Prepaid Cleared for Takeoff in Russia
By Ekaterina Konovalova, IQcard
Paybefore.com, 04.04.2014
The Russian prepaid card industry is on the upswing. Multiple factors prove that the potential for growth is immense. As Russia moves its way toward a cashless economy, prepaid cards will thrive amid increasing demand from different customer groups, development of a regulatory framework, implementation of government initiatives and increasing interest from retailers building loyalty programs.
Among people living in Russian cities with populations of more than 100,000, nearly 70 percent have bankcards, according to a recent survey by Romir Research Holding. Most people receive salaries and pensions on bankcards, but the bankcard market has evolved dramatically during the past few years. According to the Central Bank of Russia, the total number of bank-issued cards in Russia increased by nearly 80 percent within the past five years, and the average annual growth was 10 percent. The average turnover on bankcards showed significant growth, and the average number of transactions per person has increased. However, cash withdrawals still prevail. The main reason is many cards are payroll cards, but not exactly like the payroll cards you see in the U.S. and Western Europe. These payroll cards are bank-issued cards that are tied to bank accounts. Consumers prefer to withdraw cash to pay for purchases rather than risking fraudsters having access to their full balances. Payroll card users want another transactional payment card they can easily load spending money onto for in-store and online shopping. This would protect their cash flow and would be more secure than carrying cash.
Building the Infrastructure
An important factor behind the growth of the Russian prepaid card industry is the demand for non-cash payments in commerce and the economy in general. As it develops a cashless payment market, Russia has been facing and solving major issues.
One of them is infrastructure development. Today, the number of POS terminals per 1 million people in Russia is less than in Europe at 6,500, but the number is growing rapidly from year to year. The Central Bank of the Russian Federation estimates the average annual growth rate in POS terminals in the past three years is 23 percent. M-POS terminals also are gaining popularity because they are much less expensive. Increasing card acceptance is contributing to growth for small and midsize businesses in Russia.
Generally speaking, the Internet is booming in Russia. The Internet audience and the number of online stores and services that require card payments are growing in equal measure. According to the Public Opinion Fund, at the end of 2012, 52 percent of the total adult population in Russia used the Internet each month. Russia is catching up with France and Germany in terms of Internet penetration, J’son & Partners Consulting reports. The mobile Internet market also is experiencing significant growth; in 2012, the number of smartphones in Russia grew 70 percent year-on-year.
Russian consumers are shopping online more and more willingly. The E-Commerce User Index 2014 survey by Markswebb Rank & Report Agency shows that more than 20 million Russians make online purchases each month and more than 50 percent pay by card. Demand for secure online payment cards is growing in line with the increase in online shopping. Online shoppers are showing interest in prepaid cards because they can spend online without potentially exposing all their funds to fraudsters.
Increasing Financial Literacy
Improving financial literacy of Russian consumers also will spur the development of the cashless payment market and prepaid card segment. Some people do not use payment cards because they are afraid of fraud, spending too much money or overdrawing their accounts. Public authorities are interested in improving financial literacy and are taking measures to promote prepaid cards, which ensure secure electronic payments. The Ministry of Finance and Central Bank have implemented various measures to facilitate the development of the bankcard market and prepaid card segment. For example, they support POS terminal installation in stores. In addition, the Central Bank has expanded the possibility of using prepaid cards considerably. In 2011, the Central Bank raised the maximum balance for prepaid cards from 5,000 up to 100,000 rubles (US$2,820) and enabled banks to issue reloadable prepaid cards. Within the next few months, the issuance of prepaid cards increased more than 2.5 times. Implementation of legislative measures promoting the prepaid card market also is underway. A law, which goes into effect on August 1, 2014, will increase the maximum balance on personalized prepaid cards six times to 600,000 rubles (US$16,923). This law also provides a definition of a prepaid card, further legitimizing the market.
All these factors encourage analysts to give a high rating to the Russian prepaid card market. According to A.T. Kearney, the turnover on prepaid cards in Russia could reach US$110 billion by 2015. Prepaid cards account for 20 percent of the payment card market, and over the past five years the number of prepaid cards in Russia increased almost 96 times, from 455,000 to 43.3 million, according to the Russian Central Bank.
Poised for Growth
The prepaid market is growing, with demand coming from promising and solvent customers. According to Mercator Advisory Group, the prepaid card target audience is mainly people ages 35 to 64, who have payroll cards and know about their advantages but need additional cards for day-to-day spending. As discussed above, this group is very large. Additionally, one of the most important target segments for prepaid cards is families trying to control their household budgets. Other large groups of potential customers are tourists, whose number in Russia grows each year, and clients of various government organizations, foundations, etc.
Another important target audience is retail chain customers. Today, prepaid cards are handled in Russia by banks and operators (program managers). Interaction between card issuers and retailers is just beginning but is a long-term growth segment for the prepaid card market. At the moment, a few banks and financial companies operate in this area.
As a financial services startup, IQcard is operating in Russia under support of Visa and is actively building partnerships with retailers. In 2013, we started working with six Russian retail chains on launching loyalty programs based on prepaid bankcards, with total number of cards issued exceeding 350,000 and more than 1 million cards to be issued in 2014.
It is clear that the Russian non-cash payments market and the Russian economy, in general, need a developed prepaid card segment. This new payment instrument is a great tool to help the Russian economy solve a very important issue—cash excess. That is why public authorities support the prepaid market at all levels, while financial institutions and retail chains actively are participating in its development.
Ekaterina Konovalova is the co-founder and CEO of IQcard, which is a 2014 Paybefore Awards winner in the Boundary Buster category. Ekaterina has 10 years of banking experience in the B2B and B2C sectors, where she handled development and implementation of bank products, arrangement of remote payment services, sales, marketing and business process optimization. Ekaterina was co-founder of multiple startup projects and was involved in building Leader, one of the major international money transfer systems.