Efficiency as a key to success (Cards’ World, №10, 2008)

Vladimir Krupnov, CEO of NovaCard, shares his opinion on the Russian car market and its future.

«Cards’ World»: Vladimir, what are the main developments that have occurred on the cards market during the previous year?

«V.K.»: The market has changed mostly from the quantity rather than quality point of view. Today we deal with the larger customers and much bigger orders. The quantities of cards we produce for the average Russian bank has become much higher. Just several years ago when a bank issued some 500,000-th card it was a milestone. One can recall a lot of ballyhoo in mass media, press-releases of international payment systems, special rewards etc. Today half a million order volume is an ordinary case for us.

It is an interesting fact that evaluating the market from the quantative standpoint (I mean the cards that are produced by all the market players together) we come to conclusion that the issue is growing very rapidly and this growth will continue in the nearest future. According to the Central Bank of Russia 130 Mln cards are now in circulation in Russia. We are quite sure to produce 40 Mln cards by the end of this year which makes up to 30% of the total market volume. Considering this, we may conclude that all Russian card manufacturers will produce as many cards this year as there are in circulation now.

Definitely the emission will not grow twice this year. The majority of cards in Russia are debit magstripe cards which are re-issued annually. And nevertheless the industrial indicators show quite good quantitative growth of the market.

«C.W.»: How was your business affected by the latest negative events on the world and Russian financial markets?

«V.K.»: Most of the bank cards in Russia are so-called «salary cards» which are used for the non-cash salary transfer. Even if the salaries volume decreases as a result of the financial crisis, it will not affect strongly the total amount of employees and cardholders.

«C.W.»: How did the market structure change in terms of quality?

«V.K.»: Regretfully, it did not significantly change. Every year we expect the big progress in smart cards issue in the banking sector. Anyway the share of EMV-cards is still very inconsiderable and amounts to 10%. Luckily this is not only Russia-specific. We follow the European way and the rates of EMV-migration in Russia are the same as they are in Europe. There are several Russian banks issuing mostly EMV-cards. The number of such banks will grow together with the share of smart cards. Also we witness the market need for contactless payment instruments such as MasterCard PayPass or Visa Wave. Today these technologies are still piloted and Russian banks are evaluating them. The international experience says that emerging markets are the most technology-sensitive.

«C.W.»: How do you estimate the role of so-called «social projects» role for the new card technologies, for example, contactless cards employment?

«V.K.»: Social projects really could become the market locomotive from the technological point of view: I see here big potential both in terms of volumes and new card technologies introduction. However, the situation on this market is not clear today. On the one hand, social cards have obviously proved to be the excellent instrument for solving the problems which regional and municipal authorities face. The best illustration of such a conclusion is the fact that in the regions where social cards are already issued they are a complete success. One could see the successful implementation of social cards in Moscow and Moscow Regions, Chelyabinsk, Novosibirsk, Vladivostok, Ufa. This year the social card project started in Krasnoyarsk, and 500,000 cards are already in circulation while the population of the city is less than one million people.

On the other hand, there is no any standard or unified technology for social cards in Russia. It interferes with state interests and even common sense. Very often lack of the standard slows the market development down. As a result the number of incompatible social card projects is growing and nobody thinks of how to transfer this conglomerate into the unified infrastructure in the future.

«C.W.»: So is the role of the existing social projects positive?

«V.K.»: Social projects arise not on somebody’s whim but as a result of the acute necessity of the regional and municipal authorities which has its unique specifics in each particular case. For instance, in Moscow the social card started as municipal transportation mean. The regional authorities can not and do not want to wait for any unified solution because it is unlikely to meet all their needs and requirements. This leads to the technological dissociation. At the same time social cards infrastructure is being built as well as culture of their usage. From this point of view even these technologically different social projects make a very positive impact on the market development. And despite all questions, errors, doubts and lack of standards the social cards market in Russia will develop further geographically, technologically and functionally. NovaCard alone produced more that a million social cards only this year.

«C.W.»: Did the Russian card market growth lead to the tender practice adoption?

«V.K.»: Certainly, the relations between banks and manufacturers changed. The first bank to place its card order as a result of open bid was the Saving Bank of Russia. Now all large players follow this example. In the social cards market segment the situation also changes for the better. This year the first open bid took place. Earlier despite all legal requirements «social» tenders were just the fictitious acts.

Several years ago such phenomenon as delivery of «grey» plastic cards happened in Russia very often. Now this practice is perceived as nonsense. Cards manufacturing makes only a very small part of bank’s expenses in card business – licensing, processing, personalization services, etc. cost incommensurably more. For many years banks did not take cards cost into account when calculating total costs. Today the issue volumes grow substantially and the price of the cards affects the efficiency of the business. The competition in the bank market increases, and operational efficiency becomes a key to success. That is why banks choose their cards suppliers more carefully now.

«C.W.»: What about the competition? Do the Chinese manufacturers grow their market share in Russia?

«V.K.»: Mostly we compete with the Chinese manufacturers in the mobile communication market which is more sensitive to SIM-card cost. Mentioning «Chinese manufacturers» I don’t mean «no name» companies. Most of leading world card providers already established their factories in China.

The bank card market on the contrary remains more local. Delivery terms and plastic quality are more important for the banks then for the telcos. The card is in some way the face of bank so the look of the plastic plays a significant role. Besides most of our bank customers want to get their cards very fast. The card made in China is certainly cheaper than the one made in Russia. But everything changes when you add the transportation costs and customs duties. That’s why most of the bank cards are produced by national or at least regional manufacturers.

Of course, we compete with Europe-based companies but our market shares not strongly vary year by year. There is enough space for all players while the market grows rapidly.

«C.W.»: Is it likely that the new players will appear on the market?

«V.K.»: In my opinion, it’s very unlikely. The market conditions are changing very dynamically. The prices and the most profitable market segments change quickly. It is quite difficult to make long-term plans to establish new companies. In the matter of fact in Europe we see the process of absorption of the small and average local card manufacturers by the large international companies.

«C.W.»: NovaCard delivers cards to the European customers. How do you compete with the European players?

«V.K.»: I can’t tell that we develop in the European market quickly, but I see certain prospects. There are still many local manufacturers in the European countries, however, their number decreases. The main reason of this is higher costs because of the higher level of salaries in Europe. Our costs are lower and this is our main competitive advantage.

«C.W.»: Nearly a year ago you mentioned that one of NovaCard goals is to become a national personalization services provider. How big is your progress in this direction?

«V.K.»: This part of our business has grown during the last year, perhaps, most dramatically. On the one hand, it is the general trend on the market when non-profile business processes and transferred to the third parties. On the other hand, personalization services were the strategic vector of NovaCard company development for the last several years and we have reached very good quality.

We understand that sooner or later there will be market saturation, and our production volumes will cease to grow. I expect that market will require magnetic stripe cards still long because of in-house development model adopted by the most Russian banks. Simply it is very convenient for the banks to use magstripe cards for the personalization. As soon as we adopt EMV the cost of personalization infrastructure increases significantly and the process itself becomes very complicated. That’s why banks readily transfer the personalization services to third-party bureaus.

Perhaps, in future card form-factor will change and once the manufacturing of a piece of plastic will become the «business of bygone days». But personalization of a chip located either in a piece of plastic or bracelet or even a key chain will not become easier. Consequently, I do not expect banks to require EMV-cards for personalization in the coming next years.