of the share capital of Mercury Payment Services S.p.A.: 100% Nature of the business: On 15 February 2011, Bank of Italy authorised the company to provide payment services as defined in article 1.1.b).3)/4)/5) of Legislative decree no. 11/2010, namely:

execution of payment orders, including transfers of funds on a payment account with the user’s payment service provider or with another payment service provider:

- execution of direct debits, including one-off direct debits, - execution of payment transactions through a payment card or a similar device, - execution of credit transfers, including standing orders (point 3);

execution of payment transactions where the funds are covered by a credit line given to a payment service user:

- execution of direct debits, including one-off direct debits, - execution of payment transactions through a payment card or a similar device, - execution of credit transfers, including standing orders (point 4);

issuing and/or acquiring payment tools (point 5), as well as all activities relating to the authorised payment services listed above.

Following the implementation of Directive (EU) 2015/2366 of the European Parliament and Council of 25 November 2015 on payment services on the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) no. 1093/2010, and repealing Directive 2007/64/EC, and in addition to the payment services set out above, the company has the exclusive business object of also providing the following payment services:

payment order services;

account information services; as respectively defined in article 4.1.15)/16) of the same Directive (EU) 2015/2366.

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Company bodies

Board of directors

Chairman Stuart James Ashley Gent

Deputy chairman Bernardo Mingrone

Directors Alex Bowman

Simone Cucchetti

Giuseppe Dallona

Francois Gilbart

Jeffrey David Paduch

Board of statutory auditors

Chairman Alberto Balestreri

Standing statutory auditors Piero Alonzo

Marco Giuseppe Zanobio

Alternate statutory auditors Fabio Oneglia

Andrea Vagliè

General manager Stefania Gentile

Independent auditors KPMG S.p.A.

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Directors’ report

Dear shareholder, The income statement for 2017 shows a profit for the year of €49.3 million. The results were as follows:

• Operating revenue: €151.4 million • Operating costs: €52.7 million • EBITDA: €98.7 million • Operating profit: €90 million • Pre-tax profit: €73.5 million • Profit for the year: €49.3 million

Compared to the financial statements at 31 December 2016, the figures at 31 December 2017 (as shown in the reclassified income statement set out in the following “Income statement highlights” paragraph) should be analysed considering the effects of the following transactions which affected the whole of the year:

• the transfer to Intesa Sanpaolo of a business unit providing acquiring services for non captive customers (effective from 1 October 2016);

• the mutually agreed termination of the contract with Banca ITB S.p.A. (effective from 1 December 2016);

• the transfer of 8 employees to Intesa Sanpaolo (from July/August 2016). During the year, the company continued to provide processing services (to its main customer Intesa Sanpaolo and the group banks) and acquiring services for only its customers and other services. The processing services the company provides to the Intesa Sanpaolo Group are regulated by specific agreements respectively relating to the management of:

• payment cards for Intesa Sanpaolo and group banks (this agreement updated the previously existing agreement with different financial terms);

• transactions performed on POS terminals given to Intesa Sanpaolo’s merchant customers; • cash withdrawals/advances using the Intesa Sanpaolo Group’s ATM payment cards.

The above processing services are currently the company’s main source of operating revenue.

Changes to the ownership and shareholding structure On 15 December 2016, Latino Italy S.r.l., a special-purpose entity wholly owned by Mercury UK Holdco Limited (“HoldCo”), acquired full control of Setefi (now “Mercury Payment Services S.p.A.”) from Intesa Sanpaolo. The English company, HoldCo (also a shareholder of Istituto Centrale delle Banche Popolari Italiane - “ICBPI”, now Nexi S.p.A.), is controlled by a consortium formed by:

• funds managed by Advent International Corporation (assisted by Advent International plc); • funds assisted by Bain Capital Private Equity (Europe), LLP; • Clessidra SGR S.p.A., on behalf of the Clessidra Capital Partners fund.

HoldCo is the company’s ultimate parent. The above acquisition transaction was finalised after the relevant authorisations from the competent authorities. As of such date, the company no longer forms part of the Intesa Sanpaolo Group and is not managed or coordinated by any other company or body (articles 2497-sexties and 2497-septies of the Italian Civil Code).

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The economy and the market

The economy Bank of Italy’s overview of the economic situation shows solid widespread growth; weak inflation continues to be an issue. The short-term development prospects are positive. The main advanced economies have continued to grow in line with the trend seen over the last few months of the year. The most recent data for the US show rapid growth. Private consumption is recovering in the UK while Japan’s most up-to-date figures indicate that its economy’s growth has accelerated in the last few months. The emerging economies also recovered during the year. Growth remained stable in China while GDP has picked up rapidly in both India and Brazil since the summer. The Eurozone’s economy was also vibrant, mostly driven by exports. Inflation continues to be low and was around 1.4% in December. The ECB’s governing council recalibrated its monetary policy tools maintaining a very expansionary stance, which is essential for a steady downwards trend in inflation, expected to hover around 2%. The Italian economy took off towards the end of the year boosted by both internal and foreign demand. GDP continued to improve to around 0.4% in the last few months of the year, assisted by the rise in value added for both industries and the services sector. Polls showed that business confidence levels have returned to pre-crisis levels with conditions that promote capital accumulation. Credit to the non-financial private sector continued to grow in recent months, with an increase in business loans. On the whole, the risk of non-growth has decreased, as the main uncertainties are due to financial conditions and the above-mentioned global context.

The market The international and European market of payment systems is experiencing a period of great change and upheaval (new opportunities and threats, and new players), with big differences between the various geographical areas. Italy shows a moderate use of electronic payments, though it has an extensive and wide-reaching card acceptance network and a high penetration of POS terminals and of the number of cards per resident. Transactions using electronic cards have risen faster than cash transactions in recent years at rates of 7% (transaction amounts) and 12% (number of transactions) during the year, in line with 2016. However, the use of cash continues to be much higher than the European average despite the “war on cash” being a key aim of both institutions and professionals of the payments sector. Contactless cards (which account for 40% of all transactions performed) are one of the key technological tools facilitating payments by mobile phone. A phenomenon that could encourage a wide and rapid spread of electronic payments is Italy’s increasingly rapid growth of digital tools which is in line with European trends, partly as a result of the ongoing efforts of key sector operators to offer services that respond to the new needs of customers, and the introduction of more effective security measures. Operators face growing demand for integrated, secure services for digital transactions and must bear in mind the need for greater investments, as well as developing collaborations with other players, such as FinTech (financial technological companies that offer new forms of payment and new digital payment services). 2017 saw the steady increase in new products in all vertical payment segments, such as e-commerce, mobile commerce (e-commerce using portable devices) and smartphone payments both towards merchants and P2P (person to person - to send and receive money in real time using a smartphone) and P2B (person to business - so customers can pay using an app at member merchants).

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The fastest-growing component is that of e-commerce payments, up over 20% to more than €25 billion. Specifically, Mobile Remote Payment & Commerce (the services that enable remote payment of goods or services using a mobile phone) has grown strongly (currently representing some 10% of e-commerce and expected to grow to 15% by the end of 2018), boosted by the entry of new merchants and the simplified payment process offered by the mobile wallet. 2017 has also been the year that the large international players (over-the-top operators) entered the Italian mobile payment market (Apple and Alibaba followed by Samsung which is just about to launch its service) using both interoperable solutions, that use tokenisation platforms on international circuits, and “private” services offered to specific customer clusters. In this context, Mercury Payment Services continuously develops its technological solutions, providing 100% assistance to all the initiatives introduced on the market; specifically, the “private” (not based on international circuits) payments hub developed by third party operators like Alipay by Alibaba and WeChat by Tencent. Another fundamental aspect to the growth of electronic payments is the spread of cards equipped with contactless technology and mobile POS. Generally, the number of contactless cards is growing, with a consequent increase in the number of transactions carried out in this way, and there is an increase in the number of POS terminals that are enabled to read contactless cards (assisted by the growing spread and sales of the mobile POS product). The Public Administration (“PA”) is undergoing a digitalisation process to develop a smart city system (whereby people can pay the PA using physical or digital cards, e.g., for transport, museum entry, taxes, fines and permits). Mercury Payment Services is also a member of Club Italia, the national association of transport companies which promotes the digitalisation of tickets and transport processes in general. To promote the spread of electronic payments of small amounts (micropayments) in Italy, the 2016 Stability Act highlighted the need to ensure that the Ministry of Finance and the Ministry of Economic Development provide for application of the provisions of Regulation (EU) 751/2015 as regards interbank commissions on card-based payments. Other factors that are expected to impact the growth of the market are:

• PSD II (Directive (EU) 2015/2366 regarding payment services) which, inter alia, outlined new competition scenarios between payments sector operators, opening up the market to new players;

• the expected introduction of additional regulations and directives that will make the payments market more fragmented and impose increasingly stringent controls;

• the progressive digitalisation of the global economy and the growing, rapid technological evolution which will require significant investments in information technology and the adaptation of operating and organisational models to enable operators to compete.

In conclusion, financial systems are expected to grow and undergo big changes, marked by non-linear development. Traditional operators will have to focus heavily on innovation and be able to integrate the new forms of technology so as to transform potential threats into tangible opportunities.

Corporate governance structure The shareholders of Mercury Payment Services S.p.A.:

• renewed the offices of the members of the board of directors, expiring at the meeting of the shareholders held to approve the financial statements as at and for the year ending 31 December 2018 in their meeting of 15 December 2016;

• renewed the offices of the members of the board of statutory auditors, expiring at the meeting of the shareholders held to approve the financial statements as at and for the year ending 31 December 2019 at their meeting of 21 April 2017.

The board of statutory auditors of Mercury Payment Services S.p.A. carries out the duties of Supervisory Body pursuant to Legislative decree no. 231 of 8 June 2001.

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Internal and organisational structure During the year and as approved by its board of directors, the company continued to review its organisational structure to maximise the effectiveness of its operations and focus on the definition of roles and responsibilities. Specifically:

• the unit that reports to the Chief Financial Officer was revised and replaced by an Administration, Planning and Control Unit;

• the General Secretariat Unit now reports to the General Manager; • a Compliance Officer was appointed to report suspicious transactions and an AML manager, both of

whom work in the Risk, Compliance and AML Unit; • the Human Resources, Organisation and General Services Units were merged to become the

Human Resources & Organisation Unit; • the unit that reports to the Chief Information Technology Officer was reorganised to better monitor

various activities or specialist areas; specifically:

- Authorisation Systems, which manages the maintenance and development of authorisation and department applications;

- Back End Processing Applications, which manages database and accounting processes for

customers and clearing and settlement processes for international circuits; - Digital, which manages and develops e-commerce applications; - IT Governance & Security, which defines and updates security policies and procedures; - IT Infrastructure, which designs, rolls out and maintains technological infrastructure in line with

security requirements.

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Strategic lines The company has always focussed on maintaining a high quality of services for its customers, a major one of which is the Intesa Sanpaolo Group. It has always paid close attention to the following aspects:

• compliance with the agreed service levels and KPIs; • improving service management; • maintaining a suitable cost structure, while ensuring adequate operational security

levels and constant risk management; • maintaining adequate functioning levels of operating systems and equipment; • carrying out technological and process innovation projects.

New projects and process consolidation The main projects launched in 2017 included:

• continued assistance with the creation of new digital channels and the implementation of e-money services for cardholders as part of the integrated multi-channel projects of the customer Intesa Sanpaolo;

• remediation activities (organisation, security, infrastructures and application management) planned over a 24-month period and aimed at implementing risk monitoring and control tools. These activities are preliminary to the initiatives mapped as part of the Information security assessment completed in 2016; during 2017, the company completed the refresh network project as well as some other smaller security projects;

• extraordinary migration activities to align the active POS terminals at merchants with the mandates that Visa and Mastercard establish over time with the concurrent continuation of monitoring activities;

• continued use of the Mercury PS tokenisation system to manage virtual cards; • developments to support the sale of the “Mobile POS” service (“Move and Pay business” devices)

and to update the new Move and Pay Business app, including the integration of the Jiffy Pay P2B module and optimisation of the NFC payment experience;

• launch of the Cross Acceptance Q8-Tamoil project to enable acceptance of cards at the member petrol stations of the two oil companies;

• completion of activities enabling: • acceptance of JCB cards at Intesa Sanpaolo ATMs; • JCB’s migration to the secure e-commerce platform (enabling JCSecure cards); • completion of a highly innovative project designed to offer a leading public transport company a card

payment acceptance service in collaboration with the customer Intesa Sanpaolo; • completion of the activities to improve Mercury’s positioning on the electronic restaurant voucher

market by developing agreements with leading sector operators and commencement of production of the related systems;

• with respect to mobile payments, launch of a project enabling smartphone-based payments (Samsung Pay). Completion of the Samsung Pay Mastercard project and the launch of the Samsung Pay VISA project are slated for the first and second quarter of 2018, respectively;

• expansion of functions for American Express card acceptance on POS terminals (c-less) and self-service petrol stations;

• completion of a foreign currency settlement management project; • activation of the tokenisation services (alternate PAN generation service) and risk services (portal

used to grade transactions and for fraud management) at the disaster recovery site in August 2017; • start-up of the partnership with Intesa Sanpaolo to replace the POS management/sale/after sales

system (CJ); • completion of evolutionary projects to enable payment using the Masterpass wallet, in collaboration

with MasterCard and Intesa Sanpaolo; • completion of the analysis and planning for certification of the ACS 3D Secure circuits; • roll-out of a project to integrate Alipay into the internal systems through in-house developments. The

scenarios affected are the Alipay payments from cash registers and physical POS terminals; • start-up of the project to manage the Mastercard “In Control Commercial Payment & Business Travel

with SmartData” product which will allow Banca Intesa cardholders to virtualise their credit cards and use them to make payments. Roll-out is scheduled for the first quarter of 2018;

• set-up of technical groups to ensure compliance with the modifications required by the circuit before

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VISA’s renewal of the dispute management application (Visa Claim Resolution) especially as regards the application and process components;

• commencement of the project to manage ABU Acquirer, Mastercard’s new functionality that allows merchants to check the card’s validity (including for recurring payments); its roll-out is slated for the first quarter of 2018;

• commencement of the preliminary assessment of the project for the management and issue of the c-less PagoBancomat card;

• start-up of feasibility studies before the release of POS terminals differentiated for business and corporate customers (Release Top and Release Light);

• continued activities to complete the disaster recovery site in Parma (completed for the part related to the “mission critical” authorisation services and ongoing for the non-critical services). The usual annual test was performed on 28 November 2017;

• launch of application activities to reduce the management complexity of ICT tools used by the Contact Unit, Chargeback Management and Acquiring Operations unit (e.g., development of a single application interface);

• roll-out of the smart secure authentication system used to authorise payments using mobile phones rather than a physical device;

• commencement of issue of prepaid and debit cards for Veneto Banca and Banca Popolare di Vicenza as part of the Vivaldi Project (Mercury will produce roughly 65% of the cards for the two Veneto-based banks between the end of 2017 and early 2018);

• launch of a project with Nexi (former CartaSi) at the end of the year to merge the card production and customisation systems with the definitive transfer thereof to the Marcallo site in the last quarter of 2018.

Performance of the core business During the year, the company focused in particular on the processing services offered to the Intesa Sanpaolo Group and on revising its proposition in relation to the other services it provides. Processing services provided between Mercury Payment Services, Intesa Sanpaolo and the Intesa Sanpaolo group banks are governed by specific agreements:

• a payment card management service agreement: the management of payment authorisation processes for cards issued by Intesa Sanpaolo, requirements and settlement with international circuits (excluding PagoBANCOMAT® - BANCOMAT®), cash flows generated by card transactions, preliminary and additional activities that are, in any case, essential to contract performance (including plastic procurement, telephone assistance services, complaints and claims management, security and fraud prevention);

• servicing agreement for the management of transactions performed on POS terminals given to Intesa Sanpaolo’s merchant customers: managing the authorisation processes for transactions on POS terminals given to merchants, requirements of international circuits, management and settlement of cash flows and all preliminary and additional activities that are, in any case, essential to service performance (including procurement, the installation/activation/replacement of POS terminals, telephone assistance services, complaints and claims management, security and fraud prevention);

• servicing agreement for the management of cash withdrawals/advances using the Intesa Sanpaolo Group’s ATM payment cards: managing the authorisation processes for transactions on the ATMs of Intesa Sanpaolo and other banks of the Banca dei Territori division, meeting the requirements of the managed circuits, managing and settling the related cash flows and all preliminary and additional activities that are essential to the performance of this service.

In the acquiring business area, nearly all contracts with member merchants for card payment acceptance were transferred to Intesa Sanpaolo in 2016. Issuing its own paiment cards represents a negligible part of Mercury Payment Service’s overall operations. The risk profile of this business is regularly monitored.

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Work continued to develop business and innovation projects in the acquiring service sector, mainly in the fields of telecommunications, passenger transport, petrol, modern trade and luxury/fashion. The following results prepared using the quantitative data used for statistical purposes summarise the company’s performance.

Overall operations

2017 2016 % change

Issuing Processing

Cards managed (thousands) 16,243 14,934 8.8%

Transactions settled (millions) 833 749 11.2%

Transacted volume (millions of €) 82,219 76,922 6.9%

Acquiring Processing & POS Business

POS managed 475,717 425,800 11.7%



ATM management

ATMs 7,125 6,649 7.2%



The overall number of transactions settled by Mercury Payment Services (Issuing, Acquiring, ATM) increased by some 13% over 2016 (up from 1,754 million transactions in 2016 to 1,978 million transactions in 2017); the related transacted volumes increased by roughly 7.4%, from €168.4 billion in 2016 to €180.8 billion in 2017. Specifically:

• the number of transactions carried out on cards issued by Intesa Sanpaolo and group banks (Issuing Processing Business) increased by some 11.2% on 2016, from approximately 749 million transactions in 2016 to about 833 million transactions in 2017. The related transacted volumes increased by roughly 6.9% from €76.9 billion in 2016 to €82.2 billion in 2017;

• the number of transactions carried out on POSs (Acquiring Processing & POS Business) increased by some 16.9% on 2016, from approximately 814 million transactions in 2016 to about 952 million transactions in 2017. The related transacted volumes increased by roughly 11.6% from €48.4 billion to €53.9 billion. The figures for the first half of 2016 also include the volumes generated by customers that ceased operating with the company during that year;

• the number of transactions carried out on ATMs increased by approximately 1% on 2016, from approximately 191 million transactions in 2016 to about 193 million transactions in 2017. The related transacted volumes increased by roughly 3.5% from €43 billion to €44.6 billion.

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Income statement highlights A reclassified income statement has been prepared to give a clearer understanding of the results for the year, shown in the following. Reclassified income statement

Figures for the year ended 31 December (€/000) 2017 2016 % change

Net fee and commission income 153,267 140,228 9,3%

Net interest income - 1,913 - 196 877,7%

Dividends and other income 10 45 -78,8%

Operating revenue 151,364 140,077 8,1%

Personnel expense - 16,786 - 16,635 0,9%

Other administrative expenses - 36,772 - 36,328 1,2%

Administrative expenses - 53,559 - 52,963 1,1%

Net other income 911 1,277 -28,7%

Operating provisions - 5 - 344 -98,5%

Operating costs - 52,653 - 52,030 1,2%

EBITDA 98,710 88,047 12,1%

Depreciation and amortization - 8,665 - 3,968 118,4%

Operating profit 90,045 84,079 7,1%

Other Items - 16,577 79,281 -120,9%

Pre-tax profit 73,468 163,360 -55,0%

Income taxes - 24,204 - 33,372 -27,5%

Net profit 49,264 129,988 -62,1%

Note: EBITDA and the other main items have been calculated using specific data combination rules which differ from those of the general ledger and from those of the separate financial statements and/or reclassified models used for management purposes. The general criteria for the combination of management captions and traceability criteria to those of the separate financial statements are reported in an annex to the notes to the financial statements. Operating revenue This totals €151.4 million, compared to €140.1 million as at 31 December 2016 (+8.1%). The items forming operating revenue are as follows;

• Net commissions and income from services: These amount to €153.3 million, compared to €140.2 million as at 31 December 2016 (+9.3%). The demerger and transfer of the business unit to Intesa Sanpaolo S.p.A. finalised during 2016 (as described in the first part of the notes) entailed the transfer to Intesa Sanpaolo of almost all contracts with member merchants for card payment acceptance. For additional information about 2016 non-recurring transactions, reference should be made to the paragraph “Non-recurring transactions of the year” of the Directors’ report on the 2016 financial statements.

• Net interest expense: this caption came to €1.9 million and includes interest expense on outstanding credit lines.

Administrative expenses They amount to €53.6 million, compared to €53 million as at 31 December 2016 (+1.1%), and may be analysed as follows:

• Personnel expense: This amounts to €16.8 million, compared to €16.6 million in as at 31 December

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2016 (+0.9%). • Other administrative expenses: They amount to €36.8 million, compared to €36.3 million as at 31

December 2016 (+1.2%). Operating costs They total €52.7 million, compared to €52 million in 2016 (+1.2%). In addition to the administrative expenses it comprises:

• Other income and expense: These amount to €0.9 million, compared to €1.3 million as at 31 December 2016 and mainly comprise the prior year gains and losses included in that caption as per the combination rules adopted.

• Operating provisions: They amount to €5 thousand, compared to €344 thousand as at 31 December 2016.

EBITDA This totals €98.7 million, compared to €88 million as at 31 December 2016 (+12.1%). Amortisation and depreciation Amortisation and depreciation amount to roughly €8.7 million, compared to €4.0 million as at 31 December 2016. As of July 2016, the company changed the procurement arrangement for its POS devices. Operating profit The profit for the year amounts to €90 million, compared to €84.1 million as at 31 December 2016 (+7.1%). Other items They are classified under EBITDA as per the data combination rules described in the notes and are negative by €16.6 million. The main item of this caption refers to Non-recurring administrative expenses (and the related VAT). Pre-tax profit This amounts to €73.5 million, compared to €163.4 million as at 31 December 2016.

Income taxes Income taxes (IRES and IRAP) amount to €24.2 million, compared to €33.4 million as at 31 December 2016. Profit for the year This comes to €49.3 million compared to €130 million as at 31 December 2016. The 2016 profit included non-recurring income consisting of gains on the sale of the investment in Visa EU.

Statement of financial position highlights Under the current agreements governing the services provided between Mercury Payment Services, Intesa Sanpaolo and the group banks, the company settles:

• in Intesa Sanpaolo’s name and on its behalf, cash flows to credit the amounts of transactions to POS

merchants (as part of the financial services that Intesa Sanpaolo offers) and the charges for fees and commissions;

• the total cash flows generated by the acquiring services offered to Intesa Sanpaolo’s customers directly with Intesa Sanpaolo, crediting the fees and commissions collected by merchants and the POS instalments to Intesa Sanpaolo;

• in Intesa Sanpaolo’s name and on its behalf, clearing and settlement with international circuits.

For a more immediate understanding of the statement of financial position captions, a reclassified

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statement of financial position is given below. The main statement of financial position captions as at 31 December 2017 are shown below, with corresponding figures as at 31 December 2016.

Reclassified statement of financial position

(€/000) 31.12.2017 31.12.2016

Financial assets at fair value through profit or loss 154 136

Financial assets available for sale 14 13

Loans and receivables with banks 170,331 255,315

Loans and receivables with financial institutions 232,470 156,859

Loans and receivables with customers 5,603 7,238

Property and equipment 32,252 18,322

Other assets 21,992 86,255

Total assets 462,816 524,139

(€/000) 31.12.2017 31.12.2016

Liabilities with banks 171,575 230,140

Liabilities with financial institutions 65,221 4,942

Other liabilities 139,803 123,587

Post-employment benefits 1,261 1,629

Provisions for risks and charges 5,431 3,637

Equity 30,261 30,252

Net income of the period 49,264 129,988

Total liabilities 462,816 524,139

Assets

Liabilities

Assets Financial assets at fair value through profit or loss They amount to €154 thousand and mainly comprise 52,345 Intesa Sanpaolo S.p.A. ordinary shares, which were acquired for the Intesa Sanpaolo Group’s 2011 and 2014 incentive plans.

Available-for-sale financial assets They amount to €14 thousand and include:

• 4 Intesa Sanpaolo Group Service S.c.p.A. ordinary shares worth €10 thousand. They were measured at cost, which is deemed to represent their fair value;

• 1,302 Intesa Sanpaolo S.p.A. ordinary shares acquired for the 2014_2017 Lecoip worth €4 thousand, which were still held at the end of the reporting period. These shares are measured at fair value balancing the specific equity reserve.

Loans and receivables with banks Loans and receivables amount to €170.3 million. This caption includes:

• the credit balances in the current accounts held with Intesa Sanpaolo, Nexi and Poste Italiane/Bancoposta;

• the receivables for the provision of financial services (mainly to Intesa Sanpaolo and other Intesa Sanpaolo Group banks based on specific agreements for the provision of processing services signed in December 2015 and effective from 1 January 2016).

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Loans and receivables with financial institutions They amount to €232.5 million. They essentially include loans and receivables with:

• international circuits and “correspondent” legal entities (members of international circuits); for additional information thereon, reference should be made to the note to “Loans and receivables with financial institutions”;

• credit card companies following the engagement assigned by said entities to Mercury Payment Services to pay the amounts pertaining to their customers (member merchants with said entities);

• the deferred payment due from Visa, following the transfer of the Visa EU share (recognised at amortised cost and revalued each quarter until the amount falls due in 2019).

Loans and receivables with customers They amount to €5.6 million and mainly comprise receivables for Acquiring/Issuing services for customers only and other services. Non-current assets (property and equipment and investment property and intangible assets) They increased from roughly €18.3 million at 31 December 2016 to approximately €32.3 million at 31 December 2017. The increase is mainly due to the purchase of POS devices. Other assets They amount to €22 million and include:

• Tax assets: €8.2 million; • Other assets: €13.8 million. This caption includes, in particular: prepayments for the purchase of the

plastic needed to produce cards.

Liabilities Due to banks This caption amounts to €171.6 million. It includes:

• the debit balances in the current accounts held; • other liabilities for services provided by Intesa Sanpaolo.

Due to financial institutions: This caption of €65.2 million essentially includes liabilities with:

• the parent Latino Italy S.r.l. for the €45 million loan; • international circuits and “correspondent” legal entities (members of international circuits).

Other liabilities

They amount to €139.8 million and include: • Tax liabilities: €4.7 million. • Other liabilities: they amount to €135.1 million and principally include “cash advances” to be cleared

with international circuits and by the bank in a transaction after the reporting date. Post-employment benefits They amount to €1.3 million and refer to the present value of post-employment benefits which configure as an unfunded defined benefit plan.

Provisions for risks and charges Other provisions for risks and charges amount to roughly €5.4 million and consist of the following:

• “personnel expense”; • “sundry costs”, which include accruals made to cover various charges.

Equity (excluding the profit for the year) Equity amounts to €30.3 million. Profit for the year The profit for the year amounts to 49.3 million, compared to €130 million in 2017.

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The 2016 profit included non-recurring income consisting of gains on the sale of the investment in Visa EU.

Outlook The competitive scenario was particularly complex in 2017, with an increasing number of international consolidations. The payments system market is still undergoing a period of profound changes. Business development activities continued after year end and included the development of solutions designed to further support customers. Meanwhile, the efficiency and effectiveness of operating processes will continue to be improved such to ensure competitiveness and the monitoring and control of costs and the related risks. The owner’s strategic and organisational decisions will guide the company’s actions this year.

Research and development No costs were incurred for research and development projects during the year.

Events after the reporting date No significant events took place in the early months of 2018.

Relationships with the parent and its subsidiaries The company is controlled:

• directly by Latino Italy S.r.l. (a limited liability single-member company), registered office in Via Vittori Pisani 20, Milan, tax code and Milan company registration no. 09489670969. Percentage held of Mercury Payment Services S.p.A.: 100%;

• indirectly by Mercury UK Holdco Limited (“HoldCo”), an English company which wholly owns Latino Italy S.r.l..

HoldCo, the company’s ultimate parent, is in turn controlled by a consortium comprising:

• funds managed by Advent International Corporation (assisted by Advent International plc); • funds assisted by Bain Capital Private Equity (Europe), LLP; • Clessidra SGR S.p.A., on behalf of the Clessidra Capital Partners fund.

The company is not managed or coordinated by another company or body (articles 2497-sexties and 2497-septies of the Italian Civil Code). Mercury Payment Services S.p.A. applies the Supervisory provisions for payment institutes (Measure of 17 May 2016) at an individual level. Pursuant to the instructions received from Bank of Italy and upon completion of the sale of 15 December 2016, the company:

• is included in the regulatory consolidation scope of the Nexi Group with regard to the Risk Appetite Framework; ICAAP /Capital Adequacy; and Risk Monitoring;

• is included in the regulatory consolidation scope of Mercury Holdco UK, pursuant to Regulation (EU) no. 575/2013.

Contractual relationships with Latino Italy S.r.l. On 26 April 2017, the company entered into a 16-month loan agreement with Latino Italy S.r.l. worth €45 million to support the company’s financial needs. Service contracts with Nexi S.p.A. On 28 March 2017, the company entered into the following contracts:

• service contracts between Nexi (former ICBPI), Mercury UK Holdco Limited and Mercury Payment Services S.p.A., governing the manner, frequency and timing of the transmission of information flows from Mercury Payment Services to Nexi, in order to include the company in the prudential

17

supervision processes at consolidation level;

• contract governing the outsourcing of internal audit activities. In view of the Bank of Italy notification to the shareholder Latino Italy S.r.l. (Letter of 14 December 2016 - Acquisition of a controlling interest in Mercury PS S.p.A. Transmission of the measure), these activities have been outsourced to Nexi since 1 April 2017. Until March 2017, Intesa Sanpaolo’s Central Internal Auditing Department carried out these activities.

Employees After leaving the Intesa Sanpaolo Group on 15 December 2016, in addition to its ordinary responsibilities, the Human Resources & Organisation department assisted the company, in a dedicated manner, in redefining its structure. The organisational changes commenced at the start of the year continued with the gradual redefinition of the company’s structure leading to the roll out of the current organisation at the start of October, characterised by greater focus on processes to attain operating efficiency and effectiveness. Concurrently, training activities continued to assist the change management project started in December 2016 when the company was sold. With respect to training and people engagement activities, several projects were launched, including:

• a language course to improve employees’ command of English. This language has become increasingly important also considering the new operating structure;

• skill mapping and enhancing initiatives as well as actions to identify key values, necessary for the period of substantial discontinuity faced by the company, after the change in the ownership structure.

With respect to employee relationships, in addition to ensuring normal communications with the trade unions, the company entered into an agreement introducing a collective production bonus for 2017, which may also be provided in the form of benefits. On 13 December 2017, the company agreed an internal three-year labour agreement covering all non-management employees. It provides for the simplification and reorganisation of the current regulations, introduces regulatory and operating flexibility and defers the development of other related projects, partly due to the performance bonuses which will be defined in the first quarter of 2018. The company’s total workforce (employees and seconded employees) at 31 December 2017 is broken down below:

31.12.2017 31.12.2016

Employees

Managers 8 9

Junior managers 27 22

Level 1 white collars 36 37





Total 300 298

Employees seconded from

other companies 4 4

Company employees

seconded to other

companies -2 -2

Total 302 300

18

Treasury shares The company has no securities and did not trade treasury shares during the year.

Basis of presentation The financial statements as at and for the year ended 31 December 2017 consist of the statement of financial position, the income statement, the statement of changes in equity, the statement of cash flows and the statement of comprehensive income, accompanied by the notes and directors’ report, as required by:

• the measure of Bank of Italy’s governor of 9 December 2016 “The IFRS financial statements of intermediaries other than bank intermediaries”;

• the IFRS issued by the International Accounting Standards Board (IASB) and related interpretations of the International Financial Reporting Interpretations Committee (IFRIC), endorsed by the European Commission, as established by EU regulation no. 1606 of 19 July 2002, which requires the application of IFRS;

• Legislative decree no. 38 of 28 February 2005 which implemented the new standards and extended the scope to the separate financial statements (as an option for 2005 and a requirement from 2006 on) of listed companies, banks and other financial entities subject to supervision.

Pursuant to Legislative decree no. 58/98, on 2 November 2011, the company’s shareholders appointed the independent auditors, KPMG S.p.A., to audit the company’s half-year and annual reports for the years from 2012 to 2020, and to periodically check that the company’s accounts are kept properly and that the accounting entries accurately reflect its operations.

Other disclosures Procurement of POS terminals In line with the policy introduced in 2016, the company continued to directly purchase POS terminals in 2017. These purchases benefited from tax relief under Law no. 223 of 11 December 2016, i.e., the 2017 Budget Law which introduced an extension of applicability of the “accelerated depreciation”. As provided for by IAS 16:

• the acquired POS terminals are recognised in statement of financial position assets as property, equipment and investment property with the related depreciation;

• a three-year depreciation plan has been established to spread the cost of the POS terminals considering the technical and economic characteristics of the assets and their estimated useful lives;

• the fairness of the depreciation method used will be reviewed annually; • if there is any indication of impairment, the asset’s carrying amount will be compared to its

recoverable amount at each interim or annual reporting date.

19

Proposal for the approval of the financial statements and for the allocation of the profit for the year Dear shareholder In concluding our report, we propose you:

• approve the financial statements as at and for the year ended 31 December 2017, consisting of the statement of financial position, the income statement, the statement of cash flows, the statement of comprehensive income and the statement of changes in equity, accompanied by the notes and directors’ report, as they stand;

• allocate the profit for the year as follows: the profit of €49,264,000.00

• to the extraordinary reserve

Milan, 21 March 2018 On behalf of the Board of Directors The deputy chairman Bernardo Mingrone

(signed on the original)

Financial statements

Statement of financial position as at 31 December 2017

In Euros

Assets

31.12.2017 31.12.2016

10. Cash and cash equivalents 1,118 1,113

20. Financial assets held for trading 0 0

30. Financial assets at fair value through profit or loss 154,345 136,338

40. Available-for-sale financial assets 13,607 13,159

50. Held-to-maturity investments 0 0

60. Loans and receivables 408,404,145 419,411,693

70 Hedging derivatives 0 0

80 Adjustments to generically hedged financial assets 0 0

90 Property, equipment and investment property 0 0

100. Tangible Assets 23,688,966 10,789,233

110. Intangible assets 8,563,211 7,533,006

120. Tax assets 8,236,460 58,912,598

a) current 5,141,715 56,875,626

b) deferred 3,094,745 2,036,972

including as per Law no. 214/2011

130. Non-current assets held for sale and disposal groups 0 0

140. Other assets 13,754,168 27,341,760

TOTAL ASSETS 462,816,020 524,138,900

21

Liabilities and Equity31.12.2017 31.12.2016

10. Liabilities 236,795,740 235,045,655

20. Securities issued 0 0

30. Financial liabilities held for trading 0 0

40. Financial liabilities at fair value through profit or loss 0 0

50. Hedging derivatives 0 0

60. Adjustments to generically hedged financial liabilities

0 0

70. Tax liabilities 4,681,401 34,176,232

a) current 4,623,928 34,118,759

b) deferred 57,473 57,473

80. Liabilities associated with assets held for sale 0 0

90. Other liabilities 135,121,977 89,410,980

100. Post-employment benefits 1,260,948 1,628,652

110. Provisions for risks and charges 5,430,690 3,637,400

a) pension and similar obligations 0 0

b) other provisions 5,430,690 3,637,400

120. Share capital 7,108,800 7,108,800

160. Reserves 23,443,902 23,443,902

170 Valuation reserves -291,438 -300,721

180. Net Income 49,264,000 129,988,000

TOTAL LIABILITIES 462,816,020 524,138,900

22

Income statement for the year ended 31 December 2017

In Euros

31.12.2017 31.12.2016

10. Interest and similar income 103,633 53,130

20. Interest and similar expense -2,016,287 -248,760

NET INTEREST INCOME (EXPENSE) -1,912,654 -195,630

30. Fee and commission income 154,952,713 145,193,763

40. Fee and commission expense -1,693,426 -5,243,638

NET FEE AND COMMISSION INCOME 153,259,287 139,950,125

50. Dividend and similar income 9,549 45,123

60. Profits (Losses) on trading 0 0

70. Fair value adjustments in hedge accounting 0 0

80. Net income (expense) from financial asset/liabilities at fair value trough profit or loss 18,007 -35,872

Net profit on sale or repurchase of: 0 83,640,877

a) financial assets 0 83,640,877

b) financial liabilities 0 0

TOTAL INCOME 151,374,189 223,404,623

Net impairment losses: -5,082 -41,474

a) f inancial assets -5,082 -41,474

b) other f inancial activities 0 0

Administrative expenses: -69,754,244 -57,492,722

a) personnel expenses -18,779,962 -18,637,187

b) other administrative expenses -50,974,282 -38,855,535

120. Depreciation and net impairment losses on property, equipment and investement property -5,626,477 -1,426,623

130. Amortisation and net impairment losses on intangible assets -3,038,739 -2,541,517

140. Valuation differences on property, equipment and intangible assets measured at fair value 0 0

150. Net accruals to previsions for risks and charges 0 -302,607

160. Other operating income and expense 518,502 1,760,089

OPERATING PROFIT 73,468,149 163.359.769

170. Profits (Losses) on equity investments 0 0

180. Profits (Losses) on disposal of investments 0 0

INCOME (LOSS) BEFORE TAX FROM CONTINUING OPERATIONS 73,468,149 163,359,769

190. Taxes on income from continuing operations -24,204,149 -33,371,769

INCOME (LOSS) AFTER TAX FROM CONTINUING OPERATIONS 49,264,000 129,988,000

200. Income (Loss) after tax from discontinued operations 0 0

PROFIT FOR THE YEAR 49,264,000 129,988,000

90.

100.

110.

23

Statement of comprehensive income for the year ended 31 December 2017

in Euros

2017 2016

10. PROFIT FOR THE YEAR 49,264,000 129,988,000

Other comprehensive income, net of tax, that w ill not be

reclassified subsequently to profit or loss

20. Property, equipment and investment property 0 0

30. Intangible assets 0 0

40. Defined benefit plans 8,834 -54,585

50. Non-current assets held for sale 0 0

60. Share of valuation reserves of equity-accounted investees 0 0

Other comprehensive income, net of tax, that w ill be

reclassified subsequently to profit or loss

70. Hedges of investments in foreign operations 0 0

80. Exchange rate differences 0 0

90. Cash flow hedges 0 0

100. Available-for-sale f inancial assets 448 -52,440,423

110. Non-current assets held for sale 0 0

120. Share of valuation reserves of equity-accounted investees 0 0

130. Other comprehensive income/(expense), net of tax 9,282 -52,495,009

140. COMPREHENSIVE INCOME (CAPTIONS 10+130) 49,273,282 77,492,991

24

Statement of changes in equity at 31 December 2016 and 2017

Changes Comprehensive

in reserves income

2016

Share capital

a) ordinary shares 8,450,000 0 8,450,000 0 0 0 0 0 0 0 -1,341,200 0 7,108,800

Reserves:

a) income-related 20,670,861 0 20,670,861 15,000,000 0 0 0 0 -10,000,000 0 -2,226,958 0 23,443,902

b) other 0 0 0 0 0 0 0 0 0 0 0 0 0

Valuation reserves 52,194,287 0 52,194,287 0 0 0 0 0 0 0 0 52,495,009 -300,721

Equity instruments 0 0 0 0 0 0 0 0 0 0 0 0 0

Treasury shares 0 0 0 0 0 0

Profit for the year 148,513,000 0 148,513,000 -15,000,000 -133,513,000 0 0 0 0 0 0 129,988,000 129,988,000

Equity 229,828,148 0 229,828,148 0 -133,513,000 0 0 0 0 0 -3,568,158 77,492,991 160,239,981

Equity at 31.12.2016

year profit carried out during the year

Reserves Dividends & other

allocationsIssue of new

shares

Purchase of treasury

shares

Extraordinary dividend

distributionOther changes

Changes of the year

At 1.01.2016 Change to opening

balances

At 1.1.2016 Allocation of the prior Equity transactions

Change in equity

instruments

MERCURY PAYMENT SERVICES S.p.A.STATEMENT OF CHANGES IN EQUITY FOR THE PERIOD ENDED 30.06.2017

Changes Comprehensive

in rerserves income

31.12.2017

Share capital

a) ordinary shares 7,108,800 0 7,108,800 0 0 0 0 0 0 0 0 0 7,108,800

Reserves:

a) income related 23,443,902 0 23,443,902 0 0 0 0 0 0 0 0 0 23,443,902

b) other 0 0 0 0 0 0 0 0 0 0 0 0

Valuation reserves -300,721 0 -300,721 0 0 0 0 0 0 0 0 9,282 -291,439

Equity instruments

0 0 0 0 0 0 0 0 0 0 0 0 0

Treasury shares

Profit of the period 129,988,000 0 129,988,000 0 -129,988,000 0 0 0 0 0 0 49,264,000 49,264,000

Equity 160,239,981 0 160,239,981 0 -129,988,000 0 0 0 0 0 0 49,273,282 79,525,263

Changes of the peiord

At 1°.01.2017 Change to opening

balances

At 1°.1.2017 Allocation of the prior Equity transactions

Change in equity

instrumentsOther changes

Equity at 31.12.2017

year profit carried out during the period

Reserves Dividends & other

allocations

Issue of new

shares

Purchase of treasury

shares

Extraordinary dividend

distribution

25

Statement of cash flows for the year ended 31 December 2017

31.12.2017 31.12.2016

80,911 109,350

49,264 129,988

0 0

0 0

5 41

8,665 3,968

1,794 1,544

- unpaid taxes and duties (+) 21,183 -26,192

0 0

0 0

-77,709 -13,313

-9 3,893

-17,306 -4,381

-75,611 -60,980

1,635 42,362

13,583 32,419

10,128 123,303

-95,493 80,184

60,278 -1,079

0 0

0 0

0 0

0 0

45,343 44,199

13,330 245,966

0 0

0 0

0 0

0 0

0 0

0 0

0 0

-22,595 12,706

0 0

0 0

-18,526 -8.671

-4,069 -4.036

0 0

-22,595 -12,706

0 0

- dividends to be distributed

0 0

-129,988 -147,081

-129,988 -147,081

-139,255 86,178

93,846 7,670

-139,255 86,178

-45,409 93,849

- profit for the period (+/-)

A. OPERATING ACTIVITIES

1. Operations

- w ith customers

- gains/losses on f inancial assets held for trading and

financial assets/liabilities at fair value through profit or loss (-/+)- gains/losses on hedging activities (-/+)

- net impairment losses (+/-)

- depreciation/amortisation (+/-)

- net accruals to provisions for risks and charges and other costs/revenue (+/-)

- net impairment losses on disposal groups, net of the tax effect (+/-)

- other adjustments (+/-)

2. Cash flows generated (used) by financial assets

- f inancial assets

- w ith banks

- w ith f inancial institutions

- sales of equity investments

- other assets

3. Cash flows generated (used) by financial liabilities

- due to banks

- due to f inancial institutions

- due to customers

- Securities issued

- Financial liabilities held for trading

- f inancial liabilities at fair value through profit or loss

- Other liabilities

Net cash flows generated by operating activities

B. INVESTING ACTIVITIES

1. Cash flows generated by

Net cash flows used by investing activities

- dividends from equity investments

- sales of HTM investments

- sales of property, equipment and investment property

- sales of intangible assets

- sales of business units

2. Cash flows used to acquire

- equity investments

- HTM investments

- property, equipment and investment property

- intangible assets

- business units

Opening cash and cash equivalents

Total net cash f low s for the period

Closing cash and cash equivalents

C. FINANCING ACTIVITIES

- issues/acquisitions of equity instruments

- allocation of dividends and other equity purposes

Net cash flows used by financing activities

NET CASH FLOWS GENERATED (USED) DURING THE PERIOD

RECONCILIATION

26

In line with the amendment to the IAS 7, introducted with the Regulation 1990 of November 6th 2017, to be applied for the first time on Jennuary 1st2017, are given below the informations required from section 44 B in order to valuate the variations of the liabilities arising from financing activities, whether they arise from financial flows or variations not in cash.

A. Operating Activities - 3. Liquidity generated/absorbed from financial liabilities 31.12.2017

a) Variations arising from financial f low s of f inancing activities - 50,000

b) Variations arising from the obtainment or loss of the controll over subsidiaries or other f irms

c) Effect of the variations in exchange rates

d) Variations in Fair Value

e) Other variations 60,128

Liquidity generated/absorbed from financail liabilities 10,128

27

Independent auditors’ report

31

Board of statutory auditors’ report

32

Report of the Board of Statutory Auditors of Mercury

Payment Services S.p.A.

to the Shareholders’ Meeting

pursuant to article 2429 Civil Code - financial year 2017

1. PREMISE

To the Sole Shareholder.

During 2017, the Board of Statutory Auditors supervised the activities of the Company, bearing in mind

the overall system of rules governing the functions attributed to it.

The Board of Statutory Auditors carries out the duties of Supervisory Body pursuant to Legislative Decree

no. 231 of 8 June 2001.

The evolution occurred in 2017 of the Board of Statutory Auditors: the President of the Board of Statutory

Auditors, Mr. Livio Torio and the effective Statutory Auditor Mr. Massimo Broccio, resigned, respectively,

on 13 March 2017 and 14 March 2017, because of incompatibility with other offices, in the new corporate

context.

Therefore, on 13 March 2017, Mr. Paolo Giulio Nannetti took over the role of President of the Board of

Statutory Auditors and on 14 March 2017, Mrs. Francesca Monti took over the role of effective Statutory

Auditor. On 21 April 2017, the Shareholders’ Meeting appointed the new Board of Statutory Auditors,

which, as of the date of this Report, is composed as follows:

President Mr. Alberto Balestreri

Statutory Auditors Mr. Piero Alonzo

Mr. Marco Giuseppe Zanobio Alternate Statutory Auditors Mr. Fabio Oneglia

Mr. Andrea Vagliè Hence, on 21 March 2018, the Board of Directors approved the Financial Statements as of 31 December

2017 together with the Explanatory Notes and the Report on operations and sent it to the Board of

Statutory Auditors.

1.1. Legislation

The Board of Statutory Auditors carried out the task assigned pursuant to article 2403 of the civil code.

The Board of Statutory Auditors acted in accordance with the regulation applicable to the Company as

Payment Institution, pursuant to the banking and credit legislation (in particular, articles 114 sexies and

following) as well as the legislation of the Bank of Italy ("Supervisory Provisions for Payment Institutions

and Electronic Money Institutions" of 17 May 2016).

The Board also acted in compliance with the Rules of conduct of the Board of Statutory Auditors issued

by the National Councils of Accountants and Accounting Experts.

1.2. Details of the procedures of the Board of Statutory Auditors’ activities

The tasks assigned to the Board and the supervisory activity have been carried out through:

- the participation to the Board of Directors and the Shareholders’ Meetings;

33

- information from the Company’s executives and, in particular form the General Manager;

- periodical meetings with the head of “Internal Audit” (carried out by Intesa Sanpaolo until 31 March

2017 and then outsourced in Nexi S.p.A. according to the service agreement), the head of “Risks,

Compliance & AML”, the head of “Administration, Planning & Control”, the Chief Information

Technology Officer, the Chief Commercial Officer, the head of “Human Resources & Organization”

and the head of “General Secretariat”;

- information exchange with the Auditing Firm in accordance with the current legislation;

- reports from the corporate departments about the activity and the assessments;

- information and activities carried out by the Supervisory Body pursuant to Legislative Decree no. 231

of 8 June 2001.

2. GENERAL SUPERVISORY ACTIVITY

2.1. Compliance with the law and the founding act

The Board of Statutory Auditors is not aware of operations in conflict with the law carried out by the

Company, not compliant with the corporate purpose or in opposition with the resolutions of the

Shareholders’ Meeting and Board of Directors.

2.2. Participation to the corporate bodies, Board of Statutory Auditors and departments

meetings, exchanges with the auditing firm

The Board of Statutory Auditors carried out their activity, during 2017, also taking part to the Board of

Directors’meeting and Shareholders’ meeting.

In detail the Board:

- took part to the nine Board of Directors’ Meetings, acquiring the information provided therein also by

the delegated bodies, in accordance with article 2381 paragraph 5 Civil Code or by the General

Manager with regard to the management development (e.g. main operations carried out by the

Company);

- attended to the only Shareholders’ Meeting during the 2017;

- held, during 2017, eight meetings of the Board of Statutory Auditors performing also the supervisory

activity with the support of the internal control functions periodically met;

- acquired further information and conducted analyzes at the nine meetings and activities conducted

as Supervisory Body pursuant to Legislative Decree no. 231 of 2001;

- met the General Manager informing her about the highlights.

2.3. Supervisory Authority (Autorità di Vigilanza)

The Board of Statutory Auditors paid particular attention to the legislation issued in 2017 by the

Supervisory Authority, as well as to any communications and requests for information, acknowledging the

regular and timely submission to the Bank of Italy of requests and due communications.

2.4. Complaints

During the 2017, the Board of Statutory Auditors – also acting as Supervisory Body 231 - has not made

alerts to the competent authorities. The Board has not directly received complaints from customers and

verified, through meetings with the departments, the process of management of the complaints that the

Corporate Bodies and the Departments received.

34

2.5. Considerations about the main operations performed by the Company and their

compliance with the law and the constitutive act

The Board of Statutory Auditors acknowledged the main transactions from time to time submitted to the

Board of Directors and has no exceptions to raise.

2.6. Indication of the possible existence of atypical and/or unusual transactions with related

party and adequacy of the disclosure

The Board of Statutory Auditors did not note, during the year, atypical and / or unusual transactions and

acknowledged the conformity of the transactions carried out by the Company, to the Law and to the By-

laws.

The Board of Statutory Auditors has acquired information on the transactions with related party both

through the information produced in the financial statements documents and on the basis of the

information provided by the company departments and/or in relation to the items discussed in the

meetings of the Board of Directors. The transactions with related party have been put in place in

accordance with the law.

The Board of Directors approved the “Related party transactions regulation” on the meeting of 3

November 2017. The main related party transactions – as explained in the Report on operations and in

the Explanatory Notes of the Financial Statements as of 31 December 2017 – concern:

(i) the financing agreement of € 45 million with Latino Italy S.r.l. to cover any financial needs of the

Company;

(ii) the service agreement among ICBPI (now Nexi S.p.A.), Mercury UK Holdco Limited and Mercury

Payment Services S.p.A., which governs the transmission of information flows from Mercury Payment

Services to Nexi S.p.A., in order to include the Company in the prudential control processes at a

consolidated level (as required by the Bank of Italy), respecting the confidentiality of the information

transmitted;

(iii) contract governing the outsourcing of internal audit activities at Nexi S.p.A.

(iv) the Consulting Services Agreement with Advent International, Bain Capital and Clessidra, for € 5

million.

2.7. Comments on the respect of the principles of good administration

The Board of Statutory Auditors acknowledged and supervised on the respect of the sound and prudent

management of the Company. They emphasized the adequacy of the preliminary process capable of

ensuring a reasonable and informed action by the Board of Directors and the adequacy of the process of

assumption of the resolutions. They verified, on the basis of the information acquired, the compliance

with the law and the By-laws of the resolutions that do not result reckless or risky.

3. INFORMATION EXCHANGE AND SUPERVISORY AUTHORITY FOR THE RELATIONSHIP

WITH AUDITING FIRM

3.1. Comments and proposals on remarks and requests for information contained in the report

of the Auditing Firm

The Board of Statutory Auditors met, during the year, the Auditing Firm in order to conduct the

appropriate exchange of information with regard to the results of the verification activities carried out by

the Firm. The Auditing Firm has reported about the audit task and about the absence of uncertain

35

situations or any constraints in the conducted activities. The Auditing Firm have announced that -

following the amendments to Legislative Decree no. 39/2010 - the Company no longer holds the status of

"public interest entity" but that of "Subject of intermediate interest". The Board of Statutory Auditors

examined the report provided by the Auditing Firm KPMG with reference to the Financial Statements as

of 31.12.2017 and in this regard, they acknowledged the absence of remarks and findings.

3.2. Granting of additional assignments to the Auditing Firm

The Board of Statutory Auditors acknowledged the absence of further assignments conferred to the

Auditing Firm.

3.3. Comments on any significant matters arising during the meetings held with the auditors

The Board of Statutory Auditors has acquired information from the Auditing Firm on the results of the

verifications carried out during 2017 and, lastly, the results of the control activities on the reports, without

detecting any critical issues.

4. OPINIONS AND COMPLAINTS

4.1. Opinions issued pursuant to the law during the year

The Board of Statutory Auditors, in the meeting of the Board of Directors held on 25 July 2017, expressed

their favorable opinion on the appointment of Mr. Ferdinando Ceschel as head of the "Risks, Compliance

& AML", as Anti-Money Laundering Officer and as Company Compliance Officer; as required by the law.

4.2. Presentation of complaints pursuant to article 2408 Civil Code, initiatives and outcomes

During the year 2017, the Board of Statutory Auditors has not received complaints pursuant to article

2408 Civil Code.

5. SUPERVISORY ACTIVITIES RELATING TO THE ADEQUACY OF THE ORGANIZATIONAL

STRUCTURE, INTERNAL CONTROL SYSTEM AND ADMINISTRATIVE-ACCOUNTING

SYSTEM

5.1. Comments on the adequacy of the organizational structure

The Board of Statutory Auditors supervised the adequacy of the organizational structure, with reference,

in particular, to the tasks assigned to the internal control functions and to the procedures and controls set

up for the activities considered to be most sensitive for the Company. As Supervisory Body and therefore

in the context of the activity of verification of adequacy of the model of organization, management and

Control pursuant to the legislative decree 231/ 2001, the Board of Statutory Auditors acknowledged that

the 231 model was updated after the assessment carried out in July 2017, it was approved by the Board

of Directors on 21 December 2017 and that the company policies, the code of Ethics and the code of

Conduct were also updated. The Company will carry out a further assessment of follow up on the model

of organization and management during the current year.

5.2. Comments about the adequacy of the internal control system

The Board of Statutory Auditors acknowledged the modifications to the organizational structure

implemented by the Company during 2017, in order to make it suitable for business needs, as a result of

the change of control of the company. With reference to the activities carried out by the Audit function, the

Board of Statutory auditors received and acknowledged all reports delivered by the Audit function. It is

noted that the Audit function is conducting a project that will allow to apply a structured methodology of

evaluation of the Internal Control System also for Mercury Payment Services S.p.A. and that, on the basis

36

of a specific Audit report, the Company started a project to improve the compliance model with actions

aimed at strengthening the monitoring of the risk of non-compliance. With regard to the activities carried

out by the anti-money laundering function, the Board of Statutory Auditors acknowledged the activities of

continuous improvement and the ongoing adaptation of the safeguard measures.

5.3. Comments on the adequacy of the administrative/accounting system and on the

reliability of this system to properly represent the operations

The Board of Statutory Auditors assessed, to the extent applicable, the reliability of the administrative-

accounting system to transpose and correctly represent the operations. They conducted such evaluations

also by obtaining information from the heads of departments and on the basis of the periodical exchange

with the Auditing Firm, and in particular, with reference to the findings of the Auditing firm activities aimed

to verify the adequacy of the administrative-accounting system that did not reveal any criticality or points

to pay attention to. The Board of Statutory auditors consider that the administrative/accounting system is

substantially adapted to the characteristics of the company.

6. OTHER SUPERVISORY ACTIVITIES

The Board of Statutory Auditors formulate under this section a non-exhaustive list about the further

activities of supervision and the matters dealt with during their attivities. The Board of Statutory Auditors

acknowledged:

- on the basis of the reports of the competent Functions and of the contents of the 2017 Annual Report,

the overall situation of the Complaints and the procedures and organizational structures of the company,

as well as data and considerations on the management of complaints received (not significant in terms of

number and amount) in 2017. The Company has adequate controls and procedures;

- the content of the annual report due by the Employer, which indicates the main requirements put in

place to ensure a correct and constant supervision; the management system of Health and Safety at

Work in place is able to ensure compliance and legal obligations pursuant to the law.

Finally, the Board of Statutory Auditors acknowledged and acquired the following information:

- with reference to the IT security of Mercury Payment Services, the Company periodically performed the

activities of "vulnerability assessment and penetration tests" to ensure compliance with external and

internal regulations and to verify and monitor the security of its networks. Consequently, the Company

updated and is applying the "Security Remediation Plan";

- the Company, as requested by the Bank of Italy, was included in the prudential consolidation perimeter

of the Nexi S.p.A. Group and provides to Nexi S.p.A. the information flows necessary for this purpose; in

this context, the Company complies with the confidentiality obligations about the protection and

segregation of information regarding the customer Intesa Sanpaolo S.p.A.;

- in order to comply with the regulatory provisions on PSD2 (EU directive 2015/2366) and GDPR

(European Regulation 2016/679), in 2017 the Company started working groups coordinated by the

Compliance Function.

37

7. FINAL EVALUATIONS REGARDING THE ACTIVITY OF SUPERVISION AS WELL AS ANY

OMISSION, REPREHENSIBLE FACT OR IRREGULARITY DETECTED

Based on the surveillance activities carried out by the Board of Statutory Auditors, and as presented in

this Report, it was possible for the Board Statutory Auditors to acknowledge - also on the basis of the

ongoing project activities - the substantial adequacy of the Company regarding its organizational structure

and its administrative and accounting system. With reference to the internal control system, the Board of

Statutory Auditors acknowledged the actions started by the Company aimed at strengthening the

monitoring of the risk of non-compliance. During the supervisory activity no omissions, reprehensible facts

or irregularities emerged.

8. COMMENTS AND PROPOSALS TO THE FINANCIAL STATEMENTS AND ITS APPROVAL

It is recalled that, pursuant to art. 13 and 14 of Legislative Decree no. 39/2010 (formerly 2409-bis and

following of the Italian Civil Code), the Auditing firm is responsible for checking that the accounting

entries are correctly represented, their findings and their consistency with the financial statements data.

However, the Board of Statutory Auditors did not exclude checks on some items of the financial

statements to ensure that, in the broader and more general provision of the Italian Civil Code, as well as

of what is prescribed, with the necessary additions, also by the art. 2429 of the Italian Civil Code, the

ability to formulate their independent assessment on the correctness of the financial statements was not

limited. The Board of Statutory Auditors examined the financial statements according to the principles of

conduct of the Board of Statutory Auditors, established by the National Councils of Accountants and

Accounting Experts and, in accordance with these principles, the Board of Statutory Auditors referred to

the law in force in Italy, related to the financial statements.

The Board of Statutory Auditors monitored the general approach of the financial statements and the

notes on its general compliance with the law, with regard to its establishment and structure, as well as its

correspondence to the facts and information of which the Board of Statutory Auditors is aware.

In particular, the Board of Statutory Auditors note that the Financial Statements was prepared in

compliance with the IAS/IFRS international accounting standards in effect at the reference date and that

the evaluation criteria comply with those envisaged by art. 2426 of the Civil Code. Furthermore, the

Board of Statutory Auditors underline that the Financial Statements was prepared on the basis of the

instructions for the "Financial statements of IFRS intermediaries other than bank intermediaries" issued

on 9 December 2016 by the Bank of Italy.

The Directors’report provides adequate information on the sources that determined the profit for the year

and highlights the main events that characterized the year ended on 31 December 2017, as well as the

additional information required by art. 2428 of the Civil Code. The auditing firm KPMG S.p.A confirmed to

the Board of Statutory Auditors the absence of observations or requests for information in its report to the

financial statements pursuant to art. 14 of the legislative decree 39/2010 (formerly Article 2409-ter of the

Civil Code). Finally, the Statutory Auditors certify that, according to their knowledge, the Directors, during

the drafting of the financial statements, did not derogate from the provisions of the law pursuant to art.

2423, paragraph four, of the Civil Code. With reference to the Financial Statements, which show the profit

for the year equal to € 49,264,000.00, the Board of Statutory Auditors have no observations or proposals

and express, as far as they are competent, favorable opinion on the approval and acceptance of the

38

proposal formulated by the Board of Directors on the following allocation of the profit of € 49,264,000.00:

(i) to the sole shareholder: € 0.00; (ii) to the reserve: € 49,264,000.00.

Milan, 6th April 2018

The Board of Statutory Auditors

Alberto Balestreri – President

Piero Alonzo – Statutory Auditor

Marco Giuseppe Zanobio – Statutory Auditor

39

Notes to the financial statements

40

Part A) – Accounting policies

A.1 General part

Section 1 - Statement of compliance

Pursuant to Legislative decree no. 38 of 28 February 2005, the financial statements as at and for the

year ended 31 December 2017 have been prepared in compliance with the International Financial

Reporting Standards (IFRS) issued by the International Accounting Standards Board (IASB) and

related interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and

endorsed by the European Commission, as established by Regulation (EC) no. 1606 of 19 July 2002. The financial statements have been prepared in accordance with the IFRS endorsed and applicable on 31 December 2017 (including the SIC and IFRIC interpretations) which are listed in the annexes to these financial statements. The accounting policies are unchanged with respect to those applied in the previous year, the previous interim reports and the 2017 half-year report. The following table sets out the new standards or amendments to existing standards, with the related endorsing regulations issued by the European Commission, which became applicable in 2017. Standards endorsed at 31 December 2017 and applicable from 2017

Endorsement

regulation

Name

Date of application

1989/2017

Amendments to IAS 12 Income taxes

01/01/2017

First annual period beginning on or after 1

January 2017

1990/2017 Amendments to IAS 7 Statement of cash flows 01/01/2017


January 2017

Date of application

The following table shows the new standards or amendments with the related endorsement regulations. Their application is mandatory from 1 January 2018 (for entities whose reporting period is the calendar year) or subsequently.

IFRS endorsed at 31 December 2017 and applicable after 31 December 2017

Endorsement

regulation

Name

Date of application

1905/2016

IFRS 15 Revenue from Customers

01/01/2018


January 2018

2067/2016 IFRS 9 Financial Instruments 01/01/2018


January 2018

1986/2017 IFRS 16 Leasing 01/01/2019

First annual period beginning on or after 1 January 2019

1987/2017 Modification to IFRS 15 Revenue from Customers 01/01/2018


1988/2017 Modification to IFRS 4 insurance contracts 01/01/2018


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IFRS 9 (Financial instruments) and IFRS 15 (Revenue from contracts with customers) came into force on 1 January 2018. These standards replaced IAS 39 and IAS 18 which governed the recognition, classification and measurement of financial instruments and the recognition of revenue, respectively. Under IAS 8, when initial application of a standard or an interpretation has an effect on the current period or any prior period, or might have an effect on future periods, an entity shall disclose the title of the new standard, the nature of the change in accounting policy for the current period and each prior period presented and, to the extent practicable, the amount of the adjustment for each financial statement line item affected. Furthermore, again under IAS 8, when an entity has not applied a new standard or a new interpretation that has been issued but is not yet effective, the entity shall disclose this fact and known or reasonably estimable information relevant to assessing the possible impact that application of the new standard or the new interpretation will have on the entity’s financial statements in the period of initial application. IFRS 9 introduced important changes in the classification and measurement of financial instruments. Mercury Payment Services will adopt this standard on the date it will become in force, i.e., 1 January 2018. Despite the significant changes to the classification of financial instruments compared to IAS 39, the impacts on the company are not deemed significant for 2017. Indeed:

• the analysis of the debt instruments resulted in the classification in the “Held to collect” IFRS 9 portfolio, maintaining the amortised cost method (having successfully passed the SPPI test), with an insignificant impact of impairment rules due to the poor relevance of the credit risk inherent in the loans and receivables portfolio and the prevalence of on-demand or very short-term exposures;

• the classification of the equity instruments in portfolio shows no trading instruments and therefore results in “instruments not held for trading” measured at fair value through profit or loss.

IFRS 15 introduces a five-step model to recognise revenue from contracts with customers. According to the analysis carried out on 2017, no significant impacts are expected since:

• despite the existence of contracts with multiple performance obligations, the individual obligations refer to routine or recurring services to which the exception allowed by IFRS 15 applies. Accordingly, the individual contractual obligations are considered as a single performance obligation;

• the nature of the services provided in contracts which provide for multiple performance obligations generally refers to recurring services which are invoiced monthly.

Based on the above reasons, the impacts of IFRS 15 are entirely insignificant. In this respect, the following are particularly important:

• IFRS 16 – Leases; • the amendments to IFRS 4 to the benefit of insurance companies;

IFRS 16, subject to endorsement by the European Commission, applicable, to periods beginning on or after 1 January 2019, introduces significant changes to the recognition of leases in the financial statements of lessors and lessees. Specifically, the standard abolishes the distinction between operating and finance leases set out in IAS 17: all leases must be recognised as finance leases. This generally implies for lessees – with the same final profitability and cash flows – an increase in recognised assets (leased assets), an increase in liabilities (lease liability), a reduction in operating costs (lease payments) and an increase in finance costs (related to the repayment and remuneration of the recognised liability). With respect to disclosures, the lessees should provide at least:

• a breakdown of leased assets by “classes”; • an analysis of the liabilities related to leases by due date; • all information that may be potentially useful to better understand the company’s business with

respect to leases (e.g., early repayment options or extension).

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Conversely, no specific changes are expected for lessors, exception for additional disclosures. The distinction between operating and finance leases remains in lessors’ financial statements.

Section 2 – Basis of preparation The financial statements at 31 December 2017 have been prepared in accordance with the measure of Bank of Italy’s Governor of 9 December 2016 “The IFRS financial statements of intermediaries other than bank intermediaries”. They have been prepared on a going concern basis and comprise a statement of financial position, an income statement, a statement of comprehensive income, a statement of changes in equity, a statement of cash flows and these notes. They are also accompanied by a Directors’ report. The financial statements’ reporting currency is the Euro. The company has applied the general recognition and measurement criteria established by IAS 1 and other relevant standards endorsed by the European Commission. No waivers were made to the application of the IFRS. The statement of financial position and income statement comprise captions, subcaptions and additional information (identified with “of which”). In order to comply with the above Measure of Bank of Italy, they present certain captions with a nil balance in both the reporting and previous periods. Revenue is shown without a sign while costs are shown with a minus sign in the income statement. The financial statements and the notes thereto show corresponding prior year figures. The statement of cash flows has been prepared using the “indirect method” which is deemed to best represent the company’s business. The financial statements’ presentation currency is the Euro and the amounts shown in these notes are in thousands of Euros.

Section 3 – Events after the reporting date No significant events took place in the early months of 2018.

Section 4 – Other aspects

The financial statements of Mercury Payment Services were audited by KPMG S.p.A. as per the

engagement assigned by the shareholders in their meeting of 2 November 2011 to audit the financial

statements for the 2012-2020 period.

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A.2 ACCOUNTING POLICIES

A.2.1 Financial statements captions

Financial assets held for trading

The company does not currently have any financial assets held for trading.

Available-for-sale financial assets

Classification

This caption includes financial assets that are not classified as loans and receivables, financial assets

held for trading, held-to-maturity investments or financial assets at fair value through profit or loss.

Recognition

Available-for-sale financial assets are initially recognised at the settlement date (debt and equity

instruments) or at the disbursement date (loans and financing). Assets are initially recognised at fair

value, including any transaction costs or proceeds directly attributable thereto. If, when allowed by the

IFRS, their recognition is due to reclassification from held-to-maturity investments or, in the case of

unusual events, from financial assets held for trading, their carrying amount is their fair value at the

reclassification date.

Measurement

Subsequent to initial recognition, available-for-sale financial assets are measured at fair value, with a balancing entry under a specific equity reserve. Fair value gains and losses are recognised in a specific equity reserve and taken to the income statement upon transfer or when an impairment loss exists. Available-for-sale financial assets are tested for impairment. Any resulting impairment losses are measured as the difference between the asset’s carrying amount and fair value. Should the reasons for impairment cease to exist due to an event that took place after the recognition of impairment losses, they are reversed through profit or loss if relating to loans and receivables and debt instruments or equity if relating to equity instruments. Reversals of impairment losses can never exceed the amortised cost the assets would have had if no impairment losses had been recognised.

Derecognition

Financial assets are derecognised only when substantially all the risks and rewards of ownership of the asset are transferred. Conversely, if the significant risks and rewards associated with the transferred asset are retained, the financial asset continues to be recognised, even though legal title has been transferred. When it is not possible to verify the substantial transfer of the risks and rewards, the assets are derecognised when no control thereover is retained. If even a portion of control is retained, the asset continues to be recognised in line with the company’s continuing involvement, measured by exposure to changes in the value of the assets transferred and to changes in the related cash flows. Finally, transferred financial assets are derecognised when the company retains the contractual rights to receive the related cash flows with the concurrent obligation to pay them to a third party.

Held-to-maturity investments

The company does not currently have any held-to-maturity investments.

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Loans and receivables

Classification

Loans and receivables include amounts due from customers, banks and financial entities, as well as trade receivables.

Recognition

Loans and receivables are initially recognised at the agreement signing date, which is usually the disbursement date, including transaction expense or income directly attributable to the individual loan or receivable and determinable from the transaction start date, even when they are disbursed subsequently. The initially recognised amount does not include costs that, despite having the above characteristics, are to be reimbursed by the counterparty or that are administrative costs.

Measurement

After initial recognition, loans and receivables are measured at amortised cost. The amortised cost method is not used for short-term loans or receivables as their discounting has no material impact. They are measured at historical cost, while transaction expense or income attributable to it is recognised in profit or loss on a straight-line basis over the asset’s contractual term. Loans and receivables without a specified maturity or revocable are treated similarly. Loans and receivables are tested for impairment to identify those that, due to events subsequent to initial recognition, show objective evidence of impairment. These are those classified as bad exposures, unlikely to pay, or past due/overdue under Bank of Italy’s rules, which are in line with the IFRS and European supervisory regulations. Non-performing exposures are tested for impairment individually and the impairment loss is equal to the difference between their carrying amount at the measurement date (amortised cost) and the present value of the expected cash flows, calculated using the original effective interest rate. Expected cash flows also consider the estimated realisable value of any guarantees, as well as expected recovery costs. Cash flows from loans and receivables that are expected to be recovered in the short term are not discounted. The original effective interest rate of each exposure is unchanged over time, even if the agreement has been restructured, leading to a change in the contractual rate and even when the exposure, in practice, no longer bears contractual interest. Impairment losses are recognised in profit or loss. Loans and receivables are reinstated to their original value in subsequent years when the reasons for impairment are no longer valid, as long as this assessment may be objectively linked to an event that took place after recognition of the impairment loss. Reversals of impairment losses are recognised in the income statement and may never exceed the exposure’s amortised cost had the impairment loss not been recognised. Loans and receivables that are not tested individually for impairment (usually performing ones) are tested collectively. They are grouped into categories of similar assets based on their risk and the related impairment loss percentages are estimated considering historical data, based on elements observable at their measurement date, so as to estimate each category’s unrealised loss. Collective impairment losses are recognised in profit or loss.

Derecognition

Loans and receivables are derecognised when substantially all the risks and rewards of ownership of the asset are transferred. Conversely, if the significant risks and rewards associated with the transferred asset are retained, the financial asset continues to be recognised, even though legal title has been transferred. When there are uncertainties as to the substantial transfer of the risks and rewards, the assets are derecognised only when no control thereover is retained. If even a portion of control is retained, the asset continues to be recognised in line with the company’s continuing involvement, measured by exposure to changes in the value of the assets transferred and to changes in the related cash flows. Finally, loans and receivables are derecognised when the company retains the contractual rights to receive the related cash flows with the concurrent obligation to pay them to a third party.

45

Financial assets at fair value through profit or loss

Classification

The IFRS endorsed by the European Commission allow entities to classify any financial asset, defined as such upon acquisition, in the financial assets at fair value through profit or loss in compliance with relevant regulations. Reclassifications to the other financial asset categories are not permitted.

Recognition They are initially recognised at fair value.

Measurement After initial recognition, they are measured at fair value, with any resulting gains or losses recognised in profit or loss.

Derecognition Financial assets are derecognised only when substantially all the risks and rewards of ownership of the asset are transferred. Conversely, if the significant risks and rewards associated with the asset are retained, the financial asset continues to be recognised, even though legal title has been transferred. When it is not possible to verify the substantial transfer of the risks and rewards, the assets are derecognised when no control thereover is retained. If even a portion of control is retained, the asset continues to be recognised in line with the company’s continuing involvement, measured by exposure to changes in the value of the assets transferred and to changes in the related cash flows. Finally, transferred financial assets are derecognised when the company retains the contractual rights to receive the related cash flows with the concurrent obligation to pay them to a third party. Equity investments

Classification At 31 December 2015, this caption comprised investments in companies controlled by the Intesa Sanpaolo Group and recognised at cost. Indeed, companies owned by several group companies which, for consolidation purposes, are considered as subsidiaries, joint ventures or associates, must be classified as associates in the financial statements of the individual entities holding minority interests and measured and recognised accordingly. At 31 December 2016, following the company’s exit from the Intesa Sanpaolo Group, the equity investments were sold or reclassified to available-for-sale financial assets.

Recognition Equity investments are recognised at the settlement date. They are initially recognised at cost.

Measurement Equity investments are measured at cost, adjusted, where necessary, for impairment. If there is indication of impairment, the company estimates the investment’s recoverable amount, considering the discounted future cash flows that the investee may generate, including the investment’s costs to sell. When the recoverable amount is less than the investment’s carrying amount, the difference is recognised in profit or loss. Should the reasons for impairment cease to exist due to an event that took place after the recognition of impairment losses, they are reversed through profit or loss.

46

Derecognition Equity investments are derecognised when the contractual rights to cash flows therefrom expire or the investment is sold, transferring substantially all the related risks and rewards.

Property, equipment and investment property

Classification Property, equipment and investment property include technical systems, furniture and fittings and any type of equipment. They are held to be used in production or in the provision of goods and services, to be leased to third parties, or for administrative purposes, and will be used over more than one reporting period. Those to be used in production or in the provision of goods and services are classified as “operating assets” in accordance with IAS 16.

Recognition Property, equipment and investment property are initially recognised at cost, which includes the purchase price and all related costs directly attributable to acquire the asset and prepare it for its use. Extraordinary maintenance costs that lead to an increase in the future economic benefits are recognised as an increase in the asset’s carrying amount, while the other ordinary maintenance costs

are recognised in profit or loss.

Measurement Property, equipment and investment property are measured at cost, less accumulated depreciation and impairment losses. They have never been revalued. They are depreciated systematically on a straight-line basis over their useful life. If there is any indication of impairment, the asset’s carrying amount is compared to its recoverable amount at each interim or annual reporting date. Any impairment losses are recognised in profit or loss. Should the reasons for impairment cease to exist, the company reverses the impairment losses to the extent of the carrying amount, net of depreciation, that the assets would have had, if the impairment losses had never been recognised.

Derecognition An asset is derecognised when sold or when it is no longer used and its disposal is not expected to generate future benefits.

Intangible assets

Classification Intangible assets are recognised as such if they are identifiable and arise from legal or contractual rights. At present, they include, specifically, software licenses and proprietary software.

Recognition and measurement Intangible assets are recognised at cost, including directly related charges only when it is probable that the future economic benefits of the asset will materialise and its cost can be determined reliably. Otherwise, their cost is immediately recognised in profit or loss. Intangible assets with a finite useful life are amortised, net of the recoverable amount, based on their useful life, using a 20% annual rate.

47

If there are indications that an asset may be impaired, the company estimates its recoverable amount. Any impairment losses are recognised in profit or loss as the difference between the asset’s carrying amount and recoverable amount.

Derecognition Intangible assets are derecognised upon their disposal or when no future benefits are expected therefrom. Other assets At present, this caption comprises assets that cannot be included in the other asset captions.

Liabilities Due to banks, financial institutions and customers consist of amounts related to the provision of financial services. Provisions for risks and charges

Pension and similar provisions

The company does not currently have pension provisions.

Other provisions

The other provisions for risks and charges include accruals relating to legal or labour-related obligations or other disputes arising from past events with respect to which it is probable that an outflow of resources will be necessary to settle the obligation, provided that the related amount can be reliably estimated. Accordingly, the company recognises a provision if and only if:

• the company has a present legal or constructive obligation as a result of a past event; • it is probable that an outflow of resources embodying economic benefits will be necessary to

settle the obligation; • the obligation can be determined reliably.

The recognised provision is the best estimate of the future outlay necessary to settle the obligation existing at the reporting date, considering the relevant risks and uncertainties. When discounting is used, the increase in the provision due to the passage of time is recognised as in interest expense. The provisions include, inter alia, accruals for bonuses and discretionary incentives to be paid to employees, equal to the outflows that will be required to settle the obligation, without discounting future disbursements should the related charges be incurred within 12 months. The accruals to provisions for risks and charges and any amounts in excess of previously set up provisions are recognised under “net accruals to provisions for risks and charges” based on their nature, while accruals for bonuses to be paid to employees are recognised under “Administrative expenses – personnel expense”. If it is no longer probable that an outflow of resources embodying economic benefits will be required to settle the obligation, the provision is reversed.

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Post-employment benefits

The Italian post-employment benefits are classified as follows: • “defined contribution plans” for the benefits accruing from 1 January 2007 (the enforcement

date of the supplementary pension reform as per Legislative decree no. 252 of 5 December 2005), regardless of the employees’ decision to transfer them either to a supplementary pension fund or to the INPS (the Italian Social Security Institution) treasury fund. The cost recognised as personnel expense is calculated based on the contributions due, without applying any actuarial calculation;

• “defined benefit plans” for the benefits vested up to 31 December 2006, which are recognised at their actuarially calculated amount.

The actuarial amounts required by IAS 19 “Employee benefits” are calculated by an independent actuary using the projected unit credit method, without considering the current service cost as these benefits are almost entirely vested and their revaluation is not believed to produce significant benefits for the employees. The discount rate is determined by reference to market yields on high quality corporate bonds, considering the average life of the obligation, weighted by the percentage of the amount paid and advanced, for each due date, compared to the total amount to be paid and to be advanced up to the definitive settlement of the entire obligation. Service costs are recognised under personnel expense, while actuarial gains and losses are recognised in comprehensive income. Current and deferred taxes

Income taxes are calculated in accordance with domestic tax legislation. The effects of current and deferred taxation are recognised using the ruling tax rates. Income taxes are recognised in the income statement, except for those related to items taken directly to equity. They are provided for based on a prudent estimate of the current and deferred tax expense. Specifically, deferred tax assets and liabilities are calculated on the temporary differences, without time limit, between the carrying amounts of assets and liabilities and their tax bases. Deferred tax assets are recognised when their recovery is reasonably certain, based on the company’s ability to generate ongoing taxable profits. Deferred tax liabilities are recognised when the company does not reasonably expect to pay taxes on any future transactions as they would not exceed the already taxed available reserves. Deferred tax assets and liabilities are recognised in the statement of financial position without offsetting, including the former under “tax assets” and the latter under “tax liabilities”. Where deferred tax assets and liabilities relate to transactions that have been recorded in equity without affecting profit or loss (such as adjustments for IFRS first-time adoption, fair value changes in available-for-sale financial assets or of cash flow hedges), the balancing entry is made in equity, under the specific reserves where so provided (e.g., fair value reserves). Deferred tax assets and liabilities are remeasured regularly to reflect any changes in the tax laws or rates. Other liabilities At present, this caption comprises liabilities that cannot be included in the other liability captions.

Other disclosures Share-based payment

Share-based payment transactions are recognised in profit or loss with a corresponding increase in equity, based on the fair value of the financial instruments assigned at the grant date, by dividing the expense over the plan period.

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In the case of options, their fair value is calculated using a model that also considers the specific characteristics of the existing plan, in addition to other inputs such as the exercise price, the option life, the fair value of the shares and their expected volatility, expected dividends and the risk-free interest rate. This model considers the option and the likelihood that the vesting conditions on which basis the options have been assigned will be satisfied separately. The combination of the two values provides the fair value of the assigned instrument. Any reduction in the number of assigned financial instruments is recognised as a cancellation of a portion thereof. At 31 December 2017, this category is no longer present.

Cost and revenue recognition

Revenue is recognised when realised or, in any case: • in the case of sales of goods or products, when it is probable that the future economic benefits

will flow to the company and these benefits can be measured reliably; • in the case of services, when they are rendered.

Dividends are recognised in profit or loss in the year in which their distribution is approved. Costs are recorded in the income statement in the year in which the related revenue is recognised. If matching can be attributed generally or indirectly, the costs are allocated to more than one year according to rational procedures and on a systematic basis. Those costs that cannot be matched with the related revenue are expensed immediately. Fair value measurement methods

Since 1 January 2013, companies have been required to apply IFRS 13 governing fair value measurements and the related disclosures. This new standard does not extend the scope of application of fair value measurements, but rather combines in one standard the fair value measurement rules previously presented in different standards, sometimes with inconsistent provisions. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (i.e., not in a forced liquidation or as part of a distress sale) at the measurement date. Fair value is a market-based measurement, not an entity-specific measurement. Underlying the definition of fair value is the assumption that an entity is conducting its business under current market conditions and intends to holds its assets, not to materially decrease its level of activities or settle at disadvantageous conditions. When measuring the fair value of an asset or a liability, an entity uses the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. When measuring the fair value of a financial instrument, IFRS 13 provides for a hierarchy of criteria based on the origin, type and quality of information used in the calculation. The objective of this classification is to establish a hierarchy of fair value reliability according to the degree of discretion used by entities, giving priority to the use of observable market inputs that reflect the assumptions that market participants would use when pricing the asset or liability. Another objective of the hierarchy is to increase the consistency and comparability of fair value measurements. Three different levels of input are identified:

• Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date;

• Level 2: other directly or indirectly observable inputs for the assets or liabilities subject to valuation;

• Level 3: unobservable inputs for the asset or liability.

The decision about which level to use is not optional as they are to be applied in hierarchical order. Highest priority is given to official prices available on active markets for the assets or liabilities to be

50

measured (level 1) or assets and liabilities measured using techniques based on parameters observable on the market other than prices (level 2) and the lowest priority is given to assets and liabilities whose fair value is calculated using techniques that are based on unobservable inputs and which are, therefore, more discretional (level 3). The valuation model adopted for a financial instrument is the same over time, adjusted only in the case of significant changes in market conditions or subjective changes affecting the issuer. For the disclosure purposes of financial instruments measured at fair value, the fair value hierarchy described above is used consistently to classify the portfolios by fair value level.

A.3 TRANSFERS BETWEEN PORTFOLIOS OF FINANCIAL ASSETS

There were no transfers between portfolios of financial assets in 2017.

A.4 FAIR VALUE Qualitative disclosure

The company has assets measured at fair value on a recurring basis with an impact on profit or loss. The carrying amounts of current loans and receivables and on-demand loans and receivables are reasonable approximations of their fair value for disclosure purposes. The carrying amounts of on-demand liabilities with current or unknown due dates is also a reasonable approximation of their fair value.

A.4.1 Levels 2 and 3: valuation techniques and inputs used Nothing to report.

A.4.2 Measurement processes and sensitivity Nothing to report.

A.4.3 Fair value hierarchy Fair value measurements are classified based on a hierarchy of levels that reflects the significance of the inputs used. The following levels exist:

quoted prices (unadjusted) in an active market – as defined in IFRS 13 – for an asset or a liability (level 1);

inputs other than quoted prices included within Level 1 that are observable either directly (prices) or indirectly (derived from prices) on the market (level 2);

unobservable inputs for the asset or liability (level 3). There were no transfers of assets and liabilities between fair value levels.

A.4.4. Other disclosures Nothing to report.

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Quantitative disclosure

A.4.5 Fair value hierarchy A.4.5.1 Assets and liabilities measured at fair value on a recurring basis: breakdown by fair value level

Level 1 Level 2 Level 3 Total

1. Financial assets held for trading 0 0 0 0

2. Financial assets at fair value through profit or loss 154 0 0 154

3. Available-for-sale f inancial assets 4 10 0 14

4. Hedging derivatives 0 0 0 0

5. Property, equipment and investment property 0 0 0 0

6. Intangible assets 0 0 0 0

Total 158 10 0 168

1. Financial liabilities held for trading 0 0 0 0

2. Financial liabilities at fair value through profit or loss 0 0 0 0

3. Hedging derivatives 0 0 0 0

Total 0 0 0 0 Financial assets classified under:

• Level 1, comprise: - 52,345 Intesa Sanpaolo S.p.A. ordinary shares which were acquired for the Intesa Sanpaolo

Group’s 2011 and 2014 incentive plans. These shares are measured at fair value through profit or loss (using the fair value option) and included in the statement of financial position assets in caption 30 “Financial assets at fair value through profit or loss” for a total of €145 thousand;

- €9.3 thousand, being the amount due from Intesa Sanpaolo, which has agreed to pay the company, on the payment date of the Lecoip Certificates (at the maturity of the Lecoip in 2018), the portion of the total amount due to the company’s employees (for those employees that resigned before the company left Intesa Sanpaolo group). It is included in the statement of financial position assets in caption 30 “Financial assets at fair value through profit or loss”;

- the 1,302 Intesa Sanpaolo S.p.A. ordinary shares acquired for the 2014_2017 employee share ownership plan/Lecoip which were still held at the end of the reporting period. These shares are included in the statement of financial position assets in caption 40 “Available-for-sale financial assets”, for a total of €3.6 thousand.

• Level 2, comprise:

- 4 Intesa Sanpaolo Group Service S.c.p.a. ordinary shares measured at cost, which is deemed to represent their fair value (€10 thousand).

A.4.5.2 Changes in assets measured at fair value on a recurring basis (level 3)

None.

A.4.5.3 Changes in liabilities measured at fair value on a recurring basis (level 3)

None.

52

A.4.5.4 Assets and liabilities not measured at fair value or measured at fair value on a non-recurring basis: breakdown by fair value level.

CA L1 L2 L3 CA L1 L2 L3

1. Held-to-maturity investments 0 0 0 0 0 0 0 0

2. Loans and receivables 408,404 0 282,627 125,777 419,412 0 191,344 228,068

3. Investment property 0 0 0 0 0 0 0 0

4. Non-current assets held for sale and disposal groups 0 0 0 0 0 0 0 0

Total 408,404 0 282,627 125,777 419,412 0 191,344 228,068

1. Liabilities 236,796 0 65,608 171,188 235,045 0 100,822 134,223

2. Securities issued 0 0 0 0 0 0 0 0

3. Liabilities associated w ith disposal groups 0 0 0 0 0 0 0 0

Total 236,796 0 65,608 171,188 235,045 0 100,822 134,223

31.12.2017 31.12.2016

Only assets (current loans and receivables) and liabilities (current liabilities) measured at amortised cost are present in the year. Their carrying amount is assumed to be a reasonable approximation of fair value. Assets/liabilities in the form of current accounts are classified as Level 3.

A.5 INFORMATION ON “DAY ONE PROFIT/LOSS” IAS 39 establishes that a financial instrument shall be initially recognised at an amount that is equal to its fair value, which is normally the transaction price (i.e., the fair value of the consideration given or received). In practice, in certain circumstances the two amounts may differ. IAS 39 governs these circumstances by establishing that a financial instrument may be recognised at a fair value different from the amount paid/collected only if it is measured:

• by using prices from observable current market transactions in the same instrument; • using valuation techniques exclusively based on variables consisting of observable market data.

IAS 39’s presumption that fair value is equal to the price paid/collected can therefore be rebutted only if it is determined using the most objective method available, i.e., reducing valuation discretion to the minimum. The difference between the transaction price and the fair value measurement at initial recognition may generate a “day one profit or loss” that is immediately taken to profit or loss, when the specific conditions of IAS 39 have been met. The company did not recognise transactions entailing recognition of day one profit or loss.

53

Part B) – Notes to the statement of financial position

ASSETS (in thousands of Euros)

Section 1 – Cash and cash equivalents – Caption 10

31.12.2017 31.12.2016

a) Cash 1 1

b) Demand deposits w ith central banks 0 0

Total 1 1 Section 3 - Financial assets at fair value through profit or loss - Caption 30 These amounted to €154 thousand. This caption includes: . 52,345 thousand Intesa Sanpaolo S.p.A. ordinary shares worth €145 thousand, which were acquired for the Intesa Sanpaolo Group's 2011 and 2014 incentive plans. These shares are measured at fair value, i.e., their stock market price at the reporting date, through profit or loss (using the fair value option); . €9.3 thousand, being the amount due from Intesa Sanpaolo, which has agreed to pay the company, on the payment date of the Lecoip Certificates (at the maturity of the Lecoip in 2018), the portion of the total amount due to the company’s employees (for those employees that resigned before the company left Intesa Sanpaolo group). Further details on the Intesa Sanpaolo Group incentive plans and on Intesa Sanpaolo’s 2014_2017 Employee share ownership plan and Lecoip are available in the directors' report under Part D - OTHER DISCLOSURES – Section 7 Additional information - Share-based payment transactions of the notes to the 2017 financial statements. 3.1 Breakdown of caption 30 “Financial assets at fair value through profit or loss”

Level 1 Level 2 Level 3 Level 1 Level 2 Level 3

1. Debt instruments 0 0 0 0 0 0

- Structured instruments 0 0 0 0 0 0

- Other instruments 0 0 0 0 0 0

2. Equity instruments and OEIC units 154 0 0 136 0 0

3. Financing 0 0 0 0 0 0

Total 154 0 0 136 0 0

31.12.2017 31.12.2016

54

3.2 Financial assets at fair value through profit or loss: breakdown by debtor/issuer

31.12.2017 31.12.2016

Financial assets

a) Government and central banks 0 0

b) Other government agencies 0 0

c) Banks 154 136

d) Financial institutions 0 0

e) Other issuers 0 0

Total 154 136

3.3 Financial assets at fair value through profit or loss: changes

Equity

instruments and

OEIC units

A. Opening balance 0 136 0 136

B. Increases 0 18 0 18

B.1 Purchases 0 0 0 0

B.2 Fair value gains 0 18 0 18

B.3 Other increases 0 0 0 0

C. Decreases 0 0 0 0

C.1 Sales 0 0 0 0

C.2 Repayments 0 0 0 0

C.3 Fair value losses 0 0 0 0

C.4 Other decreases 0 0 0 0

D. Closing balance 0 154 0 154

Debt instruments Financing Total

Section 4 - Available-for-sale financial assets - Caption 40 This caption amounts to €14 thousand and includes:

• €10 thousand being the value of 4 Intesa Sanpaolo Group Service S.c.p.A. ordinary shares, measured at cost, which is deemed to represent their fair value;

• €4 thousand, being the value of 1,302 Intesa Sanpaolo S.p.A. ordinary shares, acquired for the 2014_2017 employee share ownership plan/Lecoip, which were still held at the end of the reporting period. These shares are measured at fair value balancing the specific equity reserve.

55

4.1 Breakdown of caption 40 “Available-for-sale financial assets”


1. Debt instruments 0 0 0 0 0 0

- Structured instruments 0 0 0 0 0 0

- Other instruments 0 0 0 0 0 0

2. Equity instruments and OEIC units 4 10 0 3 10 0

3. Financing 0 0 0 0 0 0

Total 4 10 0 3 10 0

31.12.2017 31.12.2016

4.2 Available-for-sale financial assets: breakdown by debtor/issuer

31.12.2017 31.12.2016

Financial assets

a) Government and central banks 0 0

b) Other government agencies 0 0

c) Banks 4 3

d) Financial institutions 0 0

e) Other issuers 10 10

Total 14 13 4.3 Available-for-sale financial assets: changes

Equity

instruments and

OEIC units

A. Opening balance 0 13 0 13

B. Increases 0 1 0 1

B.1 Purchases 0 0 0 0

B.2 Fair value gains 0 1 0 1


C. Decreases 0 0 0 0

C.1 Sales 0 0 0 0

C.2 Repayments 0 0 0 0

C.3 Fair value losses 0 0 0 0


D. Closing balance 0 14 0 14

Financing TotalDebt instruments

Section 6 - Loans and receivables - Caption 60 31.12.2017 31.12.2016

Loans and receivables w ith banks 170.331 255.315

Loans and receivables w ith financial institutions 232.470 156.859

Loans and receivables w ith customers 5.603 7.238

Total (carrying amount) 408.404 419.412

56

6.1 - Loans and receivables with banks


1. Deposits and current accounts 125,778 0 0 125,778 228,068 0 0 228,068

2. Financing 0 0 0 0 0 0 0 0

2.1 Reverse repurchase agreements 0 0 0 0 0 0 0 0

2.2 Finance leases 0 0 0 0 0 0 0 0

2.3 Factoring 0 0 0 0 0 0 0 0

2.4 Other f inancing 0 0 0 0 0 0 0 0

3. Debt instruments 0 0 0 0 0 0 0 0

4. Other assets 44,553 0 44,553 0 27,247 0 27,427 0

Total 170,331 0 44,553 125,778 255,315 0 27,427 228,068

31.12.201631.12.2017

Carrying amount Fair value Carrying

amount

Fair value

They amount to €170.3 million (31 December 2016: €255.3 million).

• Deposits and current accounts: these essentially consist of positive balances arising from deposits on current accounts held with Intesa Sanpaolo.

• Other assets: these exclusively consist of receivables for the provision of financial services (mainly to Intesa Sanpaolo and other Intesa Sanpaolo Group banks based on specific agreements for the provision of processing services signed in December 2015 and effective from 1 January 2016) and the balance of postal accounts with Poste Italiane/Bancoposta.

6.2 - Loans and receivables with financial institutions

PerformingLevel 1 Level 2 Level 3

PerformingLevel 1 Level 2 Level 3

Purchased Other Purchased Other

1. Financing 0 0 0 0 0 0 0 0 0 0 0 0

1.1 Reverse repurchase agreements 0 0 0 0 0 0 0 0 0 0 0 0

1.2 Finance leases 0 0 0 0 0 0 0 0 0 0 0 0

1.3 Factoring 0 0 0 0 0 0 0 0 0 0 0 0

1.4. Other f inancing 0 0 0 0 0 0 0 0 0 0 0 0

2. Debt instruments 0 0 0 0 0 0 0 0 0 0 0 0

3. Other assets 232,447 0 23 0 232,447 23 156,836 0 23 0 156,836 23

Total 232,447 0 23 0 232,45 23 156,836 0 23 0 156,836 23

31.12.2017

Impaired

Carrying amountCarrying amount Fair Value

31.12.2016

Impaired

Fair Value

They amount to €232.5 million (31 December 2016: €156.9 million). They essentially include loans and receivables with:

• international circuits and "correspondent" legal entities (members of international circuits); • credit card companies following the engagement assigned by said entities to Mercury Payment

Services to pay the amounts pertaining to their customers (member merchants with said entities);

• the deferred payment due from Visa, following the transfer of the Visa EU share (recognised at amortised cost and revalued each quarter until the amount falls due in 2019).

VISA, MASTERCARD international circuits

Every day international circuits calculate the net position of each member. The calculation includes purchases, cash advances, commissions among circuit members and the commissions due to the circuits for the services provided by the latter. Therefore, the position (settlement) may be:

• a credit position, when the transactions using the cards of other issuers on Intesa Sanpaolo and Mercury Payment Services' accepting circuit prevail over those involving international cards issued by Intesa Sanpaolo or other group banks on other accepting circuits;

• a debit position, when the transactions using the international cards issued by Intesa Sanpaolo or other Intesa Sanpaolo Group banks on other accepting circuits prevail over those involving the cards of other issuers on Intesa Sanpaolo and Mercury Payment Services' accepting circuit. In this case, the debit balance will be shown under the liability caption “Due to financial institutions”.

57

The net position is settled every day by Mercury Payment Services by crediting/debiting the current accounts held with Intesa Sanpaolo. Mercury Payment Services' direct issuing and acquiring activities are not currently material. As of October 2017, the company has been the settlement acquirer for Visa and Mastercard foreign currency which, at present, is limited to GBP and CHF.

JCB, UnionPay and DINERS international circuits Every day, Mercury Payment Services calculates the net position vis-à-vis these circuits. This is essentially a credit position since, at present, it only refers to transactions involving cards issued by JCB, UnionPay and Diners and processed on Mercury Payment Services' accepting circuit for Intesa Sanpaolo. The net position is settled every day by Mercury Payment Services by crediting the current account held with Intesa Sanpaolo. Mercury Payment Services' direct acquiring activities are not currently material.

6.3 - Loans and receivables with customers

Performing Level 1 Level 2 Level 3 Performing Level 1 Level 2 Level 3

Purchased Other Purchased Other

1. Financing 4,625 0 0 0 4,625 0 4,918 0 3 0 4,921 0

1.1 Finance leases 0 0 0 0 0 0 0 0 0 0 0 0

1.2 Factoring 0 0 0 0 0 0 0 0 0 0 0 0

1.3 Consumer loans (including revolving cards) 0 0 0 0 0 0 0 0 0 0 0 0

1.4 Credit cards 0 0 0 0 0 0 447 0 3 0 450 0

1.5 Paw n loans 0 0 0 0 0 0 0 0 0 0 0 0

1.6. Financing granted in relation to payment 0 0 0 0 0 0 0 0 0 0 0 0

services rendered

1.7. Other f inancing 4,625 0 0 0 4,625 0 4,471 0 0 0 4,471 0

2. Debt instruments 0 0 0 0 0 0 0 0 0 0 0 0

2.1 Structured instruments 0 0 0 0 0 0 0 0 0 0 0 0

2.2 Other instruments 0 0 0 0 0 0 0 0 0 0 0 0

3. Other assets 924 0 54 0 924 54 2,136 0 181 0 2,136 181

Total (carrying amount) 5,549 0 54 0 5,549 54 7,054 0 184 0 7,057 181

Impaired

31.12.2016

Carrying amount Fair value

Impaired

Carrying amount Fair value

31.12.2017

They amount to €5.6 million (31 December 2016: €7.2 million). They mainly comprise receivables for issuing/acquiring services for their customers only and other services. For the purposes of supervisory statistical reporting, non-performing financial assets are broken down into the following categories: bad, unlikely to pay and non-performing past due exposures. Impaired exposures (whose definition matches that of ruling supervisory reporting) include the sum of non-performing, unlikely to pay and impaired past due exposures in accordance with prudential regulations.

58

Section 10 - Property, equipment and investment property – Caption 100 10.1 Property and equipment: breakdown of assets measured at cost

31.12.2017 31.12.2016

1 owned 0 0

a) land 0 0

b) buildings 0 0

c) furniture 12 17

d) electronic systems 23,677 10,772

e) other 0 0

2 under finance lease 0 0

a) land 0 0

b) buildings 0 0

c) furniture 0 0

d) electronic systems 0 0

e) other 0 0

Total 1 23,689 10,789

They increased from €10.8 million at 31 December 2016 to €23.7 million at 31 December 2017. The increase is mainly due to the purchase of POS terminals, as described under “Other disclosures – procurement of POS terminals” in the directors’ report, to which reference should be made. All property, equipment and investment property are measured at cost. There are no revalued property, equipment and investment property. Depreciation is recognised in income statement caption 120 (Depreciation and net impairment losses on property, equipment and investment property).

10.2 Investment property: breakdown of assets measured at cost

There is no investment property.

10.3 Operating assets: breakdown of revalued assets

There are no revalued assets.

10.4 Investment property: breakdown of assets measured at fair value

There is no investment property.

59

10.5 Operating assets: changes

A. Opening balance 0 0 17 10,772 0 10,789

A.1 Total net impairment losses 0 0 0 0 0 0

A.2 Net opening balance 0 0 17 10,772 0 10,789

B. Increases 0 0 0 18,526 0 18,526

B.1 Purchases 0 0 0 18,526 0 18,526

B.2 Capitalised improvement costs 0 0 0 0 0 0

B.3 Reversals of impairment losses 0 0 0 0 0 0

B.4 Fair value gains

recognised in

a) equity 0 0 0 0 0 0

b) profit or loss 0 0 0 0 0 0

B.5 Exchange rate gains 0 0 0 0 0 0

B.6 Transfers from investment property 0 0 0 0 0 0

B.7 Other increases 0 0 0 0 0 0

C. Decreases 0 0 5 5,621 0 5,626

C.1 Sales 0 0 0 0 0 0

C.2 Depreciation 0 0 5 5,621 0 5,626

C.3 Impairment losses

recognised in

a) equity 0 0 0 0 0 0


C.4 Fair value losses 0

recognised in

a) equity 0 0 0 0 0 0


C.5 Exchange rate losses 0 0 0 0 0 0

C.6 Transfers to:

a) investment 0 0 0 0 0 0

property

b) disposal groups 0 0 0 0 0 0

C.7 Other decreases 0 0 0 0 0 0

D. Closing balance 0 0 12 23,677 0 23,689

D.1 Total net impairment losses 0 0 0 0 0 0

D.2 Gross closing balance 0 0 0 0 0 0

Measurement at cost 0 0 12 23,677 0 23,689

FurnitureLand Buildings Electronic

systemsOther Total

60

Section 11 - Intangible assets – Caption 110

Breakdown of caption 110 “Intangible assets”

Assets measured at

cost

Assets measured

at fair value

through profit or

Assets

measured at

cost

Assets

measured at

fair value

1. Goodwill 0 0 0 0

2. Other intangible assets

2.1) ow ned 8,564 0 7,533 0

- internally-generated assets 6,121 0 4,821 0

- other 2,443 0 2,712 0

2.2) under f inance lease 0 0 0 0

Total 2 8,564 0 7,533 0

3. Assets related to f inance leases 0 0 0 0

3.1 Unopted assets 0 0 0 0

3.2 Assets w ithdraw n follow ing termination 0 0 0 0

3.3 Other assets 0 0 0 0

Total 3

4. Assets under operating lease 0 0 0 0

Total (1+2+3+4) 8,564 0 7,533 0

31.12.2017 31.12.2016

No impairment losses or reversals of impairment losses were recognised on intangible assets. The amortisation rates, deemed to represent the asset's useful finite life, are as follows:

• Proprietary software: 20% • Software licenses: 20%

Amortisation is recognised in income statement caption 130 (Amortisation and net impairment losses on intangible assets). 11.2 Intangible assets: changes

Total

A. Opening balance 7,533

B. Increases 4,070

B.1 Purchases 4,070

B.2 Reversals of impairment losses 0

B.3 Fair value gains recognised in 0

- equity 0

- profit or loss 0

B.4 Other increases 0

C. Decreases 3,039

C.1 Sales 0

C.2 Amortisation 3,039

C.3 Impairment losses recognised in 0

- equity 0

- profit or loss 0

C.4 Fair value losses recognised in 0

- equity 0

- profit or loss 0

C.5 Other decreases 0

D. Closing balance 8,564

61

Section 12 – Tax assets and liabilities – Captions 120 and 70

12.1 Breakdown of caption 120 “Tax assets: current and deferred”

31.12.2017 31.12.2016

1. Current tax assets 5,142 56,876

1.1 of w hich: IRES 0 45,868

1.2 of w hich: IRAP 5,057 10,923

1.3 of w hich: VAT 85 85

2. Deferred tax assets 3,095 2,037

2.1 of w hich: IRES 2,808 1,851

2.2 of w hich: IRAP 287 186

Total 8,237 58,913

2. Deferred tax assets 3,095 2.037

2.1 of w hich: recognised in equity 126 130

2.2 of w hich: recognised in profit or loss 2,969 1,907

Total 3,095 2,037

62

12.2 Breakdown of caption 70 “Tax liabilities: current and deferred”

31.12.2017 31.12.2016

1.Current tax liabilities 4,624 34,119

1.1 of w hich: IRES 0 24,693

1.2 of w hich: IRAP 4,624 9,426

2. Deferred tax liabilities 57 57

2.1 of w hich: IRES 57 57

2.2 of w hich: IRAP 0 0

Total 4,680 34,176 In June 2017, Mercury's Board of Directors adopted the domestic tax consolidation scheme governed by articles 117-129 of the Consolidated Income Tax Act and Ministerial decree dated 9 June 2004, implemented into tax legislation by Legislative decree no. 344/2003, proposed by the parent Latino Italy S.r.l. to Mercury Payment Services S.p.A.. It is an optional tax regime, whereby the overall profit or loss of the individual subsidiaries adopting the scheme are transferred to the parent together with any tax withholdings, deductions and tax credits. The parent calculates a single taxable profit or tax loss carryforward, which is the sum of the individual profits/losses of the participating companies, and, therefore, a single tax liability/asset. By exercising this option and adopting the domestic tax consolidation scheme, the company calculates its own tax expense and the corresponding taxable profit or tax loss to be transferred to the parent. Both parties signed the “Domestic tax consolidation scheme rules” on 7 August 2017 for the 2017-2019 three-year period. The IRES liability to the parent arises from the company's participation in the domestic tax consolidation scheme and is recognised in “Section 9 – Caption 90 Other liabilities” of the statement of financial position liabilities. Current tax liabilities comprise the IRAP (regional tax on productive activities) charge for the year of €4.6 thousand, gross of payments on account and withholdings applied. Direct and indirect taxes On 30 September 2016, with effect from 1 October 2016, as part of the larger plan to concentrate the payment business within Intesa Sanpaolo, a business unit providing acquiring services for non-captive customers was transferred to Intesa Sanpaolo. On 30 May 2017, Mercury was served a notice of correction and settlement by the tax authorities – Milan provincial department II, following the checking of the amounts declared in relation to the assets and the rights covered by the deed transferring the business unit signed on 30 September 2016. The tax authorities challenged the criteria and the procedures used to set the transfer value which, based on the professional estimate, amounts to €3 million, and recalculated it using the “equity method with independent estimate of goodwill” to obtain the value of €7.2 million. The different valuation generates a greater registration tax of €125.4 thousand, in addition to interest and penalties. On 27 June 2017, the tax authorities were served a joint petition (of Mercury and Intesa Sanpaolo) to commence a mutually-agreed assessment settlement procedure. However, as the procedure did not result in an agreement between the parties, on 27 November 2017, Mercury and Intesa Sanpaolo jointly filed an appeal. The date of the hearing has to be set by the tax authorities. With respect to tax advances, in 2017, the company:

• paid IRES as follows: - First advance June 2017: €9.6 million entirely offset against the tax credit as per the 2017 tax

return;

63

- Second advance November 2017: €14.4 million, of which €12.3 million entirely offsetting the credit as per the 2017 tax return and €2.1 million paid to Latino Italy S.r.l. as part of the domestic tax consolidation scheme.

The receivable for IRES advances from the tax parent is included in the statement of financial position assets under “Section 14 – Caption 140 Other assets”;

• independently paid IRAP as follows:

- first advance June 2017: €3.8 million (historical method); - second advance November 2017: €1.3 million (forward-looking method).

12.3 Changes in deferred tax assets (recognised in profit or loss)

31.12.2017 31.12.2016

1. Opening balance 1,907 1,404

2. Increases 1,513 1,053

2.1 Deferred tax assets recognised in the year 1,513 1,053

a) related to previous years 0 0

b) due to changes in accounting policies 0 0

c) reversals of impairment losses 0 0

d) other increases 1,513 1,053

2.2 New taxes or increases in tax rates 0 0

2.3 Other increases 0 0

3. Decreases -451 -550

3.1 Deferred tax assets derecognised in the year -451 -550

a) reversals -451 -550

b) impairment due to non-recoverability 0 0

c) change in accounting policies 0 0

d) other decreases 0 0

3.2 Decrease in tax rates 0 0

3.3 Other decreases 0 0

4. Closing balance 2,969 1,907

64

12.4. Changes in deferred tax liabilities (recognised in profit or loss)

31.12.2017 31.12.2016

1. Opening balance 57 71

2. Increases 0 0

2.1 Deferred tax liabilities recognised in the year 0 0



c) other 0 0



3. Decreases 0 -14

3.1 Deferred tax liabilities derecognised in the year 0 -14

a) reversals 0 -14


c) other 0 0



4. Closing balance 57 57 12.5. Changes in deferred tax assets (recognised in equity)

31.12.2017 31.12.2016

1. Opening balance 130 99

2. Increases 0 30

2.1 Deferred tax assets recognised in the year 0 0



c) other 0 30



3. Decreases -4 0

3.1 Deferred tax assets derecognised in the year -4 0

a) reversals -4 0

b) impairment due to non-recoverability 0 0

c) due to changes in accounting policies 0 0

d) other 0 0



4. Closing balance 126 129

65

12.6. Changes in deferred tax liabilities (recognised in equity)

31.12.2017 31.12.2016

1. Opening balance 0 3,914

2. Increases 0 0

2.1 Deferred tax liabilities recognised in the year



c) other 0 0



3. Decreases 0 -3,914

3.1 Deferred tax assets derecognised in the year 0 -3,914

a) reversals 0 -3,914


c) other 0 0



4. Closing balance 0 0 Section 14 - Other assets – Caption 140 14.1 Breakdown of caption 140 “Other assets”

31.12.2017 31.12.2016

Other loans and receivables 3,687 18,632

Prepayments and accrued income 8,246 6,704

Other sundry 1,821 2,006

Total 13,754 27,342 At 31 December 2017:

• “Other loans and receivables” included: - €2.6 million due from the parent Latino Italy S.r.l. and arising from participation in the domestic

tax consolidation scheme; - €696 thousand due from the former parent Intesa Sanpaolo for the IRES reimbursements

claimed in previous periods with respect to the one-time IRAP deductibility (Decree law no. 185/2008) and the personnel expense IRAP deductibility (Decree law no. 201/2011);

- €165 thousand for PagoBANCOMAT® transactions settled with merchants before 31 December 2017 and cleared by the bank in the first week of January 2018 (this caption amounted to €497 million at 31 December 2016 and related to transactions settled with merchants before 31 December 2016 and cleared by the bank in the first week of January 2017);

• "prepayments and accrued income” essentially comprise €6 million related to prepayments for

the purchase of the plastic needed to produce cards;

• “other sundry” mainly consists of €1.1 million, reflecting cards in inventory at 31 December 2017.

66

LIABILITIES (in thousands of Euros)

Section 1 – Liabilities – Caption 10 1.1 Liabilities

Due to banks Due to financial

institutions

Due to

customers

Due to banks Due to

financial

institutions

Due to

customers

1. Financing

1.1 Repurchase agreements 0 0 0 0 0 0

1.2 Other f inancing 0 45,382 0 95,226 0 0

2. Other liabilities 171,575 19,838 0 134,878 4,942 0

Total 171,575 65,220 0 230,104 4,942 0

Fair Value - level 1 0 0 0 0

Fair Value - level 2 387 65,220 0 95,881 4,942 0

Fair Value - level 3 171,188 0 0 134,223 0 0

Total fair value 171,575 65,220 0 230,104 4,942 0

31.12.2017 31.12.2016

For the purposes of consistency between the classification of statement of financial position captions and the disclosure required by the Supervisory Authority, debit balances have been classified also based on the nature of the service provided. Consequently, only the liabilities related to the provision of financial services have been included. Caption 10 “Liabilities” comprises:

• Due to banks, including: - negative balances in the current accounts held with Intesa Sanpaolo S.p.A.: €171.2 thousand; - liabilities for services provided: €0.3 million due to Intesa Sanpaolo (€0.6 million at 31

December 2016).

• Due to financial institutions, which essentially comprises liabilities to: - the parent Latino Italy S.r.l. in relation to the €45 million loan agreement; - international circuits and "correspondent" legal entities (members of international circuits).

Reference should also be made to the statement of financial position note to “Loans and receivables with financial institutions”.

Section 7 – Tax liabilities – Caption 70

Reference should be made to Section 12 of the statement of financial position assets.

67

Section 9 - Other liabilities - Caption 90 31.12.2017 31.12.2016

Trade payables 11,208 8,730

Personnel (remuneration and contributions) and other items 1,145 1,183

Tax authorities 451 372

Merchants for bank transfers to be ordered 5,576 5,546

Accrued expenses and deferred income 676 639

Directors and statutory auditors 122 250

Other creditors 115,944 72,691

Total 135,122 89,411

At 31 December 2017, “Other creditors” included €115 million related to “cash advances” to be cleared with international circuits and by the bank in a transaction after the reporting date (this caption amounted to €71 million at 31 December 2016).

Section 10 - Post-employment benefits – Caption 100

10.1 “Post-employment benefits”: changes

31.12.2017 31.12.2016

A. Opening balance 1,629 1,795

B. Increases 21 144

B.1 Accruals 21 33

B.2 Other increases 0 111

C. Decreases -389 -310

C.1 Payments -377 -310

C.2 Other decreases -12 0

D. Closing balance 1,261 1,629

Caption B.1 includes the accrual of the year (interest cost) of €21 thousand.

Caption B.2 includes the actuarial gains for 2017, being the sum of the actuarial gains and losses originated by changes in financial and demographic assumptions. 10.2 Other information The actuarial valuation required by IAS 19 - Employee benefits is carried out by an independent actuary using the projected unit credit method. The Eur composite AA curve was used for the actuarial valuation required by IAS 19. The reporting date accrual for statutory purposes amounted to €1.1 million. Post-employment benefits that qualify as an unfunded defined benefit plan amounted to €1.3 million. Actuarial gains amounted to €12 thousand at 31 December 2017.

68

Changes in net defined benefit plan liabilities

31.12.2017 31.12.2016

Opening balance 1,629 1,795

Current service cost 0 0

Past service cost 0 0

Interest expense 21 33

Actuarial lossed due to changes to demographic assumptions 0 1

Actuarial lossed due to changes to f inancial assumptions 25 153

Actuarial losses based on past experience 0 0

Exchange rate gains 0 0

Increases - business combinations 0 0

Participants' contributions 0 0

Actuarial gsins due to changes to demographic assumptions -7 0

Actuariall gains due to changes to f inancial assumptions 0 0

Actuarial gains based on past experience -30 -43

Exchange rate losses 0 0

Benefits paid -377 -310

Decreases - business combinatoins 0 0

Curtailments 0 0

Settlements 0 0

Other increases 0 0

Other decreases 0 0

Closing banalce 1,261 1,629

Main actuarial assumptions

FINANCIAL ASSUMPTIONS 31.12.2017

Discount rate 1.32%

Inflation rate 1.50%

Percentage of post-emp. benefits requested in advance 100%

DEMOGRAPHIC ASSUMPTIONS

Maximum retirement age As per the most recent legislative provisions

Mortality tables SI2016

(changed as per historical data)

Average percentage of employees leaving the company p.a. 2.46%

Probability of requests for advances p.a. 2.00%

AVERAGE DURATION (IN YEARS)

Post-employment benefits 12

EXPECTED PAYMENTS OF POST-EMPLOYMENT BENEFITS

Payments expected at 31.12.2018 45,270





Payments expected from 1.01.2023 to 31.12.2027 330,948

69

SENSITIVITY ANALYSIS - DBO FOR THE PROVISION FOR

POST-EMPLOYMENT BENEFITS

+0,5% - 0,5%

Tasso Attualizzazione 1,187 1,342

tasso di rendimento Atteso N.A. N.A.

tasso attesso di incremento retributivo 1,261 1,261

Tasso di Inflazione 1,310 1,214

Section 11 – Provisions for risks and charges – Caption 110 11.1 Breakdown of caption 110 “Provisions for risks and charges” 31.12.2017 31.12.2016

1. Pension and similar provisions 0 0

2. Other provisions 5,431 3,637

2.1 legal disputes 0 0

2.2 personnel expense 5,168 3,350

2.3 other 263 287

Total 5,431 3,637 Caption 2.2 "Personnel expense" includes the current best estimate of personnel bonuses and incentives approximating €4.9 million. Caption 2.3 “Other” mainly includes accruals to cover various charges. A total of €1.1 million accrued in previous years was utilised and/or released from the provisions.

11.2 Changes in caption 110 “Provisions for risks and charges”

31.12.2017 31.12.2016

A. Opening balance 3,637 2,093

B. Increases 2,936 3,117

B.1 Accruals 2,936 3,117

B.2 Other increases 0 0

C. Decreases -1,142 -1,573

C.1 Utilisations -761 -725

C.2 Other decreases -381 -848

D. Closing balance 5,431 3,637

Section 12 – Equity - Captions 120 12.1 Breakdown of caption 120 “Share capital”

Amount

A. Share capital

A.1 Ordinary shares 7,108,800

A.2 Other shares The share capital was comprised of 162,500 shares. The company has no treasury shares.

70

12.5 Other information Breakdown of and changes in caption 160 "Reserves”

Legal reserve Retained earnings

Other Total

A. Opening balance 1,422 0 22,022 23,444

B. Increases

B.1 Allocation of profits 0 0 0 0


C. Decreases

C.1 Utilisation 0 0 0 0

- to cover losses 0 0 0 0

- extraordinary dividend 0 0 0 0

- to share capital 0 0 0 0


D. Closing balance 1,422 0 22,022 23,444

Breakdown of and changes in caption 170 "Valuation reserves”

Available-for-sale

f inancial assets

Property, equipment

and investment

property

Intangible

assets

Cash flow hedges Special

revaluation

law s

Other Total

A. Opening balance 0 0 0 0 0 -301 -301

B. Increases 0 0 0 0 0 0 0

B.1 Fair value gains 0 0 0 0 0 0 0

B.2 Other increases 0 0 0 0 0 0 0

C. Decreases 0 0 0 0 0 0 0

C.1 Fair value losses 0 0 0 0 0 0 0

C.2 Other decreases 0 0 0 0 0 9 9

D. Closing balance 0 0 0 0 0 -292 -292 “Other” includes the changes in the actuarial reserve, recognised in accordance with IAS 19. Possible use of reserves

Description AmountPossible use

(*)

Available

portion

Use in the

past 3 years

Legal reserve 1,422 b 1,422 0

Extraordinary reserve 22,022 abc 22,022 50,000

Unavailable reserve pursuant to article 2359 bis of the

Italian Civil Code for the parent’s shares 0 (1) 0 0

Valuation reserve - AFS financial assets 1 (2) 0 0

Actuarial reserve -292 (2) 0 0

Total 23,153 23,444 50,000

(*) a - for capital increase

(*) b - to cover losses

(*) c - dividends (*) (1) - the reserve is unavailable pursuant to article 2359-bis of the Italian Civil Code (*) (2) – the reserve is unavailable pursuant to article 6 of Legislative decree no. 38/2005

Use of the extraordinary reserve relates to the distribution to the shareholder of available reserves in 2014, 2015 and 2016.

71

Other disclosures

Offset financial assets or assets subject to master netting agreements or similar agreements Nothing to report.

Offset financial liabilities or liabilities subject to master netting agreements or similar

agreements. Nothing to report.

Securities lending Nothing to report.

Jointly controlled assets Nothing to report.

72

Part C) Notes to the income statement (in thousands of Euros) Interest – Captions 10 and 20 1.1. Breakdown of caption 10 “Interest and similar income”

1. Financial assets held for trading 0 0 0 0 0

2. Financial assets at fair value through profit or loss 0 0 0 0 0

3. Available-for-sale f inancial assets 0 0 0 0 0

4. Held-to-maturity investments 0 0 0 0 0

5 Loans and receivables

5.1 With banks 0 0 0 0 0

5.2 With f inancial institutions 0 0 97 97 50

5.3 With customers 0 0 0 0 0

6. Other assets 0 0 7 7 3

7. Hedging derivatives 0 0 0 0 0

Total 0 0 104 104 53

2016OtherDebt instruments Financing 2017

Caption 5.2) includes €97 thousand of interest income on the deferred payment due from Visa, recognised under caption "6.2 Loans and receivables with financial institutions" under the statement of financial position assets, to which reference should be made.

1.2 Interest and similar income: other disclosures

No interest accrues on:

• bad exposures • unlikely to pay exposures • past due/overdue exposures

1.3 Breakdown of caption 20 “Interest and similar expense”:

Financing Securities Other 31.12.2017 31.12.2016

1. Due to banks 948 0 686 1,634 249

2. Due to f inancial institutions 382 0 0 382 0

3. Due to customers 0 0 0 0 0

4. Securities issued 0 0 0 0 0

5. Financial liabilities held for trading 0 0 0 0 0

6. Financial liabilities at fair value through profit or loss 0 0 0 0 0

7. Other liabilities 0 0 0 0 0

8. Hedging derivatives 0 0 0 0 0

Total 1,330 0 686 2,016 249

This caption mainly includes €1.3 million of interest expense on outstanding credit lines.

73

Section 2 - Fees and commissions - Captions 30 and 40 2.1 Breakdown of caption 30 “Fee and commission income”

As described earlier, the demerger and transfer of the business unit to Intesa Sanpaolo S.p.A. finalised during 2016 entailed the transfer to Intesa Sanpaolo of almost all contracts with member merchants for card payment acceptance.

31.12.2017 31.12.2016

1) f inance lease 0 0

2) factoring transcations 0 0

3) consumer loans 0 0

4) guarantees issued 0 0

5) services for

- funds management on behalf of third parties 0 0

- foreign exchange transactions 0 0

- product distribution 0 0

-other 0 0

6) collection and payment services 146,510 135,926

7) securitisation servising services 0 0

8) other fee and commission income 8,443 9,268

Total 154,953 145,194

31.12.2017 31.12.2016

6) Collection and payment services

Processing - Issuing 89,934 80,108

Processing - Acquiring 56,260 49,894

Acquiring - international circuit cards 260 3,941

Acquiring - PagoBancomat® cards 56 1,983

Total (6) 146,510 135,926

8) Other fee and commission expense

Data capture 726 708

International circuits 2,323 2,551

Sundry services 5,394 6,009

Total (8) 8,443 9,268

Total (8)Total 154,953 145,194 The most significant items of fee and commission income can be analysed as follows:

Collection and payment services (6) The processing services the company provides to Intesa Sanpaolo are regulated by specific agreements signed in December 2016 with effect from 1 January 2016 respectively relating to the management of:

• payment cards for Intesa Sanpaolo and group banks; • transactions performed on POS terminals given to Intesa Sanpaolo S.p.A.’s merchant

customers; • cash withdrawals/advances using the Intesa Sanpaolo Group’s ATM payment cards.

74

Processing - Issuing: €89.9 million compared to €80.1 million as at 31 December 2016. These amounts reflect the considerations that Mercury Payment Services received for managing the Intesa Sanpaolo Group's credit, debit and prepaid cards. Processing - Acquiring: €56.3 million compared to €49.9 million as at 31 December 2016. These amounts reflect the considerations that Mercury Payment Services receives under the agreements governing the processing services to Intesa Sanpaolo and/or Intesa Sanpaolo group banks, related to the management of transactions:

• performed on POS terminals given to Intesa Sanpaolo S.p.A.’s merchant customers, which approximate €46.5 million;

• withdrawals/cash advances performed using payment cards on the Intesa Sanpaolo Group's ATMs (i.e., those of Intesa Sanpaolo S.p.A. and the group banks), approximating €9.8 million.

Acquiring - International circuit cards and Acquiring - PagoBANCOMAT® cards: €0.3 million compared to €5.9 million as at 31 December 2016. The decrease is due to the above-mentioned transfer of the business unit to Intesa Sanpaolo and the mutually agreed termination of the contract with Banca ITB S.p.A. in 2016. These amounts are the consideration received for financial services provided by Mercury Payment Services, comprised of fee and commission income for credit and debit card and PagoBANCOMAT® payment acceptance for its customers only.

Other fee and commission income (8) Data capture fee and commission income: these amount to €0.7 million and reflect the considerations that Mercury Payment Services received for its electronic information gathering services related to transactions carried out through its POS terminals, using cards issued by other parties; Fee and commission income “from international circuits”: these went from €2.6 million at 31 December 2016 to €2.3 million at 31 December 2017.

2.2 Breakdown of caption 40 “Fee and commission expense”

31.12.2017 31.12.2016

1) Guarantees received 0 0

2) Distribution of third party services 0 0

3) Collection and payment services 1,015 935

4) Other fee and commission expense 678 4,309

Total 1,693 5,244

31.12.2017 31.12.2016

4. Other fee and commission expense

Mercury Payment Services promotion 2 38

Card interchange - international circuits 655 740

Interchange and scheme fees 0 2,584

PagoBancomat® circuit (On Us Off Us Interchange) 15 941

Commercianti per servizi resi 0 0

Other 6 6

Total 678 4,309 The most significant items of fee and commission expense can be analysed as follows:

75

Collection and payment services (3) As already mentioned, the company's acquiring services are only provided to those customers not transferred to Intesa Sanpaolo S.p.A. as part of the demerger and transfer of the business unit. Other fee and commission expense (4) “International circuits interchange fees”: they reflect the amounts paid by Mercury Payment Services for the guarantee given by the Intesa Sanpaolo Group or other issuers to accept payment, on Mercury Payment Services's POS, using the cards issued by said parties; “Interchange and scheme fees”: €0 million compared to €2.6 million in 2016. The decrease is due to the above-mentioned transfer of the business unit to Intesa Sanpaolo and the mutually agreed termination of the contract with Banca ITB S.p.A. in 2016. “PagoBANCOMAT® fees”: these reflect the commissions paid by Mercury Payment Services for PagoBANCOMAT® transactions.

Section 6 – Net gains (losses) on financial assets and liabilities at fair value through profit or loss – Caption 80 6.1 Breakdown of caption 80 “Net gains (losses) on financial assets and liabilities at fair value through profit or loss” Gains Trading gains Losses Trading losses Net gain (loss)

1. Financial assets 18 0 0 0 18

1.1 Debt instruments 0 0 0 0 0

1.2. Equity instruments and OEIC units 18 0 0 0 18

1.3. Financing 0 0 0 0 0

1.4. Other assets 0 0 0 0 0

2. Financial assets and financial liabilities: net exchange rate

gains (losses)0 0 0 0 0

3. Financial liabilities 0 0 0 0 0

3.1 Liabilities 0 0 0 0 0

3.2 Debt instruments 0 0 0 0 0

3.3 Other liabilities 0 0 0 0 0

4. Credit and financial derivatives 0 0 0 0 0

Total 18 0 0 0 18

76

Section 7 – Net profit (loss) on sale or repurchase – Caption 90 7.1 Breakdown of caption 90 “Net profit (loss) on sale or repurchase”

31.12.2017 31.12.2016

Profit Loss Net profit (loss) Profit LossNet profit

(loss)

1 Financial assets

1.1 Loans and receivables 0 0 0 0 0 0

1.2 Available-for-sale f inancial assets 0 0 0 83,641 0 83,641

1.3 Held-to-maturity investments 0 0 0 0 0 0

Total (1) 0 0 0 83,641 0 83,641

2. Financial liabilities

2.1 Liabilities 0 0 0 0 0 0

2.2 Securities issued 0 0 0 0 0 0

Total (2) 0 0 0 0 0

Total 0 0 0 83,641 0 83,641 Section 8 – Net impairment losses – Caption 100 8.1. "Net impairment losses”

2017 2016

individual collective individual collective

1 Loans and receivables w ith banks 0 0 0 0 0 0

-leases 0 0 0 0 0 0

-factoring 0 0 0 0 0 0

-other loans and receivables 0 0 0 0 0 0

2. Loans and receivables w ith f inancial institutions 0 0 0 0 0 0

Acquired impaired loans and receivables 0 0 0 0 0 0

-leases 0 0 0 0 0 0



Other loans and receivables 0 0

-leases 0 0 0 0 0 0



3. Loans and receivables w ith customers 0 0

Acquired impaired loans and receivables 0 0 0 0 0 0

-leases 0 0 0 0 0 0


-consumer loans 0 0 0 0 0 0


Other loans and receivables 7 0 2 0 5 42

-leases 0 0 0 0 0 0


-consumer loans 0 0 0 0 0 0

- paw n loans 0 0 0 0 0 0


Total 7 0 2 0 5 42

Impairment losses Reversals of impairment losses

Other loans and receivables include €7 thousand related to the derecognition of impaired loans and receivables. 8.2 “Net impairment losses: available-for-sale financial assets” There are no impairment losses on available-for-sale financial assets. Reference should be made to Section 4 - Available-for-sale financial assets - Caption 40.

77

Section 9 - Administrative expenses – Caption 110 9.1 Breakdown of caption 110.a “Personnel expense”

31.12.2017 31.12.2016

1) Employees

a) w ages and salaries 12,823 12,270

b) social security charges 4,151 4,099

c) post-employment benefits 440 174

d) pension and similar costs 0 0

e) accrual for post-employment benefits 25 33

g) payments to external supplementary pension funds 244 465

- defined contribution plans

- defined benefit plans

h) other personnel expense 844 772

2) Other personnel 0 19

3) Directors and statutory auditors 100 227

4) Retired personnel 0 0

5) Cost recoveries for personnel seconded to other companies -182 -180

6) Cost reimbursements for personnel seconded to the company 335 758

Total 18,780 18,637

This amounted to €18.8 million, compared to €18.6 million in 2016. Caption 1 c) includes the accruals of the year related to the portions of post-employment benefits accruing as of 1 January 2007. The employees decided to transfer them to a supplementary pension fund or to the INPS (the Italian Social Security Institution) treasury fund. Caption 1 e) includes the accrual of the year (interest cost) of €25 thousand. Reference should also be made to Section 10 - Post-employment benefits – Caption 100 of the statement of financial position liabilities. Moreover:

• the number of employees comes to 300 (298 at 31 December 2016). There was no temporary staff;

• there were four employees seconded to the company and two employees seconded from the company;

• the current best estimate of personnel bonuses and incentives at 31 December 2017 was recognised as a balancing entry to the provisions for risks and charges in accordance with IFRS;

• the commerce sector national employment contract for white-collar employees expired on 31 December 2013 and was renewed in March 2015 with effect from 1 April 2015 to 31 December 2017. That for managers expired on 31 December 2013 and was renewed on 21 July 2016 with effect from 1 January 2015 to 31 December 2018 (with effect on remuneration as from 1 January 2017).

78

9.2 Average number of employees per category

2017 2016

a) managers 9 9

b) junior managers 25 21

c) other employees 241 246

Total 275 276

9.3 Breakdown of caption 110.b “Other administrative expenses” These expenses are in line with those of the previous year.

31.12.2017 31.12.2016

- Operating lease payments 6,601 7,453

- Maintenance services 3,271 3,215

- Replacement services 1,689 1,924

- Installation services 459 1,331

- Purchase of materials 4,768 4,643

- Transport services 516 514

- Postal costs 1,951 1,645

- Telecommunications services 1,538 1,352

- Processing services 2,207 1,461

- Office/w arehouse lease payments and building management fees 828 966

- Cleaning services 61 70

- Advertising and entertainment expenses 17 24

- Long-term car rental 59 61

- Virtual stamp duty 86 98

- Indirect taxes and duties 43 54

- Pro rata non-deductible VAT 12,839 8,163

- Indirect personnel expense 44 70

- Other general expenses and consultancy 13,997 5,812

Total 50,974 38,856

The pro rata non-deductible VAT amounted to €12.8 million. The non-deductibility percentage was 96%.

. Future minimum operating lease payments.

Within one year Between 1 and 5

years

After 5 years Total

Future minimum operating lese payments 6,601 3,301 9,902

31.12.2017

79

. Operating lease payments recognised as costs during the year.

31.12.2017

Future minimum operating lese payments 6,601

Section 10 – Depreciation and net impairment losses on property, equipment and investment property - Caption 120 10.1 Breakdown of caption 120 “Depreciation and net impairment losses on property, equipment and investment property”

Depreciation Impairment losses Reversals of

impairment losses Carrying amount

1. Operating assets

1.1 Ow ned

a) land 0 0 0 0

b) buildings 0 0 0 0

c) furniture 5 0 0 5

d) operating assets 5,621 0 0 5,621

e) other 0 0 0 0

1.2 Under f inance lease 0 0 0 0


3. Investment property 0 0 0 0

Total 5,626 0 0 5,626 This caption has already been described when analysing property, equipment and investment property under statement of financial position assets.

Section 11 – Amortisation and net impairment losses on intangible assets - Caption 130 11.1 Breakdown of caption 130 “Amortisation and net impairment losses on intangible assets”

Amortisation Impairment losses

Reverseal of

impairment losses

Net

depreciation

1. Goodw ill 0 0 0 0

2. Other

2.1 ow ned 3,039 0 0 3,039

2.2 under f inance lease 0 0 0 0


4. Assets under operating lease 0 0 0 0

Total 3,039 0 0 3,039 This caption has already been described when analysing intangible assets under statement of financial position assets.

80

Section 13 – Net accruals to provisions for risks and charges – Caption 150 13.1 Breakdown of caption 150 “Net accruals to provisions for risks and charges”

2017 2016

Legal disputes 0 0

Sundry personnel expense 0 203

Sundry costs 0 100

Total 0 303 Section 14 - Other operating income, net – Caption 160 14.1 Breakdown of caption 160 “Other operating income, net

31.12.2017 31.12.2016

POS payments 25 299

Recoveries of expenses to issue statements of account 26 83

Sundry income and revenue 496 1,438

Total other income 547 1,820

Losses on irregular credit card transactions 0 6

Other expense 29 54

Total other expenses 29 60

Total 518 1,760

Section 17 - Income taxes – Caption 190

17.1 Breakdown of caption 190 “Income taxes”

31.12.2017 31.12.2016

1. Current taxes 25,265 34,112

2. Change in current taxes from previous years 0 0

3. Decrease in current taxes for the year 0 0

3Bis. Decrease in current taxes for the year due to tax assets as per

Law no. 214/2011

4. Change in deferred tax assets -1,061 -727

5. Change in deferred tax liabilities 0 -13

6. Tax expense for the year 24,204 33,372

Reference should be made to Section 12 of the statement of financial position assets – Tax assets and tax liabilities – Captions 120 and 70. In 2016, the company used the tax relief under current legislation (Law no. 223 of 11 December 2016, i.e., the 2017 Stability Act, which extended the "Superammortamento" option, which allows companies to increase the cost of new items of property, plant and equipment by 40% for the purposes of calculating the IRES charge).

81

17.2 Reconciliation between the theoretical and effective tax expense

GROSS PROFIT 73,468

IRES THEORETICAL TAX EXPENSE 20,204

caption 20 - Interest 0

adjustment 0

reversals 0

caption 50 - Dividends and similar income -9

caption 80 - Net gain on f inancial assets measured at fair value -18

caption 90 - Net loss onn the sale or repurchase of f inancial assets 0

caption 110a - Personnel expense 11

caption 110b - Other administrative expenses 0

net extraordinary expense/income 0

othe non-deductible expense 1,634

caption 120 - Net. Imp. Losses on prop., equipment and inv. Prop. - acc. Depriciation -1,023

caption 190 - Income taxw s 0

Non-deductible taxes 0

Gain on sale of the business unit recongnised in equity 0

Total permanent increases/decreases 27.50% 594

Theoritical expense (27.50%) 163

Taxes not pertaining to the year -696

IRES EFFECTIVE TAX EXPENSE 19,671

GROSS PROFIT 73,468

IRAP THEORETICAL TAX EXPENSE 4,092

caption 10 - Interes expense

caption 50 - Dividends and similar income -5

caption 100 - net impairment losses/reverseal of impairment losses 0

adjustment 0

reversals 0

caption 40 - Fee and commission expense to thirds parties 0

caption 120a - Administrative expenses - personnel expense 1,364

caption 120b - Other administrative expenses 0

net extraordinary expense/income 0

other non-deductible expense 6,009

caption 130 - depreciation and net impairment losses on property, equipment and investment property563

caption 130 - amortisation and net impairment losses on intangible assets 304

caption 150 - accruals to the provision for risks and charges 0

caption 160 - other operating income (expense) -519

caption 180 - net gains (losses) on sales on investments 0

caption 190 - income taxes 0

Total costs that do not form part of revenue 7,716

theoreetical expense (5.57%) -430

Taxes not pertaining to the year 11

IRAP EFFECTIVE TAX EXPENSE 4,533

Effective tax expense 24,204

82

Section 19 – Income statement: other disclosures

19.1 Breakdown of interest and fee and commission income

There are no interest or fee and commission income from finance leases, factoring, consumer loans, guarantees and commitments.

83

Part D) – Other disclosures

Section 1 - SPECIFIC DISCLOSURES ABOUT THE BUSINESS

E. PAYMENT SERVICES AND ISSUING OF E-MONEY


E.8 – Operating volumes, number of and revenue from payment transactions

Transaction

amount/1000

Number of

transactions/1000

Fee and

commission

income/1000

Recovery of

expense

Transaction

amount/1000

Number of

transactions/1000

Fee and

commission

income/1000

Recovery of

expense

Acquiring

- Credit cards 30,440 2,144 260 585,464 6,656 3,941

- Debit cards 15,114 307 56 1,617,483 13,699 1,983

Issuing

- Credit cards

- Debit cards

- Transfers

- ordered by customers

- received from customers

- Money transfers:

- incoming

- outgoing

- Amounts debited to customers' payment accounts

- Amounts credited to customers' payment accounts

- Amounts collected from pre-printed payment slips (MAV)

31.12.2017 31.12.2016

E.9 – Fraud

Transaction

amount/1000

Number of

transactionsBroker's fee

Recovery of

expense

Transaction

amount/1000

Number of

transactionsBroker's fee

Recovery of

expense

- Credit cards 42 1,649 146 3,010

- Debit cards 2 13 6 47

- E-money 19 4 119

31.12.2017 31.12.2016

84

Qualitative disclosure

Mercury Payment Services S.p.A., a payment institute, is authorised by Bank of Italy to provide payment services as defined in article 1.1.b).3)/4)/5) of Legislative decree no. 11/2010. Following implementation of the Directive (EU) 2015/2366 of the European Parliament and the Council of 25 November 2015 on payment services on the internal market, amending Directives 2002/65/EC, 2009/110/EC and 2013/36/EU and Regulation (EU) no. 1093/2010, and repealing Directive 2007/64/EC, and in addition to the payment services set out above, the company has the exclusive business object of also providing the following payment services:

• payment order services; • account information services;

as respectively defined in article 4.1.15)/16) of the same Directive (EU) 2015/2366. Reference should be made to "Changes to the ownership and shareholding structure" in the directors' report. On 15 December 2016, Latino Italy S.r.l., a special-purpose entity wholly owned by Mercury UK Holdco Limited ("HoldCo"), acquired 100% of Setefi (now "Mercury Payment Services S.p.A") from Intesa Sanpaolo. As of such date, the company no longer forms part of Intesa Sanpaolo group. Security systems The company has its own IT and telecommunication structures, specific to its business. Mercury Payment Services' participation in payment cards' domestic and international circuits means, inter alia, adopting and complying with security and other related regulations, procedures and protocols, including those established by the circuits. Specifically, with respect to security issues, in 2013, Mercury Payment Services commenced the activities necessary to obtain the PCI DSS certification, which was renewed in August 2017.

• PCI DSS Issuing with an annual period of validity and covering the entire environment and scope, net of Card Production (currently under waiver);

• PCI DSS Acquiring with an annual period period of validity and covering the entire environment and scope.

The PCI DSS standards set a minimum number of security measures for systems and applications as well as organisational and regulatory measures to ensure security in the processing of sensitive data of cardholders. Vulnerability assessment and penetration tests were carried out in accordance with PCI-DSS regulations and, as a result, the company then applied risk mitigation measures. These measures will be extended also to 2018. Mercury Payment Services' systems offer high standards of data quality, ensuring their integrity, secrecy and confidentiality. The software for proprietary applications is developed in such a way that systems are designed and tested in dedicated environments, separate from operating environments. The main operations are supported by automated products for system administration, performance monitoring, process scheduling, reporting and troubleshooting and gathering the information necessary to generate service-level statistics. An agreement is in place between the company and Intesa Sanpaolo Group Services for operating services, which governs mainframe services (remote and non-proprietary system) and management of logic security using the RACF (a system that maintains information systems' user databases and regulates access to data files). At the time the sales transaction was finalised, the parties signed agreements amending and supplementing the contract.

85

Transaction control comprises two consecutive sub-systems managing access to: • the CICS (Customer Information Control System), based on the mainframe system procedures,

applying the commonly used standards; • data and executable operating functions, based on the company's proprietary system.

Access profiles comply with the security policies and allow user identification, authentication and authorisation based on the authorisation profile. Several back-up systems ensure the physical integrity of data, acting at different times and in different ways on the same data group, depending on their use, importance, management needs and legal obligations. The computers directly managed by the company are located and protected in specifically designed data rooms, located in different local units for business continuity reasons. The “authorisation system” uses fault-tolerant machines whose operating systems manage security in terms of both data protection and users' access to data files. A privileged user system (that may define, cancel, enable or disable users and reset their passwords) is in place. A user's password cannot be read by analysing data files. Specifically, systems are of a redundant type (CPUs, memories, I/O adapters, disks and power supply units) and have a control sub-system that can process data, including in the event of faults. The main data exchanged between the various interfaces and the events (traces, logs and system journals) are saved, in addition to the back-ups already made on the host computers. The security of network PC workstations is managed in accordance with applicable internal regulations (which also set the criteria to access company applications and manage the related credentials). An Information Security Risk Assessment was completed during 2016 to check Mercury Payment Services's IT security status, analysing aspects related to technology, processes and people, in order to identify the possible business risk level in connection with information security risks. The findings of the risk assessment indicated the substantial validity of the existing risk control processes. A 24-month roadmap (in terms of organisation, security, infrastructure and application management) has been defined for the implementation of risk monitoring and control tools. The programme commenced in November 2016. This roadmap was recently updated to comply with the new company's structure and future developments. Security of online transactions Mercury Payment Services manages online payments using the Verified by Visa and Secure Code protocols, applied by Visa and Mastercard, respectively, to ensure highly secure payments. Under these protocols, cardholders are assigned a security code to be used upon payment, allowing multiple-factor authentication, in addition to the code, the card PAN and the CVV2. These protocols identify the author of the transaction with a higher degree of safety, protecting both card holders and merchants in the event of disputed transactions.

86

Payment system management As a result of the demerger and transfer of the business unit during 2016, the company has transferred most of its member merchants to Intesa Sanpaolo. As already stated, there are three contracts in place with Intesa Sanpaolo governing the processing services the company provides to Intesa Sanpaolo, respectively relating to the management of:

• payment cards for Intesa Sanpaolo and group banks (this agreement updated the previously existing agreement with different financial terms);

• transactions performed on POS terminals given to Intesa Sanpaolo S.p.A.’s merchant customers;

• cash withdrawals/advances using the Intesa Sanpaolo Group’s ATM payment cards. Reference should be made to "Performance of the core business" in the directors' report for further information. Mercury Payment Services therefore provides:

• acquiring services for its customers only; • issuing of store cards that can only be used at stores of participating companies.

Card payments are processed through the direct link to the relevant card circuit (e.g., Visa, MasterCard or PagoBANCOMAT®). Payments from/to merchants and cardholders are governed by specific company regulations. As stated, with respect to the management side of its business, the company avails of some services provided by Intesa Sanpaolo Group Services (an Intesa Sanpaolo Group company), through its equipment. The main technical and operational requirements are as follows:

• an architecture ensuring business continuity through: - high reliability that provides for several operating local units, active on a dual live basis to

ensure service continuity; - disaster recovery, whereby a local unit will be activated in the event one or more of the other

units malfunctions; • compliance with the payment circuit regulations, in particular, with respect to technical and

security specifications, including the data centre physical safety, the security of key management, links and data transmission;

• a fraud prevention system (for both the acquiring and issuing sides), monitoring the alerts on managed transactions around the clock. This architecture allows for constant monitoring of the detection, identification and reporting of fraud-related activities.

Business continuity In 2014, the company launched a project to build a Disaster Recovery (DR) centre compliant with the requirements introduced by Bank of Italy. The DR centre was set up at the Intesa Sanpaolo's facilities in Parma. The DR solution for cash withdrawals at ATMs, classified as a systemic activity by Bank of Italy, was completed in 2015. The solutions for the critical activities (POS [for physical POSs] and card authorisation, the Terminal manager and the links with payment circuits) were completed in 2016. The company left the Intesa Sanpaolo Group in December 2016. In 2017, tests were carried out on the DR solutions of the authorisation system, which is the main component of the company's information systems. Other tests were also conducted on the unavailability of premises and key personnel.

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Other disclosures on payment system management The company was certified UNI EN ISO 9001:2008 in December 2014, confirming the effectiveness and efficiency of its processes. The audit for its three-year renewal took place in December 2017, adopting the 2015 version: the new certification (UNI UN ISO 9001:2015) will expire in 2020.

Section 2 - Securitisations and transfers of assets N/A.

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Section 3 - Risks and related hedging policies

Risk profiles monitored by Bank of Italy Mercury Payment Services is a pure payment institute supervised by Bank of Italy.

Bank of Italy requires that the intermediaries subject to supervision monitor:

• Credit risk • Market risk (interest rate risk, price risk, currency risk) • Operational risks • Liquidity risks • Additional other risks.

These risks are briefly commented on later on in this report. Risk management and hedging policies These policies comprise:

• Compliance with capital requirements • Internal control system, risk management departments, controls, company departments.

Compliance with capital requirements As a pure payment institute, the company is required to prudently comply with Bank of Italy measure of 17 May 2016 “Supervisory provisions for payment institutes and e-money institutes” - chapter V and Bank of Italy Circular no. 286 of 17 December 2013 “Instructions for obliged parties when filling out prudential reports" as well as the subsequent updates issued by Bank of Italy. Pure payment institutes are currently required to comply with the following capital requirements:

• for payment services rendered: the capital requirement applicable to the payment institute in respect of the risks related to the payment services rendered may be calculated using one of the two alternative methods. The payment institute normally applies the method B;

• for credit risk: payment institutes granting financing calculate a capital requirement equal to 6% of the financing disbursed. The loans granted for credit card payments with monthly settlements are excluded.

• total: payment institutes regularly maintain a total minimum capital (regulatory capital) equal to at least the sum of the capital requirement for payment services rendered and that for the credit risk.

As discussed in the paragraph “Own funds and capital ratios” of these notes:

• the company's capital requirement for the credit risk is nil at the reporting date; • with respect to the total capital requirements (only the capital requirements for the payment

services provided), Bank of Italy authorised the partial demerger of Setefi S.p.A. (currently Mercury Payment Services S.p.A.) to the then parent, Intesa Sanpaolo S.p.A., with measure no. 1171937/15 of 5 November 2015, highlighting the need to ensure the future adequate safeguarding of the activities related to the transferred acquiring contracts outsourced to the company, and their continued inclusion in the business scope subject to individual (for the company) and consolidated (for Intesa Sanpaolo) capital requirements at 15 December 2016.

At the reporting date, the company calculated the capital requirements for the payment services provided in the same way as it did for all of 2016. They totalled €19 million. The regulatory capital meets the capital requirements of relevant regulations.

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CAPITAL REQUIREMENT FOR PAYMENT SERVICES RENDERED Mercury Payment Services normally calculates the capital requirement as per Bank of Italy measure of 17 May 2016 (chapter V, Section II par. 1.3) using the method B. Method B The payment institute's capital requirement is equal to at least the sum of the slices of the payment volumes (PV) set out in letters a) - e) – where the PV represents one twelfth of the total amount of payment transactions executed by the payment institute in the preceding year – multiplied by the scaling factor k defined below:

a) 4% of the slice of PV up to €5 million; b) 2.5% of the slice of PV above €5 million up to €10 million; c) 1% of the slice of PV above €10 million up to €100 million; d) 0.5% of the slice of PV above €100 million up to €250 million; e) 0.25% of the slice of PV above €250 million.

The scaling factor k is equal to:

a) 0.5 where the payment institute provides only the payment services listed in article 1.1.6, letter b) of Decree no. 11 of 27 January 2010;

b) 0.8 where the payment institute provides the payment services listed in article 1.1.7, letter b) of Decree no. 11 of 27 January 2010;

c) 1.0 where the payment institute provides one or more of the payment services listed in article 1.1.1-5, letter b) of Decree no. 11 of 27 January 2010

For Mercury Payment Services, the applicable scaling factor k based on the payment services rendered is 1.0 (as the company provides one or more of the payment services listed in points 1-5 of the Annex to Directive 2007/64/EC on payment services in the internal market). At 31 December 2017, the PV (representing one twelfth of the total amount of payment transactions executed by the payment institute in the preceding year) is equal to €7.1 billion. The sum of the slices of VP, allocated as a percentage over the above five PV brackets, amounts to €19 million. By applying the 1.0 scaling factor k, this amount represents the final capital requirement for the payment services rendered.

Internal control system, risk management departments, controls, company departments

The internal control system The Risks, Compliance & AML unit (which includes the Risks & Controls and Compliance & AML departments) is responsible for performing level 2 controls. The principles on which Mercury Payment Services’ risk management and controls are based provides for the identification of risk assumption responsibilities, control systems, organisational segregation and assessment between of risk management and control departments. The control system is organised into three different levels:

• level 1 controls are handled by the production units or incorporated in the IT procedures. The Risks, Compliance and AML unit conducts additional level 1 controls and checks that the level 1 risk control activities described above are carried out;

• level 2 controls, i.e., risk management and compliance controls, are handled by the Compliance department and other units identified and set up specifically for these activities (such as the Operational Risk Management Department (ORMD) for operational risks);

• level 3 controls, handled by the Internal audit department. Intesa Sanpaolo's Central Internal Auditing Department carried out internal audit activities in the first quarter of 2017. These activities were subsequently assigned to Nexi's Audit service as part of a service contract.

The set of rules is formed by “Governance Documents” that regulate how the company functions (including by-laws, code of ethics, policies, guidelines and organisational models) and operating

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documents (General Management’s notes, circulars, operating guides and manuals) which define the organisational units and related functional charts, implement the relevant rules, govern the main processes and define the activities and controls to be implemented. The company's entire regulatory structure is being updated to reflect its new structure. With respect to the company bodies (i.e., all bodies responsible for strategic oversight, management and control), the board of directors is responsible for strategic oversight and the General Manager is responsible for management, while the board of statutory auditors is assigned control duties and also carries out the role of Supervisory body as per Legislative decree no 231/2001. To carry out its functions, the board of statutory auditors may rely on the organisational units with control duties and, in particular, the internal audit department which, inter alia, coordinates with the internal control departments and the independent auditors. In the light of the option offered by Law no. 183/2011, the board of statutory auditors carries out the duties of Supervisory body pursuant to Legislative decree no. 231 of 8 June 2001, with respect to the administrative liability of bodies, monitoring the functioning, compliance and adequacy of the company’s organisational, management and control model. This model is being finalised following the company's new organisational structure introduced during the year.

Risk management department Credit risk: Supervisory instructions define credit risk as the risk that a counterparty may fail to meet its obligations in lending transactions. As stated, payment institutes that grant financing in accordance with Bank of Italy measure of 17 May 2016 “Supervisory provisions for payment institutes”, chapter IV, calculate a capital requirement for credit risk equal to 6% of the financing granted; this does not include financing for the execution of payment transactions using credit cards with monthly settlements. Mercury Payment Services' credit risks are exclusively connected to issuing activities and, therefore, do not arise on “operations” relating to its non-core activities and which are not, in any case, "lending" transactions. The company currently only issues credit cards with monthly settlements and, therefore, this capital requirement was nil at 31 December 2017.

• Market risks: there is no material market risk given the nature of the company's business activity.

• Operational risks: reference should be made to the paragraph "OPERATIONAL RISKS”.

• Liquidity risks: there is no material liquidity risk given the nature of the company's business activity.

• Additional risks: as acquirer, and as related to its customers only, the company is also subject to risks typically related to the acceptance of card payments by member merchants, which are not specifically attributable to the category of credit or counterparty risks.

An acquirer operating in payment systems is obliged to recharge member merchants after the amounts have already been paid to the same in accordance with the contractually agreed due dates, when there are chargebacks by payment cardholders (after the legitimacy of these complaints has been checked). The actual possibility of recharging a merchant depends on the underlying contractual relationship and latter’s solvency.

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Another risk for the acquirer could arise from the merchant not delivering a good and/or providing a service to the cardholder who has purchased the good or service using a credit card. This could occur if the cardholder purchases a service without the physical presence of the card and will use the service after a period of time (like in the case of the travel packages purchased significantly in advance of the scheduled departure date). However, these risks are significantly lower following the demerger and transfer of the business unit which involved the company transferring almost all member merchants to Intesa Sanpaolo. The services provided by the company to Intesa Sanpaolo and the Intesa Sanpaolo Group banks are governed by specific contracts. At the time the sales transaction was finalised, the parties signed agreements amending such contracts (notified in advance to the European Central Bank as the supervisory authority having sole jurisdiction as regards outsourcing). Signing these contracts introduced, inter alia, the risk associated with penalties for non-compliance with the service levels agreed with Intesa Sanpaolo. The contracts signed with Intesa Sanpaolo have been recently supplemented with new service levels which provide for the application of a grace period during which service levels are monitored, but penalties are not applied. Conversely, the grace period of the service levels agreed as part of the contract expired in August 2017. Consequently, the overrunning of the relevant thresholds may result in the application of penalties.

Controls The main controls over the current business activities are described below. Service management

This unit was strengthened. Its aim is to monitor and improve the service provided to Intesa Sanpaolo and to monitor the performance of the contractually-agreed service levels. In respect of compliance with the service levels agreed with Intesa Sanpaolo, the units responsible for the relevant processes carry out regular checks of compliance. Each service level has a minimum and a tolerance threshold, which is the occasional non-compliance with the agreed level if duly justified. This information is received from the Service management unit and combined and carefully monitored with the General Manager. In the event of non-compliance, the operating unit analyses and sets out the reasons therefor and designs an action plan to resolve the situation.

IT security

The company has its own IT and telecommunication structures, specific to its business. Mercury Payment Services' participation in payment cards' domestic and international circuits means, inter alia, adopting and complying with security- and other related regulations, procedures and protocols, including those established by the circuits. Specifically, the security levels set by Payment circuits are complied with and ensured by obtaining the standard PCI-DSS annual certificate. Fraud Management & Chargebacks

As part of the services provided by the company to Intesa Sanpaolo and the Intesa Sanpaolo Group banks, in addition to monitoring its customers (member merchants, credit card holders), the Fraud Management & Chargeback unit monitors the issuing and the acquiring components 24 x 7 and 6x7 – h 12 (08-20), respectively.

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Monitoring is carried out using specific IT applications, the main advantages of which are:

• ISSUING: immediate identification and notification of the irregular use of payment cards and a telephone call to the cardholder and/or blocking the card, where necessary, informing the relevant branch;

• ACQUIRING: - identification of the merchants most affected by fraud and concurrently taking security

measures, where necessary;

- assistance with merchants in terms of training and improving the effectiveness of their processes.

• ISSUING/ACQUIRING:

- identification of the issuers or acquirers most at risk to fraud; - obtaining an overview of global cases of fraud useful to best exploit anti-fraud tools.

In this respect:

• the information the company uses to monitor its member merchants also derives from external sources, i.e.:

- the reports made directly by the security services of other members belonging to the international circuits;

- other credit card brokerage companies with which the company has signed agreements to activate POS terminals for the electronic acceptance and validation of cards by such companies;

- police investigations.

• the company monitors member merchants also in compliance with the provisions of article 3 of Law no. 197/9.

Claims management

The company assists Intesa Sanpaolo's unit in managing claims from merchant customers related to Intesa Sanpaolo Group banks. Furthermore, it manages directly the claims filed by its customers. The General Manager uses information on claims management to identify irregular conduct of employees and, more generally, potential operational risks.

Anti-money laundering department The head of the Risks, Compliance and AML department has also been the head of the anti-money laundering department since May 2016 and is assigned the following duties:

• ensuring compliance with Bank of Italy’s specific requirements pursuant to anti-money laundering regulations in accordance with the specific guidelines that the company has adopted, supervising all company units which are assigned duties in connection with anti-money laundering requirements and updating over time the operating instructions to reflect regulatory changes;

• sending aggregate data (S.A.R.A.) each month and managing any findings of the Financial Intelligence Unit in collaboration with the appointed company units;

• reporting suspicious transactions pursuant to anti-money laundering regulations, as well as reports pursuant to article 52 of Legislative decree no. 231/2007.

The head of the anti-money laundering department is assisted by the Compliance department coordinator, also part of the Risks, Compliance and AML department. These second level control functions are included in the same department on the basis of the proportionality principle.

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The Internal audit department As discussed, internal auditing was handled by Intesa Sanpaolo S.p.A.’s Central Internal Auditing Department until March 2017. It was responsible for continuously and independently monitoring that the company’s operations and processes were proceeding regularly to prevent or detect any irregular or risky conduct or situations. As of 1 April 2017, the Audit department has been outsourced to Nexi's Audit service pursuant to an annual service contract. Bank of Italy authorised the outsourcing of the audit function on 20 June 2017 using the silent means assent mechanism.

The Compliance Department and non-compliance risk Over time, the company implemented Intesa Sanpaolo's guidelines for non-compliance risk control as an integral part of the internal control system, also preparing an implementation document that aligned Intesa Sanpaolo S.p.A.'s guidelines to the company's operating context. In November, the company's Board of Directors approved the “Compliance Guidelines” and the “SCII (Integrated Internal Control System) Standard”, which were subsequently published in internal regulations. The Risks, Compliance & AML Manager was appointed as Compliance officer. The Compliance Guidelines set the controls necessary to ensure compliance with the law, defining the roles and responsibilities of the company's units involved, and the compliance macro-processes implemented to mitigate or prevent the reputational risk. The Compliance department directly performs all duties assigned to the department with respect to the regulatory areas that the Supervisory Authorities consider to be the most important given the company's operations. These areas are listed below:

• transparency of contractual terms, • payment systems, • administrative liability of entities, • anti-money laundering, • embargoes, • anti-trust, • protection of personal data.

Furthermore, additional regulatory areas considered relevant to non-compliance risk have been identified and other company departments carry out the related duties in whole or in part, for example:

• the General Secretariat with respect to related party transactions and the obligations of group officials;

• the manager appointed pursuant to Legislative decree no. 81/2008 with respect to safety in the workplace (in accordance with Legislative decree no. 81/2008, the employer is represented by the General Manager who relies on the Human Resources & Organisation Officer).

The SCII Standard is an integral part of the Guidelines. It establishes the set of rules, interactions and organisational units which ensure the performance of internal controls necessary to comply with regulations and to ensure efficient and effective processes and the safeguarding of the company's value. 3.1 Credit risk Qualitative disclosure 1 General issues Reference should be made to the introduction to "Risks and related hedging policies" in this section for information on the capital requirements applicable to payment institutes and, in particular, credit risk.

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Supervisory instructions define credit risk as the risk that a counterparty may fail to meet its obligations in lending transactions. With respect to its issuing business, at present, Mercury Payment Services has limited the issue of its payment cards and reviews the risk profiles of all areas where they are not already very low. The company currently only issues credit cards with monthly settlements and, therefore, this capital requirement was nil at 31 December 2017. 2 Credit risk management policies The company checks any complaints for natural persons and, if they present it, on their income tax returns. It uses CERVED for credit checks of legal entities. The company presently manages just store cards which can only be used at stores of merchants which have signed the agreement for card issue and management. The collection risk for other loans and receivables with customers is limited given the counterparts' quality and these items' residual life (mainly on demand/short term).

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Quantitative disclosure 1. Breakdown of exposures by portfolio and credit quality

Non-performing Unlikely to pay

Impaired past

due exposures

Unimpaired

exposures Other assets Total

1. Available-for-sale f inancial assets 0 0 0 0 0 0

2. Held-to-maturity investments 0 0 0 0 0 0

3. Loans and receivables w ith banks 0 4 0 0 170,328 170,332

4. Loans and receivables w ith customers 0 53 1 3 5,546 5,603

5. Financial assets at fair value through profit or loss 0 0 0 0 154 154

6. Financial assets held for sale 0 0 0 0 0 0

7. Loans and receivables w ith f inancial institutions 0 0 23 0 232,447 232,470

Total 31.12.17 0 57 24 3 408,475 408,559

Total 31.12.16 0 20 187 561 418,793 419,561

2. Exposures

2.1 Loans and receivables with customers: gross and net amount and overdue bracket

Up to 3 monthsFrom 3 to 6

months

From 6 months

to 1 yearMore than 1 year

A ON-STATEMENT OF FINANCIAL POSITION:

a) Non-performing 0 0 0 0 0 0 0 0 0

- including: forborne exposures

b) Unlikely to pay 2 0 32 19 0 53 0 0 53


c) Impaired past due exposures 1 0 0 0 0 1 0 0 1


d) Unimpaired exposures 0 0 0 0 4 4 0 1 3

- held for trading 0 0 0 0

- other 0 0 0 0 4 4 0 1 3


e) Other unimpaired exposures 0 0 0 0 5,867 5,867 0 322 5,546

- held for trading 0 0 0 0

- other 0 0 0 0 5,867 5,867 0 322 5,546

TOTAL A 3 0 32 19 5,871 5,925 0 323 5,603

B OFF-STATEMENT OF FINANCIAL POSITION

a) Impaired 0 0 0 0 0 0 0 0 0

b) Other 0 0 0 0 0 0 0 0 0

- derivatives 0 0 0 0 0 0 0 0 0

- other 0 0 0 0 0 0 0 0 0

TOTAL B 0 0 0 0 0 0 0 0 0

Total (A+B) 3 0 32 19 5,871 5,925 0 323 5,603

Gross amount

Total gross

amount

Individual

impairment

Collective

impairment

Carrying

amountImpaired assets

Unimpaired

assets

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2.2 Loans and receivables with banks and financial institutions: gross and net amount and

overdue bracket

A ON-STATEMENT OF FINANCIAL POSITION:

a) Non-performing 0 0 0 0 0 0 0 0 0


b) Unlikely to pay 0 0 4 0 0 4 0 0 4


c) Impaired past due exposures 0 0 23 0 0 23 0 0 23


d) Unimpaired exposures 0 0 0 0 0 0 0 0 0

- held for trading 0 0 0

- other 0 0 0 0 0 0 0 0 0


e) Other unimpaired exposures 0 0 0 0 403,087 403,087 0 313 402,774

- held for trading 0 0 0 0 0 0 0 0 0

- other 0 0 0 0 403,087 403,087 313 402,774

TOTAL A 0 0 27 0 403,087 403,114 0 313 402,801

B OFF-STATEMENT OF FINANCIAL POSITION

a) Impaired 0 0 0 0 0 0 0 0 0

b) Unimpaired 0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0

TOTAL B 0 0 0 0 0 0 0 0 0

Total (A+B) 0 0 27 0 403,087 403,114 0 313 402,801

More than 1 year

Gross amount

Total gross

amount

Individual

impairment

Collective

impairment

Collective

carrying

amount

Impaired assetsUnimpaired

assetsUp to 3 monthsFrom 3 to 6

months

From 6 months

to 1 year

3. Credit concentration

3.1 Breakdown of on and off-statement of financial position exposure by the counterparty's

business segment

Nothing to report.

3.2 Breakdown of on and off-statement of financial position exposure by the counterparty's

geographical segment Nothing to report.

3.3 Large exposures Nothing to report.

4. Models and other methods to measure and manage credit risk Nothing to report.

5. Other quantitative disclosure Nothing to report.

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3.2 Market risk

3.2.1 Interest rate risk There is no interest risk given the nature of the company's business activity.

3.2.2 Price risk This is the risk of changes in the price of financial instruments due to fluctuations in market variables and factors specific to issuers or counterparties. There is no price risk given the nature of the company's business activity. 3.2.3 Currency risk There is no material currency risk given the nature of the company's business activity:

• For the acquiring business:

- transactions performed at member merchants with the company using Visa, Mastercard, JCB Cards, Union Pay and Diners cards not issued by the company, regardless of whether they were issued in Italy or abroad, are settled on these circuits in Euros;

- only the management of chargebacks on merchants ordered by holders of cards issued abroad - in any case in non-Eurozone countries - may generate exchange rate gains and losses. This is because the amount considered to charge back a transaction is not the amount of the original transaction but rather the amount shown in the cardholder's account statement following the card issuer's conversion of the transaction amount. These exchange rate gains and losses are not material.

For the issuing business: the amount of transactions performed by Mercury Payment Services cardholders abroad in non-Euro currencies is translated into Euros at an exchange rate determined directly by the international circuit at the date when the transaction is charged to the company. These operations are currently not material and are limited solely to the company's customers. The amount is subsequently charged to cardholders plus intermediation charges at the rate established in the financial terms of the contract regulating cardholding and card use. The company has no innovative or complex financial products or derivatives. The company carried out the necessary procedures to manage the Visa and Mastercard settlement acquirer in foreign currency (at present limited to GBP and CHF).

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3.3 Operational risks

Qualitative disclosure General aspects, management and measurement of operational risk

Until 15 December 2016 and as instructed by the then parent, Intesa Sanpaolo, the company was part of the "second" scope, which was allowed to use the consolidated AMA method as from 31 December 2010. As for the control and mitigation of operational risks, the model adopted in 2016 was therefore that provided for by Intesa Sanpaolo for every group company. For 2017, the company completed the framework for operational risk management that is managed via an independent model by adapting the model used by Nexi to the company's needs, given the company's inclusion in the regulatory consolidation scope of Nexi group (with regard to Risk Appetite Framework; ICAAP /Capital Adequacy; Risk Monitoring). The company applies the Supervisory provisions for payment institutes at an individual level. The Board of Directors approved the Guidelines for operational risks, which were subsequently published in internal regulations together with Loss Data Collection (LDC) and Risk Control Self-Assessment (RCSA) rules. The Guidelines establish the regulatory framework, the goals, the organisational units involved and the operational risk management process. The LDC rules introduce a methodological framework and the process to manage operating loss events, while the RCSA rules govern the annual assessment process covering operational risk management. Risk management and control systems Operational risk is the risk of losses arising from inadequacies or weaknesses in internal procedures, human resources or internal systems and external factors. This risk also comprises legal risk, which is the risk of losses due to violations of the law or regulations, contractual or non-contractual liability or liabilities arising from other disputes, ICT risk and model risk. It does not include strategic and reputational risks. Organisational structure The main players are:

• the company bodies, comprised of the Board of Directors, the Board of Statutory Auditors and the General Manager, which set the general policies governing the adopted system, are responsible for its implementation, monitor its effective operation, check its overall functioning and compliance with the relevant requirements;

• the internal governance structure, i.e., the Risk and Control Committee, comprised of the General Manager, who is also the Chairman, the Risk Manager, who acts as the secretary, and the Chief Information Technology Officer, the Chief Operations Officer, the Chief Commercial Officer, the Human Resources & Organization, Administration, Planning & Control and Procurement departments' heads. Furthermore, the General Secretariat head and Nexi's Audit and Risk managers are permanent guests. The committee meets periodically and assesses the operation, the efficiency and the effectiveness of the operational risk and internal control system as a whole. It periodically updates the Board of directors and the Board of statutory auditors on the management of operational risks and the internal control system.

• the unit in charge of developing, managing and maintaining the governance framework of operational risks, made up of the Operational Risk Management department, allocated to the Risks, Compliance & AML department. The head of the latter department was appointed Operational Risk Manager with responsibilities for overseeing the loss event/effect management process, liaising with all the company's unit heads, acting as the secretary to the Risk and

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Control Committee, performing regular RCSA activities and preliminarily assessing the risk level related to the introduction of new products, processes or systems and the penetration of new markets;

• all the company's organisational units, which must cooperate with the Operational Risk Management department to develop, manage and maintain operational risks. The heads of these units are the risk owners and are responsible for managing the process underlying the collection and updating of operational risk events/effects related to the processes managed by their unit, ensuring the performance of RCSA activities, proposing mitigation and improvement measures and identifying risk champions. Risk champions are the resources within the organisational unit that ensure the collection and updating of operational risk event/effect data, alert the risk owners and promote the dissemination of the operational risk culture within their organisational structure.

An RCSA process is conducted once a year and enables the company to:

• identify, measure, monitor and mitigate operational risks by identifying the main critical operational points and defining the most appropriate mitigation measures;

• create important synergies with other departments which oversee the design of operating processes and business continuity issues, and the Compliance and Internal Audit departments, which handle specific regulations and issues (Legislative decree no. 231/01, Law no. 262/05) or conduct tests on the effectiveness of controls over business processes.

This process, which was implemented in the 2017 regulations, will began in early 2018. The collection of data on operating events and operational losses in particular, obtained from both internal and external sources, provides material information on historical exposure. Furthermore, it contributes to increasing the knowledge and understanding of operational risk exposure on one hand, while evaluating effectiveness or potential weaknesses in the internal control system on the other. The internal capital absorption calculation model is that of Bank of Italy designed for payment institutes. The quantitative component is based on an analysis of historical data on internal events recorded at the organisational units and adequately verified by Risk Management department. The qualitative component (scenario analysis) is focused on the forward-looking evaluation of each organisational unit's risk profile and is based on the structured and organised collection of subjective estimates that management has formulated with the objective of assessing the potential economic impact of particularly serious operating events. An integrated reporting system is used to monitor operational risk, providing management with information to support risk management and/or mitigation. To continuously support the operational risk governance process, the company will roll out a structured training programme for people actively involved in this process. Moreover, the company has had a traditional policy for operational risk transfer for some time (covering unlawful behaviour such as employee disloyalty, theft and damage, transport of valuables, IT fraud, falsification, fire and earthquake risks, as well as third-party liability) which contributes to its mitigation. Given the important of IT risks for its business, the company entered into a specific (cyber risk) policy, implementing a risk transfer policy.

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3.4 Liquidity risk

Qualitative disclosure Liquidity risk is the risk that the company is unable to meet its payment commitments when they fall due. Until 15 December 2016, the company followed the Intesa Sanpaolo Group's "Guidelines for Liquidity Risk Management". Bank current accounts are currently held with Intesa Sanpaolo and Nexi. Some of them have overdrafts. They fall under the “on demand” category of assets and liabilities. The assets and liabilities related to the company's core business can be classified as “on demand”. There is nothing to report on cash outflows. The company carried out the tasks necessary to manage the Visa and Mastercard settlement acquirer in foreign currency (at present limited to GBP and CHF).


1 Breakdown of financial assets and liabilities by residual contractual maturity

Type/ Residual maturity On demand

Between 1 and 7

days

Between 7 and

15 days

Between 7 and 1

month

Between 1 and

3 months

Between 3

and 6 months

Between 6

months and 1

year

Between 1 and 3

years

Between 3

and 5 yearsOver 5 years

Unspecified

maturity

Cash assets

A.1 Governement bonds 0 0 0 0 0 0 0 0 0 0 0

A.2 Other debt securities 0 0 0 0 0 0 0 0 0 0 0

A.3 Loans 0 0 0 0 0 0 0 0 0 0 0

A.4 Other assets 352,912 12,467 4,304 0 33,682 0 0 5,039 0 0 168

Cash Liabilities

B.1 Deposit and current account due to:

- Banks 171,188 0 0 0 387 0 0 0 0 0 0

- Financial istitutions 17,985 0 0 511 1,342 0 45,383 0 0 0 0

- Customers 0 0 0 0 0 0 0 0 0 0 0

B.2 Debt securities 0 0 0 0 0 0 0 0 0 0 0

B.3 Other liabilities 0 0 0 0 0 0 0 0 0 0 0

C.1 Financial derivatives w ith exhange of capital 0 0 0 0 0 0 0 0 0 0 0

- Long positions 0 0 0 0 0 0 0 0 0 0 0

- Shorts positions 0 0 0 0 0 0 0 0 0 0 0

C.2 Financial derivatives w ithout exhange of capital 0 0 0 0 0 0 0 0 0 0 0

- Long positions 0 0 0 0 0 0 0 0 0 0 0


C.3 Deposits an loans to be settled 0 0 0 0 0 0 0 0 0 0 0

- Long positions 0 0 0 0 0 0 0 0 0 0 0


C.4 Irrevocable commitment to 0 0 0 0 0 0 0 0 0 0 0

- Long positions 0 0 0 0 0 0 0 0 0 0 0


C.5 Financial guarantees given 0 0 0 0 0 0 0 0 0 0 0

C.6 Financial guarantees received 0 0 0 0 0 0 0 0 0 0 0

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Section 4 – Equity 4.1 Equity

4.1.1 Qualitative disclosure

Capital management consists of all policies and decisions necessary to define the amount of equity, to ensure that capital and ratios are consistent with the risk profile and meet capital requirements established by regulations. The policies for the allocation of the profit for the year are designed to ensure adequate capitalisation.

4.1.2 Quantitative disclosure

4.1.2.1 Equity: breakdown

31.12.2017 31.12.2016

1. Share capital 7,109 7,109

2. Share premium 0 0

3. Reserves 23,444 23,444

- income-related 23,444 23,444

a) legal 1,422 1,422

b) statutory 0 0

c) Unavailable reserve pursuant to article 2359-bis of the Italian

Civil Code 0 130

d) Extraordinary reserves 22,022 21,892

- other 0 0

4. Treasury shares 0 0

5. Valuation reserves -292 -301

- Financial assets available for sale 0 0

- Property and equipment 0 0

- Intagible assets 0 0

- Hedges of foreign investments 0 0

- Cash flow hedges 0 0

- Foreign exchange differences 0 0

- Non current assets held for sale 0 0

- Legally required revaluations 0 0

- Actuarial gains (losses) in defined benefit plans -292 -301

- Share of valuation reserves connected w ith investments carried at equity 0 0

6. Equity instruments 0 0

7. Post-tax profit from continuing operations 49,264 129,988

Total 79,525 160,240

Equity at 31 December 2017, including profit for the year, amounted to €79.5 million, compared to €160 million at 31 December 2016. The decrease in equity is substantially due to the allocation of the profit for 2016 to Dividends (€130 millions) and the profit for 2017.

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4.1.2.2 Valuation reserves - Available-for-sale financial assets: breakdown

Fair value gains Fair value losses Fair value gains Fair value losses

1 Debt instruments 0 0 0 0

2. Equity instruments 0 1 0 0

3. OEIC units 0 0 0 0

4. Financing 0 0 0 0

Total 0 1 0 0

31.12.2017 31.12.2016

4.1.2.3 Fair value reserves - Available-for-sale financial assets: changes

Debt

instruments

Equity

instrumentsOEIC units Financing

1. Opening balance 0 0 0 0

2. Increases 0 1 0 0

2.1 Fair value gains 0 1 0 0

2.2 Reclassif ication of fair value losses to profit or loss 0 0 0 0

. due to impairment 0 0 0 0

. on sale 0 0 0 0

2.3 Other increases 0 0 0 0

3. Decreaes 0 0 0 0

3.1 Fair value losses 0 0 0 0

3.2 Impairment losses 0 0 0 0

3.3 Reclassif ication of fair value gains to profit or loss: on sale 0 0 0 0

3.4 Other decreases 0 0 0 0

4. Closing balance 0 1 0 0

103

4.2 Own funds and capital ratios

4.2.1 Own funds

Bank of Italy notified:

• the shareholder (notification of transmission of the authorising measure) of the company's inclusion in the regulatory consolidation scope of the Nexi group (with regard to the Risk Appetite Framework; ICAAP /Capital Adequacy; and Risk Monitoring), on 14 December 2016;

• the company (notification of the change of organisational unit in charge of the administrative procedure), copying in the shareholder and Nexi, that, following the completion of the company's sale, it now forms part of the regulatory consolidation scope of Mercury Holdco UK, pursuant to Regulation (EU) no. 575/2013, with effect from 1 February 2017.

In compliance with the provisions of the Supervisory instructions, the breakdown and contents of regulatory capital differ from those of equity as, mainly, regulatory capital:

• does not include the profit to be distributed as dividends; • is net of intangible assets; • includes the net gains on available-for-sale assets recognised under caption 170

“Fair value reserves” which can be included for up to 50% of regulatory capital.

4.2.1.1 Qualitative disclosure

In compliance with the definition and provisions of Bank of Italy regulation of 17 May 2016 “Supervisory provisions for payment institutes” (Chapter V, Section I), pure payment institutes calculate regulatory capital in accordance with “Circular no. 286 "Instructions for obliged parties for prudential reporting" Part II, Section 6. Regulatory capital consists of Tier I capital plus Tier II capital admitted in the calculation of regulatory capital up to a maximum amount equal to Tier I capital, net of deductions (the company does not have any prudential filters, except for those introduced following the adoption of the amendments as per IAS 19 and as specifically required by Bank of Italy). Regulatory capital is calculated as the sum of a series of positive and negative elements that are permitted, with or without limitations in certain specific cases, considering the quality of each type of capital. The positive elements considered in the calculation of capital must be used without restrictions or delays to cover company risks and losses when such risks or losses arise. The amount of these elements is before any tax charges. The sum of “Tier I capital”, “Tier II capital” and “Tier III capital”, net of deductions, constitutes the "regulatory capital included in Tier III capital”.

Tier 1 capital

Paid-up share capital and reserves are the current components of Tier I capital. Their total, after intangible assets have been deducted, constitutes Tier I capital. As stated above, at present, there are no prudential filters (except for those introduced with the amendments to IAS 19 and as specifically provided for by Bank of Italy), innovative and non-innovative equity instruments.

Tier II capital

The revaluation reserves and hybrid equity instruments (the company does not currently have any) normally constitute Tier II capital. Tier II capital must never exceed Tier I capital and certain elements included in Tier II capital may only be considered up to a limit of 50% of Tier I capital. The solvency ratio must be calculated as the sum of Tier I capital and Tier II capital including Tier III capital, net of any equity investments in banking and financial entities and insurance companies (the company does not currently have any).

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4.2.1.2 Quantitative disclosure

31.12.2017 31.12.2016

A. Tier I capital before the application of prudential filters 79,817 30,422

B. Tier I prudential f ilters: 272 289

B.1 Positive IFRS prudential f ilters (+) 272 289

B.2 Negative IFRS prudential f ilters (-) 0 0

C. Tier I capital before deductions (A+B) 80,089 30,711

D. Deductions from Tier I capital 8,855 7,760

E. Total Tier I capital (C-D) 71,234 22,951

F. Tier II capital before the application of prudential filters 0 0

G. Tier II prudential f ilters: 0 0

G.1 Positive IFRS prudential f ilters (+) 0 0

G.2 Negative IFRS prudential f ilters (-) 0 0

H. Tier II capital before deductions (F+G) 0 0

I. Deductions from Tier II capital 0 0

L. Total Tier II capital (H-I) 0 0

M. Deductions from Tier I and Tier II capital 0 0

N. Regulatory capital (E+L-M) 71,234 22,951 Following the amendments to IAS 19 - Employee benefits applicable from 1 January 2013, which eliminated the corridor approach, Tier 1 capital before the application of prudential filters includes negative actuarial reserves of approximately €292 thousand due to actuarial losses resulting from application of the amendments to IAS 19. They were substantially offset by the recognition of a specific positive IFRS prudential filter, as provided for by Bank of Italy communication of 9 May 2013. Application of the prudential filter as per IAS 19

31.12.2017 31.12.2016

Net liabilities as per the old IAS 19 -885 -1,230

Net liabilities as per the new IAS 19 -1,261 -1,629

Prudential f ilter 376 398

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4.2.2 Capital adequacy

As noted earlier, the company is subject to capital requirements established by Bank of Italy for payment institutes. Reference should be made to the paragraph "Risks and related hedging policies".

4.2.2.1 Qualitative disclosure

Supervisory requirements and consequent adjustments to regulatory capital are monitored proactively over time on the basis of current and forward-looking company objectives. Throughout the year, the regulatory capital ratios are monitored quarterly and the appropriate action is taken, where necessary, to manage and control regulatory capital. Payment institutes always have regulatory capital which must be equal to at least the total capital requirement at all times and, in any case, never lower than the minimum initial capital required to establish the payment institute.

4.2.2.2 Quantitative disclosure

31.12.2017 31.12.2016 31.12.2017 31.12.2016

A. RISK ASSETS

A.1 Credit and counterparty risk 0 0 0 0

1. Standardised methodology 0 0 0 0

2. Internal rating-based methodology 0 0 0 0

3. Securitisation 0 0 0 0

B. REGULATORY CAPITAL REQUIREMENTS 0 0 0 0

B.1 Credit and counterparty risk 0 0 0 0

B.2 Credit valuation adjustment risk 0 0 0 0

B.3 Settlement risk 0 0 0 0

B.4 Market risk 0 0 0 0

1. Standard methodology 0 0 0 0

2. Internal models 0 0 0 0

3. Concentration risk 0 0 0 0

B.5 Operational risk 0 0 0 0

1. Basic method 0 0 0 0

2. Standardised method 0 0 0 0

3. Advanced method 0 0 0 0

B.6 OTHER PRUDENTIAL REQUIREMENTS 0 0 0 0

1. Capital requirement for payment services 0 0 19,176 17.036

B.7 OTHER CALCULATION ELEMENTS 0 0 0 0

B.8 TOTAL PRUDENTIAL REQUIREMENTS (B1+B2+B3+B4) 0 0 19,176 17.036

C. RISK ASSETS AND CAPITAL RATIOS

C.1 Weighted risk assets

C.2 Tier 1 capital/Weighted risk assets (CET1 capital ratio) 319,469 283,819

C.3 Regulatory capital/Weighted risk assets (Tier 1 capital ratio) 22,30% 8,09%

C.4 Total ow n funds/Weighted risk assets (Total capital ratio) 22,30% 8,09%

22,30% 8,09%

Unweighted amounts Weighted amounts/requirements

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Section 5 – Statement of comprehensive income

Gross amount Income taxes Net amount

10 Profit of the year 73,468 -24,204 49,264

Items that w ill not be reclassified susequently ti profit or loss

20 Property, eqipment and investment property 0 0 0

30 Intangible assets 0 0 0

40 Defined benefit plans 12 -3 9

50. Non-current assets hel for sale 0 0 0

60. Share of valuation reserves of eqioty-accounted investees 0 0 0

Items that will not be reclassified susequently ti profit or

loss

70. Hedges of investments in foreign operations

a) fair value gains/(losses) 0 0 0

b) reclassif ication to profit or loss 0 0 0

c) other changes 0 0 0

80. Net exchange rate gains/(losses)




90 Cash flow hedges




100 Available-for-sale financial assets



- impairment losses

- gains/(losses) on sales


110. Non-current assets held for sale




120 Share of valuation reserves of eqioty-accounted investees


b) reclassif ication to profit or loss

- impairment losses 0 0 0

- gains/(losses) on sales 0 0 0


130 Total other comprehensive income 13 -3 9

140 Comprehensive income (captions 10+110) 73,481 -24,207 49,273

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Section 6 – Related party transactions The aim of IAS 24 (Related Party Disclosures) is to ensure an entity's financial statements contain the additional disclosures necessary to show the possibility that its financial position and results of operations may have been influenced by related parties and by transactions and balances with such parties. A related party is a person or entity related to the entity preparing the financial statements:

• in the case of natural persons, a person or a close member of that person's family related to a

reporting entity if that person: - has control or joint control over the entity preparing financial statements; - has significant influence over the company preparing financial statements; - is a key manager of the entity preparing financial statements or one of its subsidiaries.

• in the case of legal persons, the following conditions must apply:

- the entities form part of the same group (meaning that each parent, subsidiary and group company is related to the others);

- an entity is an associate or a joint venture of the other entity (or an associate or joint venture forming part of the group to which the other entity belongs);

- both entities are joint ventures of the same third-party counterparty; - an entity is a joint venture of a third-party entity and the other entity is a related party of the

third-party entity; - the entity is represented by a plan for post-employment benefits for employees of the entity

preparing financial statements or of an entity related thereto. If the entity preparing financial statements is a plan of this type, the employers that sponsor it are also related parties of the entity preparing financial statements;

- the entity is controlled or jointly controlled by a person identified as a related party; - a person identified as a related party has significant influence over the entity or is one of its

key managers (or of one of its parents). The following are deemed related parties of the company:

• companies that control directly or indirectly and/or exercise significant influence over Mercury Payment Services and the entities controlled by the latter;

• the company's key management personnel and control bodies, and their close relatives or subsidiaries and associates.

As described in the paragraph “Relationships with the parent and its subsidiaries”, to which reference should be made for additional details, on:

• 28 March 2017, two service contracts were entered into with Nexi S.p.A:

- a service contract between Nexi, Mercury UK Holdco Limited and Mercury Payment Services

S.p.A., governing the manner, frequency and timing of the transmission of information flows from Mercury Payment Services to Nexi, in order to include the company in the prudential supervision processes at consolidation level;

- a contract governing the outsourcing of internal audit activities. In view of Bank of Italy notification to the shareholder Latino Italy S.r.l. (Letter of 14 December 2016 - Acquisition of a controlling interest in Mercury PS S.p.A. Transmission of the measure), these activities have been outsourced to Nexi since 1 April 2017. Until March 2017, Intesa Sanpaolo's Central Internal Auditing Department carried out these activities.

• 26 April 2017, the company entered into a 16-month loan agreement with Latino Italy S.r.l.

worth €45 million to support the company's financial needs;

• 18 May 2017, the company entered into a Consulting Service Agreement.

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In 2017, no “atypical or unusual” transactions, whose significance or relevance may cast doubts as to the protection of the company's assets, took place with related or other parties.

6.1 Fees of key management personnel These are directors, statutory auditors and other managers of Mercury Payment Services.

Fee of which: paid Fee of which: paid Fee of which: paid Fee of which: paid

Short-term benefits (1) (3) 106 0 0 0 258 258 364 364

Post-employment benefits (2) 0 0 0 0 27 27 27 27

Other long-term benefits (3) 0 0 0 0 0 0 0 0

Termination benefits (4) 0 0 0 0 0 0 0 0

Share-based payments (5) 0 0 0 0 0 0 0 0

Total 106 0 0 0 285 285 391 391

Board of statutory auditors Board of directors Other managers Total

(1) Include the fixed remuneration of directors, statutory auditors and the general manager since they fall under personnel expense

and social security contributions

(2) Include the company's contribution to pension funds and the accrual to post-employment benefits to the extent required by the law and company regulations.

(4) Include any amounts paid in relation to retirement incentives.

(3) Include an estimate of accruals for employees' seniority bonuses.

6.2 Loans and guarantees to directors and statutory auditors The company did not grant any loans or guarantees to directors and/or statutory auditors.

6.3 Information on related party transactions The following are deemed related parties of the company:

• the companies that exercise significant influence over Mercury Payment Services; • other companies controlled directly or indirectly by the parent; • key management personnel.

The following should be noted:

loan agreement with the parent, Latino Italy S.r.l., worth approximately €45 million;

contracts with sponsors (Advent, Bain Capital, Clessidra), totalling €5.1 million and related to management fees.

In 2017, no “atypical or unusual” transactions, whose significance or relevance may cast doubts as to the protection of the company's assets, took place with related or other parties.

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Section 7 - Additional information 7.1 Audit fees pursuant to article 160.1-bis The fees paid to the independent auditors to which the engagement to audit the financial statements pursuant to articles 14 and 19 bis of Legislative decree no. 39 of 27 January was assigned, are given below.

Service Provider 2017

Audit (a) KPMG S.p.A. 61

Other KPMG S.p.A. 13

Total

74

a) Includes: tax obligations fulfilled as required by the law by the auditor assigned the engagement to audit the company's financial statements. Net of out-of-pocket expenses and VAT.

7.2 Share-based payment agreements

Shares of the former parent Intesa Sanpaolo S.p.A.

The company was affected by:

• the effects of the Intesa Sanpaolo Group's 2011 and 2014 incentive plans, entailing the purchase of shares of the then parent, Intesa Sanpaolo S.p.A., pursuant to article 2359-bis and following articles of the Italian Civil Code - to serve the incentive plans;

• the "Employee share ownership plan - Intesa Sanpaolo's 2014_2017 Lecoip", recognising the effects in its financial statements, pursuant to the Intesa Sanpaolo Group accounting policies, on an accruals basis for 40 months as from December 2014. This is discussed in Part D) - OTHER DISCLOSURES – Section 7 Additional information - Share-based payment transactions of the notes to the 2015 financial statements.

In view of the finalisation of the sales transaction and the company's exit from the Intesa Sanpaolo group, the company and the relevant departments of Intesa Sanpaolo looked into how to appropriately treat such issue. Specifically: Intesa Sanpaolo Group's incentive plans. At 31 December 2017, the company held:

• 52,345 ordinary Intesa Sanpaolo S.p.A. shares; • financial statements recognition: Section 3 – Caption 30 Financial assets at fair value through

profit or loss; • nominal amount: €0.52 each; • fair value at 31 December 2017 of €145 thousand.

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Intesa Sanpaolo S.p.A.'s 2014_2017 Employee share ownership plan and LECOIP.

Intesa Sanpaolo has provided information about the treatment necessary for the company to exit the group and the related accounting entries to be made in Intesa Sanpaolo's separate and consolidated financial statements and in the company's financial statements (discussed with the independent auditors). An agreement was reached between Setefi and Intesa Sanpaolo on 14 December 2016 governing this issue and defining the legal relationships deriving from the plan subscribed by the employees.

Employees of the company that left the Group received the treatment provided for by the Lecoip in the event of the termination of the employment contract for retirement (the good leaver clauses). Mercury Payment Services will not incur any further expense related to Lecoip, as Intesa Sanpaolo has paid it an amount equal to the residual deferred amounts for the Lecoip in the financial statements. Accordingly, the costs deferred to 2017 and 2018 will not have an impact on profit or loss for those years.

Intesa Sanpaolo will have no obligations to Mercury Payment Services in relation to the Lecoip Certificates (for which, under the plan regulations, at the time the company left the group, it acquired the right to receive its residual value on maturity). The only exception is for employees that resigned before the company left the group and for whom at the time of the Plan's expiry in 2018, Intesa Sanpaolo will pay Mercury Payment Services the amount it collected for the Lecoip Certificates. This only relates to a very small number of employees (for some €5 thousand). In its 2017 financial statements, the company reclassified the parent's contribution reserve to the extraordinary reserve. Such reserve had originated and increased over time as per the group regulations for the accounting for the Plan. It was no longer increased from 15 December 2016 (the closing date).

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Annexes

Reconciliation of the income statement prepared for management and financial statements purposes The general criteria for the combination of management captions (see the paragraph "Financial performance" in the directors' report) and traceability criteria to those of the income statement are given below. EBITDA and the other main items have been calculated using specific data combination rules which differ from those of the general ledger and from those of separate financial statements and/or reclassified models used for management purposes. The main differences in the data combination refer to:

• positive income components classified under Other operating income/expense (caption 160 of the financial statements) and related to the provision of services (other than banking/financial services). In the management accounts, they are included in Net commissions and income from services;

• negative income components classified under Other operating income/expense (caption 160 of the financial statements) and related to royalties and/or marketing charges. In the management accounts, they are included in Net commissions and income from services;

• positive income components classified under Other operating income/expense (caption 160 of the financial statements) and related to expense recovery. In the management accounts, they are included in the caption to which the related expense refers;

• positive and negative income components related to prior year gains and losses, classified in the caption from which the item originated. In the management accounts, they are included in Other operating income/expense;

• fees paid to directors and statutory auditors, classified under Personnel expense (caption 110a). In the management accounts, they are included in Other administrative expenses;

• the components originated from accruals for personnel expense, classified under Net accruals to provisions for risks and charges (captions 150). In the management accounts, they are included in Personnel expense;

• positive and negative income components related (supported by evidence) to non-recurring events and/or deemed atypical for the company from a management accounts perspective, are included under Other items although they are recognised in other captions from a general ledger perspective.

The following table shows the reclassified income statement, including the general criteria used to reconcile management accounts captions to financial statements captions.

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Figures for the year ended 31 December 2017 (€'000)

Management

accounts

Reconciliation

(fin. stat. - mgmt

acc.)

Financial

statements

Consolidated

caption

Net fee and commission income 153,267 - 7 153,259 30 - 40

Net interest expense - 1,913 - - 1,913 10 - 20

Dividends on equity investments and AFS financial assets 10 - 10 50

Operating revenue 151,364 - 7 151,356 sum

Personnel expense - 16,786 - 1,994 - 18,780 110a

Other administrative expenses - 36,772 - 14,202 - 50,974 110b

Administrative expenses - 53,559 - 16,195 - 69,754 sum

Net other income/(expense) 911 - 392 519 160

Operating provisions - 5 5 150

Operating costs - 52,653 - 16,583 - 69,236 sum

EBITDA 98,710 - 16,590 82,120 sum

Depreciation and amortisation - 8,665 - - 8,665 120 - 130

Operating profit 90,045 - 16,590 73,455 sum

Other items - 16,577 16,590 13 other captions

Pre-tax profit 73,468 - 73,468 sum

Income taxes - 24,204 - - 24,204 190

Profit for the year 49,264 - 49,264 sum

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