NovaCard Success Story (Cards’ World, №10, 2006)

Success story with the history of the Russian card market as a background

NovaCard (Nizhny Novgorod) began manufacturing cards in 1994, i.e. earlier than any other Russian company currently working in this sector. NovaCard supplies all types of plastic cards for various applications: banking/payment cards, SIM-cards, prepaid cards for mobile phone operators, cards for social welfare programs, discount, club and insurance cards, access control cards, etc. Major customers include leading Russian communications companies such as MTS, Beeline, Megafon, Volgatelecom, SMARTS and large Russian and international industrial and retail companies – Lukoil, Aeroflot, Ikea, Metro Cash & Carry, M-Video and others. NovaCard also has card manufacturing and personalization contracts with many Russian banks (currently, more than 100 banks), among which are Sberbank, Russian Standart Bank, Home Credit & Finance Bank and others.

Today NovaCard manufactures around 1 million cards a day (10 years ago it would have taken a whole year to produce so many). Manufacturing capacity of the company exceeds 500 million cards a year. NovaCard employs more than 350 people, and two out three have a university degree.

The road to success took more than 12 years. In early 1990s Vladimir Krupnov, the founder of NovaCard, after the implementation of several computerization projects of emerging private Russian banks, decided to buy equipment for personalization of bank cards. In 1994, seven employees of NovaCard began manufacturing cards «almost manually» in one of the rooms that belonged to the Nizhny Novgorod Institute of Applied Physics of the Russian Academy of Science (IAP RAS). NovaCard was among the first Russian companies which began manufacturing cards for two new Russian proprietary card payment systems – Zolotaya Korona (Golden Crown) and Union Card.

Vladimir Krupnov, Director of NovaCard

Romodanovsky Railway Station is now restored to the former perfection

By 2000 NovaCard’s output increased more than tenfold, necessitating an expansion of manufacturing facilities, which was not possible to do in the rented room in IAP RAS. Vladimir Krupnov recalls: «When we realized that we had to move out, our first choice was the most logical in that situation: buying out one of the many plants which were going down. There were plenty of them at the time – not only in Nizhny Novgorod but anywhere in Russia. In such case, the needed infrastructure was already in place, and we only had to do a refurbishment. And though this appeared to be the simplest and cheaper solution, we decided otherwise. Instead, we chose to restore the building of the former Romodanovsky (Kazansky) Railway Station – one of the most beautiful buildings of Nizhny Novgorod from the early 1990s. In 1993 this building was included in the list of architectural heritage monuments, but this did not help much: the walls were on the verge of collapsing, and due to inadequate waterproofing, the building was deteriorating quickly. After having bought the building in 2001, NovaCard spent two years to refurbish. By using old photographs and blueprints we managed to restore it to the former perfection. Of course, we could have moved to a more conventional place, but our efforts were worth it. Millions of people passed through this railway station. This place still remembers their feelings – joyous meetings and grievous farewells. It would have been the great loss for the city to turn this beautiful building into ruins.

In 2003 NovaCard moved into the reconstructed building, and the production process was uninterrupted even for a second.

NovaCard is one of the key developers of the Russian plastic cards market.

In the mid-1990s the expansion of the Russian card market became possible, to a major extent, due to the rapid development of the banking sector. It was the period when NovaCard began manufacturing plastic cards for banks. The first contracts were signed with banks which issued cards of the Russian proprietary card payment systems – Zolotaya Korona (Golden Crown) and Union Card.

Since 1997 NovaCard’s business as well as the whole Russian plastic cards market has been expanding rapidly. The key driver was the contracts with mobile communication operators. At first, customers of NCC, MTS, BeeLine and other Russian operators started using scratch cards supplied by NovaCard, and later they became available in other CIS countries as well. The company developed production of access cards, discount, club, insurance and other types of cards. Since 2003 NovaCard has been manufacturing SIM-cards.

Ambassador of France to Russian Federation Mr. Stanislas de Laboulaye and Vladimir Krupnov at NovaCard, April 2007

In January, 2004 NovaCard was certified by both largest global payment systems – Visa and MasterCard. This was a remarkable event in the Russian card market as NovaCard was the first Russian company licensed to manufacture and personalize MasterCard-branded cards. In May 2007 NovaCard received the authorization to start manufacturing of American Express cards.

Why did it take a full decade before these international payment systems extended their credit to a Russian card manufacturer? The reason is that it had cost NovaCard considerable financial inputs and efforts to comply with the high standards set by Visa and MasterCard and their requirements to the manufacturing process organization and quality of products. Besides, it took time to win the confidence of international financial institutions towards the Russian market, over the distrust of the Soviet times which had only deepened after the financial crisis in Russia in 1998.

By now NovaCard has the complete range of licenses and certificates enabling it to manufacture and personalize all types of cards to the highest quality standards.

NovaCard represents one of the few examples in the Russian business, particularly in the plastic cards market, when the company’s business expansion was financed fully from internal investments. The company has become the leading Russian card manufacturer, primarily, due to the well-balanced development strategy. From the beginning, NovaCard has always been a leader in realizing new ideas and products, and this approach helped the company to retain its leading positions at the market and maintain high profitability.

Naturally, there are foreign investments in the sector, and such projects have also been a success. For example, in 2006 the Russian and German joint venture Smart Card Company launched a new production line for manufacturing SIM-cards in Zelenograd (Moscow region). The agreement to form a joint venture to manufacture, supply and market chips and chip cards as well as to develop applications for smart cards was signed between Sitronics (part of the AFC Systema holding) and one of the global leaders in the smart cards’ manufacturing: the German concern Giesecke & Devrient GmbH.

There are few companies in the cards market in Russia, which comply with international standards. At present, only three Russian card manufacturers are certified by the global card payment systems. But competition in the Russian card market is becoming more and more intense; to a certain degree this can be explained by the emergence of new international players. For example, both ORGA Zelenograd and the Smart Card Company are joint ventures with German investments. The Russian market is also of interest to such global leaders as Gemalto and Oberthur Card Systems».

Vladimir Krupnov emphasizes: «We believe that 2008 will be an interesting year for bank cards manufacturers. In the banking sector changes are not as rapid as, for instance, in telecommunications. However, many banks are realizing the need to change, and there will be more attention to Russian cards manufacturers than previously seen. This is the beginning of an explosive growth of the market. Whereas in Russia there is 1,5 card per two residents, in the US it’s ten times more, so there’s room for several years’ growth.

Today we are witnessing rapid growth in retail banking market. Banks and retail chains are putting more effort in retaining existing customers because they realize the market is becoming mature, and customer loyalty is becoming a keystone in the business. Cobranded cards are an effective tool of building customer loyalty, tested around the world as a method of increasing cardholder’s interest in new services and opportunities.

One of the major factors of the further development of the plastic cards’ market is the gradual realization of the need to have CRM systems and effective risk management tools seen by Russian banks. Retail banking market is only efficient if you collect information on your customer, to target the relevant segment with the relevant offers, and have a flexible risk management policy. What do we mean by «flexible» here? We mean that banks constantly analyze the activities of its customers, and are able to instantly adjust authorization limits or credit lines, etc. This is an opportunity EMV technology provides. Obviously, EMV-compatible cards are not by themselves an effective risk management system, however, EMV is extraordinary helpful in implementing the client-end part of the system. It is important that customers might be unaware of any «negative» actions of this bank, but at the same time they will be happy to find out some pleasant surprises. For example, a customer may not know that his bank for some reason reduced the amount of the off-line authorization limit, but he will fully appreciate the fact that the bank offers him discounts in the specialized store selling tennis racquets having found out that he uses the card to pay for tennis court hire.

EMV cards enable a bank to collect maximum necessary information on its customers. Therefore banks have a powerful tool for building and developing relations with their customers, offering tailored services matching the needs of each individual customer, such as a frequent flyer program, retail store or video rentals discounts, or a restaurant bonus program. EMV also helps reduce transactions costs and increase the level of card protection against fraud.

Nowadays more and more Russian banks get involved in EMV projects. We believe that the growing interest in co-branding programs and the existing business case will give just another impetus for building an efficient bank-to-customer relationship».