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A Russian alternative to Visa and MasterCard

– Putin’s quest to create a new credit card payments system

Visa and MasterCard have until July 1 to decide whether they want to continue doing business in Russia – but they may yet have until October 31 to pay $1.45 billion each in a security deposit.
A new law in Russia’s State Duma was signed by Vladimir Putin in early May 2014, and it is due to be enacted on July 1. The law’s aim is to create an indigenous credit card payments system. It also imposed unprecedented regulations on Visa and MasterCard within Russia.
The law was created in retaliation to Visa and MasterCard freezing services to cards issued by four Russian banks, indeed one – Bank Rossiya – was also included on a sanctions list drawn up by the US Government. The decision for Visa and MasterCard is whether to continue supplying services to Russian card holders.
But, at what cost? One of the demands that the law places on the two credit card giants is a $2.9 billion security deposit – it was initially estimated at $3.8 billion – to be placed with Bank Rossiya. That’s the equivalent of two days worth of transaction processing between Visa and MasterCard.
Speaking to Bloomberg TV in mid-May Dmitry Medvedev, the Russian Prime Minister, said: “What Visa and MasterCard did was a direct violation of their contract with Russian clients, not banks, but individuals who trusted these payment systems.”
However, on May 19 the country’s finance minister Anton Siluanov was quoted by Interfax as saying: “We can’t quit using these systems, as more than 90% of customers use them.”
On June 25, there seemed to be a softening of the Russian stance when the Finance Ministry released a draft resolution, published on the government website. In the document Visa and MasterCard were offered an extension – until October 31 – on regulatory compliance. The one condition is that Visa and MasterCard stop communicating the information on the transfer of funds in Russia to overseas payment clearing houses. If Visa and MasterCard adhere to this condition then they will not have to meet the demands of the $2.9 billion security deposit.
As a result of the proposed law Russia’s central bank is working on the creation of a National Payment Card System (NPCS), with the government hoping to complete the project by the end of 2014.
According to Russia Today a microchip for a new Russian payment card has already been created to replace the technologies used by Visa and MasterCard. The chip – developed by Payment Technologies, a company owned by Igor Godowsky – has only passed laboratory testing and will need 18 months before it can reach full-scale production.
Medvedev has already stated that the use of Russian technology will aid and improve security and provide protection of data.
The distribution of new credit cards to the Russian public, however, is estimated to take up to two years. This national clearing house will be controlled by the Central Bank of Russia.

Demand for $2.9bn security deposit

One of Russia’s demands – now enshrined in law – is for a $2.9 billion security deposit from the two credit card companies. Visa and MasterCard together processed $1.9bn in transactions per day in 2013 – 90% of all cashless payments in Russia, according to The Moscow Times.
TheGuardian.com also reports that the security deposit will be “due in eight quarterly payments starting on July 1, 2014. The law states that if a payment system unilaterally freezes operations for a Russian client, it is liable for a fee totalling 10% of its security deposit for each day without service.”
Russia will, effectively, punish the credit card companies for any interruption to their service: to the tune of $380 million per day without service.
Visa and MasterCard both considered quitting Russian in early May as they deemed the new rules to be too punishing. Indeed, research carried out by Morgan Stanley concluded that Visa and MasterCard would be better off leaving the Russian market as business there would be ‘unprofitable’ once the new law – in its current form – is enacted on July 1, 2014.
The Morgan Stanley Report titled The Russian Bear: Impacts of V and MA stated that fees will be more than five times the two companies’ combined annual revenue in Russia. In 2013 Visa reported revenue of $236 million, while MasterCard, who have operated in the Russian market for over 20 years, reported revenue of $167 million. MasterCard’s Russian operations account for just over 2% of its total net revenue.

What is Russia’s plan?

Russia’s plan is to route payments through their own system. A guest post in FT.com in May stated that “it is indicative that one of the main benefits of the new all-Russia payment system cited by Russian politicians is ‘greater protection of the privacy of Russian card holders from the eyes of US security agencies’.”
This fits with Putin’s political plan for autonomy and geo-security. Russians never felt threatened by the western-dominated credit card system, until the March sanctions were imposed by the US Government and implemented by Visa and MasterCard. Now, lawmakers want to protect Russian cardholders and there’s no better method than to create a Russian payments system.
It is predicted that the Russian NPCS would serve as a central processing hub supporting all international card payments, which would allow Russia to bypass international payment systems.

Options for Visa and MasterCard

Analysts believe that a new card system in the fast-growing Russian market would constrain future growth for both MasterCard and Visa.
A possible loophole that has been proposed would be for credit card giants to create a separate, non US-owned entity to run the Russian Visa and MasterCard divisions – akin to Visa’s European operation.
It seems unlikely that the credit card companies will agree to the proposed terms in the legislation, it would create a dangerous precedent and also show them bowing down to Kremlin pressure.

Response to US sanctions

Russia has embarked upon this mission in response to US sanctions against a series of high-profile Russian political and business leaders. The sanctions were introduced by the US after the Russian annexation of Crimea in March 2014.
Russia intends to create its own credit card payment network as it assesses the country’s vulnerability to the US payment system in the wake of sanctions. Visa and MasterCard temporarily blocked transactions at several Russian banks, but can a Russian replacement really work?
Why not? Will the prestigious high street stores of London, Paris and Milan really refuse a card from a Russian millionaire, billionaire or oligarch?
But who will process these payments? Well, Itar–Tass – the Russian-based news agency – has reported that the new card is expected to come into wide use by mid-2015 and will also be valid abroad. Crucially, it states that these operations will be processed within Russia.

Confusion reigns

For now the situation is fraught with confusion. Russia has swiftly moved down the road of creating a new credit card payment system in response to US sanctions but confusion now reigns. This is a shock to the system one that may take years to truly comprehend.
The last word for now goes to Charlie Scharf, chief executive of Visa Inc:
“We really are still trying to understand ourselves exactly how this could play itself out. But still are hopeful that we still have a meaningful opportunity to continue to participate in the growing electronic payments business in Russia.”