In the Pocket of Russia (“Expert” No 16, April 24-30, 2006)

Without small gentry complexes

How can a middle regional business reach a national orbit? Very simple! You should not quarrel with your bread and butter, love a local consumer and remember the world market. Experience of Povolzhye companies is the right testimony to this.

In the Pocket of Russia

Vladimir Krupnov, Director of “NovaCard” - a Nizhny Novgorod company – lives in a railway station, in fact in his own. A few years ago he bought a historic relic – a forsaken and decaying building of a Romodanovsky railway station. He turned it into a factory, office and an apartment altogether.

In the evening the office of “NovaCard” looks like a castle out of a fairy tail. All around are empty streets with forsaken production buildings. Taxi drivers refuse to enter this area. And suddenly you see something that is well illuminated surrounded by a graceful forged fence. The gates open by itself and a car slowly moves out. Inside, the building resembles more a Hollywood decorations than a fairy tail. A voice from behind an armoured glass demands to submit documents, biometric parameters are taken and one by one we enter the lock, press palms to a special screen. And at last, a green lamp lights up - “Access Granted”.

The owner of the castle – a physicist by education – earned some money on banks automation in the early 90th and via his immigrated to the US colleague-physicists, managed to buy equipment for personalization of banking cards. Using this machinery, the company of Vladimir Krupnov, one of the first in Russia, started to produce cards for the two payment systems: “Golden Crown” and “Union Card”. Nowadays “NovaCard”, with a turnover of about 35 million of US Dollars, is the leader among the Russian manufacturers of banking cards, SIM cards and prepaid cards (scratch cards) for mobile phone operators.

“Expert”: Vladimir, you are hard to be reached, whom are you hiding from?

V.K.: “This place is as if charmed. In the last century Nizhny Novgorod was nick-named “a Pocket of Russia” because here was a cross point of two trade routs: one from West to East and the other from North to South, water ways and a railway crossed. Here were trade and money. And around the Romodanovsky or plainly Kazansky station was the most boiling point in Nizhny - a river port and a railway station. Later on, this branch of the railway died and the life around it died too. But immense energy of meetings, partings and sympathy feelings remained here. And it is also one of the most beautiful buildings of Nizhny Novgorod. I could not cope with the thought that it would be raised to the ground as it was planned at that time by the city administration. Thus, we were left somewhat aside from the city business centre.

If we are going to speak about the building’s “stuffing”, it means that security is the basis of our business. About one million plastic cards are produced daily in this plant. Many of them are already personalized, and it means just virtual money. We build our security following Visa and MasterCard requirements. At the beginning it was hard to make international payment systems even to talk to us – so strong was a mistrust of Russia. Later on they had sent us a Talmud of technical requirements. We applied to many companies for building for us a security system that would conform to those requirements. But refusal waited for us everywhere – no one simply ever knew how to do that, as there were no precedents in Russia. At last we reached an agreement with the company that designed a security system for the Central Bank. Together we invented something and thought something up and as the result we passed certification without any comments. Today we have a full set of certificates for the cards of all types and for personalization from both payment systems.

“Expert”: Are your cards purchased because they are cheaper than the imported?

V.K.: Sure, such is the market law. Customs tax for a ready made card is 20 percent, for components – 5 to 10, apart from that the components cost cheaper. But the price is not what is the mostly important. Import logistics is very sluggish; one should order big lots and send orders long beforehand. Making card orders on the same customs territory radically spares not only money but time. That is why in all the countries this market is local.

We are unable to produce much faster, this is practically impossible, as the Russian and foreign companies follow the same standards and technologies. But a preparation stage - settling of technical arrangements - takes too much time if working with the foreign companies. We have this stage much shorter, because we speak the same language - Russian. And what else, we take much efforts keeping in mind that this is our client and we must fight for him. Due to this we win at least 2-3 weeks. Thought import share is still very high – around one half.

“Expert”: Why an import share is so high?

V.K.: There are not many companies in Russia that conform to the world standards; you can calculate them on fingers. Nowadays there are only two more companies – certified supplies of the international payment systems. Our business is not large; the market is not so big as to be interested to a serious investor. Though now “AFK-System” shows interest to our market, it will build up a plant together with Germans.

“Expert”: What can you forestall Russian competitors?

V.K.: Firstly, we have a full set of Visa and MasterCard certificates for production and personalization of all types of cards. Secondly, our solutions are based on an open platform. This is attractive to a client. You see, if a customer uses a unique solution, he sits on the supplier as if on a needle, depending on it completely. But in any way, Russian competitors are the companies of a very high level. We have fair competition with them, “interclub” relationship. But competitors that are unpleasant to us – South-East Asian cards with a “gray” customs permit.

“Expert”: This year you substantially intend to increase your market share - two and half-three times? What way and at who’s expense it might happen?

V.K.: By substitution of import. We hold seminars for the banks show our production and persuade them of co-operation benefits. We participate in the parties held by Visa and MasterCard, they get used to us. But banking business is in its core very inert and conservative. Despite of the benefits the banks take long time to change. That is why the changes in the market are very sluggish. But, in my opinion, the banks ripened for the changes and this year they will trust the national suppliers, at least partially. Any way this year is expected to be very interesting for the banking card manufacturers. According to my estimation there will be produced as many cards as have been issued for the last ten years – about 35 million. This is the beginning of an explosive rise of the market which in fact has not yet started to rise as it should to. There are only 30-35 million banking cards in Russia, when in America with a comparable size of population – one billion. There is still a perspective to rise for at least another ten years.

“Expert”: You produce SIM-cards for mobile operators. What will happen in this market?

V.K.: This market has already passed its fast developing stage; outstanding years were 2003, 2004 and 2005. Penetration is already very deep – around seventy per cent throughout Russia and all of a hundred in Moscow. Thus the rise should hardly increase its tempo. Last year there were produced from sixty to seventy million of brand new SIM-cards, this year there will be as many. For the two years: one hundred twenty-one hundred forty million cards, this equals the whole population of Russia. That is why migration of manufacturers from the SIM into the banking sphere is inevitable. And, of course, there will be new players coming.

“Expert”: Will you have to look then for a new occupation, you do not like to do what everyone does, do you?

V.K.: We are all the time looking for new occupations to ourselves. Recently we resorted to banking cards with chips instead of a magnetic band. These are cards of a new standard developed by EuroPay, Visa and MasterCard payment systems. In Europe transition to chip-cards goes very quickly, because its security level is a lot higher than that of the common cards. With them additional services are available: one chip card can be used for payments in shops, getting discounts, payments for transit in transport. In France chip cards are used for identification in medical institutions. Little-by-little such cards begin to be issued also and by Russian banks. What is still complicated that social cards containing medical or transit application are normally issued within the framework of state programs. It is very difficult to become a supplier to this solution. There is another direction – discount cards. Or co-branded cards. Judging by its volumes this is neither banking nor communication, but this market counts already millions of cards. This is the third in importance direction for us.