EMV loyal banks (Cards’ World, №10, 2009)

Vladimir Krupnov, CEO of NovaCard Company, shares his opinion on the Russian card market, today’s philosophy of payment services in banking and telecom, and on the future market developments scenarios.

«Russian Card World»: How did the structure of Russian card market change during the previous year? Do you see any qualitative changes?

Vladimir Krupnov: I almost don’t see any structure changes on the card market for the previous year. Approach to card business has nothing to do with the fact that banks decreased their new cards orders due to latest negative events in the economy. Yes, the general number of chip cards issued by Russian banks has grown. But their share in the total volume of cards issued still stays unchanged. The growth of EMV cards number produced by NovaCard today doesn’t reflect any structural changes of the market. This is only the result of bigger volumes of cards issued by the banks and nothing more.

EMV migration has always been stimulated by liability shift. Saying this I mean that international card brands use this rule to heat up the EMV migration processes. The statistics on the transactions structure can prove how unimportant liability shift is for the Russian banks behavior. In the overall payment structure it is still more than 90% share of cash withdrawals and less than 100% non-cash payments where the liability shift works properly. The share of EMV cards issued by Russian banks is less than 10% and it meets the real needs of banks and their customers. Moreover, today, when banks care about every ruble spent, we happen to hear the opinion that EMV-migration is nothing more than an excessive cost to cover risks.

I would name the attitude to card business practiced now in Russia as American from the technological point of view. It means that all «intellectual» components of the transaction system as risks management, limits management, type of the authorization, etc. are controlled by the back-office systems. Even the newest technologies such as PayPass or Visa Wave do not significantly affect this approach. The card serves only as the passive identification of the customer. Yes, one is now able not take the card out the wallet, but the transaction is still managed by the bank. The so called European approach to EMV is completely different. It was developed to partly transfer the management of transaction parameters to the card itself. The card «intellectual» enough to manage risks to some extend. Part of our banks underestimate such card features and underuse them.

«RCW»: Is there any demand for the additional chip-based services?

V. K.: It is easier to answer bringing up the analogy of a car. Its main function is to carry the driver, passengers and cargo. The cost-effective reliable automobile meeting these requirements costs about $10,000. But there are cars 10 or even 30 times dearer. It means that customers are ready to pay more for the additional services.

Other close analogies we can find on the telecom market. Voice communication is still the killer application for any GSM brand. This function is still the main competition point and it becomes more and more inexpensive. But did you notice how many services enjoy the subscribers year by year? These services are managed by SIM-card which served primarily just as a protected subscriber’s identification tool. I think that banking segment sooner or later will adopt the additional opportunities chip technology brings forth. Generally speaking, banks are conservative by their nature and innovations are deployed quite slowly here.

«RCW»: Are there any exceptions here? Are there those, who deploy new EMV-based services already today?

V. K.: EMV loyal banks in Russia exist. One of our customers – a bank – plans to issue several hundred thousands EMV cards next year. Each card will carry an application allowing to pay for fuel on various petrol stations. This bank is not aware how many customers will activate this application but nevertheless it is going to provide this opportunity to each customer. By the way, this approach is widely practiced on the telecom market. All subscribers have the same cards but they can use different applications. Today’s standard is a card with a variety of application where you can choose a needed assortment to activate. Not long ago it was usual to provide chips with only one payment application – Visa or MasterCard – in their ROM. Today we deal with chips compliant with both applications. The only thing you have to do during production process is to activate one of them.

«RCW»: Did crisis affect negatively the technological aspects of market development?

V. K.: Bad market situation does not prevent the quality growth, on the contrary, it stimulates swifter strategic decision-making in technological sphere. Depression is the time when everything changes rapidly. But banks generally offer their customers static products. By static I mean that deposit or credit line parameters are defined once and for the whole banking product lifecycle. EMV approach provides opportunities for creating dynamic products. For instance, it is possible to change card’s credit limit each time the customer requests to ATM. In crisis times when customer’s credibility, needs, risks may change rapidly such banking dynamic products can prove to become profitable and convenient for banks and will be highly estimated by customers.

I also expect high rates of EMV deployment in the small payments market. It is possible to introduce banking cards instead cash advances for payment transactions by providing more flexible management of offline limits transactions. Yes, there is no underlying infrastructure, but ten years ago it hasn’t existed anywhere. The main point is that we witness a growing and obvious demand here.

I would refer to the example from telecom again. Today your operator’s account can be used to pay for movies, music, different subscriptions and other services. It means that a whole market segment – payments via cell phones – if now formed.

«RCW»: Did banks loose this segment?

V. K.: I do not think so. Definitely, this segment was primarily created by GSM brands. However, there is another similar segment – services payments via proprietary cash-in kiosks. Here I think banks lost momentum. And the fact that most of our cards are salary cards in this particular case does not justify banks. It looks quite strange when a customer withdraws cash in ATM to pay for services thru cash-in kiosk. We do not see this in any European country.

Yes, many banks today provide payment options via ATM. But today they occurred in the role of «train catchers» with minor chances for success (at least by market share means). This segment of payment market is lost: look at the rates of cash-in kiosks infrastructure growth through the country – almost 400,000 kiosks vs 95,000 ATMs.

Nevertheless there are still plenty of opportunities in store. I do not exclude that modern card technologies will help banks to catch them up.

«RCW»: Let’s bring forward analogies between banking and telecom markets again. How deep is the GSM brands dependency on the SIM-card type? Do they fully use the SIM potential?

V. K.: SIM-card provides delivery of any service. Its cryptographic features enable payment services. At the same time, mobile operators are less card-dependent in terms of content services than banks. Very many services are provided by the handset functionalities. Unlike European Russians tend to purchase expensive multifunctional handset models. This explains why Russian GSM brands do not invest in more powerful and expensive SIM-cards. European standard-de-facto is a card with 128-256K EEPROM, Russian – 64K yet. And the price difference between these two cards is very insignificant.

Yet I see this situation as risky: on one hand, customer may ignore some operator’s services making his principle choice for the cell phone model, on the other; there are no industrial standards for handsets which all manufacturers comply with. That is why SIM-card opportunities look more promising and that’s why more reliable.

«RCW»: Do you believe in widely-discussed banking and telecom convergence?

V. K.: Mobile services develop fast. The operators are interested in payment market growth. We can witness now the results of this interest.

On the contrary, banks are very conservative in terms of services. However, this difference of speed and directions does not lead to a contradiction. Banks conservatism originates from peoples cautious attitude to money and expenses (if we don’t speak of so-called small payments). These regular payments are made mainly by banks. People prefer to use the product or tools widely adopted and well-known which could change only evolutionally. Bank card is a stage in the money evolution, and EMV card is the next step. Will next stage turn a cell phone into a wallet tied to a bank account? It is not obvious. Technologically this can be done even tomorrow as well as replacing paper money by electronic one. The question is «are your customers ready for that»?

«RCW»: You mentioned that today’s banks use card as an identification tool. What is card technology future form this perspective? Do you expect wide use of biometry features? Actually such projects have been already launched in Russia.

V. K.: The way of identification is a compromise between cost and safety. Meeting a friend we recognize him at once. We do not require his PIN or finger-print. Human identification tools are perfect and reliable thanks to very complicated interface and great capacity of our brains. Biometry is the way to simplify identification by raising cost and complication of interface. I think that this it right from industrial development perspective.

Computing capabilities become cheaper, and biometrical identification tools become more and more reliable. However, they are still too expensive for mass adoption.

As I mentioned before, the most popular way of card usage in Russia is cash withdrawal, and PIN is a quite reliable identification for this transaction type. So, consequently I do not see here any ground for wide usage of biometry on the Russian card market. I think that today’s projects deploying biometrical capabilities are of experimental rather that practical interest.

NovaCard pioneered card manufacturing in Russia since 1994. The manufacturing capacities are equipped with the latest US, Japanese and European equipment. The company produces and personalizes a wide range of cards, among them: bank cards, payment cards, (U)SIM-cards, scratch cards, discount, transportation, social, club, IDs and access control cards. Apart from manufacturing NovaCard provides card mailing services.

Back in 2004 NovaCard was the first Russian supplier certified by both international payment systems Visa and MasterCard for manufacturing and personalization card services. In 2005 MasterCard provided to NovaCard with Card Quality Management (CQM) certificate. In 2006 the company was approved to meet the requirements of ISO 9001-2000, currently it matches ISO 9001-2008. In 2007 NovaCard became the first certified American Express manufacturer in Eastern Europe. According to Nilson Report NovaCard is the No.1 bank card manufacturer in Eastern Europe (2008) and the 15-th worldwide by the number of cards shipped (and the 120th among Visa and MasterCard manufacturers).