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08 October 2012

Visa: National Payment System Will Increase Costs, Hurt Customer Service

Ukrainians could soon face problems with online shopping, mobile phone payments and their electronic cards. A controversial bill recently passed by Ukraine’s parliament, if adopted, will likely worsen standards for consumers, warns Steven Parker, head of Visa operations in Southeastern and Eastern Europe, Russia and Central Asia.

Passed in the first reading on Sept. 18, Ukraine’s payment bill proposes to create a national monopoly that takes over essential elements of the electronic payment system — routing, switching and clearing. The idea is to increase national oversight and move operations into Ukraine, thus reducing the costs for banks and consumers. Authorities are also looking to introduce obligatory electronic payments for purchases above Hr 8,500 (roughly $1,050). Critics see this as a way to force consumers to cough up more per transaction while allowing authorities to better control currency flows.

Visa currently earns less than $10 million yearly from its share in the Ukrainian processing market, said Parker, but has spent hundreds of millions of dollars to set up infrastructure on which the nation depends. Visa’s Europe processing center, for instance, cost $500 million. The company also spent millions, together with other market participants and central authorities trying to set up Topaz, a failed earlier project to create a national system.

«For a single body to start building something completely new — which will cost hundreds of millions — Where will that money come from? The banks or other people will be taxed, but in the end it will go back to consumers,» Parker said.

«We will be taking Ukraine back 5 years simply so that somebody can build a monopoly onshore in Ukraine. That’s not how the world economy works nowadays. That’s not the way technology intensive businesses work,» he continued.

The Visa head said he asked Economy Minister Petro Poroshenko whether he supported the idea during the recent Yalta conference. He said he was categorically against it.

Experts at the National Bank of Ukraine, controlled by President Viktor Yanukovych loyalist Serhiy Arbuzov, however, argue the new system will increase efficiency. They claim to be still in talks with the business community on the final version of the bill. It remains unclear what it will look like.

According to Volodymyr Yeremenko, bank infrastructure and payment systems committee coordinator at the Independent Association of the Banks of Ukraine, the legislation will clear the card payment field of monopoly-type positions and create a homogenous legislative framework, which will improve efficiency.

«The experience of other countries that for a long time have had national routing and clearing operations convincingly shows that national payment infrastructure reduces the cost of service operations, allowing banks to efficiently use available resources to expand their card programs, develop infrastructure for payment card acceptance (terminals in stores), and the best way to ensure the needs of consumers,» he said.

Yet Parker said there are few similar examples worldwide. Russia considered similar legislation in recent years, he said, but ultimately decided it would harm the country’s international competitiveness.

One Russian bank he did not want to name set up its own system for a price tag of $800 million, but ended up facing regular glitches. «Once every month they actually have to take the system offline for a few hours. Sometimes they have breakdowns,» he said.

China Union Pay is perhaps the most comparable scenario, Parker argued. Founded in 2002, it is the only company allowed to process domestic currency transactions and is an obligatory partner for any company seeking to issue payment cards in China. It was recently ruled a monopoly by the World Trade Organization, suggesting its days in its current form may be limited.

While partnerships with international lenders mean CUP cards are now accepted in over 100 countries, the system long suffered from isolation and recurring problems. «The system breaks down very frequently, and they only just got to things like contact lists and to prepaid, so the system is very far behind many other countries in the region,» said Parker.

Moreover, Ukrainians could face problems using their cards abroad, and this could be a hurdle for tourists visiting the country.

Yet the biggest headache is arguably security. Ukraine has currently one of the lowest levels of bank fraud in the world despite being home to some of its best hackers. While the lack of appealing targets is one of the reasons why, another is the millions spent on research and protection infrastructure.

Without constant innovation hacking could result in identity theft, appropriation of card details, and fraudulent payments, to name but a few. Given the pervasive corruption, it would in theory also be possible to access individuals’ and companies’ spending records, something that is technically unfeasible under the current system. Yeremenko argues that the NBU would deal with oversight, which would mean better anti-fraud measures and tracking of shady transactions

«If the system is built without really strong — read expensive — data security, there is always the risk that data could be stolen,» Parker, the Visa head counters. «There’s an exact correlation between how much you spend on a system and how secure it is.»

«15 years of infrastructure, 150 banks, several payment systems... What, are you going to just rebuild that in 12 months, 24 months? It’s a very complex task,» Parker said.

Source: Visa, kyivpost.com