Business-Case Found for the EMV ("Cards World, №4 2006)

Says Head of NovaCard company, Vladimir Krupnov. An expert estimation of the situation around the EMV-migration in Russia was given by him in an interview that we offer today for your attention.

“Cards World”: Why a process of the EMV-migration goes around the whole world so dissimilar? What facilitates this process? What hinders?

Vladimir Krupnov: EMV-migration in the long run, is not just a simple change of magnetic stripe-cards for chip-cards. A reconstruction of the infrastructure of enormous market, that is the question and, though, it is run under the initiative of the international payment systems, the cost of it is burdened into the shoulders of the banks-participants. To carry this cost just simply because someone had decided, that this would make better, the banks object. Let us recall the history of the EMV. The first workable specification version is dated by the year 2000; the main stimulus for migration at that moment, at least according to the statements of Visa International and MasterCard International, was reduction of the fraud level. A stimulus with a “minus” sign turned into forthcoming shift of liability for that fraud. However, neither this, nor that was and is not a business-case for each separate bank. As the result, there were attempts to create additional stimuli for the banks – price and technical stimuli. So far as the cost of the EMV-cards, according to the opinion of the international payment systems, went down too slowly - an unprecedented step was undertaken: for the first time in history, development of a card mask was entrusted to the third company - IBM began a development of a JCOP platform, which a few years ago was presented as a flag-captain of the EMV-industry. And what is the result? No at all. Firstly, by the moment the product was ready, international plastic-card manufacturers were already prepared to offer price-compatible native solutions. Secondly, self development of the EMV-specifications opened opportunities for creation of more advanced and currently interesting products. And at last, thirdly, JCOP did not solve the problem of the absence of universality in the EMV: specific incarnations from different vendors as ever required separate personalization profiles and etc.

I am not going to say that the efforts to promote EMV-products into the market are useless; no, they contribute to the development of the product range and cheapen the card price. In the same way, fraud reduction must not be signed off – experience of APACS and British banks gave enough prove that in this sense the EMV-platform is very efficient. I would like to underline another subject: for the launch of mass migration a real business-case is required, but there is none and can not be in the technology itself. Lasers were made for the military, but became a milestone for a multibillion industry of audio- and video recording. Felt-tip pen was invented so that astronauts could write in weightlessness but it is used by children all over the world. It happens more often – inventors of new technologies a priori never know what purpose it can be used for in future. To some extent, same happens and with the EMV.

“C.W.”: So was a business-case found for the EMV?

V.K.: In my opinion, it was. And only, because the process of the EMV-migration has moved off the dead-point in Europe. A key to success was the fact that banks began to realize the need for the implementation of CRM-systems and efficient risk management. Effective operation in a retail market deems possible only on condition that you gather information on your clients, divide the clients’ base into segments, can make targeted offers and manage your risks flexibly. What does it mean flexibly? It means that you continuously analyze the clients’ activity; you have a possibility to immediately change authorization limits, the size of a credit line and etc. The use of EMV-compatible cards provide for such opportunity. Certainly, the use of the EMV-compatible cards is not a sufficient condition for creation of an efficient risk management system, but the EMV is an extremely convenient instrument for implementation of it’s “clients’ part”. It is not less important, that in this case a client might know nothing about “negative” actions of the bank against himself but every time rejoice at pleasant surprises. He does not notice that bank on a certain reason reduced his an off-line authorization threshold, though he will praise in full the fact that the bank, having considered his regular payments of the golf-field rental charge, offers him a discount program in a specialized golf accessories shop.

“C.W.”: But the talk seems to go about evident facts, why did not then a business-case come up before?

V.K.: For that, there are not the less evident reasons. The technologies had yet to “grow” up to the business-case. Besides the talk goes not only about EMV-compatible cards themselves, but also about the EMV-specifications as they are. The latter, as I have already said, develop gradually, evolving new functional potentialities, which in their own turn open the banks new business-opportunities.

More over, the banks themselves were moving towards the technology, which was stipulated to a certain extent, by aggravation of competition outlined in the European market in the last few years.

“C.W.”: And what is the situation there in Russia? Have Russian banks, in your opinion, arrived at an understanding that they need to restructure their work with clients? Do they see a business-case in the EMV-technology?

V.K.: A Russian market of retail banking services is yet very young for a while. It evolves fast, though it has not yet reached the stage of quality competition. Basing on my personal experience, as a client I can say that presently the banks pay very little interest to those, who has already opened an account with them. Nowadays their main goal is to attract new clients - quantity raise.  At the same time, everyone understands that a stage of saturation is very near, one-two more years and the market will be divided. And only then the winner will be that, who knows how to derive maximum profit out of each and every client, who knows how to retain him, who understands how to manage risks and is technically ready to do that.

Today’s approaches of national banks to retail business are quite different, and to fancy the whole picture is very difficult. Everyone benefits from his own experience, faces his own specific problems. What is common for all nowadays is the need to solve immediate problems that directly influence the current business-parameters. More over, the banks very often due to its inborn conservatism, do not “notice” new technological solutions and wait until someone will test them and it would be possible to rely on some other’s experience. Luckily, there are those, who think seriously about the future and are capable of investing into technologies of tomorrow. These banks are not numerous, but I am sure that the others will catch up with them. Remember, who credited natural persons five years ago? A few banks only. But today there is hardly a bank that would not have this business.

“C.W.”: Do you bind up your own perspectives in the Russian market exactly with the EMV-migration? And does NovaCard have any large projects in the banking sector that are not tied in with the EMV-cards?

V.K.: At the moment, most of our today’s projects in the banking sector are tied in with the magnetic cards. We are a certified manufacturer of all types of Visa and MasterCard cards, including also chip-cards. More over, NovaCard is certified by international payment systems as a personalization bureau. Russian banks order with us both card printing and personalization. For a number of clients we produce ready for the delivery client’s packages – a card, activation guide, auxiliary materials and etc. Circulations of our banking products count millions of cards.

At the same time I can not say yet that we as an independent personalization bureau or even a manufacture of magnetic stripe-cards have reached in the market all that we wanted.

The reason for both this and that is the same. Banks are conservative; they are used to order cards abroad and personalize them in-house. Though, with the arrival of the EMV, the situation is changing. Personalization becomes a complicated and an expensive process, first of all, from the point of view of data preparation. Moreover, even having built up a personalization line for a certain single product, the banks are unable to adapt it quickly for the new product, let’s say for a card of another vendor. Such situation results, at least abroad in the reconstruction of the market of personalization services. From the one side, the largest banks avoid services of external personalization bureaus as, for example, the British MBNA does. The reason is purely economical, with the issuance of millions of cards the purchase, certification and service cost of its own personalization bureau is less than the service charges of the third companies. On the other side, smaller banks decide to outsource their personalization activity, which offers them more flexibility, spares unnecessary expenses and the headache and allows concentrating on functionalities that bring profit: development of new products, customer retention and etc. Considering the structure of the Russian market we can easily notice that the number of banks out of the second category evidently prevail, that is why, with the EMV we hold out our great hopes for the development of ‘NovaCard” business in the banking sector.

“C.W.”: The most popular argument against independent personalization bureaus is insufficient security and confidentiality. What can you comment on this? And does it not incommode NovaCard that it is not yet an international provider, but a private Russian company?

V.K.: It is an interesting question, and I would prefer to begin from its second part. Not a single international manufacturer of “plastics” relies solely upon its own power in the field of personalization. In those cases when the volumes are extremely large they arrange their own personalization bureau, in remaining cases they rely upon the partners. And the services of such partners do not in the least differ from those of the manufacturers’ themselves. Why? Simply because we don’t offer cards with the brand of NovaCard or anyone else’s. We do not invent our own personalization algorithms. We add nothing at all to what is stipulated today by the standards of the international payment systems. In this sense we just precisely follow the regulations of Visa and MasterCard where all the production and personalization processes of the cards bearing the logos of Visa and MasterCard are certified by these payment systems. We do not make cards better or worth than the others - we make it as prescribed. Then, where can we gain from? From our service charge, production time, flexibility of order and payment, accuracy of working with the customer – from only whatever is possible, but not from the product itself; which must be 100% standard compliant.

If we talk on security, it is ensured by procedures regulated by the payment systems. And respective certificates are enough prove that in our production these procedures are followed to letter. So if there is anything at all to be afraid of, that is only if we due to some other reason shall have these procedures violated. However, we are the least than whoever else interested in that. The bank in the worst case will not get its cards-order in time, though we shall loose our business. Nevertheless I reiterate – the banks are conservative, they got used to do everything by themselves; and only economical reasons can forced them to leave off such practice.

“C.W.”: Very often large banks set forth their own demands, on top of those required by the international payment systems. Did you happen to face it?

V.K.: Yes, we did. Of course, we work with the banks’ security services and try to do our best to make account of all their requirements. For one of our customers we had to convert to a certain extant our personalization bay, to tailor the data transfer and product delivery procedures to his requirements. Thus we have all the experience and are ready to advance towards the banks.

“C.W.”: Do you mean to say, that you are ready to find yourself in a situation when everyone comes to you with its own “coals”?

V.K.: Yes, this makes one of the functions of a large personalization bureau; otherwise it could not be able to work with the large customers. Even so, we also have to consider our own economical reasons if there is only a hundred cards that is in question - we shall hardly convert the production. However, it is not necessary. “Ones own coals”, as you said, carry, in fact, only large customers.

“C.W.”: And the last question: Are you waiting for the boom of the EMV-migration in the Russian market?

V.K.: Foretelling is ungrateful. Besides a development of the genuine banking services there are, in my opinion, some other factors that can urge the banks to use chip technologies. Nowadays smart-cards are not all the way anything but the EMV and are not only payment applications. For example, social project cards which become more and more numerous in our country are to be better build on exactly the chip technology, since in this case tailoring data “for a client” is also required. I am not excluding the possibility that the banking market might probability get an outside push, external stimuli will affect it. Anyway the process of “smartization” of the card market is already irreversible; and I am quite sure that our business, related to smart-technologies, will have a stead grow.