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. Last Updated: 07/27/2016

A Terminal Situation

MTA Moscow woman making a payment at an electronic terminal, the fastest growing segment of Russia’s instant payment market. Terminal payments shot up from 26 percent of all instant transactions in 2006 to 52 percent last year.

Roughly $10 billion in cell phone and consumer loan payments passed through Russia’s electronic terminals last year, but the market is facing a serious shake-up. At a minimum, hundreds of small players will be squeezed out, while new regulations could end up bringing the entire industry to a halt.

Moscow businessman Alexei’s workday begins at 6:30 a.m. and ends after midnight. He bought his first payment terminal two years ago and now owns 25, located mostly in the city’s outer residential districts. He pays 3,000 to 5,000 rubles ($95 to $160) per month to rent the space for each machine, which brings an average profit of 3,000 to 5,000 rubles.

“Everything depends on the location, on how it’s placed and the rent. On average, each spot becomes profitable in two to five months,” said Alexei, who did not want his last name published.

“I work alone. I’m the owner, the mechanic, the cash collector, the accountant, the lawyer and the chief executive — all in one,” he said. “My car always has a drill, a laptop and two packs of moist napkins to wipe the screens.”

Alexei said the vast majority of his competitors were “honest workaholics” like him.

A colleague from Tyumen, Anton, has been in the business four years. Initially he accepted telephone payments at the cash registers in his DVD stores. When he started getting as many as 100 payments a day, he bought a terminal and had it installed in a neighboring grocery store. He now owns 30 machines with monthly revenue of up to 3 million rubles ($95,500).

Electronic terminals are the fastest growing segment of Russia’s instant payment market. While there are no exact statistics, the National Association of Electronic Trade Participants, or the NAETP, estimates that from 2006 to 2008 the percentage of payments made through terminals rose to 52 percent, from 26 percent, of all instant transactions, a market that almost doubled over the same period to 536 billion rubles ($17 billion) per year.

In the first half of 2009, the share of payments through terminals rose to 55 percent of the market, or 164 billion rubles.

No one knows exactly how many electronic payment systems, or EPS, have their own processing capabilities. It’s no fewer than 15, said Yury Maltsev, president of Eleksnet, one of the founders of the country’s payment terminals market. Boris Kim, chairman of the NAETP’s payment systems and banking committee, put the figure at about 20.

A Cash Country

Eleksnet is considered the trailblazer of Russia’s payment systems market. The company was founded in 2000 by Maltsev, a former director of the Central Bank’s methodology and computations department; Sergei Kuzin, founder of the UnionCard payment system; Nikolai Redko, head of Mezhbankovsky Finansovy Dom; and Yury Lokottsov, Redko’s deputy.

“The idea came simply enough. Making cell phone payments with scratch-off cards was inconvenient. Kudos for the terminals goes mostly to Kuzin. It was his idea,” Maltsev said.

“His company happened to have a terminal lying around, an old thing from some exhibition,” he said. “It was a foreign-made informational kiosk, but it could accept card payments. There were terminals on the market then, but they were mostly used to print receipts.”

The group bought their first shipment of four used terminals from German company Wincor Nixdorf at a trade show. The machines had just one function: accepting bankcards for mobile phone payments. In February 2001, Eleksnet installed its first machines in the Moscow offices of Mobile TeleSystems and Beeline; in April they began putting them in Ramstore malls.

The early results “weren’t spectacular,” Maltsev said. “We were covering costs, but you can’t build a big business on those sorts of operations.

“Russia, at the end of the day, is a cash country,” he said. We’re not used to paying with cards. I’ve seen people take out cash at an ATM and then stick the money into a terminal, even though you can make the same payments commission-free at the bank’s machine.”

Ultimately, the company decided to buy several imported models that accepted cash. “The first cash-in terminal was installed in March 2002 at the Tishinka shopping mall” in central Moscow, Maltsev recalled. “The volumes, compared with our cards business, rose by several times in the first month, from 20,000 rubles to 80,000 rubles. It was a complete surprise. We’d been debating whether Russians would be willing to stick their hard-earned cash into some iron box, and whether it would even work.”

“In 2004, scratch-off cards began to fall out of favor as it became easier to make payments,” said Vladimir Lopatin, chief executive of payments company OSMP. “Mobile phone operators realized that working with payment terminals would be roughly twice as profitable.”

The lion’s share of instant payments — 84 percent — are still made to cell phone companies.

“In August 2005, we received our first 100 terminals, which cost $4,000 apiece, and they were bought up by agents in four days,” Lopatin said. “The next 40 terminals were sold in a week, and the third shipment went just as quickly.”

The biggest players on the instant payments market are OSMP, with a share of about 36 percent, Kiberplat, with 25 percent, and E-port, with 13 percent, according to the NAETP.

On a Roll

The NAETP estimates that there are roughly 200,000 payment terminals in Russia, the vast majority of which operate on the so-called agent model.

A White Crow in a Dark Flock

The Eleksnet payment system works on the banking model, rather than the agent model. The group includes two key companies: Moskliringtsentr, which processes and clears payments, signs agreements with service providers and rents terminals, and Eleksnet, which owns the terminals and manages the group.

Eleksnet also bears the costs for the terminals, which it produces, development of the network, and management of the business, including cash removal to Central Bank standards, and renting space for the terminals. On the plus side, however, it doesn’t have to split the commissions with anyone.

The majority of the company’s payments — 63 percent — are to banks to pay off loans and replenish card accounts. They recently increased their up-front commission to 1.9 percent, from 1.5 percent, although that’s still much less than the charge for cell phone payments. For the Big Three — MTS, VimpelCom and MegaFon — the charge is 5.98 percent.

But the turnover on bank accounts is also much higher, with an average payment of 3,000 rubles, Eleksnet president Yury Maltsev said. His company’s overall average is 544 rubles.

— Vedomosti

Under the model, an entrepreneur buys a terminal, installs and services it, and pays rent for the space — all from his own pocket. “About 20 percent of the terminals belong to big chains [with more than 120 machines], the rest are owned by small and midsize chains,” said Alexander Shirokovskikh-Smirnov, chairman of the National Association of Electronic Trade Market Participants, or NAETMP.

The terminal owner signs a contract with an electronic payment system, which takes care of the technical support, processing, signing of contracts with service providers and payments to them. The EPS opens a dedicated transfer account for the agent, who then makes an advance payment and can then collect payments for up to that sum.

When the agent’s balance reaches zero — or when an overdraft limit is hit, if the agreement allows — the terminal automatically disconnects from the EPS.

But the payments work in real time because the EPS also works on a prepayment basis, making an advance to its service providers. Because the provider has already been paid, and the new money just has to be credited to the payer’s account.

“The E-port system has about 5,000 agents, more than half of which are individual entrepreneurs,” said Alexei Nyanenko, the group’s chief executive.

Lopatin said his OSMP had 2,000 agents and around 8,000 subagents, or agents of agents. More than half of them are individuals, he said.

Every terminal in Moscow requires operating funds equal to about three days of transactions. In the regions, where revenue is lower, six days of transactions is enough, said Alexander Mikhalchuk, owner of a Moscow chain with 500 terminals. In some cases, agents can borrow from the EPS, or more accurately, from the payment system’s bank.

For example, OSMP agents have to pay interest of 24 percent to 25 percent for overdrafts at First Processing Bank. According to the NAETP, terminal owners borrow at an average rate of 25 percent.

Anton, the Tyumen businessman, said he preferred to get by with his own funds. “I need to keep at least 300,000 rubles on hand,” he said. “The optimal level of operating funds is 10,000 rubles per terminal.”

Lopatin said owners’ profit was about 6 percent of revenue and comes from two sources: An up-front charge of about 4.5 percent to 5 percent, and a commission from the provider of about 1.5 percent, which is split between the EPS and the agent. Mikhalchuk said the EPS gives 70 percent to 80 percent of the provider’s commissions to the agent.

As of July 1, agents were making an average of 8.25 percent through both commissions — 7 percent from the consumer, and about 0.25 percent from the provider (with another 0.25 percent going to the EPS), according to the NAETP.

The EPS operators make most of their money from service providers’ commissions. “The low margin — about 0.3 percent of revenue — is made up for by the huge volumes,” said Anna Zaitseva, an analyst at Finam Management. “In the first half, OSMP, for example, might have taken in 320 million rubles from payment processing with a profit of 150 million rubles.”

The EPS companies also make money by lending to agents, earning about 830 rubles per month from each terminal, according to NAETP data.

Balancing Greed, Caution

“About 70 percent of this market is connected one way or another with illegal cash operations,” said an executive from one of the payment system companies that works with agents. “But the percentage of the turnover varies, from several percent to several dozen percent. It all depends on what’s stronger: greed or caution.”

After removing the cash from the machine, the agent sells it for money on an account plus interest from a shell company, which buys the rubles under a dummy agreement. An owner of one Moscow chain said you could make a return of 2.5 percent selling cash wholesale.

“According to people who work in the business, at least one-third of the money doesn’t end up as part of the official revenue. It’s used to pay salaries under the table,” said Pavel Medvedev, a member on the State Duma’s Financial Markets Committee.

“Cashing-out using these payment terminals is high-tech. You can tell it’s being done because of the expensive rent, which has gotten so high that you could never pay it except by selling cash. They pay up to 50,000 rubles a month for the space,” said Maltsev, of Eleksnet.

According to NAETP data, more than 15 percent of transactions are commission-free.

Online forums for terminal owners are abuzz with discussion about whether there’s any economic sense in offering zero-percent commissions — other than for illegal cash transactions. The exceptions, of course, are if the goal is to promote a new spot or push out a competitor, or if the terminal is placed in a store owned by the same person.

These cash-gathering schemes require considerable organization, since you can’t collect much from a dozen terminals.

A Promising Market

The NAETP estimates that the market for utilities payments is an annual 1.7 trillion rubles ($54 billion), of which just 1 billion rubles is paid electronically. Airplane and train tickets are another 328 billion rubles, with just 200 million rubles worth being bought electronically. Consumer loan payments are worth 625 billion rubles, with just 25 billion rubles paid electronically.

— Vedomosti

“The EPS has to be completely legal, since it does business with the service providers. So do the companies that own all of the terminals and the companies renting the space the terminals are on. But around them, you’ll start to see plenty of fly-by-night firms, which operate by subletting the terminals and space,” said one market source.

“This scheme is easy to uncover if the bank servicing the agent follows the law and Central Bank regulations,” disagreed Kim, of the NAETP. “I mean, when a bank opens an account, it has to find out what the client’s main business is, and it sees where the payments are going.”

The chairman of one of Russia’s 200 largest banks said that if the transaction is small enough, there’s no need to raise questions.

“Under the law on money laundering, if a one-time transaction is less than 600,000 rubles, the bank has no formal pretense to ask questions or relay concerns to the Federal Financial Monitoring Service,” he said. “But we’re pretty quick to close agents’ accounts if we don’t like how active they are. Some firm starts paying for their building materials, renovation work, goods (sometimes even beer), and the money immediately goes to the processing bank of some payment system. You don’t have to be an investigator to know what they’re up to.”

“If there’s a team doing this, they’ll all be caught quickly,” agreed Anton, the Tyumen terminal owner. “Illegal cash conversions in our business are tough to hide.”

Representatives of the Interior Ministry’s economic crimes department and the Federal Financial Monitoring Service declined comment for this article.

The Good Days Gone?

As of July 1, terminal owners had an average return on assets of 120 percent, while a machine costing 75,000 rubles typically broke even within 10 months, according to the NAETP. Taking into account amortization, the figures fall to 87 percent and 14 months, respectively.

With amortization, the business has an operating margin of 33 percent.

Despite the impressive figures, terminal owners complain that the business isn’t what it used to be.

“Three and a half years ago, we bought two terminals from OSMP that were installed in office centers. They paid for themselves in two months, and all investments, including operating capital, were covered in three,” Mikhalchuk said. “There weren’t many terminals on the market then, and ours were generating a lot of revenue — 30,000 rubles per day — but the rent was lower, about 3,000 rubles to 5,000 rubles.”

Mikhalchuk’s company now has 500 terminals, located mostly in grocery chains and office centers. The average rent is 10,500 rubles per month — 17,500 rubles for its exclusive agreements with big chains — with revenue of 380,000 rubles.

He declined to disclose financial results, but he said he expected to break even on his latest 40 terminals — which cost a combined 3 million rubles — by the end of the year.

“Just try to find a profitable place to stick a terminal. It’s impossible,” fumed Anton. “You’re going to be paying so much in rent that you won’t see a cent. A store won’t take a terminal for less than 4,000 rubles per month, and it can go as high as 20,000.”

As a result, Anton said, he’s left with no more than 150,000 rubles, an average of 5,000 rubles per location after rent, salaries and gasoline.

Four years ago, the Tyumen businessman was paying just 1,500 to 2,000 rubles in rent, and expenses were covered “literally within a half year.” Now, when buying a new terminal for 75,000 rubles, Anton isn’t hoping to break even this year.

The terminal owners only have themselves to blame for the soaring rent. Competitors keep an eye on lucrative locations and offer to pay much higher rents. According to NAETP calculations, to make 3,000 rubles profit (after amortization) at a terminal rented for 15,000 to 20,000 rubles, you would need revenue of 310,000 rubles and an average up-front commission of 7 percent.

“The low-hanging fruit is gone, and the competition is insane. The market is oversaturated and heading toward stagnation,” Anton said. He estimated that in the past 18 months his revenue at each terminal has fallen 30 percent.

And that’s hardly a surprise. There are at least 25,000 more terminals since the start of the year, according to the NAETP. The average profit per terminal as of July 1 was 5,443 rubles per month, or 7,527 rubles without taking into account amortization.

“The only place where the average turnover isn’t falling are spots where you have an exclusive agreement, and you have to pay the property owner extra for that,” Mikhalchuk said. “You used to have to run around expanding your network. Now, I wouldn’t even start such a business.”

Nonetheless, it’s still a fairly profitable profession — the danger is coming from a different direction.

The Regulation Begins

The state decided to clean up the industry with a law that will take effect Jan. 1. Under the changes, owners of all non-bank payment terminals will need to equip them with tamper-proof technology that monitors and records all transactions. Under the rules, terminals will need to produce the electronic equivalent of a cash register’s receipt tape, which tax officials can then compare to owners’ daily accounting for transactions at each machine.

If a terminal already has an acceptable printer, the owner can simply buy a less expensive upgrade kit. But only certified service centers will be allowed to renovate or work on the terminals.

As a result, a service agreement will need to be signed for each terminal so the owner can provide the required documents to tax officials.

Terminal owners say the state’s understandable desire for more oversight comes fraught with difficulties, especially a sharp rise in expenses. OSMP says the new devices will cost 28,000 rubles to 40,000 rubles, plus service costs of 1,000 rubles per month.

Terminal owner Mikhalchuk said he was going to get a 10 million ruble loan, at 23 percent to 24 percent interest, to upgrade. “I need upgrade kits, which cost an average of 17,000 rubles,” he said. “The rest of the money will go toward setting up my own certified service center. About 20 percent of the terminals will become unprofitable.”

Shirokovskikh-Smirnov, of the NAETMP, was even more categorical. “About one-third of the terminals will stop working. The changes will shift the market in favor of the big players — the little chains will be worth peanuts by New Year’s.”

But hard times are ahead for the bigger companies, as well. Since many terminal owners won’t have time to install the new equipment and get it registered by Jan. 1, they’ll have to switch off many machines to avoid being fined.

One dealer said there was a line of up to two months to buy the new equipment. So far only three makers have been certified to provide the transaction registers: St. Petersburg firm Iskra and two Moscow companies, Atola and Shtrikh-M.

“We produce several thousand of these registry devices for terminals per year,” said Igor Volfson, supplies chief at Iskra. He said the company could provide “tens of thousands of devices per month, no problem,” but that “terminal owners are waiting until the last minute, and if they all hold out until November or December, they’re in real danger of running out of time.”

The Federal Tax Service did not respond to a request for comment. But a source in the service said terminals without the electronic registers would be banned, and that the tighter oversight could very well reshape the market.

“Some companies won’t have time to modernize simply because they’ll be put at the end of the line,” he said.

The Big Payment Systems

Company / Processing BankOwnersVolume of H1 terminal transactions (billions of rubles)Number of terminalsNumber of services
OSMP / 1st ProcessingOE Investments (100%)*94About 87,000750
Eleksnet / MoskliringtsentrMint Capital (37.5%), Balderton (12.5%), Eleksnet management20.72,814***764
E-port / 1st ProcessingOE Investments (100%)12.2About 28,500750
Kiberplat / PlatinaUndisclosed**UndisclosedAbout 100,000†600

*Digital Sky Technologies (owned by Yury Milner, Grigory Finger, Alisher Usmanov) has a blocking stake. The rest is owned by the management of OSMP and E-Port.

**According to the SPARK database, Kiberplat is co-owned by Reskameni Properti Inc. (74%) and British Virgin Islands-registered Kiberplat Vorldvaid (26%). According to the Uniform State Register of Legal Entities, Platina is owned through a series of companies by Kiberplat chief executive Andrei Gribov (98%).

***Owned

†The NAETP estimates it is one-third this figure

— Company data