From a cash economy to digital payments: Russia at the crossroads
Russia’s readiness for mobile commerce and the speed with which its mobile payments market has been developing have been hot topics for discussion of late. While optimists speak of the cell phone becoming an all-purpose payment terminal as a near-term prospect, skeptics point to Russians’ near-total mistrust of cashless transactions, the low accessibility of banking services and the “rough” journey of bank cards in the country to date.
So will Russia take on the European or the African mobile payments model? Or will it stay true to itself once again and come up with something original?
Russia’s payment systems: An overview
Source: EWDN’s Russian E-Commerce Report (2012)
While the talk is talked, the Russian mobile payments market doubles every year. But where is it heading? When will it reach saturation? Before answering these questions, let’s take a look at how the mobile commerce market has been developing around the world.
In advanced countries, mobile banking has developed rapidly due to three related sets of circumstances: the efficiency of the banking systems; the financial literacy and high financial capacity of the populations; and the maturity of the legal environments and mobile infrastructures. The main driving force behind mobile commerce has been banks; as the wealth of populations has increased, they have sought to develop new offers – including more modern and advanced mobile services. By 2017, according to recent data gathered by Forrester Research, the number of mobile banking users will reach 108 million in the United States. This represents no less than 46% of all bank account holders.
In the West, “mobile payments” means money transfer operations using mobile phones as one more access route to a bank account. As longtime consumers of banking services, westerners regard the mobile phone purely as an auxiliary means of managing their finances. They don’t feel the need for a new source of payment transfers such as, for example, a user’s mobile account.
Developing countries, including India and much of continental Africa, have displayed a quite different mobile commerce evolution scenario. Here the show has been run by cellular companies. Over the past few years the world’s leading mobile phone operators have invested over $50 billion in the development of cellular communications, and it’s estimated that at the close of this year the penetration of cellular communication in Africa will reach 50%. For example, in the Republic of Congo there are only 10,000 landline phones and over a million mobile phone subscribers; in Tanzania only about 10% of homes have electricity, while almost the entire territory of the country has cell phone coverage.
Most financial operations on the continent are cash-based. The banking infrastructure is underdeveloped or is developed very poorly. Banking services are expensive, while the population’s average income level is very low. Due to these circumstances, Africa, along with a number of developing countries elsewhere, has shown a keen interest in the mobile phone as a full-fledged payment instrument, with the user’s mobile phone accounts being the main financial source of transactions.
Thus the mobile commerce market develops, while access to the traditional banking system remains unavailable to the majority of the population – which remains in great need of wireless means of payment, as illustrated by Tanzanian fishermen who successfully use the mobile phone’s capacity to transfer real money to their families via text messages.
Which of these scenarios would best suit Russia?
Historically, the Russian mobile commerce market was created and nurtured solely by the effort of mobile operators. Leaving the banks to their own pace of growth and development, mobile operators have been pioneers in enlarging the traditional functions of the mobile phone. They have turned it from a mere means of communication into a means of financial transactions.
The story began with the simple sale of ringtones through text-messaging; then the subscribers got the opportunity to swap “minutes” from one mobile phone account to another and to “put money on their phones” using their credit cards. Then, over the last couple of years, a new generation of payment systems emerged, enabling mobile phone subscribers to use their accounts to pay for airline tickets, cable TV service, utilities, and so on.
At this point banks awoke to the fact that a myriad of new payment means were developing without their participation – and started developing their own mobile and electronic payment services. However, their progress has so far been very slow. In mid-2012, Markswebb Rank & Report investigated 30 of Russia’s largest banks and found that only four of them provided a full range of mobile banking services; only seven could perform money transfers between individual clients; and a full eight of them offered no mobile banking services at all.
Last year the 2011 law on electronic payments came into effect. It put some order in the country’s complex – if not chaotic – payment system, legalizing electronic currencies and restricting payments and related activity to registered crediting organizations. This means that e-payments, once given little attention, have come under the control of the Russia’s Central Bank, just like traditional payment systems. The law stipulates that electronic payment activity can be conducted only by credit organizations, but at the same time it created a “light” institutional status referred to as “non-banking credit organization” (NCO). This status is still more easily obtainable than that of banks, since NCOs can start with a smaller initial capital stake and their customers do not have to open bank accounts to use e-money.
This compromise allowed the existing players in the sphere of electronic and mobile commerce to gain momentum while opening the door to players new to the field as well; traditional banks, meanwhile, are late joining the battle.
All in all, mobile penetration in the country currently reaches approximately 160%, with up to 220 million active SIM-cards – 1.6 per inhabitant. The number of issued banks cards is the same: in mid-2012, there were 220 million cards in Russia, of which 146.2 million were active.
This last figure suggests that Russia stands on the same level as developed countries in banking services – but with one reservation: Russia, like Africa, remains essentially a “cash” country. As many as 83% of bank cards are payroll cards, with over nine operations in ten consisting of cash withdrawals from ATMs on paydays.
Like Africans, Russians prefer to pay cash; but unlike Africans, they don’t live below the poverty level. Our population is highly educated, financially literate, and arguably more innovation-minded than Europeans. And unlike Africans, Russians are completely devoted to their smartphones. By the end of 2012, according to J’son & Partners, 22.5 million Russians used mobile Internet via smartphones, up 88% from the previous year.
More than 16 million smartphones will be sold this year, 30% more than in 2012.
While these figures inspire optimism, the problems of mistrust towards money transfers and insufficient accessibility of banking services remain. But they can be solved. Today the market offers new alternative tools which allow transactions to be performed without opening bank accounts. Virtual cards are one of these, implemented by mobile phone operators and payment providers in partnership with MasterCard and Visa. Since they require no bank account, these virtual cards are available to all categories of the population – that is, to all mobile phone owners in Russia.
Undoubtedly, time will tell whether the development of the Russian mobile commerce system will follow the European model, with banks as the main players in mobile and electronic commerce, or the African variant, in which mobile operators rule. In fact, a symbiosis between different types of players is even more likely. Today Russia has a chance to become one of the first countries where classic banking services will develop at a slower pace than the volume of electronic money exchanges, while digital payments – with or without the involvement of classic banks – will take a significant share of the overall money flows.
Large banks will have to integrate with electronic payment systems (which has started to happen) if they want to keep those customers interested in new, convenient means of payment. Otherwise, due to their inflexibility and conservatism, banks will hardly be able to develop dynamically in the sphere of mobile and electronic commerce. And such a scenario would be quite logical and understandable. Let the banks do their banking, and mobile phone operators provide connection services, while payment operators come up with all imaginable means of processing payments.