There is no doubt Visa, MasterCard and indeed many of their member banks will initially lose revenues as the new Russian card system takes some of the fees normally earned by them.
Also, Visa and MasterCard will have to invest extra money to relocate processing capacities to Russia not just to protect their existing business, but also to build the extra interfaces needed to work with the Russian system, the NRCPS. The banks and their customers will have to absorb these extra costs.
There is already a movement by the Russian government that is pushing the banks to use a local processor to process some Visa/MasterCard transactions.
If this does in fact occur, Visa/MasterCard will also lose these network and transaction fees. This local system is similar to the set up in a number of smaller countries where Visa/MasterCard have decided not to have an in-country presence, so they use a local processor and share fees. The Russian government is currently pushing both payment associations to work with local processors in much the same way.
Local banks will still issue Visas and MasterCards unless the Russian government acts to forbid this legally. There was actually a proposal raised to this effect earlier this year, presumably by the banks that have had sanctions placed on them, but it did not get far. Most will probably issue dual or hybrid cards, which would be simultaneously a Visa/MasterCard and a NRCPS card.
The Russian Central Bank is in negotiations with both Visa and MasterCard about 2-4 day volume-based deposit guarantees. The Russian government has mandated deposits be made with the Russian Central Bank by both schemes to the value of the average volumes processed over 2-4 days as a buffer. These "negotiations" have been on going for six months now. Visa/MasterCard have discussed the funding of these deposits with Russian members, but this is highly confidential and is unlikely to be publicly acknowledged.
The main effects will be trickling down in the form of reduced revenues from Russian transactions that will be felt by the U.S. banks doing business in the region. At the end of the day, these large banks will be passing on their shortfalls to their U.S. client banks and to consumers. As costs are driven up, all will feel the pinch to a greater or lesser degree.
From a cards processing perspective, there will be little immediate impact on Visa and MasterCards U.S. business, as the co-branded cards and local processors should absorb the impact. This does not mean, however, that there is little cause for concern. The situation is best described as fluid, as the actions of the Russian government can be unpredictable when it comes to financial policy.
There are several things institutions can do, but a little background is in order first. For years a lot of Russian bank funding came from international sources, but this dried up following the 2008 financial crisis, when many European countries and their banks held on to whatever liquidity they had to deal with their own issues.
Russia's international banks have historically been "helped out" by their European and U.S. parents and partners. Following the crisis, Russian state banks started to draw funds from local Russian companies, individuals, the Russian Central Bank and more recently, the Russian government.
Other forms of funding in the short term will be more expensive, as has been the case across Europe over the last 5-6 years, but this will eventually settle down. Insiders I have spoken to say the system will work itself out in the long term, much as it has done across Europe. Although the Russian government has "suggested" not approaching U.S. banks for funding, this is being largely ignored at the present time.
With this in mind, banks in Europe and the U.S. have to think to the future, and the extent to which they desire to rob Peter to pay Paul, whether it be to provide liquidity for Russian interests, increase fees to cover shortfalls in card revenues and lost opportunities, or seek other ways to preserve profitability.
One of the best ways to improve profitability and shareholder value while neither spending more nor charging more is to look inward and assess where economies lie within the organization.
Our experience tells us that there are most often ways to improve efficiency within the existing organization without significantly impacting the operations, and this is especially true in the cards business. One of the best suggestions for U.S. banks is to talk to a specialist about optimizing revenues within the organization as a way to combat losses from the Russian and European situation.
Short engagements with consultants can provide a good reality check to make certain best practices are being used. The best ones will quickly provide a number of very specific strategies that are quickly implemented for maximum effect and minimal disruption, as well as offering shared benefits approaches as incentives.
U.S. and EU banks are inexorably linked in the global economy, but there are ways to make it work for them rather than against them as we look forward to an interesting 2015.
George White is the London-based president of EMEAR (Europe, Middle East, Africa and Russia) for Profit Insight.