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. Last Updated: 07/27/2016

Credit Card Business: Competition Mounts

Competition in the small Russian credit card business is reaching boiling point, with the big international card companies vying for monopolies and cost savings in what promises to be a major growth market.

The conflicts center on the parts of the business most credit card users never see but where much of the money is made - processing the receipts and signing up merchants.

"It's a microcosm of what's happening in the White House right now", said one Western credit card executive in Moscow. "It's all about controlling the cash flow".

Russia's major credit card issuers have set up their own receipt processing centers and are competing hard for dominance in the receipt processing business.

On one side is United Card Service and CredoBank, which control the processing of Visa receipts in Russia. On the other side, is Card Center, a newly formed consortium of nine Russian banks that generally services Europay International's Eurocard/MasterCard, the other major card chain.

Market leader American Express is not technically involved because it processes its own receipts and issues its own cards. The competition is over the other half of the market.

Visa and Europay are maneuvering into a situation where only one company in Russia, UCS for Visa and Card Center for Europay, can handle their receipts. This allows them to save money and at the same time to minimize fraud.

UCS has charged that Card Center cannot adequately process receipts, in an attempt to damage its reputation with merchants. Card Center has accused UCS of trying to establish a monopoly.

The arrangement is ungainly for the 500 to 600 merchants who take credit cards in Russia: Visa receipts have to be sent through UCS, Eurocard mostly goes through Card Center and American Express through American Express.

Elsewhere in Europe, court rulings have prohibited card companies from creating processing and issuing monopolies.

"They think they don't have to follow the same rules" in Eastern Europe and Russia, said Toby Mitchell, a former Visa executive in Europe who is now consulting for UCS.

Europay, which helped Card Center establish itself in May, acknowledges it is considering giving the company an exclusive. "Europay is prepared to consider an exclusive to the Russian banks for them to realize the investment that they've put forward", Europay press relations officer Richard Tischler said in an interview Thursday.

Visa, meanwhile, has brushed off Card Center in its bid to process receipts.

"Russian banks are becoming victims of the international payment system's global battles", said Mitchell.

At the root of the conflict is the competition for the Russian and Eastern Europe credit card business.

The market, estimated at $280 million, is insignificant when compared with world-wide turnover.

But it grew by an estimated 65 percent last year. With growth ebbing in much of the rest of the world, the region represents one of the best opportunities for credit card companies to expand.

How the situation is resolved will impact the structure of the growing domestic business, in which banks issue their own cards, and the extent to which Russia will integrate into the European financial network.

But solutions have been difficult because of the immaturity of the Russian financial system. In the short history of Western credit cards in Russia, the fraud ratios have become almost legendary.

Creating a viable card processor, which must also take responsibility for combating fraud, involves expenditures on technology by the card companies. So they want to keep the competition in the processing business to a minimum to keep their costs low.

This week, UCS announced it would restructure in an effort to break the deadlock. But its plan was seen by some observers as self-serving. It offered to take its Visa merchant business and put it into a company that would be owned by all the licensed Visa processors in Russia.

However, the only current licensed processor is CredoBank, which has a 40 percent stake in UCS.

Even as the company was extending its olive branch, its chairman couldn't resist throwing a barb at the competition.

"A whole number of banks has withdrawn from Card Center because it is a monopoly and they are not satisfying anyone", said Yuri Agapov, chairman of UCS.

Dmitry Alekhin, general director of Card Center, refused to respond to the charge, saying his company has been efficiently processing receipts.