VLADIMIR KRUPNOV: "2011 — it is the very first year when Russian banks overtook telcos in terms of cards orders."

Gracing the cover of our October 2011 issue Vladimir Krupnov, CEO and founder of NovaCard Russia, shares his valuable opinion on plastic cards market in Russia, its technological, economic, political peculiarities.

«Russian Card World»: What are the most visible trends on the Russian cards market and, especially, in cards manufacturing business in 2011?

Vladimir Krupnov: 2011 is a record-breaking year in terms of quantity of cards manufactured and shipped to banks. Firstly, retail banking business growth has driven significantly our manufacturing throughput and, secondly, as it has always been after recession the demand has adjusted. I mean that banks have run out remnants of the plastic cards by the middle of 2010, and in the end of the previous year we witnessed banks’ “buying fever”. In some cases we even failed to explain to our customers that we had been unable urgently to fulfill their order for manufacturing because all others wanted to be served as urgently as they did. Regretfully, no one manufacturing facility is that elastic to be adapted for tenfold demand growth.

In these circumstances new players cropped up on the market straining the competition and driving the industry tremendously. For NovaCard this impact led to twofold cards (Visa, MasterCard, American Express) shipments growth in 2011 compared to 2010 numbers.

Market of mobile operators’ SIM-cards expands more smoothly. Russian mobile market is saturated and the main factor for consumption growth here is the high change rate making the whole SIM-cards market less sensitive to the economic conditions.

The market slice of the pre-paid scratch-cards used for mobile communications payments shrinks relentlessly. These types of cards are quickly becoming irrelevant because more convenient ways of payment are adopted – first of all, cash-in EFT POS terminals. At the same time, scratch-cards are popular in the neighboring with Russia countries where ‘Big Three’ operators (Beeline, MTS, MegaFon) drive their usage rates. Anyway, summing up two trends we have a negative result and a consequent slump in the rates of these cards manufacturing.

RCW: Last year you said that your planned throughput for 2011 – 50 million bank cards. Is it achievable?

V. K.: Well, the year has not yet come to the end, but judging by what has been fulfilled already and the current level of demand I expect that we shall exceed this plan. Generally speaking, in 2011 we for the first time faced the situation when banks ordered more cards than mobile operators. Booming demand for GSM cards which we witnessed 10 years ago is apparent now in the bank cards segment. By the way, what do 50 million cards mean for Russian reality? This is one card per every second adult inhabitant delivered by our company alone. And imagine how fast the market saturates as a whole!

RCW: What are the most prominent qualitative changes on the bank cards market?

V. K.: I am very pleased to mention that in 2011 retail banking segment progressed remarkably. The product orders of our customers can’t delude us: if earlier we shipped predominantly the elemental electronic use only cards like Maestro or Visa Electron, today we mainly deliver Classic category cards plus premium cards. Moreover, among our customers there are banks which ordered chiefly Gold cards.

This means that our market is replacing the salary cards model (when it is absolutely unimportant what sort of card the customer uses) with the market philosophy when the customer as attracted by the status and product financial options. I think this is the affect of payment infrastructure development: at last, retailers acknowledged cards as if not a very significant but a visible instrument.

One of the most advanced ways of customers’ motivating in cards business is co-branding. We can affirm that delivery of co-branded cards has continued to grow.

NovaСard is the leading manufacturer of the payment cards in the Eastern Europe. The Nilson report1 evaluates the company throughput in 2010 as 48.6 million cards, where 26.7 million are Visa and MasterCard cards.

RCW: Today so-called lifestyle co-branding is being widely adopted. It helps the customer to identify its belonging to any social group or niche. Does this type of cards make a considerable share in the whole cards output in Russia?

V.K.: Certainly, the most common in Russia is a co-branded bank-airline product. Then joint retailer-bank cards should be mentioned. Lifestyle cards such as cards for football club casuals, students’ cards, etc. began to appear on the market, but they are not numerous.

In my personal opinion, co-branding is a very promising direction for cards business growth and lately it has started to actively evolve. With the lapse of time there will appear ever more new various co-branding and lifestyle products.

It is feasible to also mention a peculiar Russian product. It is a card with Olympic symbols issued by the Saving Bank of Russia (Sberbank). It can be regarded as a lifestyle product aiming to augment interest to sports and fore coming Olympic Games in Sochi. Also Olympic Games has always been a site where Visa and its partners could test new payment technologies. I think Sochi 2014 will not be exclusion. In any case it is not technologically difficult to manufacture a card which ensures access to Olympic facilities, tickets purchase, public transportation ticketing. Certified products are in place and we are ready to employ these technologies.

RCW: Speaking of EMV segment, how fast has been its evolution?

V. K.: ‘Evolution’ is a very precise word in this case. The expected revolution has not yet happened. Yes, the growth of EMV in 2011 was more remarkable than in 2010. I explain it so: privileged and classic products make a bigger share in the bank’ cards portfolio, cards cost is not so critical and chip itself can become an element of prestige.

Recently, we have received several requests from our customers for more complicated cards that is an indirect evidence of the industry interest to the technologically advanced projects based on chip power. I am sure these projects will take sound position on the marketplace next year.

I am sure that until international payment systems requirements to banks which did not start EMV migration or started it only formally are relatively soft, until market growth rates make up fraud losses, until business-cases for EMV-cards are not evident, we will not witness EMV revolution.

From technological point of view it is interesting to point out that Russian banks also order dual interface cards and this market segment accrues. Although insignificant volumes this year we expect to see millions of dual interfaced cards next year.

RCW: Are there qualitative shifts in mobile communication segment?

V. K.: Well, I can barely distinguish them. For the last 5 years the main product here has been a SIM-module with 64K EEPROM while 128K or even 256K SIM-cards are typical in Europe. Unfortunately, GSM cards market has not advanced yet. Moreover, during crisis period we registered certain mobile operator’s rollback to 32K SIM-cards. In my opinion, this fact illustrates cost-saving necessity rather than whole industry rollback to the older generation technologies.

RCW: How do you explain the gap between Russian and European markets?

V. K.: This is intricate. I personally think that the reason for that is insufficient competition. Our operators still compete on basic fees and not on services options provided. Until market is less sensitive to service offerings than to fees nothing will change.

In Europe operators offer more advanced and diverse services which require more complicated cards.

RCW: Can we state that convergence of communication and payment technologies became a real business driver for the European Telecom operators?

V. K.: Hardly, today’s joint NFC-projects between banks and telcos carried out in several European countries are more like pilot projects than real business. I think that after these phases of testing and preparation are concluded the market will demonstrate readiness for these technologies.

RCW: Did you have to build up NovaCard production lines as a result of market growth in 2011?

V. K.: Our production facilities constantly develop. If your question is if twofold orders growth required twofold equipment enhancement, then the answer is, certainly, no. The production lines are simply loaded more than before.

But production facilities development does not turn out only a purchase and installation of new stereotyped equipment. Among European companies I would rate NovaCard as a premium quality manufacturer. I mean that we are able to deliver big number of cards per specified time as well as technologically and design sophisticated cards with excellent quality. For instance, we shipped 1.5 million cards with Olympic Games 2014 symbols in 2011. We employed a very complicated Visa Promotion 3-D effect technology. We are still the only company in the world able to put manufacturing of these cards into mass production.

We practice comprehensive approach to production expansion: from installation of new equipment to new technologies deployment, personnel training, quality control service tuning, new software products development for cards personalization and etc.

RCW: Did new technologies of card manufacturing appear in 2011?

V. K.: Well, we see a trend to complication of cards design primarily in banking industry. The card is a multilayer object 760 mkm thick. These layers can also be transparent creating a small volume which can be layer-by-layer coated with color getting smart “premium-quality” images. Recently, a 4-layer card has seemed complicated for us and now we have shipped 20-layer card! Apart from being attractive, this card should meet all standard requirements of payment systems for durability and endurance.

The amount of such orders for complicated products is growing and this pushes us to improve our production.

RCW: You mentioned that banks are ever more interested in contactless products and you are expecting million-worth orders. What are the perspectives of these technologies in the world and particularly in Russia? Will NFC technologies replace traditional bank cards?

V. K.: We can hardly speak about technologies replacement or technological revolution. Bank cards during their 60-year history did not replace cash though they carved out their own niche in payment transactions market. I can draw an analogy: traditional cards can be considered as an attack on “paper” money territory, and contactless technologies including NFC as an attempt to win a territory of coins. The main requirement to contactless payments is speed even at the expense of security.

I am sure contactless technologies will find its place in the sun. Why not yet? The reason is in that (as with traditional cards) we are very dependant on infrastructure for customers’ transactions. I expect that this market will grow slowly until proper acquiring infrastructure is built as the situation evolved with banking cards in Russia. Why am I so sure in long life of contactless payments? Because I see how the infrastructure for acquiring of these payments is being prepared. There are not many POS-terminals with built-in contactless readers installed, but all latest models of these devices are equipped with this reader or are contactless ready de facto (i.e. they may be updated with such reader very easily). Terminals without this function will disappear from the market sooner or later as imprinters did. The number of mobile phones with NFC chip is bigger and bigger and I think that in 2-3 years the majority of mobile phones will be shipped with NFC interface.

RCW: What drives contactless technologies in Russia?

V. K.: We have already shipped millions of contactless cards. But they are ordinary cards with Mifare interface used in transportation and ID-applications.

Anyway, the quantity of such cards in circulation in Russia confirms the fact that contactless infrastructure is growing and banks will appreciate it soon. Transportation applications can become the locomotive to jump start contactless payments in Russia faster than it happened in the banking sphere.

RCW: Are there any technical restrictions for contactless technologies roll-out?

V. K.: It is not a top secret that dual-interface cards which banks plan to become a main instrument for contactless payments can not still boast high level of reliability and security. This is because this type of products have long been “grey” - there were insufficient quantity of test cards and pilot projects were not carried out properly.

Luckily the technology matures and today’s dual-interface solutions become secure enough.

RCW: We do not see many successful projects in Russia where banks and telcos jointly collaborate in the sphere of payment solutions. Why is it so? Do you see perspectives here?

V. K.: Russia does not differ from Europe in this issue indeed. Yes, Europe declares many joint projects, but only few achieve result. More often bank and telco alliances break down. The reason for this is that banks and telco are more like competitors than partners in the sphere of small payments. It is most likely that a forth-coming adoption of a law on “The National Payment System” will only sharpen this competition. I am sure that successful collaboration of banking and telco industries is possible either with the help of the state resources or under economic incentives.

Here is the example to illustrate my idea. Considering NFC pilot zones we see the most successful one in Nice, France. The so-called NFC Village test-project for contactless payments was initiated by the city government itself and not by bank or a group of banks or a telcos. The city government was able to set such requirements to project participants that they were forced to negotiate and find the ways and terms of successful collaboration.

NFC in this case is a technological environment and none of the project participants can claim for this environment ownership or its rules change. And judging by other projects experience namely this kind of mutual claims lead to projects failure. If project participants negotiate the rules of mutual use of NFC environment and do not interfere in each others business the project has good future.

by "WORLD of CARDS", Analytical journal # 10 (October), 2011