Daniel Gusev, Founder Finfit: Mobile payments in Russia: a slow movement to mitigate huge costs in cash payments

Part 1 - a prelude explaining the road of money into a Russian customer’s wallet and what went wrong until it started to get right.

Early 2000

Only a few years ago, retail payments in Russia were synonymous with cash, toted by 70+ million of the economically engaged population out of ca. 141 million, who were either issued with a salary card, or got their wage at the cashier desk. The salary card business grew quickly and uncontrollably. It was supported by ineffective bank branches network that could not sustain high-volume customer applications, therefore faced the shock of people uninitiated with banking language.

When an employee got a piece of plastic from his employer, the only thing the latter told the former was how to withdraw money and where the ATM - as banks often had to install one as well as part of the payroll card management agreement, is located for him to do so. The results of such financial literacy was that only less than 10 % of the card carrying population actually used to pay for things and the financial services industry had to muster over RUB 10 trillion in cash per year to meet the needs of customers (data and percentage of those using cards is for 2010 cycle).

This, in return, created a vicious circle, which slowed down the progress of the financial lives of end users. More so, it outsourced cash transfers from employers to banks, where the latter were left with the low financial literacy. One such particular feat was banks initiative to recover the costs of “cash management” business where employees were issued with companion credit cards or had their cards modified with an overdraft line of credit. Given the fact that literacy levels remained relatively the same, people began to withdraw cash from these instruments adding to the pressure of having to pay back the money they did not own as well as being penalized with extra annual percentage rate (APR) for doing so.

Still, the “robber baron” tactics recovered only a portion, where banks had to maintain huge ATM networks and suffer direct cash circulation costs (cash security, fraud and robbery risks) as well as indirect costs (loading cash to an ATM effectively means losing overnight rate on a daily basis, because money is taken out from circulation). For example, for Sberbank, the biggest financial institution in Russia and CEE, that manages 40 million + in salary card accounts, it means covering more than half of the economically engaged population and thus, distributing RUB trillions each year, losing tens of RUB billions in cash-related costs.

Mid 2000

Something had to be changed and the change suddenly came from the outlier that used the inefficiencies of the system to its advantage. With the struggle of big queues and blank faces of the tellers, Russians found a new hassle-free way to pay for their primary needs through reverse ATMs, kiosk machines proposed by the likes of QIWI and others. People started to take for granted the easy-to-use interfaces which eventually started the slow conversion of the traditional cash-driven payments environment to a digital one.

From a bank’s perspective, a gross margin of less of a percentage point is hard to even be considered a worthwhile adventure by a bank dabbling in 10 % point GM from near predatory lending. However, the scale of the market made it a worthwhile activity for major kiosk networks. In an attempt to answer this demand, banks started to think different about their transactional business and tried to squeeze more from the hardware.

At first, ATM recycling technologies entered the market in 2008-2009 and were of interest for payments executives. Following a study by consultancy company McKinsey that established the link between the density of an ATM network and the leftover balance on the account, banks started to cooperate to keep the money where they belong. As interfaces suffered and the lack of new projects was starting to take its toll, a change happened by end of 2000 in the online space.

By the end of the decade people got used to connect their salaries to a number of digital instruments that made banking easier, faster and ubiquitous. They voted up the outliers that created a new layer on top of banking, creating the impetus for a response.

Mobile payments road has no single route towards the end point - it is angular by nature with different means of getting past the challenges and roadblocks and hidden traps. In order to make the best scenario forecast, a second part of the story would cover the demographics and technological shifts that make the mobile payment road somewhat unique in Russia.

Part II - new generation of customers are using different technologies and ask for more - mobile payments is driven by the market instead of banks.

Before talking about the advent of a comprehensive mobile payment future, an overview of the trends that support this “next step” is needed. Here all new entrants into the mobile payments “vanity fair” should take the following into account:

- the prepaid nature of the market given by the long reliance on salary cards that people still use to withdraw money from, instead of paying;

- the availability of a cost-effective top-up infrastructure, where kiosks market is slowly being disrupted by card schemes offering P2P card transfers;

- a generational shift where the dominant force is now behind the “millennials”

The prepaid element refers to a much better interface while paying for things. Nowadays, the application process is very user-friendly to the digital generation that does not wish to sign paper forms. The appearance of mobile smartphones with GPS and 3G Internet capabilities reinforced this element with elements of feedback and context, something that pushes the importance of being the in the payments business just for the sake of notional value exchange.

Additionally, the ability to communicate on the go created pressure on banks to recreate their online channels in order for people to use them in real-time. Where the implementation could not be achieved by bank’s IT, it was tinkered with by third party developers that explored the payment schemes to win back the business from cash networks - as they lowered ATF fees and enabled a solid ground for P2P card-to-card online transfers. While Russia is a solid business in money transfers and cross-border e-commerce (a good share of it in the grey zone where people pay for goods to the same people who import goods) and is trying to get a share of the tens of RUB billions in transfers to card rails, the result was a noble achievement by itself.

Seeing the activity of 3rd party developers and non-bank players, banks scaled up their unstructured operation and several already instituted a sideshow program to assist developers with bank APIs and certifications (Sberbank, Alfa-Bank). Some are keen to do so in the near future.

In conclusion, the push towards mobile happened gradually:

- people got the habit to prepay for things and looked for better solutions to organise their cash-heavy operations

- they got served by the first intuitive online interfaces through kiosks; banks started to adapt their own interfaces

- mobile technology added ubiquitous connectivity and context, making it easier to do finances on the go, something that triggered millenials

- the rapid change of online channels ecosystem required a rethinking of how they should be addressed, creating demand for 3rd party app development (no internal skills to create the app) and in the end - a proper API to be reused by the developers community

- burgeoning mobile channel payment volumes got recognised by the schemes that pushed hard to make the card to card transfers the preferred channel of moving money, and in the process of doing it, it became the channel to load up the money on a variety of mobile-only services.

About the Author

Daniel Gusev is an active contributor to a global financial services innovation movement, who through his blogging and factual contribution in many projects on the Russian financial scene became an «esprit de corps» of good and socially beneficial products and services.

A former consultant with SAP and Roland Berger Strategy Consultants, he has started his innovation course by accident, cementing it by a now influential blog in his 6th year of operation and numerous projects at leading banks, leading to several hit-products, crafted in his most recent position as Head of Innovation at a TOP-10 Russian bank.

He is presently busy with two of his projects in FS technology space, as well as supporting Meniga, a global PFM platform provider and Mindjet an innovation service provider in his capacity as a local partner.