Seven years after bank card issuing began, Ukraine is experiencing explosive growth in Maestro and Visa Electron card programs, spearheaded by a group of progressive banks.
  Ukraine was a late starter in launching payment cards, with the earliest programs beginning only in 1997-98, six years after the country gained independence from Russia for the first time in 350 years. Though Ukraine consequently lagged behind other ex-Soviet Union satellites like Czech Republic and Poland, it is catching up fast.
  The trajectory shown in the table on page 56 hardly needs comment. A compound growth rate of more than 120% annually since 1999 cannot be sustained for much longer, but Ukraine's banks are doing their best. Total international cards issued probably will come close to 15 million by the end of 2004, which will lift the card base close to one for every three people.
  Antonin Yermolenko, who is responsible for business in the Ukraine from MasterCard International's Moscow office, predicts that cards issued with MasterCard's Maestro debit brand will reach 7.5 million by year-end. "We are overwhelmed, because even our most positive forecasts are outdone by the actual results," he says.
  A positive economic background, after a long period of contraction, has helped stimulate retail banking generally and payment cards in particular, even though, as in Russia, most cards are issued in the context of salary programs. Ukraine's gross domestic product (GDP) grew by 8.5% last year and unemployment was 3.6%. At the same time, banking sector assets were up 57% and loans to individuals up 68%.
  However, Ukraine's total GDP of $40 billion is lower than Hungary's $52 billion (2001 figures), although the population is five times as large. Salaries are 460 hryvnia and pensions 136 hryvnia per month on average ($85 and $25, respectively). "It is these parameters we have to keep in mind when we consider future developments in the card market," says Yermolenko.
  Though basic industries traditionally dominated the Ukrainian economy, a dynamic, westernized consumer culture is rapidly growing up in Kiev, the capital city. There, the shopping malls, full of designer labels and fast-food joints, would not look out of place in Dallas. The city also accounts for a large proportion of Ukraine's 6,000 automated teller machines, half of which are sited away from bank branches.
  Instead of the coal mining and manufacturing jobs filled by their parents, young people in Ukraine today are finding employment in knowledge-based and consumer-oriented businesses, usually in the private sector. In contrast to the West, where personal wealth is under the control of older people, "the young are the ones with money in Ukraine," says Gennadiy Semionov of the Commercial Law Centre in Kiev, who is promoting the development of a credit bureau (box).
  According to National Bank of Ukraine (NBU), the central bank, 157 banks were registered to operate at the end of 2003, most of them public sector-owned and 24 set up as limited liability companies. About 70 banks were issuing cards by mid-2004.
  As in Russia, and in contrast to Central and Eastern Europe (CEE), there is very little foreign ownership in indigenous Ukrainian banks. However, U.S.-based Citibank, France's Cr?dit Lyonnais, Moscow-based Alfa and Warsaw-based Bank Pekao are among those with 100%-owned subsidiaries in Ukraine.
  PrivatBank, the No. 1 Ukrainian bank by most measures, is by far the biggest card issuer and owns the biggest ATM and point-of-sale networks. In 2003 it accounted for 51% of all Maestro/MasterCard and Visa cards issued. And, in line with the market as a whole, PrivatBank continued to grow rapidly during the first half of 2004.
  Several banks function as the banking unit for a particular industry. Expressbank and Nadra (whose name means "bowels of the earth" in Ukrainian) serve the railways and mining industries respectively. UkrSibBank specializes in providing banking services to the many Ukrainians who work in Siberia.
  As would be expected, the 8.9 million internationally branded cards issued in 2003 were mainly Maestro and Visa Electron ATM/debit cards. MasterCard and Visa standard cards represented just 13% of the card base.
  In addition to the international brands, NMEPS and Ukrcard are two domestic card schemes in Ukraine. NBU launched NMEPS, the National System of Mass Electronic Payments, in 1998. It calls for at least 10 million smart cards and 100,000 POS terminals, designed for offline operations.
  According to NBU, Ukrpost, the post-office system that has a national network of 15,000 branches, supports NMEPS. NMEPS is specifically targeted at providing cashless payment services to Ukrainians with low incomes, including pensioners and students.
  NBU manages NMEPS, charging issuers a royalty per card issued, and is responsible for processing and clearing of payments. Expressbank and Imexbank have issued most of the NMEPS cards in circulation, amounting to 600,000 as of May 31.
  The slow progress of NMEPS reflects the shortage of public-sector money for development and erratic direction. Funding has been cut off in the past, and NBU top management has not always been committed to the project.
  Ukrainian bankers say that little funding currently is available for NMEPS and its future is in doubt, although this could change if government decided to put some real muscle behind it. Yermolenko says he knows of no banks that are planning to issue NMEPS cards and notes that Imexbank has become a Maestro issuer. "MasterCard proposed cooperation to NBU over NMEPS a year ago, with a proposal to continue with their rules and our branding, but unfortunately they didn't reply," he says.
  Ukrcard is the second major domestic-only program with 71,000 cards as of July, including cobranded Maestro-Ukrcards. The members are 32 medium-sized and regional Ukrainian banks.
  After the explosive growth of international payment cards over the last five years, the emphasis is set to switch to increasing transactions per card. Possession of internationally branded cards in Ukraine is approaching 0.3 per capita, near the point where issuance tends to level out. In Poland, for example, after a meteoric rise over the five years ending in 2002, the card base was static at 0.39 per capita in 2003.
  At around this point, most business and professional people have payment cards and the banks' focus turns to developing acceptance in cities, with little appetite for big expansion in rural areas. If Ukraine follows this pattern, issuance will probably plateau in 2005-6 at nearly 20 million cards and the "land-grab" phase will give way to expanding transactions at the point of sale.
  Cards are already more widely diffused in Ukraine than in Kazakhstan and Russia. Meanwhile, annual ATM withdrawals per Visa Electron card fall into a narrow range for Ukraine, Kazakhstan and Russia, while those for Poland are nearly three times higher-34.4 vs. 12.7 for Ukraine, says Visa International's Visa Central and Eastern Europe Middle East and Africa region.
  POS card payments are underdeveloped in Ukraine, Kazakhstan and Russia, while in Poland they are several times higher. One, however, has only to go back to the late 1990s to find POS payments in Poland and other CEE markets at similar levels to those in Ukraine today, so there are clear precedents for the card associations and Ukrainian banks as they consider the next phase of development.
  Alongside Maestro, which is positioned for access to the cardholder's deposit or current account, Yermolenko forecasts rapid growth of MasterCard Electronic, which provides 100% authorization linked to credit facilities. So far, 24 banks have taken up MasterCard Electronic licenses and an acquiring network is in position.
  "The first MasterCard Electronic was issued by Nadra in December 2003," says Yermolenko. "Banks have been quite interested and appreciative. We expect up to two million MasterCard Electronic cards in Ukraine in two to three years."
  Credit cards are in their infancy in Ukraine, but Nadra has launched its "Real Credit" program, and others entering the market include Aval's "Onyx" program and Kreditprombank.
  Given the demands of the urban population, it seems only a matter of time before consumer lending and card payments become widely diffused.
  Richard Rolfe is editor of England-based European Card Review magazine. ECR acknowledges the help received from Olena Gourtchik and Alla Grynko of Carte Blanche, the Kiev-based payment cards magazine, in preparing this article. They can be contacted at gurchik

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