75159   Landscaping  Report:   Financial  Inclusion  in  Russia   Timothy  Lyman,  Stefan  Staschen,  and  Olga  Tomilova         November  2012,  considering  developments  through  September  2012                                                     Photo  credit:    Siberian  fisherman,  Andrey  Rudakov,  CGAP  2012  Photo  Contest  Special  Mention.       Table  of  Contents   List  of  Acronyms  ..........................................................................................................................................  3   Statistical  Overview:  ....................................................................................................................................  4   1.   Executive  Situation  Analysis  .................................................................................................................  6   2.   Demand  for  and  Usage  of  Formal  Financial  Services  ...........................................................................  9   2.1   Financially  Excluded  and  Underserved  Communities  ....................................................................  9   2.2   Financial  Education,  Literacy,  and  Capability  ...............................................................................  12   2.3   Financial  Consumer  Protection  and  Financial  Ombudsman  ........................................................  13   3.   The  Service  Provider  Landscape  .........................................................................................................  14   3.1   Banks  and  NBCOs  .........................................................................................................................  16   3.2   Microfinance  Institutions,  Credit  Cooperatives  and  Other  Nonbank  Financial  Organizations  ....  25   ...........................................................................................................  32   3.3   Payment  Service  Providers   4.   Infrastructure  and  Other  Initiatives  with  Relevance  for  Financial  Inclusion  ......................................  45   4.1   Universal  Electronic  Card  .............................................................................................................  46   4.2   Credit  reference  services/Credit  reporting  ..................................................................................  48   .............................................................................................  50   4.3   Russian  Financial  Inclusion  Strategy   4.4   Alliance  for  Financial  Inclusion  Collaboration  ..............................................................................  51   5.   Summary  of  Key  Challenges  and  Opportunities  .................................................................................  52   References  .................................................................................................................................................  57   Annex  1:  Regulatory  provisions  applying  to  money  transfer  operators  and  electronic  money  operators  61   List  of  Boxes   Box  1:  Demand  and  Usage  –  Key  Challenges  and  Opportunities  ...............................................................  14   Box  2:  Banks  and  NBCOs  –  Key  Challenges  and  Opportunities  ..................................................................  25   Box  3:  MFIs,  CCs,  and  Other  NFOs  –  Key  Challenges  and  Opportunities  ...................................................  31   Box  4:  Payment  Service  Providers  –  Key  Challenges  and  Opportunities  ...................................................  45   1     Box  5:  UEC  –  Key  Challenges  and  Opportunities  .......................................................................................  47   Box  6:  Credit  Reporting  –  Key  Challenges  and  Opportunities  ...................................................................  50   Box  7:  Russian  Financial  Inclusion  Strategy  –  Key  Challenges  and  Opportunities  .....................................  51   Box  8:  Alliance  for  Financial  Inclusion  Collaboration  –  Key  Challenges  and  Opportunities  .......................  52     2     List  of  Acronyms   AFI   Alliance  for  Financial  Inclusion   ARB   Association  of  Russian  Banks   CBR   Central  Bank  of  Russia   CC   Credit  cooperative   FFMS   Federal  Service  for  Financial  Markets   IMF   International  Monetary  Fund   KYC   Know  your  customer   MFI   Microfinance  institution   MED   Ministry  of  Economic  Development   MIX   Microfinance  Information  Exchange   MNO   Mobile  network  operator   MOF   Ministry  of  Finance   MSME   Micro,  small  and  medium  enterprises   NAFI   National  Agency  for  Financial  Studies   NAMMS   National  Partnership  of  Microfinance  Market  Stakeholders   NBCO   Non-­â€?bank  credit  organization   NFO   Nonbank  financial  organization   NGO   Non-­â€?governmental  organization   P2P   Person-­â€?to-­â€?person   POS   Point  of  sale   RMC   Russian  Microfinance  Center   SME  Bank   Russian  Bank  for  Support  of  Small  and  Medium-­â€?Sized  Entrepreneurship   SRO   Self-­â€?regulatory  organization   UEC   Universal  Electronic  Card       3     Statistical  Overview:     Population   143  million   (2012)1     Population,  urban   74%     (2012)2     Population  aged  under  15   16%   (2011)3   GDP/capita  (based  on  purchasing-­â€?power-­â€?parity),  USD   15,612   (2010)4   Accounts  at  a  formal  financial  institution  (%  age  15+)   48%   (2011)5   Debit  cards  (%  age15+)   37%   (2011)6   Bank  branches  and  offices   44,467   (2012)7   ATMs     189,499   (2012)8   Bank  and  nonbank  payment  agents   12,479   (2011)9   Offices  of  the  Russian  Post   42,000   (2012)10   Customer  service  points  of  agents  (bank  and  nonbank)   318,992   (2011)11   Bank  accounts  of  natural  persons  (national  currency)   622  million   (2012)12     Bank  accounts  with  remote  access   76.7  million   (2012)13                                                                                                                             1  Russian  Federation  Federal  Service  for  State  Statistics,  http://bit.ly/rka5r3.   2  Ibid.   3  Ibid.   4  IMF,  World  Economic  Outlook  Database,  http://bit.ly/PFPXJW.   5  The  World  Bank  Global  Findex  Database,  http://bit.ly/W7uux9.   6  Ibid.   7  As  of  1  September  2012,  CBR,  http://bit.ly/SSFzDz  and  http://bit.ly/Viw7IU.   8  As  of  1  April  2012,  CBR,  http://bit.ly/QvjLIH.   9   Center   for   Research   of   Payment   Systems   and   Settlements   and   RMC   (2012).   The   data   represents   the   research   sample  size  which  is  estimated  to  cover  the  vast  majority  of  the  market.   10  Russian  Post,  http://bit.ly/b0sc9c.   11   Center   for   Research   of   Payment   Systems   and   Settlements   and   RMC   (2012).   The   data   represents   the   research   sample  size  which  is  estimated  to  cover  the  vast  majority  of  the  market.   12  As  of  1  July  2012,  CBR,  http://bit.ly/StZcAl.  The  majority  of  these  are  dormant  accounts,  including  accounts  in   Sberbank  opened  in  Soviet  times.   4     Mobile  subscriptions   227.6  million   (2011)14     Mobile  penetration  (total)   164%   (2012)15     Mobile  penetration  (connections)   73%   (2012)16                                                                                                                                                                                                                                                                                                                                                                                                 13  As  of  1  July  2012,  CBR,  http://bit.ly/V6yCLj.   14  Advanced  Communications  and  Media,  http://bit.ly/RcFNj7.   15  See  http://bit.ly/PFui96   16  Ibid.   5     1. Executive  Situation  Analysis   The   Russian   Federation   presents   a   picture   of   rapid   and   accelerating   change   in   the   financial   inclusion   landscape   for   lower   income   Russians   in   the   years   since   transition   to   a   market   economy.   This   reflects   official   government   policy:   as   far   back   as   2007,17   President   Vladimir   Putin   identified   the   closing   of   the   financial   access   gap   as   an   important   priority   of   his   administration,   and   it   has   remained   so   since,   with   significant   progress   being   made,   particularly   in   the   regulatory   infrastructure   for   financial   inclusion.   Russia   is   one   of   a   few   countries   in   the   region   that   has   a   comprehensive   financial   inclusion   strategy   developed   by   the   National   Association   of   Microfinance   Market   Stakeholders   for   2008-­â€?2012   and   2012-­â€? 2016.   In   2010,   the   Ministry   of   Economic  Development   prepared   a   report   to   the   Government   on   ways   to   increase   access   to   financial   services   which   set   priorities   for   further   work   on   advancing   financial   inclusion.18     Since  2008,  when  CGAP  conducted  its  first  research  on  the  state  of  innovations  in  financial  inclusion  in   Russia,19  progress  has  been  significant.  In  certain  aspects  –  such  as  the  penetration  of  bank  branches  per   100,000  adults  –  Russia  has  now  moved  ahead  of  some  highly  developed  countries.  Therefore,  the  issue   of  financial  inclusion  in  Russia  has  its  own  specifics  –  more  typical,  perhaps,  for  developed  countries  that   have   all   the   basic   prerequisites   for   financial   inclusion.   For   example,   for   city   dwellers,   particularly   in   larger   cities,   access   to   a   range   of   financial   services   has   become   more   and   more   commonplace,   with   uniquely   Russian   innovations   in   retail   payment   services   emerging   to   make   usage   of   such   services   increasingly  convenient  for  customers.  Yet,  for  residents  of  smaller  cities,  towns  and  rural  areas,  access   to   safe,   high   quality   financial   services   remains   a   far   greater   challenge.   Here   –   and   particularly   in   the   most  remote  and  sparsely  populated  areas,  which  are  also  generally  among  the  poorest   –  innovations  in   retail   payments   have   potentially   a   more   critical   role   to   play,   not   only   enhancing   convenience   for   customers   transacting   with   financial   service   providers,   but   making   it   possible   at   all.   Statistics   bear   out   this   dichotomy:   on   average,   even   though   the   supply   of   retail   banking   services20   in   Russia   as   a   whole   increased  fivefold  since  200821,  the  national  average  is  still  only  about  21  percent  of  the  Moscow  level,   and  is  as  low  as  5  percent  of  the  Moscow  level  in  the  Northern  Caucasus.22   The  Russian  penchant  for  innovation,  as  well  as  strong  local  traditions  of  mutual  assistance,  have  shaped   the  market  of  financial  service  providers  in  distinctive  ways.  Particularly  in  areas  where  bank  penetration   is   weak,   a   multiplicity   of   different   forms   of   financial   cooperatives   have   emerged,   some   growing   to   be                                                                                                                           17  President  Putin’s  address  to  the  State  Council,  November  2007.   18  See  NAMMS  (2011).   19  See  CGAP  (2009).   20  The  supply  of  retail  financial  services  is  measured  as  a  volume  of  natural  persons’  bank  loans  and  deposits  per   person.  According  to  NAMMS  (2011)  it  was  RUB  493,000  (USD  15,944)  in  Moscow  and  RUB  102,000  (USD  3,299)  on   average  country-­â€?wide.  For  all  currency  conversion,  CBR  exchange  rates  as  of  30  September  2012  were  used:  USD   1=RUB  30.92,  EUR  1  =  RUB  39.98.     21  In  2008,  the  supply  of  retail  banking  services  in  Russia  as  a  whole  was  4  percent  of  the  Moscow  level.   22  See  NAMMS  (2011).   6     substantial   institutions   (even   systemically   significant,   if   measured   by   the   population   of   the   region   in   question   and   the   size   of   other   types   of   providers   present   in   the   local   market).   At   the   same   time,   the   number,  size,  and  diversity  of  providers  of  retail  credit  have  increased  dramatically,  even  in  more  rural   and  remote  areas,  and  recently,  many  have  registered  as  microfinance  institutions  (owing  more  to  the   lack  of  other  appropriate  regulatory  categories  than  a  shared  vision  of  social  development).   Notwithstanding   the   dynamism   of   privately   and   member-­â€?owned   financial   service   providers,   state-­â€? owned  institutions  remain  important  players  in  the  Russian  financial  sector,  including  –  even  especially  –   that   part   of   it   most   relevant   to   lower   income   Russians.   The   giant   savings   bank   Sberbank,   once   (with   limited   exceptions)   the   only   provider   of   retail   payment   services   in   Russia,   is   majority-­â€?owned   by   the   Central  Bank  of  Russia  and  remains  the  dominant,  if  not  the  sole,  financial  service  provider  other  than   the   Russian   Post   in   many   more   remote   communities.   VTB24   is   another   important   example   of   a   government-­â€?controlled   institution.   There   has   been   a   marked   trend   toward   improving   both   business   practices  and  service  among  state-­â€?owned  providers,  and  in  many  areas  and  market  segments  (such  as   among  the  elderly)  they  appear  to  be  competing  very  favorably  with  private  financial  service  providers.   This  openness  to  state  involvement,  often  to  stimulate  or  subsidize  private  providers,  is  also  reflected  in   Russian  policy  toward  financial  inclusion.  For  example,  during  the  recent  years,  billions  of  Rubles  were   channeled   into   SME   lending   –   and   a   lesser,   but   not   insignificant   amount   specifically   to   microfinance   institutions   and   credit   cooperatives   –   through   the   state-­â€?owned   Russian   Small   and   Medium   Entrepreneurship   Support   Bank   (SME   Bank,   formerly   the   Russian   Development   Bank).   It   is   also   reflected   in   the   orchestrating   role   the   Ministry   of   Economic   Development   is   playing   in   the   introduction   of   the   Universal  Electronic  Card  –  an  ambitious  initiative  in  e-­â€?government  that  aims,  among  many  other  goals,   to  establish  universal  access  to  banking  services.   Beyond   the   emphasis   on   improving   statistics   on   financial   inclusion   for   lower   income   Russians,   Russian   policy   has   also   focused   importantly   on   the   quality   of   formal   financial   services   on   offer,   their   appropriateness  to  the  needs  of  customers,  the  market  conduct  of  providers,  and  the  financial  literacy   and   capability   of   financial   consumers.   These   policy   priorities,   so   much   discussed   internationally   in   the   wake   of   the   global   financial   crisis,   have   distinct   relevance   in   the   Russian   context.   Many   Russians,   particularly  older  people  (who  are  represented  disproportionately  among  the  lower  income  segments  of   the   population),   have   only   relatively   recently   had   access   to   some   financial   products,   particularly   consumer   credit.   Rapid   market   development   –   again   particularly   in   retail   credit   –   has   sometimes   resulted   in   a   lag   between   the   introduction   of   questionable   or   unacceptable   market   practices   and   a   regulatory  response.  At  the  same  time,  trust  in  formal  financial  services  (and  providers  of  those  services)   has  been  shaken  by  crises  and  devaluation.  In  the  case  of  savings,  prompt  policy  intervention  helped  to   stabilize  the  situation  relatively  quickly  during  the  2008/2009  global  financial  crisis.  After  the  crisis,  the   volume   of   savings   increased   overall,   but   their   concentration   remained   significantly   skewed   toward   trusted   public   service   providers   (for   example,   about   half   of   all   savings   of   natural   persons   are   kept   at   Sberbank).   In   the   case   of   insurance,   trust   is   so   low  that   many   ordinary   Russians   only   purchase   insurance   they  are  required  by  regulation  to  carry  (such  as  automobile  insurance).23                                                                                                                           23   Due   to   the   low   level   of   insurance   market   development   in   Russia,   insurance   providers   and   products   were   not   7     Several  Russian  initiatives  related  to  the  quality  and  appropriateness  of  financial  products  on  offer  and   the   financial   literacy   and   capability   of   financial   consumers   merit   specific   mention.   On   the   consumer   protection   and   market   conduct   front,   there   are   two   parallel   moves   afoot   to   establish   a   financial   consumer  protection  Ombudsman  in  Russia.  One,  already  underway,  is  led  by  the  Association  of  Russian   Banks   (ARB).   Although   various   non-­â€?ARB   members   have   been   invited   to   participate,   some   feel   this   initiative   lacks   the   breadth   of   provider   representation   and   independence   from   ARB   member   banks   to   garner   widespread   public   trust   and   to   cover   the   full   range   of   customer   issues   (including   those   arising   with   nonbank   providers).   The   second   relevant   initiative   would   address   these   concerns   through   the   adoption  of  a  Law  on  the  Financial  Services  Ombudsman,  which  would  establish  an  independent  body   responsive   to   all   types   of   issues   raised   by   financial   consumers,   regardless   of   the   type   of   service   or   provider.   Regarding   financial   literacy   and   capability,   in   2011   Russia   embarked   on   an   ambitious   multi-­â€? year  project  in  partnership  with  the  World  Bank.  The  USD  113  million  Financial  Education  and  Financial   Literacy  project  is  aimed  at  improving  the  financial  literacy  of  Russian  citizens  as  well  as  strengthening   the  foundations  for  consumer  protection  in  financial  services.     The   past   several   years   have   witnessed   rapid   progress   on   legislation   relevant   to   financial   inclusion,   including:   a   Law   on   Microfinance   Activity   and   Microfinance   Organizations   governing   nonbank   microlending  by  both  nonprofit  and  for-­â€?profit  entities;  a  framework  Law  on  Credit  Cooperation  aimed  at   providing  a  system  for  bringing  the  diverse  array  of  financial  cooperatives  (with  the  notable  exception  of   those   formed   as   agricultural   cooperatives)   under   delegated   supervision;   a   Payment   Agents   Law   governing   nonbank   payment   agents   (including   automated   payment   acceptance   terminals);   and   a   Payment  System  Law,  which  includes,  among  other  things,  provisions  for  regulation  and  supervision  of   e-­â€?money  and  for  banking  agents.24  Regulations  and  supervisory  arrangements  under  these  laws  are  at   various  stages   of  development  and  implementation.   While   there   are   signs   that   such   legislation   will   have   –  or  is  already  having  –  a  positive  effect  on  financial  inclusion,  the  impact  of  their  full  implementation  on   financial  service  providers  –  and  on  the  low  income  consumers  they  might  serve  –  remains  to  be  seen.     The   following   Landscaping   Report   on   the   state   of   financial   inclusion   in   Russia   is   based   on   CGAP’s   research  conducted  during  April  –  September  2012.25  The  report  is  organized  in  the  following  way:   • Section   2   presents   an   overview   of   the   demand   for   and   usage   of   formal   financial   services   in   Russia   with   a   particular   emphasis   on   the   characteristics   of   the   most   financially   excluded   categories   and   reasons   for   continued   financial   exclusion.   This   section   also   covers   several                                                                                                                                                                                                                                                                                                                                                                                                 included  in  the  research  for  this  landscaping  report  and  are  not  discussed  further.   24  The  full  titles  and  details  of  the  laws  can  be  found  in  the  list  of  references.   25  We  would  like  to  acknowledge  the  contributions  by  Michael  Tarazi  (CGAP),  who  joined  the  first  mission  in  April   2012  and  commented  on  an  earlier  draft  of  the  report;  Mikhail  Mamuta  (NAMMS),  who  provided  overall  support   to   the   research   and   valuable   contributions;   Oleg   Ivanov,   who   provided   advice   on   the   interpretation   of   various   laws,   regulations,   and   bills   mentioned;   and   Victor   Dostov   (Russian   Electronic   Money   Association),   who   provided   valuable  comments  as  well.     8     important  initiatives  vis-­â€?à-­â€?vis  the  demand  side  –  on  financial  literacy  and  education  and  financial   consumer  protection,  including  the  current  and  planned  Financial  Ombudsman  institution.   • Section   3   presents   today’s   picture   of   the   supply   of   financial   services   in   the   country   and   covers   a   range  of  providers  –  the  traditional  banking  sector,  the  sector  of  microfinance  organizations  and   credit   cooperatives   (which   has   existed   for   about   two   decades   but   only   recently   was   brought   under   a   regulatory   and   supervisory   framework),   and   the   newly   formed   and   rapidly   growing   sector   of   payment   services   providers   which   are   at   the   forefront   of   technology   innovation   in   terms  of  the  delivery  channels.  The  section  explores  the  role  and  potential  of  each  provider  type   in  advancing  financial  inclusion,  as  well  as  key  constraints  they  face.   • Section   4   covers   issues   related   to   the   infrastructure   and   other   initiatives   with   relevance   for   financial   inclusion   –   the   Universal   Electronic   Card   project   of   the   Russian   Government,   the   infrastructure   for   credit   reporting,   the   Russian   Financial   Inclusion   Strategy   and   Russia’s   collaboration  with  the  Alliance  for  Financial  Inclusion.   • At   the   end   of   each   subsection,   the   authors   share   observations   on   the   key   challenges   and   opportunities   with   respect   to   the   topics   covered   and   suggest   recommendations   for   follow-­â€?up   activities.   • The   report   concludes   with   a   summary   of   the   key   opportunities   and   challenges   outlined   for   each   subsection  (Section  5). 2. Demand  for  and  Usage  of  Formal  Financial  Services   There   is   only   limited   data   available   about   the   demand   for   formal   financial   services   among   lower   income   Russians;   rather   various   research   conducted   has   traditionally   covered   the   usage   of   such   services.   The   data  on  usage  paint  a  picture  of  the  financial  exclusion  in  Russia  –  disproportionately  affecting  remote   and   rural   areas,   and   older   and   lower-­â€?income   people.   One   of   the   initiatives   to   address   financial   inclusion   gaps  is  a  newly  launched  large  World  Bank-­â€?supported  government  project  aimed  at  improving  financial   education   and   financial   literacy   of   the   Russian   people;   with   over   a   third   of   the   population   with   low   financial  literacy  levels,  these  factors  are  recognized  as  serious  impediments  to  financial  inclusion.  At  the   same   time,   there   is   realization   in   Russia   that   financial   inclusion   cannot   be   pursued   without   strengthening  financial  consumer  protection  mechanisms,  such  as  a  Financial  Ombudsman,  and  there  is   still  much  work  to  be  done  in  this  area.   2.1 Financially  Excluded  and  Underserved  Communities     Nature  and  Scope  of  Financial  Exclusion   The  outreach  of  financial  services  among  the  Russian  population  has  been  growing  in  recent  years,  but   still  leaves  the  majority  of  the  population  without  a  bank  account.  In  2008,  about  48  percent  of  the  adult   population  did  not  use  any  banking  services,  while  at  the  end  of  2011  this  number  was  reduced  to  22   percent.26  However,  with  48  percent  the  share  of  the  adult  population  (age  15  years  and  above)  having                                                                                                                           26   Unless   noted   otherwise,   the   source   of   data   for   this   section   is   NAFI   (2012).   In   their   research   NAFI   uses   a   9     an   account   at   a   formal   financial   institution   is   much   lower,   as   many   people   use   banks   for   payment   services  without  opening  a  bank  account.27  The  share  of  the  population  is  even  lower  when  only  looking   at  the  bottom  40  percent  of  the  population  in  terms  of  income  (40  percent)  and  for  people  with  primary   education  or  less  (24  percent).28  The  most  used  formal  financial  products  are  plastics  cards  (46  percent).     Among  users  of  plastic  cards,  the  vast  majority  (89  percent)  received  the  cards  from  their  employers  to   be  paid  their  salaries;  and  84  percent  of  all  cardholders  use  their  cards  only  to  receive  cash  from  ATMs.   After   plastic   cards,   the   second   most   used   formal   financial   service   is   bill   payment   (28   percent).     The   next   most  used  type  of  formal  financial  services  is  credit  products  –  used  by  24  percent  of  the  population,  but   89  percent  of  these  are  consumer  loans.  Only  approximately  one-­â€?fifth  of  the  population  use  any  form  of   formal   deposit   account,   and   of   these,   there   are   42   percent   who   use   term   deposits   while   others   have   demand  deposits  or  other  current  accounts.  It  should  be  noted,  as  well,  that  these  latter  figures  cover   the  adult  population  as  a  whole,  and  do  not  reveal  the  levels  of  usage  specifically  among  lower  income   Russians.   Overall,   Russians   do   not   show   much   interest   in   using   formal   financial   services:   for   example,   when  asked  what  financial  services  they  plan  to  use  in  the  next  12  months,  61  percent  did  not  plan  to   use  any  and  another  21  percent  were  not  sure.   Table  1:  Use  of  Banking  Services  by  the  Adult  Russian  Population  as  of  October  2011*   Types  of  services   Percent   Breakdown  of  users   Percent   Plastic  cards   46%   To  receive  salary   89%       Debit  card   12%       Credit  card   8%   Regular  payments   28%       Credit  services   24%   Consumer  credit   89%       Car  loan   11%       Mortgage  loan   11%   Deposit  services   18%   Current  account/Demand  deposit   67%       Term  deposit   42%   Remittances   8%       Internet  banking   1%       Deposit  box   0%       None  of  the  above   22%       Source:  NAFI  (2012).  *  The  totals  exceed  100  percent  as  multiple  responses  were  allowed.   Some  of  the  reasons  for  the  low  or  passive  use  of  formal  financial  services  include:     • Distrust   in   financial   institutions.   The   whole   region   of   Eastern   Europe   and   Central   Asia   is   characterized   by   the   lowest   level   of   trust  in   formal   financial   institutions   worldwide   –   31   percent   cited   distrust   of   banks   as   a   key   reason   for   not   using   financial   services.29   Russia   is   no   exception   –                                                                                                                                                                                                                                                                                                                                                                                                 statistically  representative  sample  of  1,600  adults.   27   2011   data   from   the   World   Bank   Global   Findex   Database,   http://bit.ly/W7uux9.   The   results   are   based   on   a   representative  sample  of  2,000  people  with  a  margin  of  error  of  2.8  percent.  See  http://bit.ly/O6XkNi.   28   Ibid.   Russia   has   the   lowest   access   figures   for   people   with   low   education   among   the   BRICS   countries   (Brazil,   Russia,  India,  China,  and  South  Africa)  and  among  developing  countries  in  Europe  and  Central  Asia.   29  See  Klapper  (2012).   10     with   its   recent   history   of   multiple   economic   and   political   shocks   and   resulting   loss   of   life   savings   prior  to  the  2008/2009  crises.  It  was  rated  last  in  a  2012  Edelman  Trust  Barometer  survey  of  25   countries   with   respect   to   trust   in   financial   institutions   and   services   (with   only   34   percent   of   people   reporting   that   they   trust   financial   services).30   According   to   the   National   Agency   for   Financial  Studies  (NAFI),  only  4  percent  of  people  believe  that  saving  with  a  commercial  bank  is   safe  (though  the  trust  to  state-­â€?owned  banks  is  7  times  higher).   • Low  levels  of  financial  literacy.  According  to  results  of  a  survey  in  2011,  more  than  one-­â€?third  of   the  adult  population  has  low  levels  of  financial  literacy.  To  address  this  issue,  Russia  embarked   on  a  multi-­â€?year  Financial  Education  and  Financial  Literacy  Project  together  with  the  World  Bank   (see  Sec.  2.2).   • Low  income  levels.  In  the  first  quarter  of  2012,  there  were  19.1  million  people  (13.5  percent  of   the  population)  living  below  the  poverty  line  in  Russia.31  About  68  percent  of  people  cited  their   low  income  level  as  a  reason  for  not  using  deposit  services.  For  the  same  reason,  83  percent  said   they   cannot   afford   mortgage   loans.   According   to   NAFI,   the   desire   to   use   or   continue   to   use   deposit  services  is  directly  correlated  with  people’s  income  levels.     • Supply   side   constraints.   According   to   the   World   Bank,   53   percent   of   adult   urban   residents   in   Russia   have   an   account   at   a   formal   financial   institution,   while   in   rural   areas   this   indicator   is   45.5   percent.32  The  level  of  the  supply  of  retail  banking  services  in  the  country  has  been  uneven:  on   average,  it  is  just  above  one-­â€?fifth  when  measured  in  comparison  to  the  level  of  Moscow  (and  13   percent   when   the   two   largest   cities   –   Moscow   and   St.   Petersburg   –   are   excluded   from   the   calculation).33   With   respect   to   newer   channels   for   financial   service   provision,   27   percent   of   people  living  in  rural  areas  said  they  do  not  use  payment  terminals  (automated  cash-­â€?in  devices   allowing   for   the   payment   of   various   types   of   bills   and   services)   because   there   are   none   near   their  home  or  work.  The  lack  of  infrastructure  for  card  acceptance  is  the  most  often  cited  reason   (34   percent)   for   not   using   cards   to   pay   for   goods   in   retail   stores.   Another   16   percent   mentioned   that  those  stores  that  accept  cards  tend  to  be  more  expensive.   In   general,   the   most   financially   excluded  Russians   tend   to   be   those   living   outside   of   large   cities,   who   are   less   educated   and   older,   have   lower   income   and   are   less   technologically   savvy.   Thus,   in   Moscow   and   St.   Petersburg,   there   are   1.5   times   more   users   of   plastic   cards   and   about   3   times   more   people   who   requested   debit   and   credit   cards   themselves   (versus   receiving   them   automatically   from   an   employer);   the  number  of  deposit  account  owners  is  higher  by  10  percent  compared  to  the  rest  of  Russia.                                                                                                                             30  Edelman  Trust  Barometer  2012,  quoted  from  http://bit.ly/Q2VSKq.   31  Federal  Service  for  State  Statistics,  http://bit.ly/Q2VYl9.   32  See  World  Bank  (2012).     33  See  NAMMS  (2011).     11     Changing  Picture  of  Retail  Demand   The  majority  of  the  Russian  population  use  traditional  channels  for  financial  services  –  e.g.  68  percent  of   people   prefer   making   regular   payments   through   bank   branches   and   33   percent   through   the   Russian   Post.   Very   few   people   currently   use   mobile   banking,   e-­â€?money   or   internet   banking   to   make   payments   (2,   1   and   1   percent   respectively,   though   most   leading   retail   banks   offer   this   possibility).34   At   the   same   time,   in  the  last  few  years  there  has  been  a  shift  in  preferences  towards  the  use  of  payment  terminals  –  not   just   in   terms   of   the   number   of   people   (about   51   percent   currently   use   payment   terminals35   –   a   significant   number   given   that   the   industry   emerged   less   than   a   decade   ago),   but   also   in   terms   of   the   types   of   services   used.   For   example,   in   just   one   year,   between   2011   and   2012,   the   composition   of   payments   through   payment   terminals   and   POS-­â€?terminals   changed   –   payments   for   communication   services   reduced   in   volume  from   95   to   86   percent,   and   other   types   of   payments   started   becoming   more   popular   –   such   as   loan   repayments,   bank   account   replenishment,   payments   for   utility   services   and   purchases  of  prepaid  cards  (see  Section  3.3).36   Despite   the   fast   penetration   of   innovative   solutions   such   as   payment   terminals,   it   seems   that   in   the   coming   years   the   majority   of   people   currently   financially   underserved   will   continue   using   traditional   channels  to  meet  their  basic  needs  for  financial  services.   2.2 Financial  Education,  Literacy,  and  Capability   According   to   results   of   a   national   survey   of   the   Higher   School   of   Economics   in   2011,37   36   percent   of   people  admitted  to  having  low  levels  of  financial  literacy.  Only  23  percent  of  respondents  were  able  to   identify   characteristics   of   a   financial   pyramid,   and   80   percent   of   people   have   never   heard   the   word   “financial   ombudsmanâ€?   and   another   5   percent   were   not   sure.   Sixty   percent   could   not   say   what   types   of   investments  are  protected  by  the  deposit  insurance  system,  and  another  9  percent  were  wrong  in  their   understanding.   Less   educated,   older,   and   lower-­â€?income   people   manifest   the   lowest   financial   literacy   levels   (financial   literacy  indices  of  0.8,  1.3  and  1.1  respectively,  compared  to  1.6  on  average).38  Younger  people  tend  to   use   innovative   solutions   for   financial   services   –   such   as   payment   terminals   –   much   more   often   than   people  of  the  retirement  age.  For  example,  among  18-­â€?24  year  old  customers,  47  percent  use  payment   terminals,  while  among  people  of  55  and  older,  only  15  percent  are  payment  terminal  users.   To  address  the  issue  of  financial  literacy,  Russia  has  started  the  implementation  of  a  five-­â€?year,  USD  113   million,   Financial   Education   and   Financial   Literacy   Project   together   with   the   World   Bank.   The   project                                                                                                                           34   The   World   Bank   Global   Findex   Database   provides   more   data   on   mobile   phone   usage:   In   2011,   1.7   percent   of   adults   above   15   years   used   a   mobile   phone   to   pay   bills,   1.8   percent   to   receive   money,   and   1.5   percent   to   send   money.  See  http://bit.ly/W7uux9.   35  See  http://bit.ly/PKGIqQ.   36  See  Center  for  Research  of  Payment  Systems  and  Settlements  and  RMC  (2012).   37  See  Kuzina  (2012).   38  See  Kuzina  (2012).   12     aims   to   improve   the   financial   literacy   of   Russian   citizens   as   well   as   strengthen   the   foundations   for   consumer   protection   in   financial   services.   As   of   mid-­â€?2012,   the   project   started   in   two   pilot   regions,   Volgograd  and  Kaliningrad,  which  adopted  a  medium-­â€?term  regional  financial  literacy  programs  for  2011-­â€? 2015/16,   identified   activities   to   be   financed   from   the   federal   budget,   and   allocated   the   needed   funds   in   the  regional  budgets.39   2.3 Financial  Consumer  Protection  and  Financial  Ombudsman   There  is  currently  no  specialized  public  financial  consumer  protection  authority  in  Russia,  but  consumers   can  apply  to  a  number  of  organizations  with  their  complaints  depending  on  the  nature  of  the  complaint,   service   and   provider:   to   financial   institutions   themselves,   to   supervisory   authorities,40   to   the   Federal   Service   for   Supervision   in   the   Area   of   the   Protection   of   Consumer   Rights   and   Human   Wellbeing   (Rospotrebnadzor),  as  well  as  to  other  organizations  (for  example,  to  the  Administration  of  the  President   or   the   Prosecutor   General’s   Office).   Among   one   of   the   recommendations   of   the   World   Bank   2009   diagnostic   review41   was   the   establishment   of   a   dedicated   financial   ombudsman   to   whom   financial   consumers  could  submit  their  complaints.   A  Financial  Ombudsman’s  Office  in  Russia,  founded  in  October  2010  by  the  Association  of  Russian  Banks   (ARB),42   did   not   replace   other   authorities   as   had   been   recommended   by   the   World   Bank.   Rather,   it   became   yet   another   organization   involved   in   handling   certain   financial   consumer   complaints.   The   Financial   Ombudsman   activities   are   currently   governed   by   provisions   adopted   by   ARB,   though   there   are   plans  to  adopt  a  special  law  creating  a  government  appointed  financial  ombudsman  in  2012.43  The  law   should   provide   for   the   centralization   of   financial   consumer   protection   and   dispute   resolution   mechanisms,  as  recommended  by  the  World  Bank  in  2009,  and  ensure  that  the  Financial  Ombudsman   has  the  independence,  authority  and  capacity  necessary  to  handle  financial  consumer  complaints.   The  ARB-­â€?housed  office  of  Financial  Ombudsman  deals  with  natural  persons  with  complaint  values  of  less   than  RUB  300,000  (USD  9,700)  and  only  after  they  have  first  sought  redress  from  the  bank  in  question.   As  of  January  2012,  there  were  only  10  banks,  5  microfinance  institutions  (MFIs)  and  1  collection  agency   that   signed   the   ARB   provisions   on   the   Financial   Ombudsman;   but   in   total,   92   organizations   cooperate   with   the   Financial   Ombudsman,   though   most   of   them   informally.   In   two   years,   the   Ombudsman   reviewed  over  3,600  complaints.44  This  is  a  small  figure  if  compared  to  the  number  of  complaints  about                                                                                                                           39  See  http://bit.ly/Q2W78g.   40  This  would  be  the  Central  Bank  in  the  case  of  banks  and  NBCOs,  and  the  Federal  Financial  Markets  Service  in  the   case   of   microfinance   institutions   and   credit   cooperatives.   It   should   be   noted   that   neither   agency   has   a   specific   system  for  receiving  such  complaints,  and  customers  with  complaints  against  other  types  of  providers  –  e.g.  mobile   network  operators  or  e-­â€?money  issuers  –  may  be  uncertain  where  to  take  their  complaints.   41  World  Bank  (2009).   42  Until  February  2012  the  Ombudsman  position  was  held  by  Pavel  Medvedev,  State  Duma  deputy,  who  then  went   to  serve  as  advisor  to  the  Central  Bank  Governor  (currently  the  head  of  the  ARB  serves  as  acting  Ombudsman).   43  A  draft  law  on  financial  ombudsman  is  expected  to  be  developed  by  November  2012.  See  http://bit.ly/Q2W8ZV.   44  See  http://www.biztass.ru/news/one/7757.   13     retail   financial   services   received   by   Rospotrebnadzor   only   –   close   to   41,000   during   2011-­â€?2012.45   It   should   be   noted   that   Rospotrebnadzor   reports   a   tenfold   increase   in   the   number   of   such   complaints   since  2008  due  to  the  rapid  growth  of  the  consumer  credit  market.     Box  1:  Demand  and  Usage  –  Key  Challenges  and  Opportunities     To   date,   there   has   been   no   specific   research   on   the   demand   for   financial   services  in   Russia  –  and  there  is   no  comprehensive  picture  of  the  demand,  as  a  result.  Rather,  research  has  focused  on  the  current  use  of   financial  services  and  thus  could  not  fully  capture  the  gaps  in  supply.   Despite  impressive  progress  in  outreach  and  a  fivefold  increase  in  the  per  capita  supply  of  retail  banking   services   since   2008,   significant   regional   disparities   remain,   with   remote   and   sparsely   populated   areas   (which   are   generally   among   the   poorest)   having   just   a   small   percentage   of   the   retail   banking   services   supply  level  enjoyed  by  residents  of  Moscow.   Though   some   innovations   in   financial   service   delivery   (in   particular,   payment   terminals)   are   becoming   increasingly  popular  and  ubiquitous,  helping  meet  the  demand  for  one  of  the  most  used  services   –  bill   payment,   they   are   not   well   aligned   to   close   financial   access   gaps   for   the   financially   underserved   categories  (older,  lower-­â€?income,  living  outside  of  large  cities,  less  educated).   As   the   increased   availability   of   financial   services   (see   Sec.   2.1)   does   not   automatically   increase   uptake,   further  study  of  the  financially  underserved  categories  could  provide  insights  into  the  reasons  for  their   continued  financial  exclusion.   To   build   trust   in   financial   services,   there   is   an   ongoing   need   for   a   centralized,   specialized   financial   consumer  protection  and  dispute  resolution  agency  covering  all  types  of  financial  service  providers  that   has  sufficient  independence,  authority  and  capacity  to  handle  and  resolve  complaints.     3. The  Service  Provider  Landscape   The  landscape  of  providers  serving  lower  income  Russians  can  be  broadly  divided  into  banks  and  other   credit  organizations,  nonbank  financial  organizations  (NFOs),  and  payment  service  providers.  Banks  and   nonbank  credit  organizations  (NBCOs),  which  are  both  licensed  under  the  Banking  Law  and  supervised   by   the   CBR,   play   a   role   both   as   partner   institutions   of   payment   service   providers   and   as   providers   of   microfinance   services   themselves.   NFOs   such   as   lending-­â€?only   microfinance   institutions   (MFIs)   and   credit   cooperatives  (CCs)  mostly  target  the  lower  end  of  the  market.  Finally,  payment  service  providers  are  a   diverse   group   of   institutions   such   as   money   transfer   operators,   electronic   money   operators,   mobile   network  operators  (MNOs),  and  bank  and  nonbank  payment  agents.  They  have  recently  been  the  most   innovative   in   providing   new   payment   channels,   virtual   accounts   and   mobile   wallets,   which   may   have   potential  to  reach  previously  underserved  clients.  The  recent  introduction  of  a  Payment  System  Law  is   leading  to  substantial  changes  of  the  regulatory  framework  applicable  to  this  diverse  group  of  providers.                                                                                                                           45  See  Prusakov  (2012).     14     Table  2:  Typology  of  Service  Providers   Type  of   Main  players/  Key   Main  law   Regulatory  and   Role  in  financial   financial   characteristics   regulating  their   supervisory   inclusion   service   activities   bodies   provider   Credit  organizations     Banks 915  banks,  with  top  50   Banking  Law   Central  Bank   Banks  remain  the   banks  having  over  80   main  traditional   percent  of  all  banking   channel  for  financial   assets,  including  Sberbank   service  provision  to   with  over  25  percent   the  vast  majority  of   people.     Non-­â€?bank   60  operating  as  various   Banking  Law   Central  Bank   Most  money  transfer   credit   types  of  NBCOs  providing   operators  and     organizations a  limited  range  of  banking   electronic  money   services  (some  types  are   operators  (see  entries   allowed  mobilizing   below)  in  operation  to   deposits  from  legal   date  are  likely  to   entities).    Include   choose  this  legal  form.     payment  service  providers   with  NBCO  license     Payment  service  providers   Money   All  banks  and  NBCOs   Payment  System   Central  Bank   Providing  more   transfer   conducting  domestic  and   Law  and  Banking   convenient  and     operators international  money   Law   accessible  payment   transfers   services.  Money   remittance  operators   provide  important   lessons  on  cost-­â€?saving   innovations  in   international   remittances.   Electronic   Providers  of  virtual   Payment  System   Central  Bank   Providing  easily   money   accounts  (e.g.  WebMoney   Law  and  Banking   accessible  virtual     operators and  Yandex),  to  be   Law   accounts  to  the  wider   registered  either  as  banks   public,  but  so  far   or  NBCOs  by  November   mostly  targeting  the   2012   young,  internet-­â€?savvy,   well-­â€?educated   population.     Mobile   3  largest  include  Beeline,   Communications   Not  currently   Allowing  for  the  use  of   network   MegaFon,  and  MTS     Law  and  Art.  13,   regulated  and   prepaid  airtime  for   operators   Payment  System   supervised  as   various  types  of   Law   financial  service   payments.  Recently   providers  unless   other  services  such  as   operating  though   person-­â€?to-­â€?person   a  subsidiary  or   transfers  and  utility   partner   payments  growing  in   popularity.   15     Bank  and   Many  thousands  of  small   Payment  System   Regulated  by  the   Increasing  accessibility   nonbank   enterprises   Law  and  Payment   Central  Bank,  but   of  bank  and  payment   payment   Agents  Law,   not  supervised   services  in  areas   agents   respectively   without  bank   branches.   Nonbank  financial  organizations   Microfinance   Over  2,100  small,  lending-­â€? Law  on   Regulator:   Providing  microloans   institutions   only  institutions   Microfinance   Ministry  of   to  individuals  and   registered  in  various  legal   Activity  and   Finance   micro  and  small   forms,  both  for  profit  and   Microfinance   Supervisor:   businesses,  in   non-­â€?profit   Organizations   Federal  Financial   particular  those   Markets  Service   having  difficulties  in   accessing  bank  loans.   Many  MFIs  operate  as   consumer  lenders.   Credit   Over  1,400  small,   Law  on  Credit   Regulator:   Providing  access  to   cooperatives   membership-­â€?based   Cooperation     Ministry  of   lending  (both  for   organizations   Finance   business  and   Supervisor:   consumption)  and   Federal  Financial   savings  services  to   Markets  Service   their  members,  in   particular  those  living   in  areas  not  served  or   under-­â€?served  by   banks.   Agricultural   Over  1,700  small,   Law  on  Agricultural   Not  currently   Providing  access  to   credit   membership-­â€?based   Cooperation   supervised  as   lending  and  savings   46 cooperatives   organizations   financial  service   services  to  their   providers;  the   members  –  farmers   Ministry  of   and  peasants’   Agriculture  is  in   households  in  rural   charge   areas.      Source:  Analysis  by  the  authors.   3.1 Banks  and  NBCOs   Sector  Overview   The   banking   sector   in   Russia   is   comprised   of   all   credit   organizations   regulated   and   supervised   by   the   Central   Bank   of   the   Russian   Federation   (CBR),   including   both   banks   and   a   variety   of   nonbank   credit   organizations  (NBCOs).  As  of  April  1,  2012  there  were  975  functioning  credit  organizations,  most  of  them   banks,47   working   through   43,652   branches.48   During   2011,   the   number   of   branches   grew   by   8.4   percent.   According  to  the  IMF  Financial  Access  Survey,  in  2011  there  were  37.09  bank  branches  for  every  100,000   adults.  This  is  close  to  or  even  higher  than  in  some  highly  developed  countries  (e.g.  Germany  –  15.70,                                                                                                                           46   Agricultural   credit   cooperatives   are   covered   in   this   report   only   in   connection   with   the   discussion   about   regulation  and  supervision  of  financial  cooperatives  as  data  on  their  activities  is  limited.   47  Of  the  total,  there  are  915  banks  and  60  NBCOs.   48  Unless  otherwise  noted,  the  source  of  all  statistics  on  the  banking  sector  is  the  CBR.  See  http://ww.cbr.ru.   16     Great  Britain  –  24.87,  France  –  41.58,  USA  –  35.43).49  The  distribution  of  bank  branches  generally  follows   the  distribution  of  the  population  (see  Table  3).   Table  3:  Distribution  of  Banks,  Branches  and  Population   Federal  Districts  of  the   Percentage  Distribution   Russian  Federation   Banks   Branches   Population   Central   59%   28%   27%   incl.  Moscow  and  the  Moscow  Region   52   15%   13%   Northwester   7%   9%   10%   Southern   5%   10%   10%   North  Caucasian   6%   3%   7%   Volga   11%   24%   21%   Urals   5%   9%   8%   Siberian   5%   13%   13%   Far  Eastern   3%   4%   4%   Source:  Based  on  CBR  data,  2012.   The   solid   average   figures   of   bank   branches   and   relatively   equal   distribution   across   regions   may   be   masking   a   significant   intra-­â€?regional   variation   as   most   branches   are   located   in   oblast   and   regional   centers,  with  very  few  operating  in  smaller  towns  and  rural  areas.  Furthermore,  in  a  large  country  such   as   Russia   it   is   important   not   only   to   look   at   number   of   branches   per   population,   but   also   per  geographic   area.   A   comparison   of   the   number   of   bank   branches   per   1,000   km2   in   Table   4   shows   the   specifics   of   the   financial   inclusion   challenge   for   a   country   of   such   size   as   Russia   –   with   a   relatively   low   population   density   and   various   infrastructure   gaps   which   significantly   increase   banks’   operational   costs.   For   example,   FORUS   Bank,   the   only   specialized   microfinance   bank   in   the   country,   reported,   among   other   difficulties,   facing   unreliable   internet   connections   when   working   through   their   mobile   van   offices   in   areas  outside  of  oblast  centers.50   Table  4:  Commercial  Bank  Branches  and  ATMs  per  1,000  km  in  Select  Countries,  2011   Russia   France   Germany   Great  Britain   USA     2 Commercial  bank  branches  per  1,000  km   2.73   40.22   31.86   52.87   9.58   2 ATMs  per  1,000  km   11.75   106.22   248.2   260.94   n/a   Source:  IMF  Financial  Access  Survey,  2011.  Data  for  Germany  and  Great  Britain  are  for  2010.   The  growth  in  the  number  of  bank  and  NBCO  branches  in  recent  years  has  not  been  even:  the  number  of   full   service   branches   actually   contracted   by   about   14   percent   from   about   3,300   to   2,800,   and   the   number  of  “lightâ€?  branches  (which  include  additional  offices,  operational  cash  offices  outside  cash  units,   credit   cash   offices   and   operational   offices)   grew   by   16   percent   in   the   last   five   years   –   from   approximately  34,000  to  over  40,000.51  This  disparity  has  to  do  with  the  fact  that  in  2004  and  2007,52  the                                                                                                                           49  IMF  Financial  Access  Survey,  2011,  http://fas.imf.org/.  Data  for  Germany  and  Great  Britain  are  for  2010.   50  Interview  with  Stacie  Schrader,  FORUS  Bank,  25  September  2012.   51  For  the  purposes  of  this  paper,  the  term  “branchesâ€?  is  used  to  refer  to  full  service  and  “lightâ€?  branches.   52 CBR  Instruction  No.  109-­â€?I  of  January  14,  2004,  “On  the  Order  of  the  Bank  of  Russia  Decision  on  the  State   Registration  of  Credit  Organizations  and  Issuance  of  Licenses  for  Performing  Banking  Operationsâ€?  and  CBR   17     Central  Bank  allowed  the  establishment  of  special  types  of  bank  branches  performing  a  limited  number   of   operations   (and   therefore   less   costly   for   banks   to   set   up);   in   addition,   some   of   these   “lightâ€?   branches   could   be   opened   in   regions   other   than   the   location   of   their   parent   bank   headquarters.   Overall,   while   allowing   the   growth   of   bank   branch   infrastructure,   the   CBR   has   been   pursuing   banking   sector   consolidation:  in  2012,  the  minimum  capital  requirement  of  banks   was  increased  two-­â€?fold  to  RUB  180   million   (USD   5.8   million),   and   by   2015   banks   must   have   RUB   300   million   (USD   9.7   million)   in   capital.53   The  result  of  this  strategy  has  been  the  gradual  reduction  in  the  number  of  banks  –  by  almost  one-­â€?fifth   since  2007  (from  1,143  to  915).  Increasing  banks’  capital  is  viewed  by  the  CBR  as  key  to  increasing  the   stability   of   the   banking   sector.54   Experts   believe   that   if   the   current   trend   remains,   there   will   be   about   600  banks  and  NBCOs  by  2020.55     Banking  sector  assets  are  highly  concentrated  in  a  few  large  banks  –  the  top  5  banks  account  for  over  50   percent   of   the   total,   and   the   top   50   banks   (or   20   percent   of   the   total   number   of   all   banks)   –   for   over   81   percent   of   the   total.   Four   hundred   sixty-­â€?six   regional   banks56   at   the   beginning   of   2012   held   about   12   percent  of  the  total  assets.  As  for  the  deposits  of  natural  persons,  their  distribution  is  very  similar  to  that   of   the   total   assets   among   the   largest   banks   -­â€?   with   58.8   percent   of   all   such   deposits   held   in   state-­â€? controlled  banks,  while  regional  medium-­â€?sized  and  small  banks  hold  only  3.7  percent.   Despite  their  small  size,  regional  banks,  united  in  the  Association  of  Regional  Russian  Banks,  believe  that   they   have   important   advantages   over   larger   banks   as   they   tend   to   be   closer   to   their   customers,   are   better  suited  to  regional  specifics,   and  work  in  the  locations  where  large  banks  are  not  present.  In  their   proposed   alternative   strategy   for   the   banking   sector   development   until   2020,   the   Association,   while   acknowledging   the   need   for   a   moderate   increase   of   banks’   minimum   capital,   advocates   for   the   preservation  of  regional  banks  (most  of  which  will  be  forced  to  close  down  or  consolidate  in  line  with   the  envisaged  new  minimum  capital  requirements)  and  the  introduction  of  differentiated  regulation  and   supervision  depending  on  banks’  systemic  significance.57   In  addition  to  the  above  analysis  of  some  quantitative  financial  inclusion  indicators,  further  research  is   needed   to   fully   understand   the   complexity   of   factors   preventing   universal   financial   services   coverage.   What   is   the   profile   of   the   main   clientele   of   regional   banks   and   how   is   it   different   from   that   of   large   banks?   What   will   be   the   ramifications   of   the   upcoming   consolidation   of   regional   banks,   and   will   large   banks   be   able   to   ensure   the   same   regional   relevance   and   outreach?  How   many   bank   branches   and   in   which   locations   are   necessary   for   Russia   given   its   territory   and   population   dispersion?   And   to   which   extent   do   factors   beyond   physical   presence   of   bank   branches   influence   financial   exclusion?   These                                                                                                                                                                                                                                                                                                                                                                                                 Direction  No.  1794-­â€?U  of  February  21,  2007,  “On  Introducing  Changes  to  the  Bank  of  Russia  Instruction  Dated  14   January  2004. 53  Article  11.2  of  the  Banking  Law.   54  See  Government  of  the  Russian  Federation  and  the  Central  Bank  of  the  Russian  Federation  (2011).     55  See  http://bit.ly/Q2WdfU.   56  Defined  by  the  CBR  as  those  registered  outside  of  the  Moscow  region.   57  See  Association  of  Regional  Russian  Banks  (2009).   18     questions  need  to  be  answered  to  determine  which  policy  measures  will  be  most  effective  in  addressing   the  financial  inclusion  challenge  in  the  country.     Branchless  banking  solutions  used  by  banks   Though  much  cheaper  than  traditional  bank  branches,  “lightâ€?  branches  are  still  expensive.  Thus,  while   many  smaller  banks  have  been  growing  their  “lightâ€?  branch  infrastructure,  Sberbank,  the  largest  retail   bank   owning   about   45   percent   of   all   branches   (and   with   a   disproportionate   share   of   lower   income   customers),58  has  been  reducing  the  number  of  its  branches  –  in  six  months  of  2011,  the  reduction  was   by  239  down  to  19,110,59  and  by  August  2012  the  number  further  dropped  by  508  to  18,608.60  Instead,   Sberbank  has  been  growing  the  network  of  ATMs  and  payment  terminals,  as  well  as  developing  other   branchless   solutions.     Sberbank’s   network   of   ATMs   during   2011-­â€?2012   grew   by   23   percent   and   exceeded   34,000;  its  network  of  payment  terminals  as  of  January  2012  was  the  largest  among  banks  –  over  21,000   (Moscow   Credit   Bank,   by   comparison,   was   second   with   just   over   3,200   terminals).61   At   the   same   time,   it   remains  to  be  seen  whether  the  branchless  solutions  of  Sberbank  will  be  an  adequate  replacement  of  its   branches.   For   example,   in   one   of   the   regions   in   Siberia,   in   response   to   multiple   requests   of   local   residents,  local  authorities  had  to  interfere  and  urged  Sberbank  not  to  close  down  its  branches  in  four   rural   settlements   which   served,   in   total,   clients   in   ten   such   settlements   (six   of   them   had   no   bank   branches  and  their  residents  would  otherwise  had  to  travel  over  60  km  to  the  nearest  regional  center   with  a  bank  branch).62   According  to  the  CBR,  the  number  of  bank  devices  for  the  provision  of  “distance  servicesâ€?  (defined  by   CBR  as  “e-­â€?terminals  and  imprinters,  ATMs,  payment  terminals  and  e-­â€?terminals  for  remote  accessâ€?)    grew   by  over  20  percent  in  one  year  and  reached  about  757,400  at  the  end  of  2011.63  This  is  important  from   the   financial   inclusion   perspective   as   banks   try   to   move   closer   to   customers   and   reduce   costs   of   their   services.   Many   retail   banks   offer   remote   account   access   solutions   to   their   customers.   In   2011,   the   number   of   bank  accounts  that  can  be  accessed  through  the  internet  grew  1.8  times,  and  those  that  can  be  accessed   through   a   mobile   phone   2.2   times,   for   a   total   of   616.2   million   transactions   with   the   total   volume   of   RUB   158  trillion  (USD  5.1  trillion).64   Amendments  to  the  Banking  Law  in  2009  introduced  the  notion  of  bank  payment  agents  which  opened   up   a   possibility   for   banks   to   use   services   of   non-­â€?CBR-­â€?licensed   companies   and   individual   entrepreneurs                                                                                                                           58  According  to  the  Agency  for  Deposit  Insurance,  in  2011  Sberbank  held  47.9  percent  of  all  individuals’  deposits,  of   which  76.5  percent  were  small  and  medium-­â€?sized  deposits  (defined  as  deposits  below  RUB  700,000  –  USD  22,639);   the  average  ratio  of  small  and  medium  sized  deposits  for  all  banks  was  58.2  percent.  See  http://bit.ly/Q2WkIs.   59  See  http://bit.ly/UupUvI.   60  See  http://bit.ly/Uuq0Ue.  The  two  periods  were  chosen  due  to  data  availability.   61  See  http://bit.ly/Uuq4Du.   62  See  http://bit.ly/Uuqeea.   63  See  CBR  (2012),  p  12.   64  Ibid.,  p.  13.  These  are  likely  to  include  transactions  by  legal  entities.   19     for   cash   in   and   cash   out   functions   (with   further   clarification   of   bank   and   payment   agent   functions   in   the   Payment   System   Law   adopted   in   2011).   It   should   be   noted   that   the   banking   sector   was   not   the   one   driving  these  innovations  –  rather,  the  legislation  came  to  formalize  and  bring  under  the  supervision  the   fast   growing   (nonbank)   payment   sector.   Unlike   bank   and   NBCO   headquarters,   agents   (97   percent   of   them   registered   as   individual   entrepreneurs   and   limited   liability   companies)65   are   distributed   more   evenly   across   the   country   –   their   distribution   corresponds   to   the   distribution   of   the   population   by   regions.   This   has   a   good   potential   for   forming   a   basis   for   increased   accessibility   to   financial   services   –   however,   the   range   of   services   that   bank   payment   agents   can   perform   is   limited.   Under   current   legislative   definitions   banking   agents   are   primarily   used   by   customers   to   make   payments   and   top   up   their  existing  accounts,  as  agents  are  not  allowed  to  identify  customers  for  new  bank  account  opening   (see  Regulation  and  Supervision  below).     Some  banks  are  experimenting  with  totally  branchless  models.  Examples  include  Tinkoff  Credit  Systems   Bank   (see   Section   3.3)   and   Ocean   Bank   where   most   transactions   are   internet-­â€?based   or   performed   through   ATMs   and   payment   terminals.   Another   example   of   innovation   includes   Promtorgbank   which   joined   forces   with   Svyaznoy   (“Messengerâ€?),   a   large   network   of   electronics   retail   shops,   to   found   Svyaznoy   Bank   and   use   the   existing   retail   shops   as   its   agents.   These   models   often   require   creative   approaches   to   implementing   relevant   legislation.   For   example,   since   account   opening   by   agents   is   not   allowed,   some   banks   hire   agents’   staff   part-­â€?time   to   perform   these   operations   (see   Regulation   and   Supervision   below).   It  will   be   important   from   a   financial   inclusion   perspective   to   monitor   whether   these   new  models  hold  a  financial  inclusion  promise  for  broader  customer  groups  –  beyond  the  younger  and   more   technology-­â€?savvy   internet   users   or   electronics   shops   customers,   as   well   as   whether   other   banks   will  consider  these  models  worthy  of  replication.   An  important  factor  in  determining  the  success  of  many  financial  inclusion  innovations  is  the  significant   reliance  on  cash  in  the  provision  of  financial  services  –  in  particular,  to  lower-­â€?income  customers.  With  an   insufficient  card  acceptance  infrastructure  (see  Sec.  2.1)  and  limited  functionality  of  agents  in  terms  of   cash  out  functions  which   will   be   discussed   below,   there  is  a  risk  that  some  innovative  models  will  not   realize  their  financial  inclusion  potential.  Yet  CBR  figures  suggest  that  the  usage  of  cash  is  still  very  high  –   81  percent  in  the  total  volume  of  payments  in  2011  (though  reduced  by  5  percent  since  2010).66  Unless   there  are  convincing  incentives  in  place  both  for  customers  and  retailers  to  use  cards,  and  a  sufficient   cash  out  network,  it  is  difficult  to  imagine  how  “cashlessâ€?  solutions  such  as  internet-­â€?based  and  mobile   phone-­â€?based  financial  service  provision  models  can  compete  with  traditional  brick  and  mortar  banking.   Bank  Lending  to  Micro,  Small  and  Medium-­â€?Sized  Enterprises  (MSMEs)     As  of  April  1,  2012,  the  total  banking  sector  portfolio  of  loans  disbursed  to  MSMEs  was  RUB  4,008  billion   (USD  129.6  billion);  11  percent  of  this  portfolio  was  provided  to  individual  entrepreneurs.  It  is  hard  to   say  to  what  extent  this  meets  the  existing  demand  as  there   are  no   reliable   demand   data   with   respect   to   MSME   finance.   In   CBR   statistics,   there   is   no   disaggregation   by   micro,   small   and   medium-­â€?sized                                                                                                                           65  Center  for  Research  of  Payment  Systems  and  Settlements  and  RMC.  (2011).   66  See  http://bit.ly/UuqrOp.   20     enterprises;  all  MSMEs  are  referred  to  as  “subjects  of  small  and  medium  entrepreneurshipâ€?  –  which  can   include  MFIs  and  CCs.  It  is  possible  therefore  that  this  portfolio  includes  wholesale  loans  to  MFIs  of  CCs  –   though   it   is   unlikely   that   their   share   is   significant   (see   Sec.   3.2).   The   top   30   banks   accounted   for   over   61   percent  of  all  loans  to  SMEs,  including  about  72  percent  to  individual  entrepreneurs.     The   total   portfolio   to   MSMEs   grew   by   over   60   percent   since   2009,67   and   in   2010-­â€?2012,   per   industry   experts,   the   MSME   lending   sector   has   been   among   those   with   the   highest   growth   rates.68   Among   the   largest   MSME   lending   programs   are   those   of   SME   Bank   (122   partner   banks   as   of   August   2012)69   and   European   Bank   for   Reconstruction   and   Development   (EBRD)   (14   partner   banks   –   participants   of   the   downscaling  program).  In  comparison  to  MFIs  and  CCs,  it  is  clear  that  banks  serve  a  different  category  of   enterprises.   For   example,   EBRD   partner   banks’   average   loan   size   disbursed   to   clients   is   about   EUR   11,470   (approx.   USD   14,900),70   or   about   ten   times   higher   than   that   of   MFIs   and   CCs.71   In   case   of   SME   Bank   partners,   the   loans   to   end   MSME   clients   are   even   higher   –   about   RUB   5   million   (USD   162,000)   disbursed   by   partner   banks   and   about   RUB   1   million   (USD   32,000)   disbursed   by   other   partner   organizations  (defined  as  “small  and  medium-­â€?sized  entrepreneurship  infrastructure  support  institutionsâ€?   that  include  leasing  companies,  business  incubators,  several  MFIs  and  CCs,  as  well  as  other  organizations   falling  under  this  definition  per  the  Russian  law).72     Despite  the  high  growth  rates  of  the  MSME  lending  programs,  access  to  finance  is  still  cited  by  MSMEs   as  among  the  top  three  barriers  for  business  development.73  According  to  a  survey  of  OPORA,  a  national   organization   of   associations   of   entrepreneurs,74   over   42   percent   of   companies   and   individual   entrepreneurs  said  it  was  difficult  if  not  impossible  for  them  to  get  a  loan  for  a  term  of  one  year,  and   almost  50  percent  said  the  same  about  3-­â€?year  loans.75  This  is  confirmed  by  industry  experts  who  believe   that   among   access   gaps   for   MSME   are   longer-­â€?term   and   investment   loans   as   well   as   loans   for   start-­â€?ups   –   especially  micro  and  small  enterprises  with  less  than  6  month  of  experience.76  The   SME   Bank  operates   a   program   that   is   an   attempt   to   address   the   issue   of   longer-­â€?term   finance   as   its   partners   can   only   fund   MSME  activities  other  than  trade  and  at  a  set  interest  rate.  Depending  on  a  product,  the  rate  to  the  end   borrowers  cannot  exceed  1.5  –  2  times  the  SME  Bank  interest  rate  on  its  wholesale  loans,  resulting  in   the   weighted   average   of   12.32   percent77   –   while   the   market   average,   according   to   a   survey   of   17   banks,                                                                                                                           67  See  http://bit.ly/PKIgB5.   68  Interviews  with  Mikhail  Mamuta,  NAMMS,  September  2012.   69  See  SME  Bank,  http://bit.ly/Uuru0B.   70  See  Russia  Small  Business  Fund  (2012).   71  See  MIX  and  CGAP  (2010).   72  See  SME  Bank  2012,  http://www.mspbank.ru.   73  See  OPORA  (2012).     74  As  of  August  2012,  OPORA  had  141  associations  of  entrepreneurs  as  its  members  and  works  through  81  of  its   regional  offices  covering  the  whole  country.   75  See  OPORA  (2012).   76  Interviews  with  Mikhail  Mamuta,  NAMMS,  September  2012.   77  See  http://bit.ly/QV39KI.     21     was  19.75  percent.78  The  result  of  this  strategy  has  been  a  much  higher  share  of  investment  loans  in  the   SME   Bank   program   portfolio   –   45   percent   compared   to   the   market   average   of   19   percent.79   While   currently  the  share  of  the  SME  Bank-­â€?funded  enterprises  is  less  than  1  percent  of  the  total  bank  MSME   lending  portfolio,  the  high  growth  rate  of  the  SME  Bank  portfolio  (over  120  percent  in  2011  when  the   market   grew   just   by   19   percent)80   could   potentially   create   an   un-­â€?level   playing   field   for   other   MSME   loan   products  offered  by  banks.   Since  the  adoption  of   the   Law   on   Microfinance  Activity  and   Microfinance   Organizations   (see   Sec.   3.2),   some  banks  have  pioneered  a  different  model.  VTB24,  for  example,  a  state-­â€?owned  institution  and  one  of   the   largest   retail   banks   in   Russia,   co-­â€?founded   a   microfinance   organization   called   “Mikrofinansâ€?   that   issues   loans   with   the   average   amount   of   RUB   375,000   (USD   12,100).81   At   some   point   Sberbank   considered  the  establishment  of  its  own  MFI  as  well,  but  later  declared  that  it  would  rather  fund  existing   MFIs.82   It   is   yet   to   be   seen   which   model   turns   out   more   promising   and   cost-­â€?efficient   for   banks   –   the   former  where  the  microlending  activity  is  transferred  to  a  separate  institution  free  from  the  burden  of   the  Central  Bank  supervision,  or  the  latter  –  where  it  is  left  to  specialized  providers  such  as  MFIs  or  CCs   and  a  bank  acts  as  a  wholesale  lender.   A   model   successful   in   other   countries   –   a   specialized   microfinance   bank   –   has   not   become   popular   in   Russia.  There  is  currently  only  one  specialized  microfinance  bank,  FORUS,  established  in  2005  as  a  result   of   a   transformation   from   an   NGO   MFI.   In   the   same   year,   another   NGO   MFI   –   Russian   Women’s   Microfinance  Network  transformed  into  a  nonbank  deposit  and  credit  organization  (a  type  of  NBCO),  but   in  2011  gave  up  the  CBR  license  and  re-­â€?registered  as  an  MFI  in  the  form  of  a  limited  liability  company.   Earlier,   between   1999   and   2005,   EBRD-­â€?established   KMB   Bank83   had   been   operating   in   16   regions   of   Russia  as  a  bank  dedicated  to  small  business  lending.84  But  in  2005  the  bank  joined  the  Intesa  Sanpaolo   international   banking   group   and   under   a   new   name   of   Bank   Intesa   turned   into   a   universal   bank,   though   lending   to   MSME   remained   an   important   part   of   the   bank’s   business   (for   example,   in   2011,   it   was   rated   14th  among  the  top  20  banks  lending  to  MSME85).86  Why  has  the  specialized  microfinance  bank  model   not  worked  in  Russia  as  it  has  in  other  countries?    One  of  the  reasons  may  be  higher  delivery  costs  as   banks   try   to   reach   down   market   in   areas   outside   of   bigger   towns87   -­â€?   the   same   reason   that   makes   Sberbank  close  down  its  branches,  but  the  issue  highlights  the  need  for  additional  research.                                                                                                                           78  See  http://bit.ly/PhzjEP.   79  See  SME  Bank  (2012).     80  Ibid.     81  See  http://www.micfin.ru/about.html.     82  See  http://bit.ly/Q5wp2X.   83  Established  in  1992  by  EBRD  as  the  Russian  Bank  for  Project  Financing  and  renamed  into  KMB  Bank  in  1998;  in   2009,  renamed  into  Bank  Intesa.   84  In  Russian,  the  abbreviation  KMB  stands  for  “small  business  lendingâ€?.   85  See  http://bit.ly/OLsmMg.   86  See  http://bit.ly/ULv4xY.   87  Interview  with  Stacie  Schrader,  FORUS  Bank,  25  September  2012.     22     Regulation  and  Supervision   Banks   and   NBCOs,   as   previously   stated,   fall   under   the   regulatory   and   supervisory   jurisdiction   of   the   CBR   and  are  governed  by  a  broad  Banking  Law.  This  law  together  with  the  Central  Bank  Law  gives  the  CBR   broad   latitude   to   adjust   the   regulatory   and   supervisory   treatment   of   credit   organizations   to   be   proportionate  to  their  specific  risk  profile.     Few   examples   exist   of   MFIs   having   successfully   transformed   to   banks.   While   no   detailed   research   has   been   conducted   yet   about   the   challenges   of   transformation,   a   few   possible   reasons   can   be   identified.   One  is  high  minimum  capital  requirements  for  banks,  which  only  allow  very  large  players  to  apply  for  a   bank   license.   As   discussed   above,   the   minimum   capital   requirement   for   banks   will   rise   to   RUB   300   million   (USD   9.7   million)   by   2015.   Russian   Finance   Minister   Anton   Siluanov   even   described   a   future   requirement  of  RUB  1  billion  (USD  32.3  million)  as  “possible  and  normalâ€?,  which  would  be  very  hard  for   banks  predominantly  providing  microfinance  to  comply  with.88     Some  banks  have  criticized  CBR  for  being  heavy-­â€?handed  in  supervising  banks,  thus  driving  up  the  costs  of   compliance  and  leading  to  a  situation  where  the  costs  of  being  regulated  (not  only  cost  of  compliance   with  regulations,  but  also  the  time  spent  on  serving  information  requests  by  the  supervisor)  are  higher   than  its  benefits  (first  and  foremost  access  to  alternative  sources  of  funding  such  as  deposits).  This  can   raise  the  question  of  whether  the  legal  form  of  a  bank  is  the  best  fit  for  conducting  microfinance.   On   the   positive   side,   most   of   the   other   prudential   regulations   do   not   create   serious   issues   for   banks   offering   microfinance   services,   though   some   banks   and   NBCOs   targeting   the   low   income   market   find   them   to   be   time   consuming   and   expensive   to   comply   with.   Also   on   the   positive   side,   CBR   has   not   imposed   any   caps   on   lending   rates   that   might   be   an   obstacle   to   providing   microloans   (given   the   inherently  higher  costs  involved  in  large  numbers  of  small  transactions).     An   important   legal   innovation   for   banks   is   the   introduction   of   provisions   on   the   use   bank   payment   agents.89  An  amendment  to  the  Banking  Law  in  200990  permitted  banks  to  use  bank  payment  agents  to   accept  cash  from  individuals  as  payment  for  goods  or  services,  as  well  as  taxes  and  other  government   fees   and   dues.   Art.   14   of   the   Payment   System   Law   has   now   superseded   these   rules   (see   Sec.   3.3).   It   includes  detailed  rules  for  banks  and  NBCOs91  utilizing  bank  payment  agents  (Art.  14),  which  are  wider   than  the  previous  rules  under  Art.  13.1  of  the  Banking  Law.  In  particular,  with  the  lifting  of  restrictions   on  the  types  of  payments  that  can  be  conducted  through  bank  payment  agents,  they  can  now  provide   all   kinds   of   card   transactions,   and   have   been   authorized   to   conduct   cash-­â€?out   services   as   well.   Bank   payment   agents   can   also   identify   clients   in   case   of   funds   transfers   that   do   not   involve   the   opening   of   bank  accounts  (including  e-­â€?money  operations  described  in  Sec.  3.3.                                                                                                                             88  See  http://buswk.co/Qrkpa4.   89  See  CGAP  (2010).   90  Federal  Law  No.  121-­â€?FZ  of  3  June  2009.   91  The  Payment  System  Law  defines  these  as  money  transfer  operators  (see  Sec.  3.3).   23     Bank  payment  agents  are  different  from  the  nonbank  payment  agents  described  below  (see  Sec.   3.3),  as   they  can  offer  a  broader  range  of  services  since  the  payee  can  be  a  bank  or  other  credit  organization.   Typical   transactions   only   permitted   for   bank   payment   agents   are   deposits   into   bank   accounts,   inter-­â€? account  money  transfers,  and  loan  repayments.  Unlike  nonbank  payment  agents,  they  are  also  allowed   to   use   more   than   one   level   of   sub-­â€?agents   (nonbank   payment   agents   can   only   use   one),   and   to   accept   payments  via  ATMs.     Permission   for   banks   to   use   bank   payment   agents   as   their   main   customer   interface   is   limited   by   customer  identification  requirements  in  the  AML/CFT  Law.92  In  particular,  the  law  requires  for  account   opening   that   bank   clients   be   identified   through   government-­â€?issued   identity   documents   and   that   their   residential  address  is  established.  This  seems  to  be  easy  to  comply  with  for  most  Russian  citizens,  as  all   of   them   are   issued   with   a   national   passport   (national   ID),   which   also   states   their   registered   address.   However,   one   issue   is   that   the   account   opening   cannot   be   delegated   to   an   agent   and   requires   the   physical   presence   of   the   client.   At   the   same   time,   the   law   does   not   specify   that   the   account   opening   must   be   undertaken   at   a   bank   branch   so   one   option   is   for   banks   to   place   a   person   authorized   by   the   bank   to   conduct   client   identification   (this   does   not   necessarily   need   to   be   a   bank   employee)   at   an   agent’s  location  for  conducting  the  know  your  customer  (KYC)  procedures.93  There  are  no  restrictions  on   agents   conducting   “transactionalâ€?   KYC,   i.e.   for   all   transactions   (payments   and   transfers)   that   do   not   involve   the   opening   of   a   bank   account   (this   applies   to   both   payment   and   bank   payment   agents).   However,   if   bank   payment   agents   provide   cash-­â€?out   services,   the   recipient   must   in   most   cases   be   identified  regardless  of  the  amount.94                                                                                                                           92  See  also  CGAP  (2010).   93  An  example  for  this  is  the  retailer  Svyaznoy  (see  Sector  Overview  above),  which  bought  a  bank  and  is  now  able  to   post  bank  staff  at  its  retail  locations  for  account  opening  purposes.   94  One  exception  is  if  the  bank  payment  agent  offers  cash-­â€?out  services  at  ATMs  and  the  client  uses  a  plastic  card  to   withdraw  cash  at  an  ATM,  authorization  via  PIN  rather  than  identification  is  sufficient.  See  Ministry  of  Economic   Development  and  Alliance  for  Financial  Inclusion  (2011).   24     Box  2:  Banks  and  NBCOs  –  Key  Challenges  and  Opportunities     Despite   a   period   of   consolidation   in   the   banking   industry   triggered   by   higher   capital   requirements,   banks   have   overall   been   successful   in   expanding   their   physical   footprint.   The   higher   number   of   access   points   is   mostly  due  to  the  opening  of  more  “lightâ€?  branches  and  the  introduction  of  bank  payment  agents,  yet  it  is   still   mostly   branch-­â€?based   and   thus   relatively   expensive   to   maintain.   The   recent   permission   for   bank   payment  agents  to  conduct  cash-­â€?out  transactions  might  help  to  change  this.   There   is   a   risk   that   more   regional   banks   will   be   forced   to   close   down   or   merge   with   larger   banks,   which   might  have  a  negative  impact  on  accessing  banking  services  in  less  populated  areas.   Banks  face  difficulties  and  have  no  strong  incentives  to  move  down-­â€?market  and  to  offer  innovative  financial   services   for   customers   at   the   base   of   the   economic   pyramid.   At   the   same   time,   increasingly   high   capital   requirements   for   banks   constitute   a   high   barrier   for   MFIs   that   might   consider   transforming   into   banks.   Inflexible  regulations  on  issues  such  as  non-­â€?face-­â€?to-­â€?face  account  opening  and  high  costs  of  compliance  can   lead  to  an  unfavorable  cost-­â€?benefit  ratio  for  providing  microfinance  services  under  the  legal  structure  of  a   bank.   Disaggregated   data,   both   in   terms   of   geographic   distribution   (urban   versus   rural)   and   in   terms   of   client   profile   (e.g.,   by   age   and   gender)   is   needed   to   understand   why   banks   and   NBCOs   are   not   realizing   their   financial  inclusion  potential.  For  example,  the  MSME  sector  has  been  experiencing  strong  growth,  but  it  is   not   clear   how   much   of   this   reaches   microfinance   clients   rather   than   providing   relatively   larger   loans   to   SMEs.   Without  clear  initiatives  to   adapt  to  the  needs  of  the  most  excluded  segments  –  particularly  the  elderly  and   poorer  Russians  -­â€?  it  is  difficult  to  say  whether  innovative  delivery  channels  hold  a  financial  inclusion  promise   for  broader  customer  groups  –  beyond  those  already  reached  by  financial  services.       3.2 Microfinance   Institutions,   Credit   Cooperatives   and   Other   Nonbank   Financial  Organizations   Sector  overview   In   addition   to   banks   and   NBCOs,   there   are   financial   institutions   in   Russia   that   are   not   subject   to   the   Central   Bank   regulation   and   supervision   as   they   are   not   allowed   to   mobilize   deposits   and   disburse   credit.  Instead,  these  are   lending  institutions  taking  advantage  of  the  general  power  granted  to  all  legal   entities   under   the   Russian   Civil   Code   to   make   loans.95   Among   these   nonbank   financial   organizations   (NFOs),   microlending   microfinance   institutions   (MFIs)   and   credit   cooperatives   (CCs)   are   of   particular   importance  to  financial  inclusion.   As   of   September   2012,   there   were   2,137   registered   MFIs96   and   1,433   registered   CCs   (representing   approximately   983,000   individual   CC   members),97   the   latter   organized   into   10   Self-­â€?Regulatory                                                                                                                           95  It  should  be  noted  that  there  is  an  important  legal  difference  between  “credit  activityâ€?  allowed  only  to  Central   Bank-­â€?licensed   institutions   and   “lending   activityâ€?   allowed   to   other   institutions.   While   economic   relationships   between  the  parties  of  credit  and  loan  agreements  are  similar,  only  “creditsâ€?  may  be  financed  from  deposits,  and   only  CBR-­â€?licensed  entities  are  permitted  to  mobilize  deposits.   96  FFMS,  http://bit.ly/QHhkEx.   25     Organizations   (SROs).98   Previously   unregulated   and   unsupervised,   all   MFIs   and   CCs   came   under   the   regulatory   jurisdiction   of   the   Ministry   of   Finance   (MOF)   with   the   adoption   of   the   Law   on   Credit   Cooperation  in  2009  and  the  Law  on  Microfinance  Activity  and  Microfinance  Organizations  in  2010.  (No   change  was  made  to  the  Russian   Civil  Code  provisions  on  lending,  so  there  remain  NFOs  that  still  lack   any   regulation   beyond   these   minimal   definitions   and   requirements.)   In   late   2011,   once   the   legal   framework   for   CCs   and   MFIs   was   finalized,   the   Federal   Service   for   Financial   Markets   (FFMS)99   was   appointed   as   their   supervisor.   Responsibilities   of   FFMS   include   registration   of   MFIs   and   CCs   as   well   as   the  monitoring  of  their  activities.   As   of   the   date   of   this   report,   there   was   no   information   available   on   the   total   of   MFIs   and   CCs   as   the   collection  of  statistics  by  FFMS  started  only  in  the  first  quarter  of  2012.  According  to  the  Microfinance   Information  eXchange  (MIX),100  the  average  loan  balance  of  Russian  MFIs  and  CCs  is  about  USD  1,600.101   An  average  CC  or  MFI  is  small,  serving  less  than  1,000  borrowers.  (For  example,  according  to  the  data   provided   by   a   leading   SRO,   the   average   number   of   individual   members   of   its   member   CCs   is   741.)102   According  to  industry  experts,103  there  are  about  70  NFOs  with  loan  portfolios  exceeding  USD  10  million.   However,   there   is   data   available   only   on   6   such   CCs   and   MFIs   (see   Table   5).   NFOs   serve   many   more   microenterprise  clients  than  downscaling  banks104  (see  Sec.  3.1)  and  reach  to  remote  and  less  populated   areas.  The  latter  is  especially  true  for  CCs.  For  example,  among  the  largest  NFOs  are  the  First  Far  Eastern   Credit   Cooperative   and   EKPA   Credit   Cooperative   working   in   the   Far   East   and   Urals,   respectively.   It   is   not   uncommon   for   CCs   in   small   towns   and   settlements   to   unite   a   significant   share   of   local   residents   as   their   members.  The  case  of  EKPA  is  especially  noteworthy  as  this  CC’s  membership  represents  one-­â€?fourth  of   the  population  of  43,500  in  the  town  of  Uray  where  it  operates.                                                                                                                                                                                                                                                                                                                                                                                                         97  Data  from  Mikhail  Mamuta,  NAMMS,  based  on  data  published  by  SROs.     98  FFMS,  http://bit.ly/UEXNo3.   99  FFMS  is  the  federal  agency  in  charge  of  the  supervision  of  most  financial  institutions  in  the  country  other  than   Central   Bank-­â€?supervised   banks   and   NBCOs.   These   include,   in   addition   to   CCs   and   MFIs,   participants   of   the   securities   market,   investment   companies,   pension   funds,   commodity   stock   exchanges,   credit   bureaus,   insurance   companies,  as  well  as  any  self-­â€?regulated  organizations  of  these  financial  institutions.     100  MIX  is  the  leading  global  provider  of  business  information  and  data  service  for  the  microfinance  industry.  The   MIX  has  self-­â€?reported  data  on  98  MFIs  and  CCs  from  Russia  covering  the  largest  institutions.   101  This  is  approximately  ten  times  lower  than  loan  balances  of  Russian  banks  partnering  with  the  EBRD  to  lend  to   micro  and  small  enterprises.   102  Interview  with  Alexander  Solomkin,  SRO  “Cooperative  Financesâ€?,  18  April  2012.   103  Interviews  with  Mikhail  Mamuta,  NAMMS,  September  2012.   104  The  total  number  of  active  end  clients  of  the  largest  Russian  MSME  finance  program  of  the  SME  Bank  was  about   26,000  as  of  August  2012.  See  http://bit.ly/LSEJ7L.   26     Table  5:  Largest  NFOs  in  Russia  by  Loan  Portfolio  (USD)     Name   Date   Type   Gross  Loan   Number  of   Portfolio   Active    1   CMFinance   2011   MFI   58,921,813   55,567    2   EKPA   2010   CC   40,691,139   11,034    3   FINCA  -­â€?  Russia   2011   MFI   33,569,563   11,281    4   First  Far  Eastern  Credit  Cooperative  (FFECC)   2011   CC   11,550,163   5,226    5   Udmurtia   State   Fund   for   Small   Business   2011   MFI   11,535,938   377   Support  (USFSBS)    6   Doveriye  (Amursk)   2010   CC   10,579,357   3,440    7   Gorodskoy   2011   CC   9,176,656   3,882    8   Women’s  Microfinance  Network  (WMN)   2010   MFI   7,981,756   3,258    9   Kassa  Vzaimopomoshi   2011   CC   6,586,844   5,880   10   SBS  (Union  of  Bank  Workers)   2011   CC   4,762,875   1,582   Source:  http://www.mixmarket.org.   At   the   same   time,   many   MFIs   and   CCs   do   not   pursue   any   enterprise   or   social   development   goals   and   engage  primarily  in  consumer  lending.    In  fact,  the  adoption  of  a  new  Law  on  Microfinance  Activity  and   Microfinance   Organizations   (see   below)   providing   for   relatively   low   market   entry   barriers   prompted   many  NFOs  to  apply  for  an  MFI  status  simply  to  lend  legal  certainty  to  their  lending  activities  (formerly   carried   out   based   only   on   general   provisions   of   the   Russian   Civil   Code).   The   divide   between   development-­â€?oriented  NFOs  that  have  existed  since  the  mid-­â€?1990s  and  newly  registered,  purely  profit-­â€? maximizing  consumer  lending  “MFIsâ€?  became  especially  evident  in  early  2012  when  a  payday  lender105   registered   as   an   MFI   commenced   a   partnership   with   the   Russian   Post   and   began   advertising   “mini-­â€? loansâ€?   at   over   2,700   percent   per   annum.   This   caused   massive   public   criticism   of   both   the   concept   of   microfinance  and  the  Russian  Post  as  a  public  institution,  and  led  to  regulatory  discussions  and  proposed   regulatory  changes  described  below.   Unlike   banks,   CCs   and   MFIs   have   not   been   making   much   use   of   the   innovative   solutions   that   have   emerged  in  the  market  in  recent  years.  (For  example,  there  is  only  one  CC  that  acts  as  a  bank  payment   agent.)   From   the   financial   inclusion   perspective,  CCs’   and   MFIs’   typical   closeness   to   clients   and   focus   on   lower-­â€?income   consumer   segments   are   strong   advantages,   and   linking   with   these   new   financial   service   delivery  models  could  represent  an  important  opportunity  to  expand  outreach.     Regulation  and  Supervision   MFIs   Until  2010,  there  was  no  legal  definition  in  Russia  for  microfinance  or  microloans;  however  lending  has   been  allowed  to  any  legal  entity  since  the  adoption  of  the  Russian  Civil  Code,  while  deposit  taking  was   and  remains  only  allowed  to  Central  Bank-­â€?licensed  credit  organizations.                                                                                                                           105  In  other  countries,  a  term  “payday  loanâ€?  is  usually  used  to  describe  a  small,  short-­â€?term  unsecured  loan  that  is   intended  to  cover  a  borrower’s  expenses  until  his  or  her  next  payday.  In  Russia,  the  repayment  of  the  loan  is  not   necessarily   linked   to   a   borrower's   payday.   There   is   no   legal   definition   for   a   payday   loan   or   a   payday   lender   in   Russia.   27     In  2010,  a  federal  law  on  Microfinance  Activity  and  Microfinance  Organizations  was  adopted  (effective   from  January  2011)  with  the  purpose  of  providing  legal  definitions,  standardizing  and  streamlining  the   activities   of   microlending   MFIs   (both   nonprofit   and   for-­â€?profit).   Though   registering   as   an   MFI   is   not   mandatory  and  a  lending  institution  can  still  operate  under  the  Civil  Code,  receiving  MFI  status  gives  a   number  of  important  benefits  (such  eligibility  for  government  financial  support  offered  through  the  SME   Bank,  calculating  tax-­â€?deductible  loan  loss  provisions  etc.).   The  law  introduced  a  formal  definition  of   a  “microloanâ€?  as  not  exceeding  RUB  1  million  (USD  32,342).     MFIs  can  still  disburse  larger  loans  but  these  will  not  be  considered  microloans.  The  microloan  definition   was   introduced   not   to   limit   lending,   but   rather   to   get   a   better   picture   of   the   size   of   the   sector   and   demand  for  such  type  of  loans,  as  reflected  in  MFIs’  statistics.  At  the  same  time,  it  is  not  clear  whether   institutions   disbursing   only   a   small   percentage   of   microloans   or   engaged   primarily   in   activities   other   than  lending  or  microlending  can  rightfully  be  registered  as  MFIs.       MFIs  can  be  funded  with  loans  (i.e.,  from  lenders  not  licensed  by  the  CBR)  and  credits  (i.e.,  from  banks   and   NBCOs   licensed   by   the   CBR),   voluntary   contributions,   donations,   and   other   (unspecified)   types   of   funding.  The  law  limits  borrowing  from  natural  persons  to  prevent  unlicensed  financial  intermediation:   MFIs   cannot   receive   loans   smaller   than   RUB   1.5   million   (USD   48,500)   unless   this   money   comes   from   the   MFI’s  founders  (participants,  shareholders  or  members).  For  MFIs  taking  loans  from  natural  persons  and   legal   entities,   there   are   two   prudential   standards   established   by   MOF   regulations:106   capital   adequacy   and   liquidity.107   While   the   law   does   not   impose   significant   limitations   on   funding   sources   for   MFIs,   in   reality  it  is  difficult  for  them  to  get  access  to  funding.  For  many  banks,  MFIs  are  not  eligible  borrowers  as   most  of  them  can  offer  only  their  loan  portfolios  as  collateral  –  which  many  banks  consider  risky.  The   SME   bank   mentioned   above   serves   primarily   banks;   there   are   fewer   than   30   MFIs   in   its   portfolio   but   currently  this  is  the  largest  wholesale  MFI  lender  in  Russia.  Other  large  banks  have  recently  started  or   announced  similar  programs  (e.g.  VTB24  and  Sberbank,  respectively)  which  is  expected  to  send  signals   to   even   more   banks   to   start   lending   to   MFIs.   There   are   few   foreign   microfinance   investors   working   in   Russia  and  only   one   small   specialized   microfinance   wholesale   lender   –  Centurion   Capital   (which   had   3   MFIs  and  6  CCs  in  its  portfolio  as  of  August  2012108).109   In   the   area   of   consumer   protection,   in   response   to   the   Russian   Post   interest   rate   scandal,   a   draft   law   requiring  standardized  interest  rate  disclosure  was  developed  (initiated  by  the  National  Partnership  of                                                                                                                           106  Ministry  of  Finance  Decree  No.  42n  of  March  30,  2012,  “On  Approving  the  Numerical  Values  and  the  Order  of   Calculation   of   the   Economic   Standards   on   Capital   Adequacy   and   Liquidity   of   Microfinance   Organizations   Attracting   Monetary  Funds  of  Natural  Persons  and  Legal  Entities  in  the  Form  of  Loansâ€?.   107   The   capital   adequacy   ratio,   defined   as   MFI’s   capital   in   relation   to   its   assets   (excluding   cash   and   cash   equivalents),  cannot  be  below  5  percent  for  all  types  of  MFIs  except  those  registered  as  non-­â€?profit  partnerships;   for   the   latter,   being   membership-­â€?based   organizations,   it   must   be   at   least   50   percent.   The   liquidity   ratio,   calculated   as  liquid  assets  (excluding  inventory  and  value-­â€?added  tax  on  purchased  assets)  in  relation  to  short-­â€?term  liabilities   (excluding  deferred  income  and  estimated  liabilities),  must  be  at  least  70  percent  for  all  types  of  MFIs.   108   Information   from   Irina   Fedyaeva,   Centurion   Capital,   September   2012.   The   total   loan   portfolio   of   Centurion   Capital  as  of  August  2012  was  RUB  148  million  (USD  4.8  million),  and  the  loans  to  MFIs  and  CCs  were  45  percent  of   the  total  (the  rest  was  to  5  leasing  companies  and  25  MSMEs).   109   Centurion   Capital   is   a   joint-­â€?stock   company   owned   by   the   Russian   Microfinance   Center   and   the   Association   of   Russian  Banks.     28     Microfinance   Market   Stakeholders   (NAMMS)   –   see   Sec.   4.3),   and   amendments   to   the   Law   on   Microfinance  Activity  and  Microfinance  Organizations  and  regulations  were  proposed  requiring  all  MFIs   to  report  to  credit  bureaus  (see  Sec.  4.2)  and  report  to  FFMS,  the  supervisor,  on  their  short-­â€?term  (less   than  60  days)  loan  portfolio  of  microloans  below  RUB  45,000  (USD  1,455).  As  it  is  difficult  at  this  rather   early   stage   of   the   microfinance   market   development   in   Russia   to   clearly   define   the   term   payday   loan,   the  characteristics  of  the  term  and  microloan  size  will  be  used  as  proxies  which  should  help  assess  the   magnitude   of   this   market.   In   addition,   according   to   industry   experts,110   discussions   are   currently   underway   about   mandatory   MFI   membership   in   MFI   SROs   and   on   the   need   to   collect   and   publish   information  on  average  interest  rates  for  various  lenders  and  credit  products.  It  is  not  clear  which  entity   will   be   responsible   for   this.   There   are   also   proposed   legal   amendments   which   provide   for   a   definition   of   “an   indicative   usury   ceilingâ€?   calculated   on   the   basis   of   an   average   market   interest   rate   for   different   types  of  loans/credits.111  If  adopted,  these  will  apply  to  all  financial  institutions  –  both  banks  and  credit   organizations  and  NFOs.     Credit  Cooperatives   Before  2009  financial  cooperatives  existed  in  at  least  four  different  legal  forms  and  were  governed  by  a   number   of   legal   acts.   The   adoption   of   the   Law   on   Credit   Cooperation   in   July   2009   was   important   for   the   harmonization   of   the   CC   sector,   bringing   all   but   one   type   of   financial   cooperative   –   agricultural   CCs   (important,  in  terms  of  market  share)112  –  under  the  same  legislation  and  regulation.   The   law   established   a   number   of   prudential   requirements   for   CCs,   such   as   limitations   on   borrowing,   lending   and   member   savings.   CCs   can   operate   only   if   they   join   one   of   the   self-­â€?regulated   organizations   (SROs)  for  CCs  –  NGOs  required  by  the  law  to  perform  monitoring  functions  for  the  supervisor,  FFMS.  CC   SROs  must  maintain  a  register  of  their  member  CCs,  and  are  responsible  for  monitoring  their  members’   compliance   with   legal   and   reporting   requirements.   CC   SROs   are   also   required   to   maintain   a   compensation   fund   of   0.2   to   5   percent   of   aggregate   member   assets   aimed   at   helping   member   CCs   meet   financial  obligations  before  their  shareholders  (within  the  limits  and  following  the  rules  set  forth  in  the   legislation);   however,   it   is   not   clear   whether   the   fund   can   be   used   (or   will   be   sufficient)   to   cover   lost   savings  of  members  in  the  event  of  CC  failure.  It  should  be  noted  that  legally  member  savings  are  not   considered   deposits   (though   CCs   are   obliged   to   repay   members’   share   capital   upon   their   withdrawal   from  CC  membership  and  members  can  earn  a  return  on  their  shares).  They  are  therefore  not  covered   with  the  deposit  insurance  scheme  which  applies  to  all  deposits  held  in  Central  Bank-­â€?licensed  banks  and   NBCOs.   As  with  MFIs,  funding  of  CCs  presents  an  issue  as  there  are  very  few  funding  options  available.  Besides   member   savings   (in   the   form   of   mandatory   and   voluntary   share   capital),   the   law   provides   for   the   establishment   of   the   so   called   second-­â€?tier   CCs   (credit   cooperatives   of   credit   cooperatives)   to   provide                                                                                                                           110  Interviews  with  Mikhail  Mamuta,  NAMMS,  June  2012.   111  Information  from  Oleg  Ivanov,  Association  of  Regional  Russian  Banks,  August  2012.   112  Agricultural  CCs  are  numerous  in  Russia  –  as  of  January  2011  there  were  1,772  agricultural  CCs;  in  2010  they   lent   over   RUB   3   billion   (USD   97   million)   in   rural   areas   (according   to   data   from   the   Ministry   of   Agriculture,   cited   from  materials  of  a  conference  of  the  Union  of  Agricultural  Cooperatives  held  on  4-­â€?5  April  2011).   29     funding   to   their   member   CCs.   According   to   industry   experts,113   there   are   currently   only   5   registered   second-­â€?tier   CCs   with   approximately   150   member   CCs.   Though   the   law   does   not   encourage   extensive   borrowing  by  CCs  as  they  hold  member  savings,114  the  vast  majority  of  CCs  has  no  options  for  external   borrowing  at  all.   With  the  newly  appointed  supervisor  with  no  prior  experience  supervising  CCs  and  CC  SROs  that  have   just  been  established  (some  of  them  under  pressure  to  reach  membership  thresholds  by  the  legally  set   deadline),  the  adequacy  of  these  supervisory  arrangements  remains  to  be  seen.                                                                                                                             113  Interviews  with  Mikhail  Mamuta,  NAMMS,  June  –  September  2012.   114  Per  the  law,  the  total  volume  of  external  funding  in  CC  cannot  exceed  50  percent  of  the  total  volume  of  funds   attracted  from  CC  members.   30     Box  3:  MFIs,  CCs,  and  Other  NFOs  –  Key  Challenges  and  Opportunities         While   bringing   most   types   of   financial   cooperatives   under   the   common   legal,   regulatory   and   supervisory   framework  was  a  significant  step  in  terms  of  the  harmonization  of  the  Russian  financial  service  market  for   lower-­â€?income  customers,  there  still  remains  a  huge  market  of  agricultural  CCs  that  are  regulated  separately   and   are   subject   to   the   oversight   of   the   Ministry   of   Agriculture   rather   than   any   financial   market-­â€?related   authority.   As  some  larger  CCs  may  be  of  systemic  importance  –  at  least  in  terms  of  the  share  of  the  population  they   serve  in  their  regions  –  the  involvement  of  the  Central  Bank  as  the  supervisory  authority  with  the  greatest   experience  and  capacity  related  to  preserving  systemic  stability  may  be  justified.   Individual  member  savings  and  shares  placed  with  CCs  in  the  economic  sense  are  very  similar  to  deposits   with  Central  Bank-­â€?licensed  credit  organizations,  yet  they  are  not  protected  by  either  the  deposit  insurance   scheme  or  its  equivalent.     The  Law  on  Microfinance  Activity  and  Microfinance  Organizations  has  set  the  stage  for  the  harmonization   and  increased  transparency  of  the  microfinance  sector  and  set  basic  rules  for  its  regulation  and  supervision.   But  the  absence  of  significant  entry  barriers  and  a  very  general  definition  of  ‘microfinance  institution’  has   resulted   in   a   situation   where   virtually   any   company   can   obtain   registered   MFI   status,   (even   if   lending   or   microlending  is  not  its  core  activity),  and  has  spawned  the  rapid  proliferation  of  extremely  heterogeneous   registered   ‘MFIs’.   This   in   turn   creates   various   risks   -­â€?   particularly   reputational   risk   for   the   industry   due   to   irresponsible   activities   of   some   market   players,   and   increased   burden   for   FFMS   supervising   market   conduct   of  registered  MFIs.  One  approach  to  mitigating  the  problem  would  be  the   introduction  of  additional  classes   of  registered  NFOs,  allowing  for  differentiation  between  development-­â€?oriented  MFIs  on  the  one  hand  and   various  types  of  consumer  and  payday  lenders  on  the  other.   There   is   still   risk   of   unregulated   financial   intermediation   since   on-­â€?lending   of   loans   from   the   public   is   not   restricted  for  those  NFOs  that  do  not  have  registered  MFI  status  (and  borrow  and  lend  instead  under  the   Civil   Code).   It   is   also   currently   impossible   to   assess   the   size   of   the   unregistered   NFO   market   –   and   there   are   115 industry  experts  who  believe  it  may  be  even  larger  that  the  market  of  registered  MFIs.  Policy  makers  in   Russia   therefore   face   a   challenging   task   of   offering   the   right   incentives   for   microlending   institutions   to   obtain   registered   MFI   status   (and   remain   registered)   and   while   providing   an   adequate   level   of   market   conduct  supervision  for  registered  MFIs,  as  well  as  appropriate  levels  of  and  types  of  prudential  supervision   in   the   case   of   those   that   borrow   from   natural   persons.   The   effectiveness   of   the   delegated   supervision   model   is   yet   to   be   evaluated   –   both   FFMS   and   SROs   currently   have   no   prior   experience   and   very   limited   capacity  and  resources  to  ensure  compliance  with  the  prudential  norms  set  forth  in  the  law  and  reporting   requirements   for   CCs.   Experience   shows   that   the   chosen   model   of   the   delegated   supervision   has   worked   in   some  countries  where  the  government  financial  supervisor  closely  monitored  the  quality  of  the  delegated   116 supervisor’s  work,  although  it  is  not  clear  that  this  model  reduces  total  supervision  costs.     Neither   MFIs   nor   CCs   are   integrated   well   with   the   financial   sector   –   there   are   very   few   options   for   refinancing.   While   this   is   less   of   an   issue   for   CCs   that   have   strict   limitations   for   external   borrowing   established  by  the  law,  limited  access  to  finance  for  MFIs  significantly  restrains  their  growth.     CCs   and   MFIs,   though   many   of   them   located   close   to   their   lower-­â€?income   customers,   are   yet   to   make   use   of   the  new  delivery  channels  –  such  as  payment  terminals  and  agents.  This  may  be  an  important  opportunity   for  them  to  further  expand  outreach  to  the  under-­â€?served  segments.                                                                                                                                 115  Interviews  with  Mikhail  Mamuta,  NAMMS,  June  –  September  2012.     116  See  CGAP  (2012).     31     3.3 Payment  Service  Providers   Innovations   in   retail   payments   have   been   among   the   main   drivers   in   improving   access   to   finance   in   Russia.   As   recently   as   2007,   three   main   provider   types   of   innovative   retail   payments   could   easily   be   distinguished:    providers  of  automated  payment  terminals  (only  providing  cash-­â€?in  services),  web-­â€?based   e-­â€?money  issuers,  and  mobile  network  operators,  with  only  the  former  two  showing  any  scale. 117  Most  of   the  providers  have  since  diversified  their  product  channels  and  expanded  the  range  and  accessibility  of   their  offerings,  bringing  them  into  direct  competition  with  each  other.    Thus,  companies  mostly  known   as  leaders  in  the  payment  terminals  market  (such  as  QIWI)  now  also  offer  virtual   accounts   (e.g.,   QIWI   Wallet);  e-­â€?money  issuers  have  linked  their  virtual  accounts  to  payment  cards  (e.g.,  Yandex  Money);  and   mobile   network   operators   have   launched   virtual   and   plastic   cards   under   joint   branding   with   Visa   or   MasterCard  and  in  cooperation  with  banks  (e.g.,  MegaFon  Online  Card  and  MTS  Dengi)  and  are  slowly   moving   into   the   remittance   market   (Beeline   in   cooperation   with   Mobi.Dengi).   As   a   result   of   this,   the   world   of   innovative   retail   payments   has   become   much   more   complex,   but   the   potential   for   synergies   between  different  models  has  also  increased.  These  different  types  of  payment  service  providers  have   since  founded  the  Russian  Electronic  Money  Association  as  a  platform  to  bring  different  players  together   and  to  discuss  issues  of  common  interest  in  particular  pertaining  to  the  issuance  of  electronic  money.118   Innovations   in   retail   payments   make   use   of   the   impressive   market   penetration   rate   of   mobile   phone   connections  (1.7  connections  per  Russian  citizen;  see  Statistical  Overview)  and  the  wide  card  base  in  the   country   (see   Sec.   2).   They   have   had   a   profound   impact   on   improving   the   accessibility   and   increasing   the   convenience   of   conducting   basic   retail   payments   not   only   in   urban,   but   also   in   more   remote   and   sparsely  populated  areas,  where  a  higher  percentage  of  the  population  lacks  access  to  accounts  in  the   formal  financial  sector  (see  Sec.  2.1).  However,  it  is  not  equally  clear  that  these  innovations  have  been   successful   in   providing   previously   underserved   communities   with   essential   services   to   manage   their   financial  lives.   A   parallel   development   to   the   innovations   introduced   by   payment   service   providers   has   been   the   emergence   of   nonbank   payment   agents   that   can   accept   payments   on   behalf   of   a   payee.   Unlike   bank   payment   agents   (see   Sec.   3.1),   nonbank   payment   agents   are   not   permitted   to   undertake   settlements   (defined  in  the  Russian  Civil  Code  as  transfers  from  one  bank  account  to  another)  and  to  offer  cash-­â€?out   services.   While   many   of   the   innovations   in   the   payments   arena   initially   happened   without   a   clear   legal   framework,   legal   changes   with   regard   to   payment   service   providers,   KYC   rules,   and   payment   agents   have   been   gradually   introduced.   With   the   recent   adoption   of   the   Payment   System   Law   in   2011,   regulatory   change   has   taken   center   stage.   This   law   is   gradually   coming   into   force   over   a   period   of   18   months  and  will  be  fully  in  effect  by  the  end  of  December  2012.  More  than  50  implementing  regulations   are   supposed   to   be   issued   by   then,   of   which   about   half   had   been   issued   by   August   2012.   Respective   changes  in  the  supervision  of  payment  service  providers  are  still  ongoing.   Even  though  this  means  that                                                                                                                           117  See  CGAP  (2008).     118  See  the  Association’s  website  at  http://www.npaed.ru.   32     the  legal  framework  for  payment  service  providers  still  is  very  much  in  flux,  what  can  already  be  said  to   date   is   that   the  Payment   System   Law   has   brought   clarity   with   regard   to   a   number   of   issues   affecting   the   operations   of   payment   service   providers,   which   are   described   in   detail   in   the   Sec.   Regulation   and   Supervision  below.   The   fast-­â€?moving   nature   of   the   sector   and   of   its   regulation   and   supervision,   as   well   as   the   diversity   of   players  and  different  models  that  are  in  operation  to  date  make  it  difficult  to  provide  a  fully  up-­â€?to-­â€?date   picture  of  the  sector  and  the  legal  framework  applying  to  it.  The  following  provides  a  snapshot  of  the   main  players  and  the  applicable  legal  provisions  as  of  September  2012.   Table  2  lists  the  main  types  of   payment  service  providers.   Sector  Overview   A   wide   range   of   payment   service   providers   can   be   distinguished   that   are   currently   operating   under   various  institutional  set-­â€?ups  and  different  legal  regimes.  The  Payment  System  Law  has  introduced  a  new   categorization,   which   will   also   be  broadly   followed   here:   money   transfer   operators,   e-­â€?money   operators,   and  mobile  network  operators.119   Money   transfer   operators:   Sberbank   and   the   Russian   Post   have   long   had   a   near-­â€?monopoly   in   the   provision   of   retail   payment   services   in   Russia.   Two   major   innovations   have   changed   this   over   recent   years.  The  first  innovation  is  the  emergence  of  payment  terminals.  The  second  innovation  is  web-­â€?based   e-­â€?money   issuers   (see   Electronic   Money   Operators   below).   Companies   such   as   OSMP120   (offering   terminals   under   the   QIWI   brand)   and   Cyberplat   –   the   two   biggest   providers   –   have   set   up   their   own   payment  processing  platforms  and  provide  clearing  and  settlement  services  for  a  network  of  self-­â€?service   payment   terminals.121   These   terminals   are   essentially   cash-­â€?in   devices   allowing   for   various   types   of   payments   (for   mobile   communication   services,   for   internet   service   and   commercial   TV,   loan   repayments,  top  up  of  electronic  wallets,  tax  payments,  etc.).  Some  of  the  terminals  are  owned  by  the   payment   service   provider,   others   are   run   by   banks   or   (bank   or   nonbank)   payment   agents.   The   total   number  of  payment  terminals  in  Russia  is  not  exactly  known,  but  is  estimated  to  be  between  220,000   and   300,000,122   which   means   that   there   are   between   five   and   seven   times   as   many   terminals   as   bank   and   NBCO   branches   and   still   more   terminals   than   ATMs.123   While   these   numbers   are   impressive,   the   majority   of   payments   processed   through   terminals   have   traditionally   been   for   mobile   top-­â€?ups.   Only                                                                                                                           119   The   latter   are   referred   to   as   communications   service   providers   under   the   law.   The   law   also   provides   for   payment   system   operators,   which   develop   the   rules   of   payment   systems   and   own   them,   and   payment   infrastructure  service  providers,  which  provide  the  back-­â€?end  infrastructure.  As  both  do  not  directly  interact  with   individual  customers,  they  are  not  covered  in  the  report.   120  OSMP  (Unified  Instant  Payment  System)  is  licensed  as  a  non-­â€?banking  credit  organization  (NBCO)  by  the  CBR.     121  Cyberplat  does  not  hold  a  license  as  bank  or  NBCO  and  is  therefore  not  a  money  transfer  operator  as  defined  in   the  Payment  System  Law.   122   According   to   Center   of   Payment   Systems   and   Settlements   and   RMC   (2012),   the   share   of   terminals   among   customer  service  points  is  70  percent.  According  to  Boris  Kim,  QIWI,  the  total  number  is  approx.  300,000  (interview   on  16  April  2012).   123  Center  for  Research  of  Payment  Systems  and  Settlements  and  RMC  (2012).   33     recently  this  has  started  to  change  with  repayment  of  bank  loans  and  the  top  up  of  virtual  accounts  (see   Electronic  Money  Operators  below)  becoming  more  popular  than  before.124     Payment   service   providers   make   use   of   payment   agents   for   cash-­â€?in   or   bank   payment   agents   for   cash-­â€?in,   cash-­â€?out,   and   customer   identification   purposes   (see   Payment   Agents   below).   Most   agents   operate   a   number   of   customer   service   points.   In   the   majority,   these   are   unmanned   terminals,   but   they   also   operate  through  manned  agents  that  use  a  cashier  and  are  equipped  with  technology  such  as  point-­â€?of-­â€? sale   (POS)   terminals   or   computers   linked   to   the   internet   (using   either   a   web-­â€?interface   or   special   software   provided   by   the   operator).   This   allows   clients   to   choose   the   technology   they   feel   most   comfortable  with,  as  some  might  prefer  the  “human  touchâ€?  of  interacting  with  agent  staff  rather  than   operating  through  a  self-­â€?service  terminal.   Growing  numbers  of  terminals  are  owned  by  banks  (which  can  also  operate  as  money  transfer  operators   under  the  Payment  System  Law),  which  increasingly  make  use  of  a  combination  of  terminals  for  cash-­â€?in   and   ATMs   for   cash-­â€?out   as   a   substitute   for   traditional   brick-­â€?and-­â€?mortar   branches   (see   Sec.   3.1).   While   terminals  and  ATMs  are  lower  cost  delivery  channels,  it  remains  to  be  seen  whether  the  elderly,  those   who  are  less  financially  educated,  and  customers  in  more  remote  regions  will  feel  equally  comfortable   with  using  them  as  compared  with  traditional  bank  branches.   Another  group  of  money  transfer  operators  are  money  remittance  operators  that  are  providing  domestic   and   international   money   remittance   services.125   From   a   financial   inclusion   perspective   of   great   importance  is  the  Russian  Post,  which  is  the  dominant  player  in  the  domestic  remittances  market  (with   185  million  Postal  remittances  per  year)  and  delivers  pensions  to  people  without  a  bank  account  (over   23  million  pensioners  or  almost  60  percent  of  all  pensioners  in  Russia).126  The  Russian  Post  is  regulated   under  its  own  law  (and  thus  not  a  money  transfer  operator  as  defined  in  the  Payment  Systems  Law)  and   can   take   advantage   of   its   vast   network   of   42,000   post   offices,   many   of   them   located   in   remote   rural   areas   where   no   other   financial   service   providers   are   present.   Since   the   launch   of   its   electronic   money   order   system   in   2003,   the   Post   has   been   in   a   better   position   to   compete   with   banks   and   money   remittance  operators  in  the  money  transfer  business  both  domestically  and  internationally.  It  has  signed   agreements   with   13   countries   (8   CIS   countries   plus   the   Baltic   States,   China,   and   France),   which   allow   for   electronic   transmission   of   remittance   transaction   data   (rather   than   using   the   previous   system   of   physically  sending  postal  orders).   The   international   remittances   market   between   Russia   and   CIS   countries   is   huge   and   still   growing.   According  to  CBR  data,  (resident  and  nonresident)  individuals  sent  USD  43.8  billion  from  Russia  across   the  border  in  2011,  of  which  about  40  percent  was  sent  via  money  remittance  operators  (a  year-­â€?on-­â€?year                                                                                                                           124   No   data   are   available   for   the   whole   sector,   but   QIWI   reports   that   the   share   of   the   payments   volume   for   mobile   top-­â€?ups  paid  through  terminals  has  dropped  from  93  percent  in  2008  to  54  percent  in  the  first  half  of  2012,  while   now  16  percent  of  payments  are  for  repaying  bank  debt.  See  http://bit.ly/SED1cC).   125  Confusingly,  the  use  of  the  term  money  transfer  operator  has  previously  been  used  by  the  Central  Bank  to  refer   narrowly  to  money  remittance  operators,  while  it  now  also  includes  companies  mostly  offering  payment  services.   126  All  data  from  the  website  of  the  Russian  Post  (without  date):  http://www.russianpost.ru.   34     growth   of   37   percent).127   For   the   first   time   again   the   remittance   flows   were   higher   than   before   the   financial   crisis   in   2008.128   Nineteen   international   money   remittance   operators   are   currently   registered   with  the  Central  Bank,  including  Western  Union  and  MoneyGram,  as  well  as  leading  Russian  companies   with   a   wide   regional   presence   (particularly   in   CIS   countries)   such   as   CONTACT,   Golden   Crown,   Leader,   and   Unistream,   and   the   Russian   Post.   The   main   service   offered   by   them   is   processing   payments   without   the   opening   of   bank   accounts.   In   most   cases,   it   is   cash   on   both   ends,   although   in   some   cases   the   money   can  also  be  transferred  to  a  bank  account  or  even  to  a  mobile  wallet.129  This  is  also  reflected  in  the  low   share   of   people   in   Russia   who   use   bank   accounts   to   send   or   receive   remittances   (2.1   percent   and   2.4   percent  of  people  15  years  and  above,  respectively),  which  is  below  the  regional  average  and  even  lower   when  compared  to  other  upper-­â€?middle-­â€?income  countries.130  To  send  money,  customers  either  have  to   go   to   the   branch   of   a   partner   bank,   to   a   retail   store   that   operates   as   an   agent   for   the   money  remittance   operator,   or   to   use   a   payment   terminal.   Russia   is   one   of   the   lowest-­â€?cost   remittance   markets   globally   with  a  total  average  cost  for  sending  USD  200  of  2.68  percent  and  very  low  spreads  between  minimum   and   maximum   amounts   charged   (indicating   a   highly   competitive   market).131   It   therefore   provides   important  lessons  on  how  to  implement  cost-­â€?saving  innovations  that  benefit  mostly  unbanked  migrants.   At   the   same   time,   there   seems   to   be   a   large   untapped   potential   to   link   remittance   flows   to   other   financial  products  such  as  savings  or  loans.     Golden  Crown,  as  one  of  the  fastest  growing  operators,  allows  for  money  to  be  sent  from  almost  17,000   bank  branches  or  about  11,000  retail  shops  operating  as  agents.132  It  has  also  been  a  pioneer  among  the   money   remittance   operators   in   offering   “sender   cardsâ€?   which   can   store   basic   information   about   the   sender  and  recipient,  thereby  speeding  up  the  process  of  sending  money  (and  reducing  the  costs).  Some   operators   have   also   signed   agreements   with   mobile   operators   that   allow   customers   to   send   money   directly  from  mobile  wallets  (see  Mobile  Network  Operators  below)  to  one  of  their  outlets.   Most  money  remittance  operators  also  offer  retail  payment  services.  For  example,  the  Russian  Post  is  a   major   player   in   accepting   payments   for   various   services   (the   same   type   of   services   also   being   paid   through   the   terminals).   In   2009,   it   accepted   642   million   payments   for   8,000   different   services   with   an   overall   volume   of   almost   USD   10   billion.133   At   least   one   money   remittance   operator,   Leader,   has   launched   its   own   digital   wallet   that   can   be   replenished   at   one   of   its   partner   locations   (banks,   MNOs,   agents,  terminals,  etc.)  and  be  used  for  payments.134                                                                                                                           127  The  CBR  does  not  report  how  the  remaining  remittances  were  transferred.   128  Data  from  CBR’s  External  Sector  Statistics,  http://bit.ly/RnbCXO.   129  For  example,  in  April  this  year  the  CONTACT  system  launched  direct  transfers  into  M-­â€?PESA  accounts  in  Kenya.   See  http://bit.ly/KkIZ81.   130  See  World  Bank  (2012).   131  Data  for  third  quarter  2011.  See  World  Bank  (2011).   132  Interview  with  Maria  Mikhailova,  Golden  Crown,  18  April  2012.   133  See  Ministry  for  Economic  Development  and  Alliance  for  Financial  Inclusion  (2011).   134  See  http://bit.ly/SFp0JV.   35     Electronic   money   operators:   The   second   innovation   changing   the   retail   payment   landscape   has   been   (mostly  web-­â€?based)  e-­â€?money  issuers  that  are  classified  as  e-­â€?money  operators  under  the  Payment  System   Law.  They  allow  customers  to  open  electronic  wallets  (further  referred  to  as  “virtual  accountsâ€?)  either   on   the   internet   or   through   terminals   or   other   agent   locations.135   These   virtual   accounts   can   be   replenished  at  agent  locations,  through  payment  terminals,  scratch  cards,  bank  transfers,  or  by  payment   in  cash  at  a  bank  teller.   Figure  1:  Number  and  volume  of  virtual  account  transactions   60%   50%   40%   Number  of   payments   30%   Volume  of   payments   20%   10%   0%     Source:   Dostov   (2012).   Financial   instruments   includes   virtual   prepaid   cards,   P2P   transfers   to   other   virtual   accounts,   loan   repayments,  and  other  transfers  that  do  not  involve  the  purchase  of  goods  or  services.   According   to   the   CBR,   12   providers   offering   e-­â€?money   over   the   internet   are   currently   operating   in   Russia.136  The  most  widely  used  virtual  accounts  are  Yandex.Money,  QIWI  Wallet  (offered  by  QIWI  Bank,   which  belongs  to  the  same  group  as  OSMP),  and  WebMoney.137  PayPal  entered  the  Russian  market  in   2006,  but  has  not  made  much  headway  yet.138  Looking  at  some  data  on  the  market,  it  can  be  seen  that   virtual   accounts   have   become   increasingly   popular,   but   that   their   use   is   still   very   much   focused   on                                                                                                                           135  Depending  on  the  type  of  transaction,  customers  might  be  required  to  send  a  scanned  copy  of  their  passport  or   show  their  passport  at  one  of  the  agent  locations  and/or  a  notary.   136  Interview  with  CBR,  20  April  2012.   137   This   is   according   to   a   public   opinion   survey   among   18-­â€?45   year-­â€?olds   living   in   Russian   cities   with   a   population   exceeding   800,000,   which   was   commissioned   by   Yandex.Money   and   conducted   by   TNS   in   February/March   2012   (TNS  2012).   138  A  planned  cooperation  with  the  Russian  Post  might  change  this.  See  http://bit.ly/JMZ7lv.   36     paying  for  services  without  much  relevance  for  financial  inclusion.139  The  volume  held  in  virtual  accounts   has  increased  from  RUB  40  billion  (USD  1.29  billion)  in  2009  to  RUB  70  billion  (USD  2.26  billion)  and  RUB   125   billion   (USD   4.04   billion)   in   2010   and   2011,   respectively,   and   is   expected   to   double   in   2012.   The   number  of  active  mobile  wallets  has  grown  from  30  million  (2010)  to  34  million  (2011).  However,  almost   ¾  of  all  payments  from  virtual  accounts  are  for  online  games,  entertainment,  social  networks,  lotteries,   airtime,   and   internet   (see   Figure   1).   Virtual   accounts   are   hardly   used   for   paying   for   physical   goods,   utilities   and   housing,   and   payments   to   the   government   budget   (e.g.   taxes),   all   of   which   would   be   of   interest   to   the   financially   excluded.   One   reason   for   this   is   that   users   would   want   to   receive   a   paper   receipt   or   electronic   confirmation   by   the   payee   that   they   have   paid,   a   functionality   that   has   not   been   launched  yet.  All  this  said,  financial  instruments  are  the  number  one  payment  in  terms  of  volumes,  as   payment   amounts   are   much   higher   than   for   the   other   categories.   To   get   cash,   customers   have   to   transfer  the  e-­â€?money  balance  to  a  Visa  or  MasterCard  (which  could  also  be  a  prepaid  card  as  described   below  in  the  Section   Regulation  and  Supervision   and  can  then  be  accessed  through  the  usual  channels   such  as  ATMs),  to  a  bank  account,  or  they  can  use  a  money  remittance  operator  for  cashing  out.140  In  all   cases  that  involve  the  opening  of  a  bank  account,  full  identification  of  the  customer  is  required  before   the   money   can   be   taken   out   as   cash.  Cashing   out   through   money   remittance   operators   without   opening   a   bank   account   is   also   possible   without   client   identification   if   the   amount   is   below   RUB   15,000   (USD   485).  According  to  a  public  opinion  survey  among  3,500  18  to  45  year-­â€?olds  living  in  Russian  cities  with  a   population   exceeding   800,000   (1,800   of   the   respondents   live   in   Moscow),   the   typical   e-­â€?money   user   in   Russia   tends   to   be   young   (35   and   younger),   male,   an   advanced   internet   user,   and   either   a   student   or   professional.141   This   is   clearly   not   the   typical   profile   of   someone   who   lacks   access   to   financial   services.   It   still  has  to  be  shown  that  e-­â€?money  operators  will  be  a  compelling  value  proposition  to  someone  living  in   more   remote   areas,   who   does   not   have   access   to   traditional   bank   accounts   and   might   not   be   familiar   with  using  the  internet.   An   interesting   recent   innovation   is   the   tie-­â€?up   between   e-­â€?money   operators   and   card   issuers.   In   November  2011,  QIWI  started  offering  a  physical  Visa  prepaid  card  to  its  QIWI  Wallet  users.  Five  months   later,   Yandex.Money   followed   suit   and   launched   a   joint   product   with   Tinkoff   Credit   Systems   Bank   (a   purely   virtual   bank   without   any   bank   branches   and   with   a   focus   on   credit   cards),   which   allows   all   Yandex.Money   customers   to   receive   a   free   MasterCard   debit   card.   This   card   is   linked   to   the   Yandex.Money  account  and  transforms  an  e-­â€?money  account  that  can  only  be  used  in  the  world  of  online   payments   and   transfers   into   a   physical   card   that   is   accepted   at   about   28   million   merchants   and   more   than  1  million  ATMs  worldwide.142  Innovations  like  these  might  eventually  lead  to  a  unified  payment  tool   that  would  combine  all  the  advantages  of  different  access  channels  (virtual  and  physical  cards,  e-­â€?money,                                                                                                                           139  The  data  in  this  paragraph  is  from  Dostov  (2012)  and  correspondence  with  Victor  Dostov,  October  2012.   140   Yandex.Money,   for   example,   charges   3   percent   commission   on   transferring   the   e-­â€?money   balance   to   a   money   remittance  operator,  which  might  charge  an  additional  1  to  1.5  percent  commission  for  cashing  it  out.  Interview   with  Evgeniya  Zavalishina,  Yandex.Money,  16  April  2012.  As  some  of  the  virtual  accounts  are  also  linked  to  a  virtual   credit   card   (e.g.,   QIWI   wallets   come   with   a   prepaid   Visa   virtual   card),   they   can   even   be   used   to   order   at   online   stores  that  otherwise  do  not  accept  payments  from  e-­â€?money  accounts  (e.g.  at  foreign  stores).   141  See  TNS  (2012).   142  See  http://on.mktw.net/LfbECC.   37     mobile  wallets,  etc.)  and  lead  to  a  wider  network  of  access  points  and  greater  usability.  The  impact  on   financial  inclusion  is  difficult  to  estimate  at  this  point,  but  can  potentially  be  substantial.   Mobile   Network   Operators:   Unlike   in   some   other   countries,   the   mobile   network   operators   (MNOs)   in   Russia  have  not  been  at  the  forefront  of  innovation  in  the  retail  payments  arena,  not  least  because  of   the  lack  of  legal  certainty  before  the  Payment  System  Law  was  introduced.  The  need  to  top  up  prepaid   airtime   accounts   has   driven   many   of   the   payments   innovations   in   Russia,   but   the   relevant   payment   channels  were  mostly  operated  by  other  providers  (money  transfer  operators  and  e-­â€?money  issuers).143   However,  recently  the  MNOs  have  increased  their  efforts  to  tap  into  the  market  for  retail  payments  as  a   way  to  earn  additional  fee  income  outside  their  traditional  voice  market.144   During  recent  years,  MNOs  have  launched  several  initiatives  either  alone  or   in  cooperation  with  other   financial   sector   players,   which   are   mostly   targeted   at   allowing   mobile   customers   to   use   their   prepaid   airtime  balance  for  various  payments  and  to  link  it  with  other  channels  such  as  cards  or  those  offered  by   money  remittance  operators.145  The  three  largest  MNOs  -­â€?  MTS,  MegaFon,  and  Beeline  -­â€?  have  all  entered   into  more  or  less  close  partnerships  with  banks  that  allow  them  to  expand  their  mobile  financial  services   offerings.146   The   biggest   question   is   how   many   of   these   services   are   likely   to   reach   new   customers   that   have   previously  been  financially  excluded  rather  than  just  providing  a  more  convenient  payment  channel  for   existing  bank  customers.  The  fact  that  Sberbank  has  not  entered  into  a  special  partnership  with  any  of   the  MNOs,  even  though  it  might  have  the  highest  potential  of  reaching  out  to  the  financially  excluded,  is   not   a   good   sign   for   this.   Moreover,   while   most   of   the   current   services   allow   for   person-­â€?to-­â€?person   transfers   (P2P),   they   are   –   quite   similar   to   the   e-­â€?money   operators   –   rather   restrictive   with   regard   to   cashing   out   (i.e.,   mostly   through   the   banking   channel   or   by   transferring   money   from   the   electronic   wallet  to  a  card  account),  which  implies  that  they  cannot  be  easily  used  as  a  basic  substitute  for  a  bank   account.   Further  research   would   be   required   on   the   impact   of   MNOs’   innovations   in   retail   payments   on   financial  access.   On   the   positive   side,   one   peculiarity   of   Russian   mobile   money   services   is   that   most   make   use   of   the   existing   prepaid   airtime   account   rather   than   requiring   clients   to   open   a   separate   wallet   for   payment   transactions.  It  can  be  hoped  that  this  will  facilitate  adoption  by  the  financially  excluded,  as  clients  do                                                                                                                           143  According  to  one  blogger,  around  75  to  85  percent  of  terminal  providers’  revenues  come  from  mobile  top-­â€?ups   and  about  80  percent  of  MNOs’  revenues  come  from  voice  traffic.  See  http://bit.ly/Pi77Sc.   144  For  example,  MegaFon  has  recently  launched  MegaLabs,  which  focuses,  among  others  things,  on  developing  a   strategy  for  MegaFon  in  providing  financial  services.   145   The   following   blog   by   Daniel   Gusev   covers   many   of   the   innovations   by   MNOs:   http://blog.danielgusev.com.   Interestingly,  the  three  largest  MNOs  have  signed  an  agreement  of  interoperability  at  merchants,  which  allows  a   customer   of   one   operator   to   make   a   payment   for   a   supplier   of   goods   and   services,   which   is   only   connected   to   one   of  the  other  operators.  See  http://bit.ly/SFSkBR  (in  Russian).   146  MTS  and  MTS  Bank  (recently  rebranded  from  Moscow  Bank  for  Reconstruction  and  Development)  are  part  of   the  same  investment  company;  Beeline  works  with  Alfa-­â€?Bank,  which  are  both  part  of  the  Alfa  Group  Consortium   (even  though  Beeline  previously  cooperated  closely  with  Tavrichesky  Bank);  and  MegaFon  works  with  five  smaller   banks  that  have  an  interest  in  playing  a  stronger  role  in  the  retail  payments  market.   38     not  have  to  fund  a  separate  wallet  before  they  can  start  transacting,  but  can  simply  use  their  existing   airtime   balance.   However,   as   the   average   balances   on   prepaid   accounts   are   relatively   low   (estimated   to   be   below   USD   7),147   customers   generally   still   have   to   top   up   their   account   before   they   can   initiate   larger   payments.   There   is   no   separate   data   available   about   the   current   usage   of   mobile   money   accounts   for   payments  and  transfers.   Payment   agents:   Bank   payment   agents   and   nonbank   payment   agents   are   also   important   players   in   providing   retail   payment   services   on   behalf   of   banks   and   a   wide   range   of   payees.   It   was   not   only   the   amendment  of  the  Banking  Law  in  2009  which  allowed  bank  payment  agents  to  accept  cash  on  behalf  of   a   bank   (see   Sec.   3.1),   but   also   the   adoption   of   a   new   Payment   Agents   Law   at   the   same   time   that   permitted  nonbank  payments  agents  to  accept  cash  funds  from  individuals  (but  not  from  legal  entities)   as   payment   for   goods   and   services.   One   and   the   same   entity   can   be   both   a   bank   agent   and   nonbank   payment  agent  at  the  same  time,  as  these  terms  do  not  define  the  type  of  market  participant,  but  the   type   of   financial   transaction   they   are   authorized   to   provide.   QIWI,   for   example,   which   has   a   bank   license,  but  also  the  NBCO  OSMP  in  its  group,  uses  both  types  of  agents  opportunistically  to  minimize   the  costs  of  regulatory  compliance.148   According   to   a   2012   study   on   agents,   70   percent   of   bank   and   nonbank   payment   agents   are   providing   services   via   unmanned   payment   terminals,   with   the   remainder   serving   their   customers   using   a   cashier.149   The   number   of   both   categories   of   agents   has   been   increasing   rapidly   –   from   7,800   in   2010   to   12,400  the  year  after,  working  through  over  319,000  customer  service  points  (including  both  unmanned   terminals   and   outlets   with   cashiers).150  The   latter  model  is  mostly  offered  by  retail  enterprises  for  which   payment   services   do   not   constitute   their   core   business,   as   it   would   otherwise   not   be   economically   feasible.     By  far  the  largest  use  of  agents  is  for  mobile  top  ups  and  payments  for  other  communication  services   such  as  internet  fees  (86  percent  of  the  number  of  transactions  in  2012,  down  from  95  percent  during   the   previous   year).   However,   other   payments   (deposits   into   a   personal   bank   account,   purchases   of   prepaid   cards,   loan   repayments,   replenishment   of   payment   cards,   and   person-­â€?to-­â€?person   transfers)   have   recently  been  experiencing  strong  growth  so  that  this  picture  might  change  in  the  near  future.  Figure  2   shows  how  the  composition  of  payments  has  changed  between  2011  and  2012.  (As  a  comparison,  89.9   percent  of  payments  by  natural  persons  through  banks  were  for  utilities  and  to  public  authorities).151                                                                                                                           147  See  http://bit.ly/SFSkBR.   148  Interview  with  Boris  Kim,  QIWI,  16  April  2012.   149   Unless   otherwise   noted,   the   source   of   data   for   this   section   is   Center   for   Research   of   Payment   Systems   and   Settlements  and  RMC  (2012).   150  These  are  the  respective  sample  sizes  of  research  conducted  by  the  Center  for  Research  of  Payment  Systems   and   Settlements   and   RMC   (2011   and   2012).   The   survey   covered   all   major   players   and   it   is   estimated   that   these   numbers  represent  at  least  90  percent  of  the  total  market.  There  is  no  other  data  available  on  the  total  number  of   agents  and  customer  service  points  in  Russia.   151  See  CBR  (2012),  p.  12.   39     Figure  2:  Breakdown  of  number  of  transactions  processed  by  bank  and  nonbank  payment  agents   100%   Other  operaton   Funds  transfers  in  favor  of   95%   individuals   Acceptance/replenishment  of   deposits  and  accounts   Replenishment  of  payment  cards   90%   “Purchaseâ€?  of  pre-­â€?paid  cards   Replenishment  of  electronic   85%   wallets   Payment  for  housing  and  utlity   services   80%   Repayment  of  loans  and   replenishment  of  bank  accounts   Payment  for  the  Internet  and   commercial  television   75%   Payment  for  communicaton   2011   2012   services   Source:  Center  for  Research  of  Payment  Systems  and  Settlements  and  RMC  (2012).     While  the  average  payment  amount  has  slightly  increased  mostly  due  to  the  higher  share  of  payments   with  larger  average  amounts  such  as  loan  repayments  (from  RUB  145  or  USD  4.69  to  RUB  176  or  USD   5.69),  it  is  still  clear  that  this  channel  is  mostly  used  for  small  retail  payments.  The  regional  distribution   of   agents   across   the   territory   of   the   Russian   Federation   aligns   well   with   the   distribution   of   the   population.   Assuming   that   other   payment   services   with   a   higher   financial   inclusion   potential   (such   as   deposits  into  bank  accounts  and  person-­â€?to-­â€?person  transfers)  will  continue  to  grow  fast,  the  importance   of  payment  agents  in  areas  where  bank  branches  are  not  profitable  will  also  increase.   Regulation  and  Supervision   While   Russia   has   been   implementing   incremental   changes   on   payment   regulations   and   applicable   KYC   rules   for   at   least   the   past   6   years,152   the   Payment   System   Law   will   lead   to   some   fundamental   changes   in   the  regulation  of  the  retail  payments  sector.  The  law  was  implemented  in  phases,  with  a  final  date  of   September  29,  2012  for  all  operators  to  comply.  As  not  all  implementing  regulations  under  the  law  have   been   issued   yet,   only   the   broad   contours   of   the   future   legal   framework   are   currently   visible.   By   the   end   of   December   2012,   approximately   50   regulations   are   expected   to   have   come   out,   specifying,   among   other   things,   the   details   on   registration,   prudential   regulation,   and   supervision   of   various   types   of   operators.                                                                                                                             152  For  a  brief  summary  on  this,  see  CGAP  (2010).     40     The   Payment   System   Law   distinguishes   between   the   three   types   of   operators   introduced   above:   money   transfer   operators,   electronic   money   operators,   and   mobile   network   operators.   Banks   and   NBCOs   can   be   part   of   any   payment   system.   This   means,   for   example,   that   a   client   using   one   of   the   money   remittance  operators  to  transfer  funds  can  use  the  branches  and  offices  of  many  different  banks  as  long   as  they  are  connected  to  the  specific  payment  system.  The  law  also  includes  details  on  the  use  of  bank   payment   agents   (and   their   subagents)   for   rendering   funds   transfer   services   on   behalf   of   banks   and   NBCOs   (replacing   earlier   rules),   but   it   simply   refers   to   the   existing   rules   for   the   use   of   nonbank   payment   agents  (which  are  also  considered  as  part  of  the  national  payment  system).   The  following  table  summarizes  the  main  provisions  of  the  law.  More  details  on  rules  applying  to  money   transfer  operators  and  e-­â€?money  operators  can  be  found  in  Annex  1.     Table  6:  Main  Regulatory  Provisions  for  Payment  Service  Providers   Type  of  financial   Legal  form   Operational  rules   service  provider   Money  transfer   Bank  or  NBCO   • Initiate  and  receive  payments  in  cash  or  from/to  bank  account   operator   under  Banking   • Settlement  within  3  business  days   Law   • Use  of  bank  and  nonbank  payment  agents  permitted   Electronic  money   Bank  or  NBCO   • Can  open  virtual  accounts153   operator   under  Banking   • Customers  increase  balance  of  virtual  account  in  cash,  via  bank   Law   transfer,  or  card  payment   • Withdrawals   via   personal   bank   account   or   (if   customer   is   identified)  via  agents     • Transfer  from  one  bank  account  to  another  not  permitted   • Settlement  immediately  or  at  end  of  business  day   • Use  of  bank  and  nonbank  payment  agents  permitted   • Max.   balance   in   virtual   account   of   RUB   100,000   (USD   3,230)   (identified   customers)   or   15,000   (USD   485)   (unidentified   customers).   Additional   monthly   transfer   limit   of   RUB   40,000   (USD  1,300)  for  unidentified  customers   • If   operating   as   NBCO,   minimum   capital   requirement   of   RUB   18   million   (USD   582,000),   capital   adequacy   ratio   of   2   percent   and   a   liquidity  ratio  of  100  percent  (ratio  of  cash  and  assets  maturing   within  30  days  over  liabilities)   Mobile  network   Communications   • Working  in  partnership  with  e-­â€?money  operator   operator   service  provider   • Payments   are   initiated   from   mobile   phone,   funds   taken   from   under   prepaid   balance   held   with   MNO,   channeled   through   a   virtual   Communications   account   held   with   the   e-­â€?money   operator,   and   immediately   Law     transferred  to  ultimate  beneficiary   • Settlement  between  MNO  and  e-­â€?money  operator  by  end  of  next   business  day   • No  fund  safeguarding  and  fund  isolation  rules  for  protection  of   customers’  funds      Source:  Analysis  by  the  authors.                                                                                                                           153   According   to   the   Payment   System   Law,   electronic   money   operators   can   hold   customers’   electronic   money   balances.  The  accounts  where  these  balances  are  held  can  be  referred  to  as  ‘virtual  accounts’.     41     Money   transfer   operators:   The   law   defines   money   transfer   operators   as   organizations   that   have   the   right   to   transfer   funds.   All   credit   organizations   (banks   and   NBCOs)   are   money   transfer   operators   by   definition  and  only  credit  organizations  are  authorized  to  operate  as  money  transfer  operators.  In  effect,   this   limits   the   role   that   institutions   not   licensed   by   CBR   can   play   in   the   payment   system   to   the   provision   of  payment  infrastructure,  the  definition  of  payment  system  rules  and  similar  back  end  functions  or  to   the  operation  as  agents  on  behalf  of  banks  and  NBCOs.   Many   of   the   existing   payment   service   providers   are   already   licensed   as   credit   organizations   (banks   or   NBCOs)   or   have   an   entity   as   part   of   their   corporate   group   that   holds   such   a   license,   so   that   it   will   be   relatively  easy  for  them  to  comply  with  the  licensing  requirement  under  the  Payment  System  Law.154  If   they  only  define  the  payment  system  rules  and  operate  the  payment  platform,  but  do  not  conduct  the   money   transfers   themselves,   they   are   classified   as   payment   system   operators   under   the   Payment   System  Law  and  do  not  need  a  license  by  the  CBR.   Electronic   money   operators:   E-­â€?money   operators,   as   defined   in   the   law,   offer   “electronic   money   transfers   without   opening   a   bank   account.â€?   They   fall   under   the   definition   of   money   transfer   operator   (and   must   therefore   be   a   bank   or   NBCO),   but   are   subject   to   some   special   rules.   In   particular,   unlike   money   transfer   operators   they   must   settle   with   the   payee   either   immediately   or   by   the   end   of   the   business  day,  and  they  are  not  permitted  to  provide  settlement  services  as  defined  in  the  Civil  Code  (i.e.   money  transfers  from  one  bank  account  to  another).  If  an  e-­â€?money  operator  is  a  NBCO,  it  has  to  comply   with   the   respective   prudential   regulations   such   as   a   minimum   capital   requirement   of   RUB   18   million   (about   USD   600,000)   and   a   capital   adequacy   ratio   of   2   percent.  The   law   does   not   use   the   term   e-­â€?money   account  (perhaps  to  avoid  confusion  with  term  “accountâ€?  as  used  with  respect  to  banks)  nor  is  e-­â€?money   issuance   referred   to.     However,   customers   in   practice   can   both   transfer   and   hold   e-­â€?money   balances.   These   balances   are   referred   to   in   this   report   as   “virtual   accountsâ€?   (to   distinguish   them   from   bank   accounts  as  defined  in  Russian  law).   E-­â€?money  is  explicitly  not  considered  to  be  a  deposit.  However,  the  law  does  not  set  any  restrictions  on   how   long   clients   can   keep   e-­â€?money   balances   in   their   virtual   account.   To   assure   sufficient   liquidity,   e-­â€? money  operators  that  are  NBCOs  rather  than  banks  are  required  to  keep  the  e-­â€?money  float  in  cash  or   short-­â€?term   instruments   (convertible   into   cash   within   30   days).   There   are   no   requirements   for   the   e-­â€? money   float   to   be   isolated   from   any   other   funds   owned   by   the   e-­â€?money   operator   and   to   safeguard   it   against   third   party   claims.155   (However,   as   e-­â€?money   operators   organized   as   NBCOs   are   single   purpose   entities,  there  is  no  risk  of  losses  or  third  party  claims  from  unrelated  business  activities.)   To  date,  some  of  the  e-­â€?money  operators  already  hold  a  license  as  a  bank  (e.g.,  QIWI  bank)  or  NBCO  (e.g.,   Yandex.Money),  while  others  have  an  NBCO  in  their  corporate  group  (e.g.,  WebMoney).   As  the  previously  existing  rules  applying  to  prepaid  cards   have  not  been  repealed  with  the  introduction   of   the   new   Payment   System   Law,   e-­â€?money   and   prepaid   cards   are   now   being   regulated   under   two                                                                                                                           154  For  example,  Unistream  holds  a  bank  license;  the  CONTACT  money  transfer  system  is  offered  by  Russlavbank;   Leader  holds  a  license  as  NBCO;  and  Golden  Crown  has  an  NBCO  in  its  corporate  group.   155  On  fund  safeguarding  and  fund  isolation  rules  for  e-­â€?money  issuers,  see  Tarazi  and  Breloff  (2010).   42     different  legal  regimes.  While  e-­â€?money  has  been  brought  under  the  law,  prepaid  cards  continue  to  be   regulated  under  a  separate  regulation.156  They  can  be  issued  by  banks  and  NBCOs  and  are  not  linked  to  a   bank  account.  The  maximum  amount  that  can  be  held  on  a  prepaid  card  is  RUB  100,000  (USD  3,230)  and   monthly   deposits   onto   the   card   cannot   exceed   RUB   40,000   (USD   1,300).   There   is   some   controversy   regarding  the  question  whether  prepaid  card  balances  should  follow  the  same  rules  as  electronic  money   balances.   One   option   currently   under   debate   is   for   prepaid   card   rules   also   to   be   brought   under   the   Payment  System  Law.   Mobile  network  operators:  MNOs  can  choose  to  become  e-­â€?money  operators  themselves,  which  implies   that  they  would  have  to  get  a  license  as  a  bank  or  NBCO  and  that  they  have  to  set  up  a  subsidiary  for   their   e-­â€?money   business   as   credit   organizations’   business   must   be   kept   separate   from   the   provision   of   mobile   services.   As   an   alternative,   an   MNO   can   work   in   partnership   with   an   e-­â€?money   operator   as   specified  in  a  separate  article  of  the  Payment  System  Law  (Art.  13).  In  this  model,  a  client  can  instruct   the   MNO   to   transfer   money   out   of   her   prepaid   balance   held   with   the   MNO   to   an   e-­â€?money   operator,   from  where  it  can  be  used  immediately  to  make  a  payment  or  transfer  according  to  the  e-­â€?money  rules.   In   practice,   the   e-­â€?money   balance   is   always   zero   as   the   prepaid   balance   held   by   the   MNO   is   only   transferred   to   the   e-­â€?money   operator   once   a   client   initiates   a   payment   from   the   mobile   phone,   but   then   immediately  transferred  to  the  payee.  The  settlement  between  the  e-­â€?money  operator  and  the  MNO  has   to   occur   not   later   than   the   next   business   day.   As   the   prepaid   balance   of   a   mobile   subscriber   is   considered  an  advance  payment  for  a  service  provided  by  the  MNO,  customers  cannot  use  it  directly  to   buy  goods  and  services  other  than  those  offered  by  the  MNO  (airtime,  ring  tones,  etc.).  Yet  once  they   have   transferred   it   to   the   e-­â€?money   operator,   it   can   be   used   in   the   same   way   as   any   other   e-­â€?money   balance   (except   that   in   practice   it   is   not   stored   in   a   virtual   account,   but   used   immediately   to   effect   a   payment  or  transfer).     The   advantage   of   this   approach   for   MNOs   is   that   they   do   not   have   to   comply   with   the   stricter   regulations   applying   to   e-­â€?money   operators.   Most   importantly,   they   do   not   have   to   get   a   license   as   a   NBCO  and  they  are  not  subject  to  the  100  percent  liquidity  requirement  applicable  to  NBCOs.  They  are   also  not  currently  subject  to  KYC  rules  under  the  AML/CFT  Law.     From   a   legal   point   of   view,   MNOs   do   not   issue   e-­â€?money.   However,   from   a   customer   perspective   the   prepaid  balance  held  with  the  MNO  is  functionally  identical  to  electronic  money  held  in  a  virtual  account   with  an  electronic  money  operator  with  an  important  exception:  the  money  paid  by  customers  to  MNOs   for   prepaid   value,   however,   is   not   subject   to   prudential   regulation   requiring   safeguarding   or   isolation   of   customers’  funds.   In  practice,  MNOs  hold  the  money  in  a  commingled  corporate  account  with  a  bank,   where  it  is  exposed  to  the  MNOs’  general  creditors  and  customers  have  no  priority  in  the  event  of  an   MNO’s  insolvency.   Payment   agents:   Money   transfer   operators   and   e-­â€?money   operators   are   credit   organizations   and   can   therefore   make   use   of   bank   payment   agents.   The   same   rules   apply   described   above   in   the   section   on                                                                                                                           156   CBR   Regulation   266-­â€?P   of   December   24,   2004   (as   amended   through   15   November   2011)   “On   the   Issuance   of   Bank  Cards  and  on  Transactions  Carried  Out  with  Payment  Cardsâ€?.   43     Banks  and  NBCOs.  In  addition,  nonbank  payment  agents  can  enter  into  a  contract  with  a  payee  to  accept   payments  on  its  behalf  (regulated  under  the  Payment  Agents  Law).  Such  nonbank  payment  agents  are   restricted  to  a  narrow  range  of  payment  services  that  are  not  listed  as  bank  operations  in  the  Banking   Law.157  In  particular,  they  can  collect  funds  from  natural  persons  for  the  purpose  of  paying  suppliers  of   goods   and   services   and   for   paying   taxes.   They   are   not   permitted   to   undertake   settlements   as   defined   in   the   Civil   Code   (transfer   money   from   one   bank   account   to   another)   or   to   provide   cash-­â€?out   services.  As   payments   and   transfers   made   from   prepaid   balances   held   with   an   MNO   that   has   not   created   a   subsidiary   for   its   e-­â€?money   operations   must   be   made   through   a   partner   e-­â€?money   operator,   the   same   rules  apply  regarding  the  use  of  bank  and  nonbank  payment  agents.    An  important  relaxation  for  low-­â€? value  transactions  is  that  all  payments  below  RUB  15,000  (USD  485)  that  do  not  involve  the  opening  of  a   bank   account   do   not   require   the   identification   of   the   customer,   as   they   are   exempted   from   the   KYC   requirements   under   the   AML/CFT   Law.   The   42,000   post   offices   in   Russia   are   also   legally   permitted   to   become  bank  or  nonbank  payment  agents.                                                                                                                               157   This   provision   ensures   that   there   is   no   overlap   between   the   scope   of   payments   provided   by   bank   payment   agents  and  nonbank  payment  agents.   44     Box  4:  Payment  Service  Providers  –  Key  Challenges  and  Opportunities     This  sector  has  been  at  the  forefront  of  innovation  making  tremendous  progress  in  offering  clients  products   that   are   more   convenient,   more   accessible,   and   cheaper,   even   in   more   remote   and   sparsely   populated   areas.   Though   it   is   still   very   much   focused   on   a   few   payment   transactions   (predominantly   payments   for   communication  services)  with  only  limited  value  for  financial  inclusion,  recently  other  payment  transactions   such   as   person-­â€?to-­â€?person   transfers,   payments   for   utilities,   loan   repayments,   and   replenishing   deposit   and   virtual   accounts   have   experienced   strong   growth.   At   the   same   type,   new   partnerships   between   e-­â€?money   operators,   banks,   and   mobile   network   operators   carry   the   potential   of   combining   the   advantages   of   different  models.   The  wide  network  of  outlets  (terminals  and  cashier-­â€?based  services)  operated  by  bank  and  nonbank  payment   agents   make   financial   services   much   more   accessible   in   areas   without   sufficient   branch   infrastructure.   At   the   same   time,   it   remains   to   be   seen   whether   these   channels   will   not   only   be   attractive   for   the   mostly   young,  well-­â€?educated,  and  technology-­â€?savvy  current  users,  but  also  for  those  that  currently  lack  access  to   finance  most  –  the  elderly,  less  educated,  and  more  remote  customers.     The   permission   for   bank   payment   agents   to   provide   cash-­â€?out   services   has   the   potential   to   make   this   channel  much  more  attractive  as  a  basic  substitute  for  bricks-­â€?and-­â€?mortar  branches.  However,  cashing  out   from   virtual   accounts   and   mobile   wallets   is   still   mostly   done   through   existing   bank   accounts   or   by   transferring  the  money  to  cards.   Russian   money   remittance   operators   have   been   among   the   most   efficient   operators   globally.   This   brings   important  benefits  to  their  users  in  the  form  of  low  commissions  and  efficient  and  easily  accessible  services.   However,  they  have  not  been  equally  successful  in  linking  the  remittance  flows  to  other  financial  services   such   as   loans   and   savings   accounts,   and   thus   have   made   only   a   limited   contribution   to   broader   goals   of   financial  inclusion.  The  Russian  Post  plays  a  dominant  role  in  the  domestic  remittance  market  making  use  of   its  vast  network  of  post  offices.  Even  though  post  offices  are  legally  permitted  to  act  as  bank  or  nonbank   payment  agents,  the  potential  of  this  network  for  providing  financial  services  in  harder  to  reach  areas  has   not  been  fully  tapped  yet.   There   is   need   for   further   research   about   the   impact   of   technological   innovations   by   all   different   types   of   payment   service   providers   on   financial   inclusion.   While   the   numbers   of   transactions   and   volumes   are   impressive,   the   attractiveness   of   new   products   and   channels   for   the   elderly,   poorer,   less   educated,   and   more   remote   customers   is   still   an   open   question.   There   is   also   little   information   available   about   the   geographic  spread  of  alternative  delivery  channels  –  not  even  the  overall  number  of  terminals  and  agents  is   exactly  known.   The  new  Payment  System  Law  will  bring  all  money  transfer  operators  and  e-­â€?money  operators  under  direct   CBR  supervision  and  require  MNOs  offering  payment  services  to  partner  with  e-­â€?money  operators.  It  will  be   important  to  see  what  it  means  for  existing  operators  to  either  become  or  partner  with  NBCOs  (or  banks).   For  MNOs,  the  most  attractive  model  will  be  to  operate  through  NBCOs/banks,  which  does  not  bring  them   under  direct  Central  Bank  regulation.     4. Infrastructure   and   Other   Initiatives   with   Relevance   for   Financial   Inclusion   Progress  in  creating  an  inclusive  financial  sector  does  not  only  depend  on  demand-­â€?side  issues  (see  Sec.   2),   and   the   supply   by   and   regulation   of   various   financial   service   providers   (Sec.   3),   but   also   on   the   financial  infrastructure,  and  support  initiatives  targeted  at  promoting  access  to  finance.  This  is  a  diverse,   45     yet   important   field.   This   section   discusses   two   elements   of   the   financial   sector   infrastructure   –   the   Universal  Electronic  Card  (UEC)  and  credit  reference  services  –  and  two  initiatives  –  the  Russian  Financial   Inclusion  Strategy  and  the  Russian  collaboration  with  the  Alliance  for  Financial  Inclusion  (AFI)  –  with  a   potentially   significant   impact   on   financial   inclusion.  The   UEC   is   an   electronic   ID   that   can   possibly   play   an   important   role   in   identifying   customers   for   account   opening   and   transaction   purposes,   but   also   in   connecting  them  electronically  to  bank  accounts.  Credit  reference  services  can  facilitate  healthy  access   and  minimize  risk  of  over-­â€?indebtedness  if  they  are  broad  enough  to  include   data  on  lower-­â€?income  client   segments   and   cover   all   types   of   lenders   serving   this   market.   Russia   may   be   the   only   country   in   the   region   that   has   a   comprehensive   financial   inclusion   strategy   which   covers   most   of   the   financial   sector   players   –   but   long-­â€?term   results   of   the   strategy   are   yet   to   be   seen   as   it   was   adopted   only   recently.   Russia’s   collaboration   with   AFI   contributed   to   financial   inclusion   measurement   activities,   as   well   as   market  research  and  regulatory  initiatives  of  the  Russian  Government  in  the  area  of  agent  banking.  They   suggest   possibility   for   follow-­â€?up   research   and   activities   to   encourage   innovation   to   better   understand   and  close  the  Russian  financial  access  gap.   4.1 Universal  Electronic  Card   The   introduction   of   the   Universal   Electronic   Card   (UEC)   is   part   of   the   Russian   Government’s   administrative   reform   initiative   launched   in   2003,   implemented   by   the   Ministry   for   Economic   Development.  The  ambitious  initiative  aims,  among  other  things,  at  facilitating  access  to  (and  efficiency   of)  state  and  municipal  services  of  all  types  as  well  as  commercial  services.  The  UEC  is  intended  to  be   used   for   certifying   the   identity   of   citizens   as   well   as   verifying   a   citizen’s   rights   of   access   to   state   and   municipal   services.   It   will   replace   a   multiplicity   of   documents   that   are   currently   used   for   these   purposes   (e.g.,   pension   certificates,  driving   licenses,   national  medical   insurance   cards,   car   insurance   certificates,   etc.).158   Services   currently   under   consideration   for   UEC   access   include:   medical,   tax,   migration,   state   registration,  transport,  traffic  police,  banking,  utilities,  education,  and  many  others  (it  is  estimated  that   the   UEC   will   contain   some   260   separate   service-­â€?linked   applications).   While   the   participation   in   the   program  is  voluntary,  the  card  will  be  automatically  issued  to  all  citizens  above  the  age  of  14  unless  a   citizen  has  opted  out  by  submitting  a  request  to  government  authorities.159   The   UEC   is   currently   being   piloted   among   a   few   select   staff   of   the   Moscow   Government.   The   countrywide  roll-­â€?out  of  the  UEC  will  only  start  in  January  2013  (by  individual  request)  and  January  2014   (to  anyone  who  has  not  opted  out).  Three  banks  (state-­â€?owned  Sberbank,  Uralsib  and  Ak  Bars  Bank)  set   up   the   open   joint   stock   company   OJSC   “UECâ€?,   which   was   appointed   as   the   authority   in   charge   of   issuing   and  servicing  UECs.160                                                                                                                             158  In  3-­â€?5  years,  the  Russian  Government  is  planning  to  launch  a  new  generation  of  internal  passports  (the  national   identity  document)  that  builds  on  the  UEC  technology  and  would  replace  the  UEC  (http://bit.ly/Uulfdr).     159   According   to   newspaper   report,   in   Moscow   the   UEC   will   even   be   issued   to   children   at   birth   (http://bit.ly/OcgGgh).     160  According  to  reports,  two  more  banks  (Citronix  and  Troyka  Dialog)  have  since  joined.  See  http://bit.ly/N1ovZa   (in  Russian).   46     Two   applications   on   the   card   are   of   particular   interest   from   a   financial   inclusion   perspective:   the   electronic   identification   of   the   holder   of   the   card161   and   an   electronic   banking   application   linking   the   card   to   a   bank   account   and   allowing   for   it   to   be   used   for   various   payment   transactions.   Citizens   can   choose  from  a  list  of  pre-­â€?qualified  banks  (the  exact  list  of  banks  will  depend  on  the  region).  It  is  not  yet   clear   whether   the   activation   of   the   account   function   will   be   automatic   or   whether   citizens   can   decide   not  to  link  the  card  to  a  bank  account  (though  they  can  of  course  decide  not  to  receive  a  UEC).162  For   account  opening  and  servicing  purposes,  the  OJSC  “UECâ€?  plans  to  engage  a  huge  agent  network  with  at   least   one   outlet   in   each   of   the   more   than   23,000   municipalities   in   the   Russian   federation.163   Many   of   these   agents   might   be   existing   payment   agents   and   bank   payment   agents.   Depending   on   how   many   citizens   decide   to   opt   out   of   the   UEC   and   how   many   of   those   with   a   UEC   activate   the   bank   account   function,   this   can   potentially   lead   to   a   massive   increase   of   bank   account   penetration   in   the   Russian   federation.   Box  5:  UEC  –  Key  Challenges  and  Opportunities     The   fact   that   UECs   will   be   offered   to   all   Russian   citizens   unless   they   opt   out   makes   it   likely   that   the   164 uptake  will  be  high  and  thus  a  majority  of  Russian  citizens  will  be  issued  with  a  UEC  in  the  near  future.     From   a   financial   inclusion   perspective,   the   potential   lies   in   simplifying   customer   identification   and   in   providing   previously   unserved   people   with   convenient   access   to   a   bank   account.   As   regards   the   first,   the   UEC  will  establish  a  simple  means  of  identifying  customers  as  part  of  KYC  requirements.  As  regards  the   latter,   the   overall   impact   on   financial   inclusion   will   not   only   depend   on   the   share   of   people   who   will   activate   the   bank   account   function   of   their   card,   but   also   on   their   actual   usage   of   the   bank   accounts   thereafter.   Reaching   all   Russian   citizens   with   bank   accounts   linked   to   the   UEC   will   require   an   upgrade   of   the   current   banking   infrastructure.   Bank   payment   agents   will   play   an   important   role   in   this.   An   issue   to   explore   is   165 whether  they  could  play  a  stronger  role  in  account  opening  then  just  collecting  documents.   A  challenge  of  which  the  Government  is  aware  and  already  engaged  in  addressing  is  to  ensure  the  data   security  and  privacy  of  such  a  ubiquitous  system.                                                                                                                               161   No   biometrics   are   used   for   identification,   but   the   card   and   a   unique   passcode   are   considered   by   the   authorities   to  be  sufficient  as  an  access  key  to  the  databases  of  all  the  relevant  government  agencies.  (For  security  reasons,   there  will  be  no  single,  consolidated,  database  of  all  UEC  data.)  Basic  information  will  be  stored  on  the  card  itself   (name,  date  of  birth,  photo,  signature,  pension  fund  number,  medical  insurance  policy  number,   and  bank  account   number).  See  http://mfc44.ru/uek/security.   162  The  rules  for  producing,  operating,  and  connecting  the  banking  application  have  not  yet  made  public.  However,   as  cardholders  would  have  to  enter  into  an  agreement  with  a  bank  (Art  23,  item  17  UEC  Law),  it  might  be  legally   impossible  to  force  them  to  do  so.   163   Because   of   the   above-­â€?mentioned   restrictions   on   account   openings   via   agents,   the   agents   might   only   collect   the   documents  and  forward  them  to  the  bank  (see  for  a  discussion  on  this  http://marker.ru/news/4669).     164  There  is,  however,  some  opposition  to  the  UEC  from  Orthodox  Christians.  See  http://marker.ru/news/517429.   165   One   option   would   be   to   authorize   them   to   open   accounts   subject   to   transaction   limits   and   that   full   identification  would  only  be  required  once  a  client  wants  to  transact  higher  amounts.   47     4.2 Credit  reference  services/Credit  reporting   As  lending  expands  to  the  massive  financial  market  of  lower-­â€?income  consumers,  the  need  for  reliable,   accurate   information   on   existing   and   potential   low-­â€?income   borrowers   is   also   growing.   In   Russia   this   is   especially  relevant  as  the  growth  in  consumer  lending  in  the  recent  years  has  resulted  in  the  significant   increase  in  arrears  level  which  almost  doubled  from  2008  to  reach  RUB  291  billion   (USD  9.4  billion)  in   2011.166   Credit   reporting   systems   are   essential   in   ensuring   sound   coverage   of   lower-­â€?income   segments   with   credit   services   and   preventing   reckless   lending   which   may   lead   to   borrower   over-­â€?indebtedness.   This  said,  there  are  challenges  to  effective  credit  reporting  systems  covering  lower-­â€?income  customers,   some  of  the  most  important  being  (i)  establishment  of  credit  reporting  systems  that  cover  all  types  of   lenders  in  a  given  market;  (ii)  regulatory  or  cost  barriers  that  limit  participation;  (iii)  comparatively  high   costs   of   obtaining   and   processing   high-­â€?quality   data   on   lower-­â€?income   borrowers;   (iv)   establishing   the   identity  of  lower-­â€?income  borrowers;  and  (v)  protection  of  data  privacy  and  accuracy  at  a  reasonable  cost   given  high  transaction  volume  and  low  loan  sizes.167     Credit   reporting   in   Russia   is   regulated   by   the   Law   on   Credit   Histories   adopted   in   2004   and   in   force   since   2005.  The  law  provides  for  a  two-­â€?tier  credit  reporting  system:   • Private  credit  bureaus  that  hold  borrower  credit  information.     • The  Central  Catalogue  of  Credit  Histories  (the  Catalogue)  at  the  Central  Bank  that  keeps   information  on  the  credit  bureau(s)  where  credit  histories  of  borrowers  are  held.   As  of  January  2012  there  were  31  credit  bureaus  all  over  the  country,  including  10  in  Moscow  and  3  in   St.   Petersburg.   Reporting   to   at   least   one   credit   bureau   is   mandatory   for   banks   and   NBCOs   (provided   there  is  explicit  borrower  consent);  for  other  institutions  –  both  financial  (e.g.,  MFIs)  and  non-­â€?financial   (e.g.  telecom  companies)  –  it  is  optional.   A  credit  history  consists  of  3  parts:  (i)  the  “titleâ€?  containing  identification  information  of  a  borrower,  (ii)   the  “core  â€?  containing  additional  borrower  information  such  as  loan  terms  (including  amounts,  duration,   repayment   dates,   classification   of   arrears,   etc.);   and   (iii)   the   “additional   (closed)   partâ€?   containing   information  about  the  source  of  credit  history  (creditor)  and  users  of  the  credit  history.  Credit  bureaus   must   submit   the   title   of   the   credit   history   to   the   Catalogue   within   two   working   days   after   its   creation   and   keep   each   credit   history   for   15   years.   Thus,   the   Catalogue   contains   only   borrower   ID   information   and  information  on  the  credit  bureau(s)  where  credit  histories  are  held,  but  no  information  on  borrower   performance.   Among   the   credit   bureaus,   there   are   four   leaders168   that   cover   up   to   95   percent169   of   the   market,   claiming   to   maintain   over   60   million   individual   credit   histories.   According   to   Doing   Business   2012,   the                                                                                                                           166  See  Prusakov  (2012).     167  See  CGAP  and  IFC  (2011).     168   These   are   Equifax   Credit   Services,   the   National   Bureau   of   Credit   Histories,   Russian   Standard,   and   the   United   Credit  Bureau  “Experian  Interfaxâ€?.   48     private  credit  bureau  coverage  in  Russia  is  somewhat  lower  –  35.8  percent  of  the  adult  population,170  or   43.4   million   people.   At   the   same   time,   FFMS,   the   supervisor   of   credit   bureaus,   is   much   more   conservative   in   the   estimates   of   the   current   number   of   credit   histories   and   believes   the   high   figures   are   due   to   the   data   overlap   among   several   credit   bureaus   and   the   fact   that   the   latter   tend   to   report   the   number   of   loans   rather   than   individuals.171   As   mentioned   above,   credit   organizations   must   receive   explicit   borrower   consent   for   checking   and   submitting   their   credit   histories   to   credit   bureaus.   Many   borrowers  are  concerned  about  their  personal  data  security,  which  keeps  them  from  giving  consent  for   submitting   their   credit   information   to   credit   bureaus   as   there   have   been   some   reports   of   data   protection  breaches.   Thus,   there   are   at   least   two   reasons   why   the   market   coverage   by   credit   bureaus   is   not   comprehensive  –   (i)   absence   of   a   mandatory   credit   reporting   requirement   for   types   of   providers   besides   licensed   credit   organizations172   (although   there   are   many   MFIs   and   credit   cooperatives   that   do   report,   and   leading   credit   bureaus   develop   special   offers   for   them),   and   (ii)   the   borrower   consent   requirements   of   the   current  legislation.     The   Law   on   Credit   Histories   and   its   supporting   regulations   provide   for   a   2-­â€?stage   process   for   checking   credit  information,  both  for  borrowers  and  for  creditors  –  first  a  free  of  charge  request  is  submitted  to   the  Catalogue  which  provides  information  about  the  credit  bureau(s)  where  a  borrower  history  is  kept;   then   creditors   and   borrowers   can   send   requests   to   respective   credit   bureau(s).   Each   borrower   has   a   right   to   receive   information   about   his   credit   history   from   each   credit   bureau   where   it   is   kept   free   of   charge  once  a  year,  and  an  unlimited  number  of  times  for  a  fee.  Although  the  Catalogue  has  an  online   facility  for  information  requests,  it  is  available  to  borrowers  only  in  case  they  know  their  code  as  a  credit   history   subject   (which   is   assigned   by   a   creditor);   in   other   cases,   borrowers   should   apply   through   their   creditor,   credit   bureau,   a   post   office   or   a   notary.   While   this   system   should   work   well   for   borrowers   who   gave  their  consent  for  reporting  their  credit  information  (provided  that  they  know  their  codes  as  credit   history  subjects),  a  person  who  did  not  give  such  consent  cannot  easily  check  whether  he  has  a  credit   history  or  not  –  for  example,  when  a  credit  history  was  created  by  mistake  or  as  a  result  of  personal  data   theft.                                                                                                                                                                                                                                                                                                                                                                                                   169  Russian  Business  Gazette,  http://www.rg.ru/2010/10/12/buro.html.     170  See  Doing  Business  (2012).  The  private  credit  bureau  coverage  indicator  reports  the  number  of  individuals  and   ï¬?rms   listed   by   a   private   credit   bureau   with   information   on   their   borrowing   history   from   the   past   5   years.   The   number  is  expressed  as  a  percentage  of  the  adult  population  (the  population  age  15  and  above  in  2010  according   to  the  World  Bank’s  World  Development  Indicators).     171  Interview  with  Nadezhda  Serikova,  FFMS,  November  2011.   172  There  are  currently  discussions  in  place  to  introduce  a  requirement  to  report  for  MFIs  and  credit  cooperatives.   49     Box  6:  Credit  Reporting  –  Key  Challenges  and  Opportunities     Consolidation   of   the   credit   bureau   market   would   be   beneficial,   as   currently   87   percent   of   all   credit   bureaus  have  information  on  no  more  than  5  percent  of  the  market.    This  fact  works  against  the  kind  of   comprehensiveness   needed   for   credit   bureaus   to   serve   as   an   effective   tool   (especially   in   averting   over-­â€? indebtedness  among  lower-­â€?income  segments  of  the  population).      A   level   playing   field   for   all   types   of   loan   and   credit   providers   –   in   terms   of   reporting   to   and   getting   information  from  credit  bureaus,  loan  conditions  disclosure  and  other  data-­â€?related  consumer  protection   requirements  –  will  be  useful  in  preventing  regulatory  arbitrage  and  similar  problematic  market  conduct   detrimental  to  the  interests  of  lower-­â€?income  clients.     In   the   absence   of   mandatory   reporting   requirements   for   NFOs   and   personal   data   confidentiality   requirements,   the   credit   bureau   coverage   in   Russia   is   far   from   comprehensive.     While   mandatory   reporting   can   be   addressed   relatively   easily,   addressing   the   challenge   of   personal   data   confidentiality   173 presents   significant   difficulties.   Though   there   have   been   discussions   in   the   banking   community   with   respect   to   the   need   to   waive   the   requirement   to   obtain   explicit   borrower   consent   for   checking   and   reporting  his  or  her  information,  this  would  go  against  the  national  law  as  well  as  such  international  data   protection  standards  as  the  European  Commission  Directive  on  Use  of  Personal  Data;  in  addition,  it  seems   that  credit  bureaus  are  not  presently  immune  from  potential  data  protection  breaches.     The   process   of   checking   personal   credit   histories   is   rather   burdensome   for   consumers   as   it   requires   information   other   than   personal   ID   data.   While   justifiable   for   checking   the   content   of   a   credit   history,   this   seems  excessive  for  checking  for  the  existence  of  a  credit  history.       4.3 Russian  Financial  Inclusion  Strategy   NFOs   are   recognized   in   Russia   as   important   in   advancing   financial   inclusion.   In   2006,   ARB   and   the   Russian  Microfinance  Center  (RMC)  initiated  the  creation  of  an  association  to  advance  the  interests  of   the   NFO   sector   -­â€?   the   National   Partnership   of   Microfinance   Market   Stakeholders   (NAMMS).174   NAMMS   developed   a   medium-­â€?term   strategy:   “Increasing   Access   to   Retail   Financial   Services   and   Microfinance   Development  in  the  Russian  Federationâ€?  for  2008-­â€?2012  and  2012-­â€?2016.  The  strategy  focuses  primarily   on  MFIs,  CCs,  and  innovative  branchless  solutions  for  financial  service  and  is  an  update  of  the  first  such   strategy  document  developed  for  2008  –  2011.     One   of   the   NAMMS   co-­â€?founders,   RMC,   deserves   a   special   mention.   Established   in   2002,   RMC   has   developed   into   a   strong   institution   possessing   a   comprehensive   knowledge   of   and   expertise   in   the   microfinance   sector   in   the   country.   It   has   been   able   to   present   interests   of   broad   and   various   stakeholder   groups   present   in   the   NFO   market   and   beyond   it   in   the   wider   Russian   financial   system.  This                                                                                                                           173  See  http://bit.ly/Uw0nlW.   174   NAMMS   was   founded   in   2006   by   ARB,   RMC,   Association   of   SME   Support   Agencies   “Developmentâ€?,   and   the   National   Union   of   Non-­â€?Profit   Organizations   for   Mutual   Financial   Assistance.   It   currently   has   10   members   –   in   addition   to   the   4   founders,   the   other   members   include:   the   Union   of   Agricultural   Credit   Cooperatives,   a   non-­â€?profit   partnership  “Microfinance  and  Developmentâ€?,  the  Association  of  MFIs  “People’s  Treasuryâ€?,  the  Mutual  Insurance   Society   “People’s   Cashâ€?,   the   E-­â€?Money   Association,   and   the   OPORA   Association.   See   http://www.rmcenter.ru/naumir.   50     position  of  the  RMC  has  led  government  authorities  (as  well  as  some  international  organizations  such  as   the  World  Bank)  to  use  RMC  data  and  advice  with  respect  to  financial  inclusion-­â€?related  policy  decisions   and  projects.   The  mentioned  NAMMS  strategy  (which  also  relied  on  RMC  data  and  expertise  in  the  sector)  has  been   extensively   used   the   market;   it   was   also   considered   by   the   Government   as   it   worked   to   form   its   own   strategy  and  develop  activities  vis-­â€?à-­â€?vis  financial  inclusion  –  specifically,  concerning  the  NFO  sector  and   branchless   banking   activities.   These   include   regulatory   initiatives   covering   MFIs   and   CCs   as   well   as   banking   and   payment   agents,   and   a   Ministry   of   Economic   Development   (MED)   report   to   the   Government  on  ways  to  increase  access  to  financial  services.175  The  MED  report  developed  in  2010  on   the  basis  of  key  strategy  documents  of  the  Central  Bank,  the  Ministry  of  Finance,  ARB,  NAMMS,  the  E-­â€? Money  Association  and  other  important  stakeholders,  identified  the  following  three  priorities  as  key  in   advancing   access   to   financial   services:   (i)   the   implementation   of   the   G-­â€?20   Principles   for   Innovative   Financial   Inclusion;   (ii)   improving   financial   inclusion   data   and   developing   financial   inclusion   indicators;   and  (iii)  the  development  of  a  methodology  for  assessing  target  financial  inclusion  indicators.     The   existence   of   a   comprehensive   financial   inclusion   strategy   makes   Russia   stand   out   in   the   region   as   very  few  countries  in  Eastern  Europe  an  Central  Asia  have  such  strategies.176     Box  7:  Russian  Financial  Inclusion  Strategy  –  Key  Challenges  and  Opportunities     The   Russian   strategy   may   benefit   from   the   harmonization   of   various   stakeholder   views   on   the   future   of   the   financial   market   and   the   development   of   a   shared   agenda   for   the   whole   financial   sector.   For   example,  there  are  different  views  with  respect  to  the  banking  sector  consolidation,  the  regulation  and   supervision  of  NFOs  and  agents,  as  well  as  the  regulation  and  supervision  of  the  CC  and  agricultural  CC   sectors  –  to  name  just  a  few.  The  solution  of  these  issues  will  largely  depend  on  further  development  of   inter-­â€?agency  coordination  in  the  Russian  Government  with  respect  to  financial  inclusion  issues.         4.4 Alliance  for  Financial  Inclusion  Collaboration   Represented  by  MED,  since  2009  Russia  has  been  a  member  of  the  Alliance  for  Financial  Inclusion  (AFI)  –   a   global   network   of   financial   regulatory   institutions.   Supported   by   AFI   and   in   coordination   with   the   Central   Bank,   MOF,   RMC,   the   E-­â€?Money   Association   and   the   two   associations   of   banks   (ARB   and   the   Russian   Regional   Banks   Association),   MED   has   been   involved   in   the   implementation   of   a   project   “Promotion   of   Innovative   Regulation   and   Supervision   over   Banking   Agents   to   Improve   Access   to                                                                                                                           175  The  Ministry  of  Economic  Development  Report  on  p.  76  of  the  Plan  of  the  Realization  of  the  Main  Anti-­â€?Crisis   Activities  and  the  Policy  for  the  Modernization  of  the  Russian  Economy  of  the  Government  of  the  Russian   Federation  for  2010  “The  Realization  of  Measures  of  Increasing  Accessibility  of  Financial  Services,  Including  Credit,   for  the  Population  and  Entrepreneursâ€?.   176  The  authors  are  aware  of  the  existence  of  microfinance  development  strategies  in  Kyrgyzstan  and  Uzbekistan   which  however  do  not  cover  the  whole  financial  sectors  of  these  countries.   51     Financeâ€?   during   2010-­â€?2012.   The   project   pursued   three   main   objectives:   the   development   of   a   system   of   national  financial  inclusion  indicators;  research  of  the  development  of  the  bank  and  nonbank  payment   agents   market   over   the   course   of   two   years;   and   the   development   of   supporting   regulations   to   the   Payment   Agents   Law   and   Payment   System   Law.   Completed   in   April   2012,   the   project   provided   an   important   contribution   to   the   current   financial   inclusion   measurement   activities,   as   well   as   market   research  and  regulatory  initiatives  of  the  Russian  Government  in  the  area  of  agent  banking.177   Box  8:  Alliance  for  Financial  Inclusion  Collaboration  –  Key  Challenges  and  Opportunities     The   financial   inclusion   measurement   activities   undertaken   as   well   as   market   research   and   regulatory   initiatives  of  the  Russian  Government  in  the  area  of  agent  banking  may  provide  a  good  foundation  for   follow-­â€?up   research   and   activities   to   encourage   innovation   and   get   a   deeper   understanding   of   what   is   necessary  to  close  the  Russian  financial  access  gap.     5. Summary  of  Key  Challenges  and  Opportunities   5.1  Demand  and  Usage   To  date,  there  has  been  no  specific  research  on  the  demand  for  financial  services  in  Russia  –  and  there  is  no   comprehensive   picture   of   the   demand,   as   a   result.     Rather,   research   has   focused   on   the   current   use   of   financial  services  and  thus  could  not  fully  capture  the  gaps  in  supply.   Despite   impressive   progress   in   outreach   and   a   fivefold   increase   in   the   per   capita   supply   of   retail   banking   services   since   2008,   significant   regional   disparities   remain,   with   remote   and   sparsely   populated   areas   (which  are  generally  among  the  poorest)  having  just  a  small  percentage  of  the  retail  banking  services  supply   level  enjoyed  by  residents  of  Moscow.   Though   some   innovations   in   financial   service   delivery   (in   particular,   payment   terminals)   are   becoming   increasingly   popular   and   ubiquitous,   helping   meet   the   demand   for   one   of   the   most   used   services   –   bill   payment,  they  are  not  well  aligned  to  close  financial  access  gaps  for  the   financially  underserved  categories   (older,  lower-­â€?income,  living  outside  of  large  cities,  less  educated).   As   the   increased   availability   of   financial   services   (see   Sec.   2.1)   does   not   automatically   increase   uptake,   further   study   of   the   financially   underserved   categories   could   provide   insights   into   the   reasons   for   their   continued  financial  exclusion.   To  build  trust  in  financial  services,  there  is  an  ongoing  need  for  a  centralized,  specialized  financial  consumer   protection  and  dispute  resolution  agency  covering  all  types  of  financial  service  providers  that  has  sufficient   independence,  authority  and  capacity  to  handle  and  resolve  complaints.   5.2  Banks  and  NBCOs   Despite   a   period   of   consolidation   in   the   banking   industry   triggered   by   higher   capital   requirements,   banks   have   overall   been   successful   in   expanding   their   physical   footprint.   The   higher   number   of   access   points   is   mostly  due  to  the  opening  of  more  “lightâ€?  branches  and  the  introduction  of  bank  payment  agents,  yet  it  is   still   mostly   branch-­â€?based   and   thus   relatively   expensive   to   maintain.   The   recent   permission   for   bank   payment  agents  to  conduct  cash-­â€?out  transactions  might  help  to  change  this.                                                                                                                           177   E.g.   the   following   reports   were   prepared   within   the   MED   project   with   AFI:   Center   for   Research   of   Payment   Systems  and  Settlements  and  RMC  (2011  and  2012).   52     There   is   a   risk   that   more   regional   banks   will   be   forced   to   close   down   or   merge   with   larger   banks,   which   might  have  a  negative  impact  on  accessing  banking  services  in  less  populated  areas.   Banks  face  difficulties  and  have  no  strong  incentives  to  move  down-­â€?market  and  to  offer  innovative  financial   services   for   customers   at   the   base   of   the   economic   pyramid.   At   the   same   time,   increasingly   high   capital   requirements   for   banks   constitute   a   high   barrier   for   MFIs   that   might   consider   transforming   into   banks.   Inflexible  regulations  on  issues  such  as  non-­â€?face-­â€?to-­â€?face  account  opening  and  high  costs  of  compliance  can   lead  to  an  unfavorable  cost-­â€?benefit  ratio  for  providing  microfinance  services  under  the  legal  structure  of  a   bank.   Disaggregated   data,   both   in   terms   of   geographic   distribution   (urban   versus   rural)   and   in   terms   of   client   profile   (e.g.,   by   age   and   gender)   is   needed   to   understand   why   banks   and   NBCOs   are   not   realizing   their   financial  inclusion  potential.  For  example,  the  MSME  sector  has  been  experiencing  strong  growth,  but  it  is   not   clear   how   much   of   this   reaches   microfinance   clients   rather   than   providing   relatively   larger   loans   to   SMEs.   Without  clear  initiatives  to  adapt  to  the  needs  of  the  most  excluded  segments   –  particularly  the  elderly  and   poorer  Russians  -­â€?  it  is  difficult  to  say  whether  innovative  delivery  channels  hold  a  financial  inclusion  promise   for  broader  customer  groups  –  beyond  those  already  reached  by  financial  services.   5.3  MFIs,  CCs,  and  Other  NFOs   While   bringing   most   types   of   financial   cooperatives   under   the   common   legal,   regulatory   and   supervisory   framework  was  a  significant  step  in  terms  of  the  harmonization  of  the  Russian  financial  service  market  for   lower-­â€?income  customers,  there  still  remains  a  huge  market  of  agricultural  CCs  that  are  regulated  separately   and   are   subject   to   the   oversight   of   the   Ministry   of   Agriculture   rather   than   any   financial   market-­â€?related   authority.   As  some  larger  CCs  may  be  of  systemic  importance  –  at  least  in  terms  of  the  share  of  the  population  they   serve  in  their  regions  –  the  involvement  of  the  Central  Bank  as  the  supervisory  authority  with  the  greatest   experience  and  capacity  related  to  preserving  systemic  stability  may  be  justified.     Individual  member  savings  and  shares  placed  with  CCs  in  the  economic  sense  are  very  similar  to  deposits   with  Central  Bank-­â€?licensed  credit  organizations,  yet  they  are  not  protected  by  either  the  deposit  insurance   scheme  or  its  equivalent.     The  Law  on  Microfinance  Activity  and  Microfinance  Organizations  has  set  the  stage  for  the  harmonization   and  increased  transparency  of  the  microfinance  sector  and  set  basic  rules  for  its  regulation  and  supervision.   But  the  absence  of  significant  entry  barriers  and  a  very  general  definition  of  ‘microfinance  institution’  has   resulted   in   a   situation   where   virtually   any   company   can   obtain   registered   MFI   status,   (even   if   lending   or   microlending  is  not  its  core  activity),  and  has  spawned  the  rapid  proliferation  of  extremely  heterogeneous   registered  ‘MFIs’.    This  in  turn  creates  various  risks  –  particularly  reputational  risk  for  the  industry  due  to   irresponsible   activities   of   some   market   players,   and   increased   burden   for   FFMS   supervising   market   conduct   of   registered   MFIs.   One   approach   to   mitigating   the   problem   would   be   the   introduction   of   additional   classes   of  registered  NFOs,  allowing  for  differentiation  between  development-­â€?oriented  MFIs  on  the  one  hand  and   various  types  of  consumer  and  payday  lenders  on  the  other.   There   is   still   risk   of   unregulated   financial   intermediation   since   on-­â€?lending   of   loans   from   the   public   is   not   restricted  for  those  NFOs  that  do  not  have  registered  MFI  status  (and  borrow  and  lend  instead  under  the   Civil   Code).   It   is   also   currently   impossible   to   assess   the   size   of   the   unregistered   NFO   market  –   and   there   are   178 industry  experts  who  believe  it  may  be  even  larger  that  the  market  of  registered  MFIs.  Policy  makers  in   Russia   therefore   face   a   challenging   task   of   offering   the   right   incentives   for   microlending   institutions   to   obtain   registered   MFI   status   (and   remain   registered)   and   while   providing   an   adequate   level   of   market                                                                                                                           178  Interviews  with  Mikhail  Mamuta,  NAMMS,  June  –  September  2012.   53     conduct  supervision  for  registered  MFIs,  as  well  as  appropriate  levels  of  and  types  of  prudential  supervision   in   the   case   of   those   that   borrow   from   natural   persons.   The   effectiveness   of   the   delegated   supervision   model   is   yet   to   be   evaluated   –   both   FFMS   and   SROs   currently   have   no   prior   experience   and   very   limited   capacity  and  resources  to  ensure  compliance  with  the  prudential  norms  set  forth  in  the  law  and  reporting   requirements   for   CCs.   Experience   shows   that   the   chosen   model   of   the   delegated   supervision   has   worked   in   some  countries  where  the  government  financial  supervisor  closely  monitored  the  quality  of  the  delegated   179 supervisor’s  work,  although  it  is  not  clear  that  this  model  reduces  total  supervision  costs.     Neither   MFIs   nor   CCs   are   integrated   well   with   the   financial   sector   –   there   are   very   few   options   for   refinancing.   While   this   is   less   of   an   issue   for   CCs   that   have   strict   limitations   for   external   borrowing   established  by  the  law,  limited  access  to  finance  for  MFIs  significantly  restrains  their  growth.     CCs   and   MFIs,   though   many   of   them   located   close   to   their   lower-­â€?income   customers,   are   yet   to   make   use   of   the  new  delivery  channels  –  such  as  payment  terminals  and  agents.  This  may  be  an  important  opportunity   for  them  to  further  expand  outreach  to  the  under-­â€?served  segments.   5.4  Payment  Service  Providers   This  sector  has  been  at  the  forefront  of  innovation  making  tremendous  progress  in  offering  clients  products   that   are   more   convenient,   more   accessible,   and   cheaper,   even   in   more   remote   and   sparsely   populated   areas.   Though   it   is   still   very   much   focused   on   a   few   payment   transactions   (predominantly   payments   for   communication  services)  with  only  limited  value  for  financial  inclusion,  recently  other  payment  transactions   such  as  person-­â€?to-­â€?person  transfers,  payments  for  utilities,  loan  repayments,  and  replenishing  deposit  and   virtual   accounts   have   experienced   strong   growth.   At   the   same   time,   new   partnerships   between   e-­â€?money   operators,   banks,   and   mobile   network   operators   carry   the   potential   of   combining   the   advantages   of   different  models.   The  wide  network  of  outlets  (terminals  and  cashier-­â€?based  services)  operated  by  bank  and  nonbank  payment   agents   make   financial   services   much   more   accessible   in   areas   without   sufficient   branch   infrastructure.   At   the   same   time,   it   remains   to   be   seen   whether   these   channels   will   not   only   be   attractive   for   the   mostly   young,  well-­â€?educated,  and  technology-­â€?savvy  current  users,  but  also  for  those  that  currently  lack  access  to   finance  most  –  the  elderly,  less  educated,  and  more  remote  customers.     The   permission   for   bank   payment   agents   to   provide   cash-­â€?out   services   has   the   potential   to   make   this   channel  much  more  attractive  as  a  basic  substitute  for  bricks-­â€?and-­â€?mortar  branches.  However,  cashing  out   from   virtual   accounts   and   mobile   wallets   is   still   mostly   done   through   existing   bank   accounts   or   by   transferring  the  money  to  cards.   Russian   money   remittance   operators   have   been   among   the   most   efficient   operators   globally.   This   brings   important  benefits  to  their  users  in  the  form  of  low  commissions  and  efficient  and  easily  accessible  services.   However,  they  have  not  been  equally  successful  in  linking  the  remittance  flows  to  other  financial  services   such   as   loans   and   savings   accounts,   and   thus   have   made   only   a   limited   contribution   to   broader   goals   of   financial  inclusion.  The  Russian  Post  plays  a  dominant  role  in  the  domestic  remittance  market  making  use  of   its   vast   network   of   post   offices.   The   potential   of   this   network   for   providing   financial   services   in  harder   to   reach  areas  has  not  yet  been  fully  tapped.   There   is   need   for   further   research   about   the   impact   of   technological   innovations   by   all   different   types   of   payment   service   providers   on   financial   inclusion.   While   the   numbers   of   transactions   and   volumes   are   impressive,   the   attractiveness   of   new   products   and   channels   for   the   elderly,   poorer,   less   educated,   and   more   remote   customers   is   still   an   open   question.   There   is   also   little   information   available   about   the   geographic  spread  of  alternative  delivery  channels  –  not  even  the  overall  number  of  terminals  and  agents  is   exactly  known.                                                                                                                           179  See  CGAP  (2012).     54     The  new  Payment  System  Law  will  bring  all  money  transfer  operators  and  e-­â€?money  operators  under  direct  CBR   supervision   and   require   MNOs   offering   payment   services   to   partner   with   e-­â€?money   operators.   It   will   be   important  to  see  what  it  means  for  existing  operators  to  either  become  or  partner  with  NBCOs  (or  banks).  For   MNOs,  the  most  attractive  model  will  be  to  operate  through  NBCOs/banks,  which  does  not  bring  them  under   direct  Central  Bank  regulation.   5.5  Universal  Electronic  Card   The  fact  that  UECs  will  be  offered  to  all  Russian  citizens  unless  they  opt  out  makes  it  likely  that  the  uptake   180 will  be  high  and  thus  a  majority  of  Russian  citizens  will  be  issued  with  a  UEC  in  the  near  future.     From   a   financial   inclusion   perspective,   the   potential   lies   in   simplifying   customer   identification   and   in   providing   previously   unserved   people   with   access   to   a   bank   account.   As   regards   the   first,   the   UEC   will   establish   a   simple   means   of   identifying   customers   as   part   of   KYC   requirements.   As   regards   the   latter,   the   overall   impact   on   financial   inclusion   will   not   only   depend   on   the   share   of   people   who   will   activate   the   bank   account  function  of  their  card,  but  also  on  the  actual  usage  thereafter.   Reaching   all   Russian   citizens   with   bank   accounts   linked   to   the   UEC   will   require   an   upgrade   of   the   current   banking   infrastructure.   Bank   payment   agents   will   play   an   important   role   in   this.   An   issue   to   explore   is   181 whether  they  could  play  a  stronger  role  in  account  opening  then  just  collecting  documents.   A   challenge   the   Government   is   aware   about   and   already   working   on   is   to   ensure   data   security   of   such   a   ubiquitous  system.   5.6  Credit  Reporting   Consolidation   of   the   credit   bureau   market   would   be   beneficial,   as   currently   87   percent   of   all   credit   bureaus   have   information   on   no   more   than   5   percent   of   the   market.     This   fact   works   against   the   kind   of   comprehensiveness   needed   for   credit   bureaus   to   serve   as   an   effective   tool   (especially   in   averting   over-­â€? indebtedness  among  lower-­â€?income  segments  of  the  population).      A   level   playing   field   for   all   types   of   loan   and   credit   providers   –   in   terms   of   reporting   to   and   getting   information   from   credit   bureaus,   loan   conditions   disclosure   and   other   data-­â€?related   consumer   protection   requirements   –   will   be   useful   in   preventing   regulatory   arbitrage   and   similar   problematic   market   conduct   detrimental  to  the  interests  of  lower-­â€?income  clients.     In   the   absence   of   mandatory   reporting   requirements   for   NFOs   and   personal   data   confidentiality   requirements,   the   credit   bureau   coverage   in   Russia   is   far   from   comprehensive.     While   mandatory   reporting   can   be   addressed   relatively   easily,   addressing   the   challenge   of   personal   data   confidentiality   presents   182 significant   difficulties.   Though   there   have   been   discussions   in   the   banking   community   with   respect   to   the   need   to   waive   the   requirement   to   obtain   explicit   borrower   consent   for   checking   and   reporting   his   or   her   information,  this  would  go  against  the  national  law  as  well  as  such  international  data  protection  standards   as  the  European  Commission  Directive  on  Use  of  Personal  Data;  in  addition,  it  seems  that  credit  bureaus  are   not  presently  immune  from  potential  data  protection  breaches.     The   process   of   checking   personal   credit   histories   is   rather   burdensome   for   consumers   as   it   requires   information  other  than  personal  ID  data.  While  justifiable  for  checking  the  content  of  a  credit  history,  this   seems  excessive  for  checking  for  the  existence  of  a  credit  history.                                                                                                                           180  There  is,  however,  some  opposition  to  the  UEC  from  Orthodox  Christians.  See  http://marker.ru/news/517429.   181   One   option   would   be   to   authorize   them   to   open   accounts   subject   to   transaction   limits   and   that   full   identification  would  only  be  required  once  a  client  wants  to  transact  higher  amounts.   182  See  http://bit.ly/Uw0nlW.   55     5.7  Russian  Financial  Inclusion  Strategy   The   Russian   strategy   may   benefit   from   the   harmonization   of   various   stakeholder   views   on   the   future   of   the   financial  market  and  the  development  of  a  shared  agenda  for  the  whole  financial  sector.  For  example,  there   are  different  views  with  respect  to  the  banking  sector  consolidation,  the  regulation  and  supervision  of  NFOs   and  agents,  as  well  as  the  regulation  and  supervision  of  the  CC  and  agricultural  CC  sectors  –  to  name  just  a   few.  The  solution  of  these  issues  will  largely  depend  on  further  development  of  inter-­â€?agency  coordination  in   the  Russian  Government  with  respect  to  financial  inclusion  issues. 5.8  Alliance  for  Financial  Inclusion  Collaboration   The  financial  inclusion  measurement  activities  undertaken  as  well  as  market  research  and  regulatory  initiatives   of  the  Russian  Government  in  the  area  of  agent  banking  may  provide  a  good  foundation  for  follow-­â€?up  research   and  activities  to  encourage  innovation  and  get  a  deeper  understanding  of  what  is  necessary  to  close  the   Russian  financial  access  gap. 56     References   Laws   Federal   Law   No.   395-­â€?1   of   December   2,   1990,   “On   Banks   and   Banking   Activitiesâ€?   (as   amended)   (the   Banking  Law).   Federal  Law  No.  193-­â€?FZ  of  December  8,  1995,  “On  Agricultural  Cooperationâ€?.     Federal   Law   No.   115-­â€?FZ   of   August   7,   2001,   “On   Countering   the   Legalization   of   Illegal   Earnings   (Money   Laundering)  and  the  Financing  of  Terrorismâ€?  (as  amended)  (the  AML/CFT  Law).   Federal  Law  No.  86-­â€?FZ  of  July  10,  2002,  “On  the  Central  Bank  of  the  Russian  Federation  (Bank  of  Russia)â€?   with  additions  and  amendments  (the  Central  Bank  Law).   Federal  Law  No.  126-­â€?FZ  of  July  7,  2003,  “On  Communicationsâ€?  (the  Communications  Law).   Federal  Law  No.  218-­â€?FZ  of  December  30,  2004,  “On  Credit  Historiesâ€?  (the  Law  on  Credit  Histories).   Federal   Law   No.   121-­â€?FZ   of   June   3,   2009,   "On   Introducing   Changes   and   Additions   to   Certain   Legal   Acts   of   the  Russian  Federation  in  Connection  with  the  Adoption  of  the  Federal  Law  “On  the  Activity  of  Receiving   Payments  from  Natural  Persons  by  Payment  Agents.â€?   Federal  Law  No.  103-­â€?FZ  of  June  3,  2009,  “On  the  Activity  of  Receiving  Payments  from  Natural  Persons  by   Payment  Agentsâ€?  (the  Payment  Agents  Law).   Federal  Law  No.  190-­â€?FZ  of  July  18,  2009  “On  Credit  Cooperationâ€?  (the  Law  on  Credit  Cooperation).   Federal  Law  No.  151-­â€?FZ  of  July  7,  2010  “On  Microfinance  Activity  and  Microfinance  Organizationsâ€?  (the   Law  on  Microfinance  Activity  and  Microfinance  Organizations).   Federal  Law  No.  210-­â€?FZ  of  July  27,  2010,  “On  the  Organization  of  the  Provision  of  State  and  Municipal   Servicesâ€?  (the  UEC  Law).   Federal  Law  No.  161-­â€?FZ  of  June  27,  2011,  “On  the  National  Payment  Systemâ€?  (the  Payment  System  Law).   Other  documents   Association   of   Regional   Russian   Banks.   2009.   “Concept   of   the   Financial   Market   Development   in   Russia   until  2020â€?.  Moscow.  http://www.asros.ru/ru/Initiative/.   CBR.   2012.   “Report   on   the   Development   of   the   Banking   Sector   and   Banking   Supervision   in   2011â€?.   Moscow:  CBR.  http://bit.ly/RL6I7h.   57     Center  for  Research  of  Payment  Systems  and  Settlements  and  RMC.  2011.  “Assessment  of  Accessibility   of   Financial   Services   Provided   Through   Banking   and   Payment   Agents.   Report   on   Research   Results.â€?   Moscow:  RMC.   Center   for   Research   of   Payment   Systems   and   Settlements   and   RMC.  2012.  “Evaluation  of  accessibility  to   financial  services  provided  via  bank  and  payment  agents:  Second  Survey.â€?  Moscow:  RMC.   CGAP.   2008.   “Notes   on   Regulation   of   Branchless   Banking   in   Russia.â€?   Washington,   D.C.:   CGAP.   http://bit.ly/Wq2ODZ.     CGAP.   2010.   “Update   on   Regulation   of   Branchless   Banking   in   Russia.â€?   Washington,   D.C.:   CGAP.   http://bit.ly/QJPadU.     CGAP   and   IFC.   2011.   “Credit   Reporting   at   the   Base   of   the   Pyramid.   Key   Issues   and   Success   Factorsâ€?.   Washington,  D.C.:  CGAP  and  IFC.  http://bit.ly/ReRj0O.   Christen,  Robert  P.,  Kate  Lauer,  Timothy  Lyman,  and  Richard  Rosenberg.  2012.  “Microfinance  Consensus   Guidelines.  A  Guide  to  Regulation  and  Supervision  of  Microfinance.â€?  Washington,  D.C.:  CGAP.   Doing   Business.   2012.   "Doing   Business   in   a   More   Transparent   World".   A   copublication   of   The   World   Bank  and  the  International  Finance  Corporation.  Washington,  DC:  World  Bank.  http://bit.ly/O0fDDP.   Dostov,  Victor.  2012.  “E-­â€?Money  2011  (&1Q  2012):  New  Stage  and  New  Opportunitiesâ€?.  Presentation  at   Press  Conference,  Russian  Electronic  Money  Association,  10  April.  http://bit.ly/Q2VKdG.     Government   of   the   Russian   Federation   and   the   Central   Bank   of   the   Russian   Federation.   2011.   “Declaration  on  the  Strategy  for  the  Development  of  the  Banking  Sector  of  the  Russian  Federation  for   the  Period  until  2015â€?.  April  13,  2011.  http://www1.minfin.ru/ru/regulation/bank/.   Kuzina,  Olga.  2012.  “Dynamics  of  Financial  Literacy  Indicators  2008  –  2011â€?.  Unpublished  presentation.   Klapper,  Leora.  2012.  “Measuring  Financial  Access:  Global  Findexâ€?.  Presentation  at  the  APEC  Conference   “Improving  Efficiency  of  the  National  Strategies  for  Financial  Literacyâ€?.  St.  Petersburg,  June  26-­â€?27,  2012.   Ministry  of  Economic  Development  and  Alliance  for  Financial  Inclusion.  2011.  “Legal  Regulation  of  Bank   Agents:  Current  Legislation  and  Recommendations  for  the  Future.â€?  Moscow:  RMC.   MIX  and  CGAP.  2010.  “Eastern  Europe  and  Central  Asia:  Microfinance  Analysis  and  Benchmarking  Report   2010â€?.   NAMMS.   2011.   “Concept   of   Increasing   Access   to   Retail   Financial   Services   and   Microfinance   Development  in  the  Russian  Federation  for  2012-­â€?2016â€?.   NAFI.  2012.  “One  Hundred  Facts  on  the  Financial  Behavior  of  Russians.â€?  Moscow.   OPORA.  2012.  “Entrepreneurial  Climate  in  Russia:  OPORA  Index  2010-­â€?2011â€?.  http://bit.ly/Ut58ah.   58     Prusakov,   Oleg.   2012.   “Importance   of   Strengthening   the   Financial   Consumer   Protection   in   the   Russian   Federationâ€?.   Presentation   at   the   APEC   Conference   “Improving   Efficiency   of   the   National   Strategies   for   Financial  Literacyâ€?.  St.  Petersburg,  June  26-­â€?27,  2012.     Russia   Small   Business   Fund.   2012.   “Current   Issues   in   MSME   Finance   in   Russia   2012â€?.   http://bit.ly/QOJJaF.   SME  Bank.  2012.  “Analytical  Center  Bulletin.  July  2012â€?.  http://bit.ly/QqHQk5.   Tarazi,   Michael,   and   Paul   Breloff.   2010.   “Nonbank   E-­â€?Money   Issuers:   Regulatory   Approaches   to   Protecting  Customer  Funds.â€?  Focus  Note  63.  Washington,  D.C.:  CGAP.  http://bit.ly/VCWJDM.   TNS.   2012.   “Electronic   Payment   Systems   in   Russia:   Public   Opinion   Survey   February-­â€?March   2012â€?.   http://slidesha.re/Qlpl4t.   World   Bank.   2009.   “Improving   Protection   in   Financial   Service   for   Russian   Consumersâ€?.   http://bit.ly/   NH6B9Z.   World   Bank.   2011.   “Remittance   Prices   Worldwide.â€?   Washington,   D.C.:   World   Bank.   http://bit.ly/MTK51H.   World   Bank.   2012.   “The   Little   Data   Book   on   Financial   Inclusion:   2012.â€?   Washington,   D.C.:   World   Bank.   http://bit.ly/OhW47m.   Zavalishina,   Evgeniya.   2011.   “The   Russian   Regime   for   E-­â€?Money:   Newly   Adopted   National   Payment   System  Law  in  Respect  of  Electronic  Money  Regulation.â€?  Unpublished  presentation.   Interviews   Association  of  Regional  Russian  Banks   Association  of  Russian  Banks   Center  for  Research  of  Payment  Systems  and  Settlements     Central  Bank  of  Russia   E-­â€?Money  Association   Federal  Financial  Markets  Service   Federal  Service  for  Financial  Monitoring   FORUS  Bank   Golden  Crown   MegaLabs   Ministry  of  Economic  Development   Ministry  of  Finance   National  Agency  for  Financial  Studies   National  Bureau  of  Credit  Histories   National  Partnership  of  Microfinance  Market  Stakeholders     QIWI  Bank   59     Russian  Microfinance  Center   SRO  “Cooperative  Financesâ€?   State  Duma   The  World  Bank   WebMoney   Yandex.Money 60     Annex   1:   Regulatory   provisions   applying   to   money   transfer   operators   and  electronic  money  operators   The  Payment  System  Law  does  not  only  regulate  money  transfer  operators,  electronic  money  operators,   and  mobile  network  operators  (referred  to  as  communications  service  providers  under  the  law),  but  it   also   defines   payment   system   operators,   who   define   the   payment   system’s   rules   and   provide   the   payments   platform.183   In   many   cases,   one   organization   plays   more   than   one   role   under   the   law.   For   example,  Golden  Crown  is  the  name  of  a  particular  payment  system,  but  at  the  same  time  it  provides   money   transfer   services.184   MNOs   are   not   regulated   under   the   Payment   System   Law,   but   under   the   Communications   Law.   If   they   offer   e-­â€?money   business,   they   have   to   comply   with   operational   rules   described  in  the  main  body  of  this  report.  This  Annex  describes  in  more  detail  the  regulations  applying   to  money  transfer  operators  and  e-­â€?money  operators.     Money   transfer   operators:   The   law   defines   money   transfer   operators   as   organizations   that   have   the   right  to  transfer  funds.  The  following  rules  apply  to  their  operations:   • A   money   transfer   operator   must   be   a   credit   organization   (a   bank   or   NBCO)   that   is   authorized   to   effect  funds  transfers.185     • A   payment   can   either   be   effected   by   providing   cash   to   the   money   transfer   operator   (or   its   agent)  or  by  debiting  the  payer’s  bank  account.  The  payee  can  receive  the  money  in  cash  or  in  a   bank   account.   The   transfer   must   be   completed   within   3   business   days   (meaning   that   money   transfer  operators  cannot  maintain  virtual  accounts  as  electronic  money  operators  can).   • Money  transfer  operators  can  make  use  of  bank  payment  agents  and  subagents  for  cash-­â€?in  and   cash-­â€?out   transactions.  Only  bank  payment  agents  (and  not  subagents)  are  authorized  to  identify   clients,   if   such   identification   is   required   under   AML   legislation   (i.e.   for   cash-­â€?in   transactions   in   excess   of   RUB   15,000   (USD   485),   and   for   all   cash-­â€?out   transactions   and   suspicious   transactions).186   Bank   payments   agents   and   subagents   have   to   use   a   “special   bank   accountâ€?   (which   is   a   dedicated   account   only   used   for   this   purpose)   for   crediting   and   debiting   money   transfers.     The  law  distinguishes  between  payment  system  supervision  and  oversight.187  Money  transfer  operators   are   subject   to   CBR   supervision,   while   payment   system   operators   (which   can   operate   without   license                                                                                                                           183   In   addition,   it   also   specifies   rules   for   payment   infrastructure   service   providers,   operations   centers,   payment   clearing  centers,  settlement  centers,  and  payment  system  participants,  which  however  will  not  be  discussed  here.   184  According  to  the  law,  a  payment  system  operator,  money  transfer  operator,  and  payment  infrastructure  service   provider  can  all  be  one  and  the  same  organization.   185   In   addition   to   credit   organizations   also   the   CBR   and   Vnesheconombank   (a   development   bank   regulated   under   a   special  law)  can  be  money  transfer  operators.   186  Art.  7,  item  1.1  of  AML/CFT  Law.   187  Art  14  of  Payment  System  Law.   61     from   CRB)   only   to   CBR   oversight.   Supervision   entails   CBR   monitoring   of   operator   compliance   with   the   Payment  System  Law,  while  oversight  consists  of  CBR  efforts  to  improve  the  services  operators  render.   Supervision  includes  on-­â€?site  inspections  not  more  than  once  every  two  years  and  allows  CBR  to  impose   corrective   measures.   Oversight   is   less   intrusive   and   includes   gathering   and   analyzing   information   to   provide  recommendations  for  improving  operations.   Electronic  money  operators:  The  law  defines  e-­â€?money  operators  as  offering  “electronic  money  transfers   without  opening  a  bank  accountâ€?  and  a  special  type  of  money  transfer  operator.   E-­â€?money  operations  are  subject  to  a  number  of  rules:   • They  must  be  registered  as  a  credit  organization  -­â€?  either  a  bank  or  a  nonbank  credit  organization   (NBCO)   -­â€?   under   the   Banking   Act   and   must   be   authorized   to   transfer   funds   through   virtual   accounts.   If   they   are   NBCOs,   they   are   subject   to   more   limited   prudential   regulations,   most   importantly  a  minimum  capital  requirement  of  RUB  18  million  (USD  582,000),  a  capital  adequacy   ratio  of  2  percent  and  a  liquidity  ratio  of  100  percent  (cash  and  assets  maturing  within  30  days   over   liabilities).188   E-­â€?money   operators   must   notify   CBR   not   later   than   10   days   after   they   have   launched  e-­â€?money  services.   • With   reference   to   the   AML/CFT   Law,   an   individual   client189   need   not   be   identified   by   the   e-­â€? money   operator.   Unidentified   clients   can   only   hold   a   maximum   balance   of   RUB   15,000   (USD   485)  and  transfer  a  maximum  of  RUB  40,000  (USD  1,300)  per  month.  Identified  clients  can  hold   a  maximum  balance  of  RUB  100,000  (USD  3,230)  (there  is  no  limit  on  transfers).     • Clients  can  build  electronic  money  balances  by  replenishing  their  virtual  account  either  from  a   bank   account   (bank   transfer)   or   without   the   involvement   of   a   bank   account   (transfer   from   mobile  wallet  or  by  paying  cash  at  agents  or  automated  payment  acceptance  terminals).  They   can  use  their  balance  for  e-­â€?money  transfers  to  a  payee  (who  could  be  the  client  of  the  same  or   another  e-­â€?money  operator)  or  for  transferring  it  to  a  bank  account.  Only  clients  that  have  been   identified  according  to  the  KYC  rules  in  the  AML/CFT  law  can  withdraw  e-­â€?money  in  cash.   • Other   operational   rules   are   that   e-­â€?money   operators   are   not   permitted   to   pay   interest   (or   any   other   remuneration)   on   e-­â€?money   balances,   and   that   clearing   has   to   be   immediate   or   (in   the   offline  mode)  at  the  end  of  the  business  day.   • As   electronic   money   operators   are   either   banks   or   NBCOs,   they   are   subject   to   the   same   supervision  rules  as  these.   The  following  table  summarizes  the  main  rules  applying  to  e-­â€?money  operators.                                                                                                                           188  CBR  Instruction  137-­â€?I  from  15  September  2011.   189  The  rules  are  different  for  legal  entities  or  “individual  entrepreneursâ€?.   62     Table  7:  Rules  Applying  to  Electronic  Money  Operators     Natural  person  (unidentified)   Natural  person  (identified)   Legal  person   Who  can  open   No  restrictions   No  restrictions   Only  entities   virtual  account   registered  with   operator   Russian  Tax   Authorities   No.  of  virtual   No  limits   No  limits   No  limits   accounts  per   person   Top-­â€?up   Bank  payment  from  any   Bank  payment  from  own   Bank  payment   personal  account;  money   account  money  transfer;  card   from  own   transfer;  card  payment;  cash   payment;  cash  (including   account   (including  via  agents)   through  agents)   Receiving  e-­â€? Only  natural  persons   Anybody   Only  natural   money  from   persons   Paying  e-­â€?money   Anybody   Anybody   Only  identified   to   natural  persons   Withdrawals   To  any  personal  bank  account   To  any  personal  bank   To  own  bank   account;  by  money  transfer;   account   by  cash  (including  through   agents)   Virtual  account   RUB  15,000  (USD  485)   RUB  100,000  (USD  3,230)   RUB  100,000   balance  limit   (USD  3,230)  at   the  end  of  the   day   Virtual  account   RUB  40,000  (USD  1,300)  per   No  limits   No  limits   turnover  limit   month   Source:  Adapted  from  Zavalishina  (2011).     63   Â