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HISTORY OF CREDIT CARD IN RUSSIA
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HISTORY OF CREDIT CARD IN RUSSIA: 1989-1994

PIONEERS OF CARD BUSINESS

It has not been for a long time that the initiators of replacing paper money payments with electronic transactions began to develop the vast expanses of Russia. Surprisingly, the domestic plastic card mar-ket marked only its tenth anniversary in 1999. In 1989 Sberbank and Kredobank became VISA members. The former achieved this goal largely thanks to its monopoly position and big size while the latter - thanks to its enthusiasm, decisiveness and ambitious plans. Kredobank also started earlier issuing its VISA cards already in the autumn of 1991.
At that time, the payment systems pursued an unofficial policy of containing the admission of new Russian banks. However, Russia gradually overcame the cautious attitude of international payment associations and the ranks of principal and associated members began to grow steadily. In 1992 MENATEP bank, and in 1993 Mostbank and Inkombank, became members of VISA International. Notably, Mezhkombank began to issue its first American Express cards only in January 1995. Later, Optimum bank and Unikombank, and also Credit Swiss bank accredited in Russia began to offer them to clients.

A Large Area for Operations Appears

The international payment systems continued to compete between themselves in Russia as well, trying to be the first to develop the new market and prevent their colleagues from getting access to such a de-licious piece. For example, actually simultaneously with VISA, Kredobank joined Europay International; however, it did not begin to issue these cards explaining this by the prohibition on the part of that association. Although this was not admitted officially, many Russian banks really had to choose only one payment system for some time. It was only Mostbank that managed to combine operations in VISA and Europay from the very start.
Simultaneously with the growth of the number of issuing banks, the expansion of the international card-servicing network was observed. This was largely achieved through the increase of the number of foreign exchange offices: the government finally permitted Russian commercial banks to engage in such operations and this type of services enjoyed great demand.

Gold Card Worth $10,000

Initially, international cards were advertised as an elite product and cost the banks clients quite a lot. The insurance deposit for gold cards could exceed $10,000. On the other hand, new banks that were entering the market of plastic cards were frequently compelled to use dumping prices (in the condi-tions of Russia) to attract clients. Afterwards, banks used the same policy in their struggle for the expansion of the acquiring network when they set fees below the level of profitability to service stores that accepted plastic cards. The main aim was to attract clients (first corporations, then persons) and get their place in the acquiring system.
Thanks to the efforts of the most active banks (first of all, Kredobank, Mostbank and Inkombank, and later Stolichny bank), the number of the users of international plastic cards and their servicing network continued to grow. Along with this process, local card products began to appear on the Russian market. This was linked, in the first place, with the limited number of persons who could afford full-fledged international cards and the banks desire to develop the market of their own cards designed for mass consumers. An ever greater number of banks began to shift the emphasis of their operations to work with private individuals. The MMM and Chara fraudulent pyramid schemes clearly demonstrated the powerful financial potential of Russian citizens. The ban on cash foreign currency circulation, tight state control over money transfer abroad and the periodically intensifying shortage of cash rubles, coupled with high interest on the issue of cash rubles by banks, stepped up citizens interest in plastic cards.

STB Cards in UAE

In 1993 Mostbank offered the first MostCard Russian bankcard. Along with individual banks (Mytishchi commercial bank, Optimum bank, Elexbank, Elbimbank, Hermes-Center bank and others), domestic card associations appeared (STB Card and Union Card based on magnetic cards (1992-1993), Zolotaya Korona (1994) and Universal based on smart cards). Most domestic banks were oriented to the issue of largely Russian cards (their own or system cards), which were cheaper and adapted to the solution of such a pressing problem at that time as the shortage of cash resources in the process of settlements.
The systems whose founders paid close attention to the creation of card acceptance infrastructure (STB Card, Union Card, and Zolotaya Korona) were conquering the market. Over two years of operation, the number of STB members reached 70 and the card acceptance network included 1,600 outlets while the respective figures for Union Card were 200 and 2,500. At the same time, the Universal system in-cluded 17 regional banks and Tveruniversalbanks 14 branches and units.
In the hunt for clients, banks were busy offering new types of cards and democratizing the terms of their servicing. In this process, the issuers of domestic cards took efforts to create a network of their acceptance outside Russia. Thus, STB announced about the acceptance of its cards in the UAE, Optimum bank about the acceptance of its cards in Israel, Cyprus and Geneva, Zolotaya Korona in Germany and Union Card in Cyprus and Ukraine.

Combining Jobs

From 1994 joint card programs also became popular both in the Union Card and STB-Card systems and among separate banks. The first projects, which were implemented together with insurance companies (ROSNO, MAX), proved to be effective enough as they turned out to be profitable for all the participants. After that, banks began to carry out joint card programs with commercial trading companies that had a ramified network of stores and a group of relatively permanent clients. For example, Inkombank began to issue Visa-Bee-Line-Inkombank cards making it possible to increase the number of Beeline telephone owners.
In March 1995 Russian banks started to combine domestic cards with international debit cards. After classic cards Most-bank issued MostCard/Cirrus/Maestro and Visa/Electron/Plus cards. Other banks also hurried to occupy this niche of cheap international cards. Thus, on the basis of these cards, Stolichny Bank Sberezheniy (SBS) launched its Student Card program. Within several years it came to in-volve higher schools from ten regions of Russia, and over 200,000 students became the banks clients. The program was based on the fully automated process of salary and stipend distribution and payment. Within the framework of this program, SBS opened personal accounts free of charge, issued international plastic cards to students and the teaching staff, equipped higher schools with automated teller machines functioning round the clock, and their canteens with electronic payment terminals.
Incidentally, a solution was also found for banks, which wished but failed to become independent issuers of international cards. Some major business operators agreed to give them a helping hand (naturally, to get benefits from this scheme in the form of fees, insurance deposits and the growth of their influence in the eyes of the payment systems). For example, within the Alliance interbank program, Mostbank provided an opportunity to its colleagues, which were not VISA or Europay members, to offer their clients the cards of these payment systems. Therefore, debit schemes developed almost exclusively on the Russian market (even classic international cards were issued on the terms, under which they could not be considered credit cards.)
The first stage of the development of this market came to an end late in 1995. It was characterized by the banks acquaintance with technologies: when launching their plastic card programs, the banks were interested not so much in deriving profit as in other circumstances (their prestige, the desire to suit major clients, etc.). The projects were basically small and were not expected to bring in any special yields. There was a lot of money at that time: inflation enabled banks to spend much. Prudent banks, which understood what they were actually doing, used this period to get their share in the market and, first of all, to establish a developed card acceptance network.


PROCESSING AS A STUMBLING BLOCK

The Russian plastic money market, which promised to be very capacious in the future but was actually very narrow in the early 1990s due to its undeveloped infrastructure and the low incomes of the population, was divided within a short period of time.
The struggle for the servicing of trade outlets was especially fierce. The pioneers of Russian processing were established from the very start for work with international cards. Settlements were effected through Vneshekonombank and later through the International Moscow Bank. Until 1987 Intourist and Aeroflot were the main servicing centres in the USSR and mainly serviced tourism and entertainment. Later they were joined by OLBI, STB, and Union Card while the sphere of operators accepting payment cards expanded through trade companies. Work with the commercial network of international payment systems (except AmEx) was actually fully concentrated in the hands of the company of uni-fied credit cards (UCS). The main scandals involving cards in the early 1990s erupted, in the first place, due to the redistribution of forces among its stockholders and the appearance of new ones.

Banks Apanage Principalities

Cardcenter processing company was for a long time the leading operator for servicing Eurocard/MasterCard transactions in Russia. However, in 1995 Most-bank, a stockholder of Cardcenter, opened its own processing center and took a part of Eurocard/MasterCard clients with it to Multikarta company while Stolichny Bank Sberezheniy transferred its Eurocard/MasterCard servicing to STB Card center, its subsidiary processing structure. As a result, the share of Cardcenter on the market dropped substantially. Whereas the processing centers (UCS, Cardcenter) had to be linked to international payment systems to process VISA, Europay, AmEx, JCB and Diners Club International cards, they serviced internal cards through their own processing centers (STB, Union Card, Universal, Zolotaya Korona).
Apart from that, the processing centers of some large banks also struggled for the market. Thus, Rossiisky Kredit, Montazhspetsbank, Inkombank and Avtobank preferred to create their own processing centers and independently go a long, labor intensive and expensive way of their certification in the payment systems.


UNITY IS STRENGTH

A large variety of card systems in Russia created certain difficulties. Sometimes commercial outlets accepted over a dozen of various cards, and each of them required a separate imprinting machine. Soon stores began to give up the systems with a small number of cards and the issuers began to think about the technical and political solution to that problem and take certain steps to get rid of the large number of cards.

Alliances of Past Days

Sberbank of Russia, Promstroibank and Agroprombank even signed in the autumn of 1994 an agree-ment stipulating coordination in the field of chip technology. Four Moscow banks: MBRR, Moskovsky Kreditny Bank, Rikk-bank, Optimum bank and the Russian company Skuntek signed a similar declaration. The agreement, which was concluded between Optimum bank and the company STB-Card but, unfortunately, was not fulfilled, also aimed to resolve this problem. Under it, the sides agreed to unite their technologies and create a single card based on SMART Card of Optimum bank and the magnetic STB-Card.
The main aim of these efforts was to unite the issuers efforts for improving the infrastructure and the technology of the plastic money market. It was obvious that each issuer taken separately could not organize a full-fledged infrastructure of its own cards (to organize the channels of communication, install automated teller machines and create a wide trade network of card servicing). In experts estimates, it was necessary to spend over $200 million in Moscow alone for this purpose while profits from the im-plementation of the card programs could be received only if no less than 1-1.5 million cards were issued.

Single National Card

The project of the single national card was aimed at resolving the problems that had emerged. The single national payment system was designed to raise the profitability of plastic business in Russia both through the growth of the gross volume of fees from the sharp increase in transactions and termination of the practice of sharing them with international payment systems. Domestic operators did not want payments to be effected through international payment systems abroad. All of them wanted to participate in the cash flow to reduce the prime cost of settlement services through profits from operations with the balance of funds.
The decision taken in September 1995 by SBS, UNEXIMBANK, the bank International Financial Company and INKAKHRAN cash collection firm (a subsidiary of SBS) to invest $250 million in the STB-Rossiya system, with Alexander Smolensky elected as its president, could become the first real manifestation of the unifying approach. STB-Rossiya was intended to open in Moscow Russias largest center of settlements with the help of smart cards on the CIS territory. Therefore, it was expected that a single system of citizens non-cash payments similar to VISA, Europay International and other systems would be established. However, the projects implementation was postponed for an indefinite time due to the fact that UNEXIMBANK and SBS banks were unprepared to carry it through.

TOPIC:
FROM FOREIGNERS TO ATHLETES (1958-1988)
PIONEERS OF CARD BUSINESS (1989-1994)
THE PRINCIPLE OF DOMINO (1995-CRIZIS)
AUGUST 1998: DEAD SEASON (1998-PRESENT...)
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