You're reading: Banking sector pushing the power of plastic cards

They have their pagers, cellphones and designer sunglasses, and now Ukraine's nouveaux riches have a new emblem of success – credit cards.

Long accustomed to paying in cash, Ukraine's better off are now settling bills in restaurants and shops with newly introduced Europay, Visa, and Mastercard credit and debit cards. And in an odd juxtaposition to the wooden abacuses and hand-held calculators that are the standard in the marketplace, cash machines and credit card terminals have appeared around Kyiv in the last two years.

Until 1996, credit card terminals were almost nonexistent. There were few places where cards were accepted, and these mostly in locations where card-carrying foreigners were most likely to visit. But in the past two years the number of card-accepting locations has grown, fueled largely by the growth of the new Ukrainian upper class. Now there are about 1,000 credit card terminals and about 30 Automated Teller Machines (ATMs) in Ukraine – mostly in the capital Kyiv.

The ATM machine is the latest addition to the electronic money infrastructure, with the first one opening only a year ago in mid-1997. Now there are ATMs in more than ten hotels, at Borispol international airport and at a few select McDonald's restaurants.

While the number of credit and debit card holders is still small, some firms have had success in introducing electronic money to their workers in the form of direct deposit. Under this system, a firm pays its employees by transferring money to their bank accounts, which the employee then accesses with a debit card. There are currently more than fifty firms in Ukraine that use this form of payment, including Coca Cola, UMC and Aerosvit.

Now Ukraine's banking sector is planning to make plastic cards, mostly held by wealthy New Ukrainians, a handy addition to the wallets of everyday Ukrainians.

Wider use of electronic cash would make a big impact on the Ukrainian economy. Most importantly, it would create an audit trail for transactions, cutting away at the huge shadow economy. It would also improve cash circulation, making the economy more efficient, and aid fiscal stability by providing a dependable payments mechanism. Finally, the formalized payments system would eliminate many opportunities for tax evasion.

The National Bank of Ukraine (NBU) has recognized the payoffs of switching to plastic, and is working first of all to establish a local system that would process electronic payments within the country.

'Ukraine currently depends on the international credit card system for processing payments,' said Boris Diachenko, who works in the department of the NBU which is developing a national system for electronic payments. 'Under Ukraine's current system, even if a Ukrainian bank transacts with another Ukrainian bank down the street, the transaction must go overseas to get processed.'

The NBU is trying to eliminate the economy's dependence on foreign processing by creating its own system of processing and settlement. Creating this system includes introducing debit and credit 'smartcards' that would operate locally. A pilot program for the system will be launched in September, with the NBU introducing about 75,000 cards.

Most of the electronic payment cards in Ukraine are debit cards rather than credit cards, and the NBU system would continue this trend.

'Debit cards pose a minimum risk for a bank, since the cardholder only makes purchases within his means,' said Diachenko. 'Our goal is to substantially increase the number of debit and credit cards in use within two or three years, as well as the number of sales positions [that accept debit and credit cards]. Ideally the system would be available everywhere-including bus terminals, banks, and phones.'

In order to realize its goal, the NBU plans to tailor its system for the ordinary citizen by making it inexpensive and convenient.

'The country has 13 million pensioners. We want to make this service available even to them, so they can access even their pension funds with these cards,' said Diachenko.

But the banking sector still has to convince the bulk of the population – which relies on paper hryvnas – that paying by plastic is reliable and safe.

'People are reluctant to use cards because they are unfamiliar with them,' said Vladislav Artemenkov, a consultant in the Credit Department of Aval Bank. 'They have just never seen them before.'

Besides inexperience, there is another more practical reason why ordinary people are not clamoring to get their hands on a new debit or credit card.

'There's nowhere to use them,' said Alexei, a twenty-three year old Kyivite. 'None of the stores or cafes accept them. It's just as easy to use cash.'

Both the NBU and commercial banks aim to change that attitude. Though banks to this point have marketed credit and debit cards mostly the upper class, they are now slowly turning to the rest of the population. Aval bank, which has lead Ukrainian banks in introducing electronic money, plans to issue its first series of 'Onyx' debit and credit cards in the fall.

'Onyx cards will be less expensive than the foreign-issued cards,' said Artmenkov. 'This will make them more accessible to the general population.' Two classes of the cards-called 'First Step' and 'Twenty-first Generation'-are aimed at teenagers and twentysomethings.

'Ultimately we would like to plan a system so that it gradually replaces money,' said Diachenko, commenting on the NBU plastic payment plans.

However, the largest obstacle to the widespread use of electronic money in Ukraine is the country's bust economy: unless the Ukraine starts generating wealth, its banks will have few transactions to process.

Asked whether she would use a card to access her money, forty-seven year-old pensioner Nadezhda summed up the problem: 'First there would have to be money for me to access. There's no point in having a card if there's no money to get from it.'