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INTERVIEW REGARDING THE FUTURE OF MOBILE AND ON-LINE PAYMENTS
The General director of Smartfin Company (2can) about the future of mobile and online payments.
In the end of March Smartfin, one of the most significant players of the Russian mobile payments market, announced investments attraction amounted to five million USD. Theese money would be spent on 2can brand development, the trade mark, under which Smartfin promotes mobile acquiring systems and decisions for quick non-cash transactions. TheRunet interviewed Nikolay Zhmurenko, the general director of Smartfin, regarding the future of mobile commerce and online payments.
TheRunet: In Russia there are already more plastic cards than people, the traction of payment for goods by card in the Internet is increasing. However, legal regulation of online payments stays unclear. At RIW-2012 in the conversation with the minister for communication Nikiforov, you noticed that it would be nice to get rid of paper cheques. What has changed within two years?
Nikolay Zhmurenko: Nothing has changed globally yet. In the law concerning cash-register equipment 54-ФЗ, payments by cards are equated with cash payments. In both cases it is necessary to issue fiscal cheques. It looks rather strange, because at the time when 54-ФЗ law came into force (in 2003— here and further remarks of TheRunet), — as I understand, as a number of people understand, its idea was to control cash turnover, which was not controlled before, rather than non-cash payments. For tax service it was not a problem and is not a problem now to control non-cash payments, because these are settlement accounts of the companies in banks, information regarding funds, accounting reports of companies and banks.
Under some reasons, the law included bank card as well. Why? Maybe due to badly developed bank cards market at that time. Only a few people understood what were that, there were not many cards and a minimum places where they were accepted. The situation has changed significantly. You should know that the emission of cards exceed the number of population, according to the latest data, there are 220 million cards at 148 million population. The infrastructure of cards acceptance is rapidly developing and, correspondingly, everyone pays by cards. The last year the number of payment operations exceeded the number of cash withdrawals in ATM. Cards are actively used in our live, from one side.
From the other side, the payments by cards are becoming more and more diverse^ it is possible to pay by card via terminal, in the internet, to connect it to the mobile application. Except payments by cards, new ways of electronic payments are being created. In such circumstances, the situation when the cards are considered to be the same as cash from the point of view of 54-ФЗ law is becoming stranger. We discuss it with the other companies-participants of the market, with payment systems (Visa and MasterCard), discuss at different associations and would do all our best to get this problem across to legislator.
After the issue of the law concerning national payment system the number of irregularities increased. In Russia the cards are one of the types of electronic payment facilities (the other one is, for example, electronic purse). It means that one of electronic payment facilities should be fiscalized via electronic cheque. It is not clear, why, how it differs from the other types. When I pay by card, I do not give cash to anybody. In fact I give an order to my bank to write-off the money from my account to the benefit of the receiver, but this order is carried out in a sophisticated manner – at first, information flow goes to Visa or MasterCard, than to the card-issuing bank, and then comes back. This information transfer is needed for my issuing bank to get my order to transfer the funds from my account to the account of the salesman.
In general, it does not differ from the actions I carry out while entering internet-bank and giving an offer to transfer money to the salesman; and I can enter both via stationary computer and via mobile device. I can enter internet-bank standing in front of the salesman and process the payment (and nobody should give me a cheque) or use Visa, MasterCard infrastructure and give the same order, but hereof I should receive a cheque. I can pay through Yandex purse, for example, and I will not need a cheque. A combined operation is possible as well. I, for example, use two taxi services, one of which is under 54-ФЗ regulation, and another one is not. In the first case I, going out from the car, pay directly, and in another case the money at first are transferred to electronic purse and than from it to the taxi driver. It seems to be a card payment and a fiscal cheque or a strict reporting form should be given. In the second case it is not a card payment, but a combined one: it began as a card payment and ended by a payment made via an electronic purse.
It seems to me that this strange situation exists, because a number of years passed since the moment of 54-ФЗ adoption, infrastructure developed, types of payments became diverse, innovative methods of payments are being created, but nobody looked back and thought that it was necessary to make amendments in the law concerning cash equipment, to make it correspondent to the innovative payment methods.
I have a feeling that demands became, on the contrary, stricter. One can remember the letter of Federal Tax Service concerning demands to cashier cheques – now they should be issued in five minutes after the purchase.
I would not name it stiffening, I would rather name it detailing. Previously, the Tax Service supposed. That the couriers of internet stores may issue cheques in the morning and now it considers that they should issue cheques in situ. Such detailing is not the most important or the strangest one. More unexplainable situations exist; for example, before the adoption of “the letter concerning five minutes” within online-payment I entered an internet store and paid by card - and the salesman should have issued a cashier cheque. Previously, if we talked about physical goods, the following situation happened: I entered the store, paid by card, the salesman promised me to deliver my purchase the next week. If it is a big well-known store I would believe, pay by card in advance and the next week the courier would deliver the good and together with it there would lay a cheque. The other situation is more complicated: I enter an internet store and buy software, pay by card and download a file; and nobody would deliver me anything, there is no cashier cheque, they do not have any couriers because they do not need them. But there are no exceptions for such situations provided by law.
I was interested in this topic, asked different market participants in different situations why they behaved in such a manner and if they broke 54-ФЗ law? They answered that they did not break the law because they did not accept a payment made by card, while entering the payment page and filling in the card number there, you do transfer the funds not to us, but to our bank, which receives them and then transfers to us. If to follow this logics, than no one from those who accept payments by cards should not issue cheques, because none of them receives money directly. In every store on the street where you pay by card, a cheque is given to you. However within the logics provided by online-traders, they should not issue cheque because they do not accept payment – their acquiring bank does. We return to the very beginning of my speech. Payments by cards were included into 54-ФЗ artificially, because payments by cards are non-cash payments with a special way of transferring a payment order to bank, that is why when you are trying to reach the very depth of the issue and find out what is the sense, you understand that sometimes it is very difficult to implement the 54-ФЗ law.
Essentially, the situation is similar to that with the law concerning personal data – maybe it is broken from time to time, but officially no one wanted to punish anybody or to carry out any investigation so far.
As for proving and investigation, I do not know what to say, but if anyone would like to do it, a very interesting collision would arise, because the arbitration would begin and what would be in the court...
There has never been any real practice.
Actually, I have never heard that someone was punished for online sale and non-issue of the cash cheque. Besides, it is very interesting how the salesman would be punished or how to him it would be explained how he had to act. After adoption of the "letter concerning 5 minutes" everything became even more complicated. Previously the situation was as follows: you pay in a store by card, next day the goods and the cash cheque whereof the time is printed are delivered. Probably, it was the time when the courier took goods from a warehouse. Now the cheque has to be both issued and given within 5 minutes after payment and goods transfer. And these two events are separated in time: I pay now, and I receive goods tomorrow. If to follow requirements formally, the shop has to materialize somehow the courier who has to give me everything instantly and then next day to deliver the goods. Actually if to start following this letter literally, Internet trade with payment by card on a site should stop in general.
And if a store reserves the funds on a card and the cheque is issued at the time of delivery simultaneously with writing-off, is it a way to bypass the system?
By the way, it is an interesting idea; I have never considered money reservation to be used on such a purpose. I make purchases in such shops myself and know that reservation there is demanded because the exact amount is not known. Especially when it is referred to fruit or vegetables, the weight of which is not known in advance and when something is not delivered, that is why the payment is processed afterwards, ex post. Maybe it is worth recommending all salesmen to behave in this manner. At the moment when I type the card number, the system reserves the money and then the next day a courier comes with goods and issues the cheque. From the other side, the money are written –off from the reserve not at the moment of goods delivery, but later, to the end of the day – so, there is a break again. And we would again talk about creation of strange schemes of managing the situation with the 54-ФЗ law and non-cash card payments. It seems to me, that a direct way – amendments to 54-ФЗ — is righter.
We in this situation created the solution integrated with the fiscal registrar for Internet trade. The fiscal registrar is a part of cash desk, "defective" cash desk, there is no keyboard, screen, but it is the device having fiscal memory and being able to issue the fiscal cheque on the basis of the data transferred from the smartphone or a tablet. This complex, a mobile application on a smartphone/tablet which interacts with the card reader and the fiscal registrar, gives the chance to our merchants under influence of 54-ФЗ, not to violate the regulator requirements.
Rather often representatives of electronic commerce discuss the ways to decrease acquiring rates as for small business it is too expensive to operate cards.
First of all, decreasing [of costs] would depend on Visa and MasterCard positions because, as you know, the main part of the commission which the bank-acquirer charges from a merchant, is the so-called commission of interchange, regulated by payment systems. Why this commission was and, maybe, will remain rather large, is clear. Recently a few cards existed, currently they became a widespread habitual for buyers instrument of payment. At what expense? Due to the banks that issued these cards, sold them, convinced us that cards were convenient and even beneficial. I, for example, use the card with accumulation of airlines bonuses; there exist banks giving cashback, granting gifts, charging bonuses.
However issuing banks are commercial organizations, it has to be favorable to them to issue, operate cards, to give all these gifts, cashbacks and bonuses to those who pays by cards. At what expense they do it? They do it at the expense of the commission of interchange which the bank-acquirer transfers to issuing bank. Therefore it is possible to understand why MasterCard and Visa established and held high interchange — to stimulate significant issue of cards. Otherwise we would now sit and discuss how badly it is without cards in Russia. Now we discuss another history: how bad it is that there are lots of cards, but not all merchants want to accept them because of the high commission.
It is an issue of fragile balance. Here it is impossible to jerk, there would be a terrifying story if someone legislatively fixes decrease in the commission up to 0,01%. It would result in the situation that at first salesman would say: "We are ready to accept cards" — but then the issuer would cease to issue them and the problem would not be solved. Currently, when in the country the issue is already large, accurate collaboration of the Central Bank and payment systems concerning smooth decrease of interchange rate to that level when, on the one hand, issue/operation of cards remains beneficial to bank, and on the other hand, decrease in the commission for acquiring would involve new merchant in cards accepting, should begin.
As for payment system rates: some companies in the western market tried to experiment, for example, they withdrew not the interest, but a monthly fee. In your opinion, what other business models could be created for convenience of the salesman?
The interest is a clear story depending on volume of payments. If you did not accept payments according by cards — you pay nothing, if you accepted a little — you pay to an acquirer a little. If a turnover of card payment is high, for example at large online stores, we discuss an individual rate.
There exist other reasons why many merchants were not interested in non-cash card payments. First, microbusiness simply could not receive acquiring because banks are not interested in working with small turnover. The second reason is mobility because, even when we speak about mobile POS terminals it is rather a bulky device, inconvenient for continuous carrying. Moreover, traditional POS terminals are not really suitable for any additional functions, for example for integration with user’s systems, creation on their base of the automated workplace of the courier. After all, not just a terminal existence is interesting, but an opportunity at the time of payments for a courier not to press the buttons, not to enter an amount, because he may make a mistake.
If we speak about online store, they are interested in the courier entering an order number, and the order number to be checked in the database. It is even better if the courier scans a code on the order form, and after it happens, information instantly is redirected to online store ERP system, and in the morning information concerning orders to be delivered is downloaded to the device. I.e. "the automated workplace of the courier" is needed. The traditional POS terminal does not correspond this purpose, and a smartphone/tablet is a “smart device”, created for such business software inclusively. If we speak about our mobile acquiring, maintaining the order, reading of bar codes or a QR code from order forms, integration with ERP - we provide our clients with everything abovementioned.
Could payment systems “eat” the market by themselves with own solutions for mobile payments?
They do not have their solutions. Payment systems develop infrastructure where issuers, acquirers, PSP, aggregators, etc. work. Payment systems regulate interaction of participants of this market, support perspective projects meeting their requirements. Probably, because of such support there arises sometimes confusion, a feeling that Visa or MasterCard payment systems carry out their own projects.
It is possible to tell about us that we are the Visa project. If to remember our launch in September, 2012, our first transaction was processed at a press conference held by Visa. Afterwards I saw in the Internet the comments – when journalists wrote about our projects, they pointed out in in brackets "the joint project of Visa, Promsvyazbank and Smartfin"; they wrote the same about other projects. It is wrong, we are the project the solution of which met safety requirements of Visa, the perspective project developing a new sector of the market, therefore Visa supported us. Other projects are very often mistakenly considered to be the solutions of the international payment systems.
One more example. MasterCard likes to show at big exhibitions different devices and applications for mobile acquiring. But it is not "a solution of MasterCard" as well. These are the companies-participants of MasterCard mPos BestPractices program. This program was presented by MasterCard in February in the last year on Mobile World Congress in Barcelona. We became the first participants of the program from Russia. Currently there appeared other Russian projects, but it does not mean that all of us are MasterCard though it is possible to see their mount with examples of participants.
The same with Visa. It launched VisaReady, more difficult program due to laboratory testings, etc. Recently we overcame all certification procedures, and our solution for mobile acquiring, allowing to work both with a magnetic stripe, and with chip cards, now is in the VisaReady list, as the first Russian "magstripe/EMV + signature" solution.
Payment systems actively promote solutions under NFC in Russia.
NFC does not contradict our activity. Moreover, the international payment systems promote ideas, infrastructure and rules. And issue contactless cards, fill in cards in smartphones, install the equipment for contactless reception the participants of the market — banks, specialized companies, but not Visa and MasterCard. As well as mobile acquiring, this is a solution that should be developed by someone. There is a Tinkoff card which can be filled in the smartphone. Who is the owner of this system? Tinkoff Bank, instead of MasterCard. The payment system is not a competitor to various providers. The payment system is the legislator, and there exist a great number of performers. In general contactless payment is an interesting facility. If it develops, issue of contactless cards would increase, we would be involved into this process as well on the party of payments acceptance, on the party of a merchant.
It develops rather slowly.
I absolutely agree. The issue amounts to 220 million cards, and the share of contactless cards was over 1% as of the autumn last year. If we speak about NFC, about smartphones as payment facilities, there are even less of them, one hundred thousands of NFC smartphones working within pilot projects. It may appear afterwards that it is not NFC, but any other standard, iBeacon, for example. We attentively consider this subject.
If currently there exist not two million, but at least 20 million of contactless cards, then we would start consider the solution. Now we do not see any necessity to do it. We are a developing project, we make facilities necessary today, tomorrow. When we launched the service in March, 2012, we discussed inside the company, whether to support cards with chips or not; and we launched with support of only cards with magnetic stripes as there were a few chip cards. The market develops, the number of chip cards increased, at some instant Visa suggested mPOS providers to shift to the combined device, and we agreed. By February of the current year we came to a decision, started migrating and are migrating. The first clients already actively participate. Old clients would gradually migrate. Perhaps, once there would appear the same story with contactless cards. Or perhaps in mPOS it would not be required.
Contactless cards operate in certain, outlined sectors — transport or small cafes where you ran up, took a paper glass with tea, waved the card and ran further. All these sectors where it is necessary to do everything quickly and where the cheque is small, have a permission not to enter PIN according to the rules of payment system, not to put on a signature. As soon as you exceed the amount of the cheque and it amounts to over 1000 rubles, it is necessary to use PIN or the signature. In this case all advantages of the decision vanish. In mobile acquiring an average cheque amounts to over 3000 rubles. I mentioned that I test a contactless card, and the only place where I use it in Moscow is...
No, I do not use contactless cards there because I book the ticket in advance through a mobile application and reserve a place. I use it on BP, thus I understand that you do not derive any pleasure, as the check for gasoline exceeds 1000 rubles. The time I save when I put the card to the terminal instead of inserting the chip into the terminal, is lost considerably due to the time I spend for PIN code input.
In Aeroexpress — yes: you ran up, wave, you do not have to put in anything, just come inside the train; it is worthy in the bus, in the underground, in Starbucks when you take a cup of tea on spot. These are exactly outlined sectors, as referred to us, mobile acquiring, not many such sectors get to us. What comes to my mind is a taxi driver. An average cheque there amounts to less than one thousand rubles. When the amount of contactless cards would reach a half of total amount of cards, then we would probably decide if we need to add a NFC function, a function of contactless card payment acceptance.
On the Russian market there exist projects of large banks and internet companies. Cell phones operators also are interested. The market is very competitive. Is it difficult to work or start-ups have advantages in flexibility and speed?
You are right, huge players develop really slowly. The issue is what market we are talking about. If we are talking about mobile acquiring market, I would not say, that huge companies are developing, creating their own products. Moreover, I know only one bank having its own product. In general, as for the mobile acquiring market, the competition exists only between startups. Currently there are four basic players on the mobile acquiring market, each of them is some kind of an independent project, developing ab ovo as a start-up. Afterwards we may compare and discuss if it is possible to say about any of them that it is a part of something larger. LifePay may be named a part of Life bank group. It is possible to say that SumUp is a Svyaznoy Bank project, and pay-me is a project of Alfa Bank. Not a separate company, but a constituent of something large.
From one side, it is possible to say the same about us. Our shareholders are large venture funds, industrial group. But there are no banks among them. In Venture Partners is a big experienced fund, AlmazCapital is a well-known, oldest fund; ЕСН group is a large industrial group. It is possible to say that we are also a part of a group that is why small startups should be afraid of us. From the other side, we are the project, backed up by shareholders, but hereof we are independent, rapidly developing company, which is not restricted by bureaucracy and clumsiness of large structures.
We do not have a shareholder bank supporting us, and Promsvyazbank is the first partner bank with which we carried out integration, but we are absolutely independent. One may say that it is bad. But in reality it is an advantage, while due to our independence we can develop not only direct sales model, but partnership projects with a lot of banks. We have developed whitelabel direction, and our service is sold by Russian Standard Bank, Raiffeisenbank, Otkritie Bank and Yandex.Cashier. Instead of one shareholder bank whereof it is impossible to get rid of due to the fact that it is a shareholder, we have a wide range of banks and we would have good banks, which would offer the service on our platform to their clients.
Except us and three abovementioned start-ups, the fifth player is MKB, which directly made a solution as an inhouse project, inside the bank. I do not know if it helped or became an obstacle to this project, the indexes are not disclosed.
Several years ago PrivatBank presented its solution at industry conferences as well.
As I said, issues concerning correspondence of payment systems demands exist. One of them, which we implemented immediately, is the demand to codify data in card reader. All the abovementioned participants entered the market with devices codifying the data as well. It demands time for development, experienced technical team, investments into development and card readers purchase, but demands are as they are, because it is unsafe to transfer non-codified card data to smartphone. As for the Square company, it entered the USA market with a very simple device without any codifying. But afterwards, some time later, the company shifted to codifying. In Russia basic projects were launched directly from the second stage. Privat in Ukraine chose a simple way, with the cheapest card reader without codifying. They tried to enter Russian market on this very basis, but they failed — payment systems did not support it, and promoted to the Russian market more sophisticated projects, meeting the security requirements.
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