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Slow on the cards

Credit cards are relatively new to Russia and take-up is still slow as cash remains the dominating payment method. Brian Caplen reports on progress.
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Russians may have quickly developed a taste for capitalist essentials, such as cars and designer clothes, but credit cards seem to be ­taking a while longer to get established. Out of 103 million financial cards in circulation, only 12 million are credit cards and many holders use them like debit cards to get cash out of ATMs rather than buying goods in shops.

Russia remains a predominantly cash society and outside of the big cities, such as Moscow and St Petersburg, ­merchants have resisted accepting cards. But this is changing due to tighter legislation and big promotional activities by the card operators and the banks.

“The credit card is a very new product in Russia,” says Andrey Korolev, MasterCard’s general manager in ­Russia. “We are heading for one card per capita [140 million] but we are not there yet and the rest of eastern Europe is already above this level.

“Our principal competition is from cash [as opposed to rival operators]. More than 90% of the payments in Russia are still in cash. In the mass sector, Russians use credit cards more like debit cards as a tool to access cash. It requires both ourselves and the banks to educate the consumer on the ­benefits of using credit cards to make purchases.”

But although the average Russian is slow off the mark, those in the affluent sector spend twice as much with their credit cards than their counterparts in western Europe. And the card market is growing fast: there has been a 37% leap in total financial cards from 75 million in 2007 to 103 million this year, and a doubling of credit cards, according to figures in a report on financial cards in Russia produced by Euromonitor International. After one advertising campaign, take-up was so strong that Sberbank is reported to have run out of cards.

“The banks see credit cards as a major growth area and will be putting serious advertising efforts into this segment,” said the report. “They are also most likely to employ alternative distribution channels such as selling through agents, multi-level marketing companies and direct sales.”

MasterCard’s sponsorship of the UEFA Champions League – Europe’s premier football competition – which held its final in Moscow in May, should also have raised awareness of credit cards locally.

Caution remains

Yet bankers in Moscow remain ­cautious about the market. “The credit card business only started 18 months ago and it is absolutely new. In Russia, we don’t have the culture of using credit cards and the vast majority of people don’t understand how to use them,” says Ilya Yurov, chairman of the board at Trust National Bank ­(formerly Menatep). “We also have problems with sending information via telecoms in Russia and not a lot of stores in the regions have the ability to use credit cards.”

Trust has issued about 300,000 credit cards under both Visa and MasterCard branding, compared with two million debit cards.

“It is too early to say whether the ­culture of revolving credit cards [with interest charged on balances] will develop in Russia as opposed to charge cards [with the balance being paid off every month] as is the case in Germany, Austria and Italy,” says Helmut Bernkof, acting president of the management board at UniCredit Bank in Russia.

One company that should be able to deal with the technological issues is the conglomerate Sistema with its interests ranging across telecoms, retail, healthcare and banking. Sistema banking subsidiary Moscow Bank for ­Reconstruction and Development increased its interest income from non-Sistema clients – winning business ­outside the group is always an issue for Russian conglomerates – by 69% during 2007 and first quarter 2008, according to figures in a recent presentation for investors. This was the result of a push on the retail banking front, which is likely to go still faster now that Sistema has increased its stake in ­Dalcombank, based in the far east of Russia, from 48.2% to 98.7%.

More useful even than its technological advantage is Sistema’s ability to draw on a database of 100 million telecoms customers (85 million of them using mobile telephones) that could give it an edge in new areas of business such as credit cards. The company has a further 10 million customers from retail, healthcare and travel businesses.

The challenge, however, is to overcome legal restrictions. “The telecoms information is the most valuable but it is difficult to use because under Russian law you cannot transfer the infor­mation,” says Anton Abugov, first vice-president of Sistema. “You need a special clause in the contract [to ­transfer information] and all our new mobile contracts have this clause – but the more important clients are the ones with a 10-year credit history [who are not covered by the new contracts].”

Change in the law

Legal changes in the credit card business itself are likely to “slow down the credit growth rate in the short term, but could be beneficial for the industry as a whole in the long term, as the banks will be able to attract responsible borrowers and reduce non-performing loan numbers”, reported Euromonitor International.

The legal changes in question are a requirement introduced last July for credit organisations to properly disclose effective interest rates for products, and another a month later that stopped banks from using hidden charges. Prior to these, the Russian credit card business classically worked by high and non-transparent charges being used to offset high rates of bad debt.

In the end, financial card acceptance in Russia may come from an unlikely source: the government. While some banks have made a big push on cards – notably Russky Standart Bank, Home Credit & Finance Bank and newly established Tinkoff Credit Systems –  huge amount of card awareness is being generated by projects issuing pension cards with transport rights attached or social benefits cards giving the holder access to childcare and other social benefits. As in so many areas, one thing for certain is that Russia’s development in credit cards will be unique.

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