Andrey Korolev: “Russian Card Business. Again at the crossroads …”

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There are fears that the global crisis can retard integration of the Russian card market into the world market or eventually even lead to its full isolation, are they grounded? Can the concept of a state in the role of an acquiring market regulator be viable? Emphasis on VIP-clients – is it an attempt to survive or a stable trend, which originated long before the crisis? These and other questions, which today, undoubtedly, are of great interest to all the participants of the Russian industry of cashless payments, are discussed by Andrey Korolev, President of the Russian Europay Members' Association (REMA), Alexander Grizov, Publisher of PLUS Journal, and Mikhail Svishchyov, its Editor-in-chief.

PLUS: So, a year has passed, since the global financial situation began to deteriorate. Now, early in the fourth quarter of 2009, what conclusions, in your opinion, can already be drawn concerning the impact of the crisis on the situation in the Russian card business and banking sector as a whole?

Andrey Korolev: Today the topic of the crisis and its consequences for the Russian market became notorious, to put it mildly. Moreover, hardly anybody, who tries to analyze the existing situation, can boast of a perfect knowledge of the subject. Only one thing is clear enough: the global crisis has shown that the Russian banking system is not at all a “circulatory system” of the domestic economy.

And this, among other things, is proved by the fact that huge financial injections in this system actually did not reach the economy. Therefore the first and, perhaps, only doubtless conclusion, which can be drawn in this situation, is that today something should urgently be done with the banking system of the Russian Federation, so that it could really correspond to the main aims and tasks of the national economy.

PLUS: When the crisis began in Russia, the international payment systems and accordingly the Russian banks immediately turned to VIP clients, premium cardholders. Was that an attempt to keep afloat? Or understanding that these clients confirm justice of 20/80 model? Or does it mean that the market has reached its maturity, and the crisis and simultaneous emphasis on the premium segment is just a coincidence?

Andrey Korolev: To a certain extent it can be qualified as a coincidence, because in the years preceding the crisis the Russian card market was expecting that the extensive phase of its growth would end sooner or later, and the potential of the market segments, development of which ensured a rapid increase of the issue and circulation of cards, would eventually be exhausted.

Therefore, the most responsible participants of the market, as well as the payment systems, always see ahead. This allowed them to foresee the end of the wave of the market's extensive growth, to determine categories of the most profitable clients and take prompt measures in order to keep them. For the same reason card products for the premium segment have always been available in the portfolios of the universal banks issuers adhering to an effective medium-term development strategy.

But another thing is that until recent time the work with the premium segment was frequently done on a residual principle, because in order not to lose their share in the dynamically growing card market, the banks had to invest constantly in the infrastructure of the card service, etc. However, the most far-sighted banks understood that sooner or later they will need to concentrate on the premium segment.

Therefore even in the pre-crisis time they began to develop strategies focused on the given categories of clients, build VIP branches and change the content of their product lines. On this background it is possible to say, that activation of the banks' work in the premium segment coincided with the crisis only in time. On the other side, the crisis, which stopped abruptly the extensive development of the retail banking, including card business, demonstrated clearly, which of the banks issuers were then ready to start full-fledged VIP-programs, implementation of which was immediately and actively launched.

Therefore I am not inclined to believe that the card business development strategy with an emphasis on VIP clients was a certain compelled attempt of the banks to keep afloat during a hard time. The necessity to look for new client segments against the background of stagnation, when other segments ceased to be profitable, was too obvious even before the crisis.

The trend of the credit organizations' emphasis on VIP clients is noticeable not only in the card segment, but also in the market of retail banking as a whole. Thus, today many leading retail banks undertake optimization of their retail service networks – they reduce some of their regular branches for mass clients and introduce VIP branches instead.

PLUS: How much grounded are the fears, that the crisis and the trends generated by it (in the economic, technological, ideological and political spheres) can eventually retard integration of the Russian card market in the world market or even lead to its complete isolation?

Andrey Korolev: It should be recognized, that in the modern uneasy situation we see a growing number of the market participants – supporters of the idea of isolation of the domestic segment of payment cards from the global market. As practice shows, such trends, which traditionally are present in any market, become especially pronounced in the times of crisis. And today they turn into a dominating trend. However, I would not connect directly the trends to isolation in the domestic market with the advent of the crisis.

The fact, that in near future the Russian market will face serious changes of at least a structural character, is already a small wonder for any of the market participants. Actually, we shall witness another restructuring of the domestic market of retail payments. What kind of forces will render the dominant influence on this process will be clear within the next year. In particular, the regulators already announced certain possible scenarios of the future development, implementation of which, in my opinion, may not only slow down integration of the Russian card market into the world one, but also hinder such integration in principle, because their aim is isolation of the payment environment.

In this connection I do not rule out a launch of a certain administratively controlled isolation process, inherently parallel to the natural market processes and aimed to solve a whole range of corresponding problems, from elaboration and up to implementation of some narrow-technical plans and schemes. If a proper decision is taken “at the top”, I do not think that this process could meet a counteraction. As a result, an administratively controlled structure will appear in the market, which will provide certain regulatory advantages to certain participants of this process. Besides, the given process can involve constructive market participants and natural market mechanisms, which, in turn, will contribute to a more effective achievement of the set tasks.

Up till now we have heard only calls to find stimuli in order to alter the existing disbalance between the issue volumes of the international and Russian payment systems (which, according to some sources, looks like 85% : 15% or 75% : 25%) and which is not in favor of the latter. But so far we have no answers to the questions, what kind of stimuli should be elaborated and introduced, and who is supposed to do that. Instead there is much talk about giving to one of the already existing domestic structures a role of the operator of the single national payment system. Therefore, we should not exclude such a scenario, when establishment of a national payment system will be accompanied by an attempt to reduce everything to uniform standards and technologies. However, in this case the process of formation of a national payment system will be parallel to the development of a competitive card market.

Unfortunately, today regulators practically do not consider an alternative variant, which is obviously more rational from the point of view of all the market participants. Banks and interbank organizations should be given a chance for self-regulation, which would allow them to solve the problem of issue disbalance in the most painless way. In my opinion, provision of stimuli for a joint activity of the market participants in a certain important direction yields better results, than attempts to launch a parallel process and then see if it can get along with the natural market processes. Such awkward attempts to regulate the card market can seriously affect three major macrospheres: the share of cashless payments in the economy, competitiveness of the Russian banking system as a whole, and, at last, the quality of client servicing.

According to the most pessimistic scenario, over 120 millions of the Russian bank's clients will simply cease to use effective modern banking instruments. Of course, the present situation is far from being so grave now, but it would be irresponsible to try to regulate the market without taking this scenario into account. Therefore, any attempts to impose somebody's view on the Russian card market, which has been developing for almost 20 years, without a dialog with the market participants, without a proper analysis of the existing market situation, without a clear vision of the aims and tasks of the proposed reforms will be ill-considered, to put it mildly.

PLUS: Proceeding from a general situation to a particular one: as is known, trade-service network enterprises are the weakest link in Russia from the point of view of development of the card business. How, in your opinion, can we achieve a universal acceptance of cards in the trade network? According to some largest Russian acquirers, experience of our neighbors in the CIS countries shows that the results of a state decision on a compulsory installation of POS terminals in the enterprises are mainly visible in the volumes of the installed equipment, but not in card market size. Are there any alternatives to such a state support?

Andrey Korolev: As a result of an irresponsible behavior of the majority of the Russian acquiring market participants, who ignore the concept of profitability of a business model, today the acquiring activity is usually not very profitable for the banks, if profitable at all, while for the trade enterprises, in their turn, card acceptance appears too expensive. As far as the stimuli for expansion of a card acceptance network are concerned, none of the present market participants has them. The state has not yet formulated a more or less clear policy for stimulation of the development of trade acquiring, and I doubt that a certain separately taken administrative measure could provide a real way out from the evolved situation.

Of course, if shops are forced to install POS terminals, they will do it, but one cannot force a client to pay with a card, and a shop – to accept this card. Therefore the tactics and strategy for development of a card acceptance network in the trade-service enterprises are yet to be developed. Today this direction in the Russian market is in stagnation, if not an impasse. And, unfortunately, I do not see any sensible ideas, which could cardinally change the situation.

At that a rigid state regulation of the given sphere also cannot be considered seriously: there are too many players in the Russian acquiring market today, and their intention to involve in servicing as many points, as possible, are very short-sighted.

We should not forget that without a wide card acceptance network the whole of the card business becomes absolutely meaningless, and can only be viewed as a service for automation of the accounting operations and salary payments.

In my opinion, the situation in the given sphere can only be settled by joint actions of the state (which a priori must be interested in increasing the share of cashless settlements), banking community and retail trade networks for development (after a careful analysis of the evolved situation) of the corresponding business models, suitable for all the market participants.

PLUS: But what if the trends for strengthening of the state's regulatory role in the bank card market result in strengthening of the non-banking structures – first of all, electronic cash operators, payment terminal networks and mobile telecom operators – in the market of cashless retail payments?

Andrey Korolev: It should be underlined that electronic cash systems (or Internet payment systems) and operators of the terminal networks are more flexible, they understand better the client’s requirements and respond quicker to them. On this background, in my opinion, the Russian banks should seriously take into account the cardinal changes in the market of cashless payments possible in near future not only because of the strengthening state regulatory role, but also owing to a natural infrastructural redistribution of the financial flows in favor of the electronic payment systems and mobile telecom operators.

PLUS: Creation of a single Russian payment environment: how realistic is this idea in the light of the past year events? On what key principles should it be based, since the initiative, in our opinion, is in many respects an alternative to construction of a certain National Payment System in Russia, cherished for many years? Is it possible to elaborate uniform rules, commission systems, etc., satisfactory for the majority of the market participants, instead of a certain regulatory body or a group?

Andrey Korolev: All the answers to these questions lay on a surface: the initiative on creation of a single Russian payment environment should be based on the principle of a universal acceptance of all the Russian cards in all the ATMs and POS terminals installed in Russia. Another thing is that the efficiency of operation of the self-regulation mechanism in the card market depends on the level of a state's participation and support.

And there are no doubts that this mechanism will work, because, for example, banks actively look for any opportunities to universalize their networks, to integrate them in order to increase the profitability of their retail business, etc.

So, if the idea of creation of a single Russian payment environment is given the status of a state importance, and a number of stimuli and encouragements are provided to the market participants – the process will go on faster. And, on the contrary, if this question is left within the competence of any state department – the process will be considerably retarded, but nevertheless go on.

From the technological point of view the banks would have to make some adjustments, and some of them, for example, will have to switch to the open technologies. However, such expenses will be paid off due to the benefits from the use of a single card service network and efficient operation with the international systems.

So, whatever way becomes a reality, today we can be confident about one thing: the Russian market is on the threshold of great changes, and their character and the principles of their implementation will determine the future of not only the card business, but of the whole domestic banking system.

Journal:  PLUS Journal 9 (149) 2009

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