Vladimir Komlev: Russian trade acquiring during the period of business depression, or How to survive till a turn for the better without loss?
Whether it is possible to assert, that retail acquiring in Russia today, when a global economic crisis is in full swing, holds it’s own? What challenges local market players have already faced? Vladimir Komlev, CEO of UCS, the largest Russian acquirer, shares his opinion on possible ways of acquiring business development in Russia with readers of PLUS Journal.
PLUS:Is it right to assert, that retail acquiring in Russia today, when a global economic crisis is in full swing, holds it’s own? What do you think about some CIS countries’ government initiative – to force merchants of certain categories to accept payment cards?
V.Komlev: The fact that today not all merchants accept cards as payment systems and banks-issuers would like to have, is not a problem of card business as that. Russian acquiring business develops in its natural way, it can be encouraged in some way, but it’s impossible not to pass certain stages of civilized retail business step-by-step formation, both in banks, and retail. It is impossible to place POS-terminals in all shops, bakeries, taxi, and order: work! Going such way we would come to full grief: on the one hand, not all merchants are eager to accept cards, and they have many different reasons for that, on the other hand, not all of them are rather interesting for acquirers from the economic point of view, as the volume of transactions in the most of shops would appear to be insufficient to cover the minimum operational costs on acquiring (processing, POS-terminal installation, communication channel maintenance, etc.).
The recent Visa initiative – to maintenance a minimum speed of authorization within 20 seconds - is a good example of it. Fortunately, this requirement for acquirers was not approved as obligatory. Otherwise, we would cut off that "low-level" segment of clients, which only have started to rise. It‘s not so easy to get the level of authorization within 15-20 sec. It is impossible to get this level just at someone’s will. The dial-up authorization takes 35-40 sec. at its best. Other ways of communications, that faster than dial-up, are tone dialing, special allocated communication channels, etc. And such channel costs not less than $50 per month. Further calculations are simple. Even the "fattest" acquirer earns on its acquiring not more than 1%. So, a merchant should have monthly $5 000 turnover of card transactions as min only to cover the communication line costs.
I dare to assure you that such segment of clients, payment systems try to persuade us to work with does not fully meet the case even in Moscow. Plus, we have POS-terminal rent - $20 dollars per month, processing cost, advance payments etc. And it costs money, so it is necessary to consider all expenses precisely. So, an acquirer will get a profit, only if a client has its monthly revenue about $15000 - $20000 per each POS-terminal (that using an allocated communication line). Let’s make an experiment: we take some merchants, which have monthly revenue $15000 and more per POS-terminal. I’m sure, all of them authorize cards within 10-12 sec and even faster. And we should put all our clients on this level, including those, who is not ready economically and sometimes doesn’t meet certain security and risk management requirements?! Let's not ask the acquirer, which is far from to be well-fixed, to make impossible, unnecessary and outright harmful things! Now let’s return to the question of the government initiatives concerning to acquiring stimulation. We know, that retail market develops rather systematically and gradually. And each merchant will not be equipped with a POS-terminal until their owners and top-managers get realized the necessity of this step in full and get ready to invest in such systems. But it’ll be so only when merchants get really convinced that their further refusing to accept payment cards causes them big loses – a large share of turnover and the most perspective categories of clients which go with their cards to more cautious competitors. But, we still don’t observe it.
At the same time, even considering all listed reasons, we couldn’t tell that all is so bad with acquiring in the Russian market. And it is true not only for Moscow and St.-Petersburg, but also for other cities with population more than 1 million or about it.
Ifyou consider the market of acquiring in a city where the number of merchants and population are in 50 times less than in Moscow the competition for a merchant in such rather small market will be significantly more intense. The fact is that, here we have local banks providing acquiring services as agents and branches of almost all leading Moscow banks-acquirers. It means that a regional merchant with its turn, sometimes, 10 times lower, than a Moscow merchant has, would have as many offers as its Moscow counterpart has. And so the regional level of rates quite often is much more attractive for merchants, than in Moscow.
So, I reiterate: the acquiring in Russia develops in its own way, quite logical for the certain Russian market, thus the competition between banks and acquiring companies here is very tough and, by the way, many retailers take advantage of it.
However, if we talk about our CIS neighbors’ initiatives in direct imposing on merchants to accept payment cards by administrative methods, it is far from to be a way out. The government can only make certain motivations for acquiring penetration in those sectors of the market which are not captured by it yet, but it should be the policy of “not a big stick but with a carrot”.
At the same time you cannot forget that today as a result of tough competition the acquiring business in Russia is on the edge to be unprofitable. Against this background, I believe, in the near future leading and responsible domestic acquirers will have to revise tariffs for their clients, and first of all, for large retailers, the profitability of work with which is now close to interchange.
PLUS:What are the key trends caused by the global financial crisis, you can note today in the Russian market of acquiring? How the largest Russian acquiring company feels against this background? What are your priorities for the crisis period?
V.Komlev: Certainly, the market varies, as crisis has affected to some extent all players of payments market and all categories of consumers. Changes in consumers (cardholders) behavior as well as low general predictability of the acquiring market were the very first sings of the crisis. That is to say, key market trends have appeared to be completely unbalanced. Well, if in times of stability at the beginning of each year I could predict with much confidence what UCS turnover would be, say, in November, now I can’t.
However, we see positive trends as well. One of them is increasing number of transactions, but along with an average sum of payment decreasing (app. 18 %). I think, today this trend is typical for our company as well as for the Russian market in general. As for UCS we observe also significant growth of merchants which have contracted with our company for acquiring. So, as I’ve noted, there is an increasing number of processed transactions. In quarter I of 2009 this indicator has increased by 11-12 % in comparison with the same period of last year.
Thusit is a question of growth both quantitative, and qualitative: in the end of the last – the beginning of this year some large retail chains have become our clients, including H&M – one of the largest global retail chains, successfully entered the Russian market at the very beginning of 2009. And this trend, I hope, will be keeping on within 2009, so we can look forward with muted optimism.
In this crisis time the main goal of UCS is to retain its existing clients, help them to meet the crisis, and get new ones, particularly, merchants which are ready to accept payment cards or already in the process. The crisis is not only time to solve problems, but also to get new opportunities.
At the same time, our competitors clients, especially those categories we are really interested in, quite reasonably prefer not to rush and appreciate stability of work with existing acquirers. And you have a chance to get them as clients only when their work with the acquirer is getting unstable. On the one hand, certainly, we are happy that our clearing bank – Rosbank - Societe General – is a bank of very high reliability that guarantees our clients stable, safe and effective work with UCS. On the other hand, today any serious challenges of this or that large acquirer first of all can indicate, that the situation has changed for the worse and inevitably it will infringe on interests of all market players. So, in my opinion, the crisis is not the right time when you’re happy to see your competitors struggling with its problems.
Therefore, UCS now pays special attention to analysis of a current situation in the retail banking market, to monitoring of positions of existing competitors among large banks-acquirers, and how they work with clients. Besides, we work with own client base much more precisely than ever and analyze our client work efficiency. We make sampling among the largest UCS clients weekly and smaller ones monthly or quarterly and then analyze the correlation of the size and interchange turnover, and also the dynamics of this indicator – how its size and change depend on a way of carrying out of transaction, card type etc.
In the crisis you have to be more flexible with clients and to pinch and save every penny. I’m pretty sure, that our acquiring market will keep developing, but only after companies get their turnovers restored, retail chains continue their expansion, Russian banks start issuing more cards, and new sectors of business get involved etc. And the main thing is not to get in the red today, so you should just follow your costs and incomes attentively to keep yourself afloat and also remain good foothold for growing after the crisis wanes.
Todayeven the most insignificant piece of business has a great value for banks. The competition for each existing or potential client – merchant is getting more and more intense, and clients often take advantage of it successfully. And hardly anybody knows how long it will last. Quite probably that the market still hasn’t touched “the bottom", as its growth past years mostly was provided with mass credit cards issuing. Whether or not issuers still keep such pace, and if “yes”, what credit limits will be, what cardholders spending power will be by the middle and by the end of 2009. It’s not clear. At the same time, even in such difficult current situation, it is possible to assert with much confidence that today the Russian retail acquiring market is alive and still has serious potential for the further development. It’s another matter that today all its players stand the waiting game. But it’s more than clear, why. However, it is not timeless as well as financial crisis.
PLUS:What are the key challenges the Russian acquiring market players has got to face in this crisis?
V.Komlev: One of the greatest challenges, we have faced recently, is unbalanced ratio between incomes and costs on different currencies. All payments were and still are in roubles, and rouble-to-dollar and rouble-to-euro rates were rising within last 5 years. And card business turnover was increasing by 30-100% per year both in roubles and dollars. But, in crisis, retail acquiring turns and card business revenues in roubles has been practically kept at the same level, but in dollars has been considerably reduced as dollar-to-rouble and euro-to-rouble rates has risen dramatically. Thus practically any item of expenditures of processing business – Sun or HP servers’ support, Oracle license, Informix license, IBM-applications support, conditioning systems for servers, software licenses, and also service backup and many other things – has a considerable currency component, or is fully nominated in dollars or euro. The fall in rouble exchange has caused 1.5 times growth of dollar/euro-nominated part of expenditures. It is also important that thus the average size of transaction in roubles has been reduced, but the payment systems fees are still nominated in dollars and euro and also have considerably grown in per cents to acquiring incomes which have remained at the same level or even have been reduced a little. Whether it is necessary to say that this disbalance has affected the acquiring profitability very deeply.
Besides,tariffs on such regular international payment systems services as various certifications, RAMP-audits, annual physical and logic safety audits, paid by banks-members, are also nominated in dollars and euro.
A fresh example, the PCI DCC certification, UCS passed recently, cost us app. 1 million dollars and 1.5 years (incl. all preparatory events and the audit). Almost all costs – network screens, state-of-the- art routers, additional servers, software, licenses – were nominated in dollars or euro. And all of them also increased in roubles: nominated in dollars by 50 %, in euro – by 30 %.
PLUS:Could any key acquiring market player just cut its business down, because he has to? What are your forecast of small and medium-seized bank-acquirers behavior now and in the nearest future? What they will do most probably?
V.Komlev: I do not believe that any large bank will leave the acquiring market essentially. Moreover, personally I would respect such decision of strong will as it would mean that the bank was ready to admit: that kind of business has ceased to be profitable, and it would be better to sell it, than to keep getting losses. But I don’t know such examples. Furthermore, how this process of acquiring portfolio transfer would look like? Would it be as a form of contract renewal with every merchant or as a kind of assignment of the contract? The process of technical switching of POS-terminals on new acquirer also will take some weeks, a considerable part of clients (app. 20-30%, the largest ones) will most likely get some more interesting offers from competitors, so the expediency of acquiring portfolio sale will be nor so evident.
Thus, from my point of view, an acquiring portfolio can be sold only together with appropriate client managers, who works with these merchants and engineering solutions established in acquiring networks. But if such processes occur in the Russian market, it’ll be only in the form of mergers and take-overs of banks entirely, but not only a part of their business. I think, it is much more probable scenario. And we can already see such processes, especially in the segment of small and medium-sized banks-agents working in the acquiring market.
At the same time, if we trust what Mr. Kudrin and some well-known experts of finance say, the Russian banking sector is just at the very beginning of their period of big troubles, and not all of financial institutions will survive this crisis. So, it’s very much difficult to predict how a problem bank-acquirer will struggle with its challenges, whether it will have time to transfer anyone its acquiring portfolio.
PLUS:Could Russian banks organize a certain «pool of acquirers», which would be able to influence the international payment systems policy in Russia?
V.Komlev: I do not believe that in the nearest future we’ll see a structure, organized on the basis of this or that bank association, capable to influence the international payment systems policy in acquiring area. Traditionally existing special associations, organized by banks, play this role. At MasterCard level it’s Russian Europay Members’ Association and at Visa level it’s Association of Russian members of Visa. These associations set the rules for the local market. And I see no background to make any changes in this practice, where unfortunately issuers interests are put in the first place. At the same time, I should notice that in Visa the Moscow office has less and less influence the problems to be solved, but more and more decisions and initiatives are made in the European office of this largest international payment system. A particular concern is caused by the fact that the payment system makes decisions on establishing domestic, purely Russian rules without discussing it with Russian banks-members. So, recently we got from London new rates of domestic interchange on corporate and business card products. It’s a bad sign…
Butlet’s return to economics. Let’s assume, that we would create a certain internal clearing, "internal" association. And then, for example, all international payment cards issued by Russian banks (or, say, 90% of these cards) would go not to the international payment systems, but into our special local network. But even if we manage to organize and build it all, there will be a question: what interchange will be in this hypothetical network. As a result we will inevitably return to existing natural conflict of interests: the issuer wants more money, and the acquirer wants to lose less on interchange. Thus, we, most likely, will leave interchange at level of the international payment systems. But then there is one more natural question: and what we, actually, win? And we only win these most hundredth part of percent (no more than 0,1 %-0,3 % depending on the transaction sum) which today we pay as fees for processing, clearing and settlement into payment systems. And if we count up all our costs – our own local network maintenance, local processing with clearing and settlement – most probably we will come to conclusion: with international payment systems it’s cheaper! So, the circle has closed up … I think we could change such situation only if the government decided to take part in this and fund it. And then both Visa and MasterCard would be more conscious to such structure. Here is an example from the allied sphere – ATM-acquiring. I mean the United Settlement System (USS or NPO “ORS”) on the basis of banks, which are acquiring clients of UCS and some of interhosting banks. This organization (USS) carries out the local ATM clearing of all cards, issued by its banks-members. This project has been completely approved by the Central Bank of the Russian Federation which has regarded it as one of bricks in the basis of newly-built national payment system.
PLUS:Well, and what the crisis initiatives of leading players in the Russian acquiring market could you point out? What can be emphasized hereafter?
V.Komlev: As I’ve already mentioned, the first and the most important goal of acquirers today is to preserve their own client network, to work with clients of those competitors which have some challenges, and also to make a certain basis for the further growth of business. I don’t know when the market will start growing exactly, but we follow the trends in finance, macro- and microeconomics globally and in Russia with the great care and make certain conclusions. Often enough we meet and talk with our largest clients and their mutual opinion in brief is that: the retail market will touch its “bottom” in autumn of 2009 then there will be long enough period of stagnation, and the market will start recovering only from summer of 2010. And it’s very hard to conjecture the situation in the banking sector and in the financial market as a whole. We have very inconsistent forecasts.
Anyway,UCS pursues the policy of preparing step by step to go on its further development when the market revives. So, the company should operate in the market very much accurately and cautiously, keep all its clients and never get in the red.
Coming back to the Russian retail acquiring practices, I think, that Russian merchants have a strongly marked approach of “consumption” to acquiring services. The current situation is the result of long way of Russian acquiring market development, which is much different to the way of the majority of developed countries. And we can change the situation only if we are in common, cause only then merchants would make aware, that it’s them, not banks, who need to accept payment cards. Now we still see mostly quit opposite approach: “well, let’s make all of it free of charge, provide us this, give us that, you should do this, etc.” At present, when we have to discuss the size of the acquiring fees with a client, especially with large one, unfortunately, we discuss a certain figure of acquirer’s compensation which includes all! And that is all, merchants needn’t pay for anything else. And year after year large clients ask us: “Let's reduce the commission, you see, our turns have strongly grown!” or “Let's reduce the commission, it’s crisis, we need to cut our costs down!” or “Let's reduce the commission, your competitors has made us a more cheaper offer!” Thus the acquiring fee of large clients can contain 80% and more of the interchange fee. And this fee depends on a card type ("more fancy" – more money), on a region of card issuing (the further – the bigger), on a way of transaction carrying out (the more manual operation, not using a POS-terminal or any other special methods of payment cards acceptance – the bigger fee).
And as an acquirer, I’m not eager to burden myself with such expenses and be responsible for them if these expenses are related to the great desire of a merchant to serve clients with such cards as Platinum, Infinite or Signia. If a merchant is ready to do its client a favour and accept his card just taking his card number by phone, if this merchant loves to serve rich Japanese or American clients, especially, with corporate cards, he should understand, that these are all ITS clients! And its HE, who wants to serve such clients and serve that way to give them the best service and to receive more profit!
I understand merchants’ wishes perfectly well. And I’m ready to support them with the acquiring processing. But they should be ready to pay for these wishes! And if additional 0.5-1.0% to the transaction cost for the merchant is no more, than the same 0.5-1.0% of his revenue, then it’s quit a different thing for the acquirer – for him it means he has a profit or not.
Therefore in those countries which are advanced in retail acquiring and where market formation occurred on essentially other way, local acquirers use an absolutely different principle of large clients tariffing, it’s so-called “interchange +”. It means, that a merchant accept all the international payment systems fees (an interchange fee and all other fees) on default. And a merchant pay an acquirer only this “+” which is expressed, as a rule, in the form of a combination of a certain percent from a turn and the fixed sum for processing of each type of transactions and operations (including chargebacks, retrieval requests, reversals, credits, etc.). And when you talk about the tariff you talk only about that “+”. And it is absolutely logical! After all it’s an acquirer or a processor, which responsible of this “+”, and this is the size of “+”, which defines the acquirer efficiency, but not the size of interchange fee, which depends very much on merchant’s actions! Thus, all additional expenditures (equipment, communication channels, technical support, personnel training, etc.) are tariffied separately! So an acquirer is fully guaranteed that: firstly, it doesn’t get the red whatever card its client accepts and whatever way of accepting he chooses; secondly, a merchant along with an acquirer gets interested in state-of-the-art terminal devices and payment methods implementing (as a rule, they cost acquirer/merchant cheaper if we bring it into comparison with older solutions) and watches, that the maximum number of cards is accepted by the system in electronic way with all established procedures (thus it decreases not only transaction cost, but also risk of fraud).
Within“interchange +” a tariff rate for аmerchant is absolutely transparent, it’s clear, how much money its provider earns, and a merchant sees real ways of how to improve its efficiency at carrying out of transactions and reduce its costs. A merchant realizes it and makes its decisions of what it is more important quite independently and consciously: to serve a profitable client and accept his card in the way he prefers, or to save a percent on this transaction.
Well,Having regard to the way of market developing in Russia, today, I think, that if we don’t implement such tariffing system of key merchants we’ll be at a deadlock soon enough.
As a conclusion I want to note, that I’d like to hold back from any attempts to give you a kind of common forecast concerning the Russian acquiring market development this year, cause it’s a very thankless task. But we have to keep in mind that sooner or later everything will be in place as it always happens after each crisis in our economy and banking sector. So, today I’d like to wish all market players, both, our partners, and our competitors all the best. I’m fully aware that if anyone of our colleagues feels bad, all of us will suffer of it. It’s a "domino effect". And the common negative effect will be so serious that it will bring to nothing those additional possibilities which appear when any competitor leaves the market. So, I’d like to wish our clients and partners to be patient, self-controlled and successful.
Journal: PLUS Journal 4 (144) 2009
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