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The insolvency of the Russian state in August 1998 generated a wave of bankruptcies of domestic banks and a panic among their clients. The wisest citizens hurried to withdraw money from their accounts in problem banks with the help of cards, making purchases and obtaining cash from the cash machines. However, they failed to release their intention in full.
On August 17 VISA International prohibited operations for obtaining cash from automated teller machines with Russian cards, irrespective of the real financial position of their issuers. It was suggested to Russian member banks that they should stop internal inter-bank operations for cash withdrawal. The clients of Inkombank, SBS-Agro, MENATEP, Rossiisky Kredit, Imperial and many other authoritative banks instantly turned from the proud holders of cards accepted throughout the world into the holders of worthless pieces of plastic. The shock was terrible. Many trade outlets, without going into details, refused to accept cards all together.
It was only on October 28, 1998 that VISA International resumed inter-bank cash dispensing operations in Russia.

Giants in a Crisis State

In the conditions of the crisis both VISA international and Europay tried to keep liquidity without losing the Russian market at the same time. Within a short period of time, they lost the main Russian issuers, and their far-going plans became quite distant.
Europay and VISA had to freeze actually at once the cards of Imperial, Inkombank and MENATEP. Moreover, they blocked the cards of the latter two banks on their request. The shaky position of Inkombank actually crossed out the implementation of the COPAC project. The problems of UNEXIMBANK, a payment agent of the largest processing company UCS, considerably complicated settlements. On September 25 Europay blocked the banking code of UNEXIMBANK. As a result, UCS suspended operations for servicing Eurocard/MasterCard and Cirrus/Maestro cards. Early in October Rosbank became a payment agent of UCS and most Russian trade and service outlets accepting VISA international Cards returned to their normal regime of work. The bank Slavyansky began to service settlements within the systems Diners Club and JCB, and Dialogue bank and Elbim-bank began to service settlements within Europay system. As time showed, this choice was not successful. Later Avtobank, Sobinbank and Expobank replaced them.
The problems of Europay did not end with this: SBS-Agro bank that collapsed had been its settlement bank for internal Russian transactions (Citibank-Moskva had been the settlement bank of VISA and American Express, and Imperial had been the settlement bank of Diners Club). For one more year Europay had to experience all the difficulties of effecting settlements through the dying bank until it decided to get this function back to its Midland Bank.

Fierce Competition Goes On

No sooner had the curses of the clients of collapsed banks died away, when the banks, which had survived, began to divide the market. They were not ashamed of dumping policies in the acquiring business, and made all possible efforts to ensure the uninterrupted servicing of card accounts. They were also busy expanding additional services (the issue of insurance policy certificates and various discount cards), and introduced round-the-clock consulting of clients and additional services like account management by telephone. However, some of the giants that disappeared managed to transfer business to their legal successors in the card business (MENATEP St. Petersburg, Impexbank, 1 O.V.K., Rosbank) and so, their clients could not expect much from them.
International payment systems also rushed to make up for what had been lost. VISA International and Europay tried to capture the Russian plastic money market by admitting new members. A record number of Russian banks (23) became VISA members in October 1998. They included such banks as Petrokommerts, MENATEP St. Petersburg, Impexbank and Bank of Austria. At the same time Vneshtorgbank, Garanti bank, GUTA-bank and Sobinbank received the status of Europay principal members. Expobank and the Federal Bank of Reconstruction and Development received the status of affiliated members. In the process, the division between VISA and Europay banks became more pronounced than before the crisis. Due to financial considerations, the issuers had to give preference to one payment system only.
By the results of 1998 the volume of the issuance of Europay cards (about 1.6 million cards) was larger than that of VISA (over 1.2 million cards) but expenses for them were considerably lower. VISA expenses amounted to almost $1.2 billion while the expenses of Europay did not exceed $800 million.

Omnipresent Sberbank

Sberbank’s card operations were neither good nor bad for a long time. However, after the August 1998 it actually became the sole large stable bank. The crisis of major banks’ card programs, the blocking of Russian cards by international payment systems, and also definite steps by the government and the Central Bank of Russia (the transfer of accounts from the problematic big six banks) re-distributed clients in favour of Sberbank.
As a result, Sberbank of Russia became the largest issuer of plastic cards in Russia. As at 1st May 2000, 1.725 million cards were issued. International payment systems accounted for the bulk of cards issued by Sberbank: over 45,000 VISA cards and over 714,000 Eurocard/MasterCard cards. The number of AS SBERKART cards issued by Sberbank equalled 615,000.

The Roads of Survivors

The crisis postponed until the distant future the implementation of many local projects of both international and Russian payment systems, and the creation of the national card payment system, which had been discussed for a long time. Among the Russian systems, the crisis, perhaps, affected least of all Zolotaya Korona (it ran into difficulties back in 1995 due to the collapse of the Siberian settlement merchant bank and largely worked with small regional banks), and Union Bank. The latter, however, after recovering from the 1998 crisis, was drawn into a card fraud scandal and was no better off than at the start in international card processing.
Against the background of the suffering rival, STB Card became more active and rushed to capture anew the market and produce new projects. In particular, its subsidiary United Settlement System (ORS) and Europay signed an agreement on introducing in Russia a chip project based on Maestro cards (one of European brands). The fate of Most-bank and its processing company was put into question. Vneshtorgbank formalised a deal for acquiring the 100% package of Most-bank shares and simultaneously got 50% of Multikarta. The other 50% had been earlier transferred to the structures integrated into Most-bank. So far, it is unclear what will be the fate of the second international card processing company after UCS.

The Issue of Platinum Cards

After the Russian players, who had suffered from the 1998 crisis, left the market, the subsidiaries of foreign banks, in particular, Bank Austria and Raiffeisenbank became active on it. With such a support behind them, they looked very attractive for new Russians wishing to acquire reliable cards.
In order not to lose well-to-do clients, a number of domestic banks decided to issue an exclusive and truly credit product – VISA Platinum. Avtobank, Alfa-bank, Impexbank and Bank Moskvy were the first to embark on this road.

Electron and Diners Club

However, few Russians and banks can afford expensive cards. The other operators prefer debit prod-ucts and salary payment projects. Thus, Electron cards account for 88 per cent of Russian VISA cards. At the same time, salary payment projects account for about 90 per cent of the Russian card business.
Not only Russian but also international payment systems place their emphasis on mass clients in order to expand business. Diners Club which has issued only 4,000 cards in Russia has decided to make a joint product – Diners ClubSTB Card, which is also designed for salary payment projects.

Modernisation of Settlements System in Russia

Frequent interruptions in the system of carrying out and receiving payments, conditioned by the banks’ financial difficulties, compelled many stores to give up plastic card settlements all together. The loss of the network and the reduction of the activity of its participants, naturally, could not but worry the payments system.
Therefore, it is not surprising that VISA, as well as its main rival Europay, began to think seriously over the modernisation of the system of settlements in Russia and took a number of extraordinary steps. In summer 1999 VISA held a large-scale marketing campaign under the slogan “You’ll Be Lucky With Visa”, including a lottery for cardholders and a special system of incentives for servicing outlets. Apart from that, VISA International founded a new servicing company in Russia designed to service card payments at trade outlets (acquiring) while Europay proposed to Russian banks to sign a letter of intent to create a non-exclusive united acquiring company to offer the services of the payment system to traders. On the one hand, the banks seem to deprive them of their main business that yields reve-nues. On the other hand, it has been promised that the issuers will be able to become the companies’ stockholders.
However, these are already the latest events and we shall follow them in the mass media.

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