"20 Years of Being a Pioneer..." - the interview of the CEO of NovaCard JSC, Vladimir Krupnov for "Cards' World" journal - #10, 2014

Under such conditions certain enterprising individuals came up with the idea of offering local substitutes for cash that would allow limited trade in certain areas. Bank cards turned out to be a very convenient instrument. The idea was a huge success. The first Russian payment systems Union Card and “Zolotaya Korona” (‘The Golden Crown’) experienced explosive growth from the very beginning.

For those that started the cards’ production at that time, the appearance of Russian payment systems and other developments, such as payroll projects, became an unstoppable tide. That made it necessary to set up industrial production to support massive cards issuance.

We entered the bank card market in cooperation with the ‘Zolotaya Korona’ payment system, which at that time offered banking participants everything: cards, payment terminals, and program support. We had to show that our aim to produce ‘Zolotaya Korona’ cards was not an attempt to gain their territory, but rather the possibility to accelerate their growth so as to provide a more rapid satisfaction of the substantial growth in demand. They trusted us, and the partnership was mutually profitable. We continue to work with ‘Zolotaya Korona’ even today. Some of the cards that were produced for this system twenty years ago still work today. Such is the reliability and durability of even the most simple chip technology!

Over time, the economic situation stabilized, and ‘Zolotaya Korona’ and Union Card grew rapidly, developing to interbank level, and became payment systems in the traditional meaning. A more-or-less civilized market for the production of cards appeared. We accepted orders not only from ‘Zolotaya Korona’, but also from Union Card; our competitors, in turn, collaborated with ‘Zolotaya Korona’. Nonetheless, each card manufacturer had the very same dream: to enter the card market for international payment systems. At that time it seemed impossible , but we already sensed that our primary hope for future growth lay in that direction.

RCW: Did you attempt to start a conversation with Visa and Europay?

V. K.: Of course! Periodically we sent both payment systems inquiries and invitations for partnership. Visa simply did not respond. Europay carefully answered all our invitations. Their answer was pretty much, “What you are asking for can never be, not now nor in the future!”

RCW: How were you able to break down the walls of misunderstanding?

V. K.: It happened much later. However, before the ice age of interrelationships with international payment systems came to an end, we received a terrible blow from the collapse of the banking market following the 1998 default. Had there not begun an almost simultaneous boom in the mobile phone market, we probably would not have survived as a production enterprise.

RCW: How did your business get into the communications market?

V. K.: Precisely in the same way we entered the bank card market, we were able to crest the wave of overwhelming demand. The basic product that we prepared for the mobile communication operators was cards for express payment. Their appearance is a truly interesting story. For some reason it is generally considered that the VimpelCom company (Beeline brand) was the founder of accessible prepaid mobile communications in Russia and that scratch cards first appeared in Nizhny Novgorod.

In actual fact, the company ‘Nizhigorodskaia Sotovaia Sviaz’ (NSS) was the first GSM network operator in Russia, beginning work in the summer of 1995. By the end of the year, they had only 600 accounts. At that time the management began to consider how to construct a business model in which it was possible to reduce drastically the price threshold to use what was such an expensive service at that time. The reduction in costs for equipment and calls to the minimal acceptable level vis-à-vis profitability did not have any explosive effect; by the end of 1996, NSS had only 2000 accounts. It must be noted that the services of all mobile operators at that time were based on a postpaid system. After paying a deposit, the customer received a bill each month for services rendered. The deposit and the bills were substantial. In order to provide mass service in mobile communications, it was necessary to introduce prepaid rates, and therefore to have a convenient mechanism to accept prepayments. Self-service terminals, and the general understanding of acceptance of cash payments by such terminals, did not exist at that time, and ATMs, like bank cards, were very rare. But in 1997 NSS entered the market with an express-pay card. The customer would buy a card with a specific denomination, remove the protective covering, enter the code, and the account would be refilled. The cards cost about five cents, so for a $10 card, the operator took a commission of no more than 0.5%.

With low cost and apparent simplicity, the technology was and remains sufficiently protected. Thus, a card not activated at point of sale, but perhaps stolen during shipping, could not be activated; the billing system prohibited such a procedure. Most importantly, express-pay cards started the principle of “talk as much as you like.” For a hundred rubles, talk for one hundred rubles worth; for a thousand, talk for a thousand. With the appearance of affordable telephone models, thanks to the GSM network, scratch cards became the key to mass mobile communications. After the initial success of express-pay cards, other operators began to use them, including VimpelCom with its well-known product Bee+. By the way, Bee+ success became a very successful milestone for VimpelCom. The company refused to support the DAMPS standard and changed the main brand to BeeLine GSM.

As practice has shown, the demand for communication grows in times of crisis; hence, despite the problems in 1998, the mobile communications market in Russia grew rapidly.Thanks to our experience in producing scratch cards, we received an enormous number of orders from across the country. This demand helped us to survive until the recovery of the banking market.

RCW: When did the market recover?

V. K.: It is difficult to say now just when exactly we once again achieved solid growth. I think it was in 2001. The return to stable growth in the banking sector, the appearance of credit, and the rapid expansion of international payment systems with the initial transition to microprocessor cards led us back to the idea of certifying the production of international card products.

The icy relations with Visa and MasterCard began to thaw in part due to their success in our market, in part due to the support from Russian banks, and in part due to our persistence. Moreover, with time, the leadership of the payment systems changed and the change in personnel removed some people who had been in the habit of considering all things Russian as potential adversaries and replaced by more pragmatic managers. Europay turned into MasterCard Europe, and its executives thought the Russian market had an excellent future. I was able to convince them of the seriousness of our intentions. This turned out to have played a decisive role in moving NovaCard into the international product market. Both the company and I personally, went through a tough test, as a result of which it became clear that Vladimir Krupnov was crazy about his business, because only a crazy person could plan such a business in Russia and count on its success. A crazy European or American might not be so bad, but he was a crazy Russian! But people I had already talked to thought that being crazy was not so bad and could lead us to mutual success on the Russian market. As a result, MasterCard agreed to begin discussions on certification of NovaCard. Visa joined in later, following this precedent.

We built our own production building which gave us the capability to meet all the expectations of the international system regarding security, technology, and quality control. The factory was built by restoring from a dilapidated state the ruins of the Kazansky Railway Station in Nizhny Novgorod (we used the original drawings of 1904). The NovaCard factory is now considered to be an architectural monument and the most beautiful factory building in Europe.

Thus, in January 2004 we became the first certified domestic producer of bank cards for the two largest international payment systems.

RCW: To what extent did the results justify your earlier hopes?

V. K.: It justified them. By about 2005, international payment system cards became the only mass product in the banking market with physical card manufacture being in the millions. The demand for cards grew consistently, and every year we increased and improved production.

RCW: How quickly were you able to cope with such great volumes?

V. K.: We already had experience with mass production from our work with the mobile communications market. First we made scratch cards, then GSM SIM cards. Manufacturing the latter was a particularly valuable experience because we learned to produce millions of not only simple products, such as those with magnetic strips, but also of those with embedded chips. When the banks began to demand EMV smart cards on a mass scale, we were ready.

In 2009 we appeared for the first time in the Nilson Report global ratings of card manufacturers, and three years later, in its estimation, NovaCard was the top producer of bank cards in Russia.

RCW: What other areas of card production were important in the history of the company?

V. K.: We began, like just about any other independent producer, by issuing commercial cards: discount cards, club cards, loyalty cards, etc. This segment still maintains a distinct place in our portfolio even today. If we look back to a more recent time, a mention should be made of the social projects, which made a mass appearance in the Russian market from 2005. We made and continue to make social services cards within the framework of a multitude of projects and partnerships with various banks and payment systems.

In 2012 we were certified to produce bank cards MasterCard PayPass and Visa payWave, and we also made the first NFC SIM cards in Russia, which comes with the with the ability to pay by MasterCard PayPass, for an innovative project for MTS mobile operator and MTS Bank.

The banking and telecommunications segments came together for us in one product. It seems to me that from that moment a fundamental new stage in the history of the NovaCard company began. If earlier we were a producer of cards and a personalization bureau, today we have become a designer of payment solutions.

RCW: Do you believe in a contactless future?

V. K.: Belief plays no role here. The numbers show that the issuing of contactless cards is growing throughout the world at an ever-increasing pace. Recall that just 20 years ago multifunctional cards were some sort of technological ideal that the biggest producers of that time were trying to create, i.e., Gemplus, Schlumberger, Bull CP8, and others. Some projects were successful, but mass acceptance of the idea did not take hold because there were no standards and each solution seemed to be merely a brave experiment.

NFC should not be seen as just the latest in-demand process, allowing the implementation of cashless payments in places where traditional cards work too slowly (such as on public transportation). It should not only be seen as a magic link, connecting mobile commerce with the physical card payment infrastructure. But it is first and foremost a standard, guaranteeing the compatibility of technologies from various manufacturers. Multifunctionality has become reality.

RCW: What is NovaCard’s role in these new conditions and what obstacles do you see in implementing your plans?

V. K.: We are able to make the respective NFC UICC cards. We have learned how cards interoperate with mobile phone applications and are able to control the payment environment remotely via TSM (Trusted Secure Management). We have TSM solutions for both MNOs and service providers.

NovaCard is also starting to develop mobile applications to deal with NFC cards and can personalize embedded secure elements of different mobile phones. We are participating as a developer and integrator in projects which create the multifunctional payment infrastructure. At present there are only a few such projects, but the technology is developing so swiftly that its transition to mass implementation is already a thing of the not-too-distant future.

As far as obstacles are concerned, first of all, the development of contactless mobile payments is new for all players on the market and there will inevitably be some surprises and, possibly, some mistakes.

Secondly, the more complex and diverse the market becomes in the technological sense, the greater the number of players that appear. In the Russian market, there are many providers of bank cards and payment technologies. On one hand, this increases competition, which is good; but on the other, it leads to a dispersion of resources and to a decrease in the margins in all segments. Thus, I think some consolidation would be good.

The above does not mean, however that we are looking at the future pessimistically. Looking back, I understand that throughout these twenty years one way or another we have been pioneers. We are pioneers even now. Possibly, that is the most interesting facet of this business.