Kazakhstan may have been placed on the comedy map by the character of Borat, but in payment circles at least, the country has been acknowledged as a major growth hotspot for payment cards and electronic banking. Victoria Conroy reports on the development of Kazakhstan’s payment sector to date.
Kazakhstan, on the border with Russia, is a country rich with natural mineral and energy resources, which has helped Kazakhstan’s GDP to achieve an average annual growth of around 10 percent since the beginning of this decade.
This gathering of wealth, coupled with foreign direct investment into Kazakhstan (around $50 billion since 1991), has trickled down into the real economy, pushing up household incomes in a country with a population of 16 million, expanding the number of middle-class consumers, bolstering purchasing power, and opening up a fertile market for electronic payments.
So much so, in fact, that Kazakhstan’s banking sector is acknowledged as being more advanced than that of Russia, even though both economies have followed similar patterns of development. The proportion of Kazakhstan’s population living below the poverty line fell from 43.4 percent in 1998 to 18.2 percent in 2006.
But despite being Central Asia’s largest economy, it too is caught in the headwinds of global economic turbulence.
According to the International Monetary Fund (IMF), the country’s economic growth in 2008 and 2009 may slip below forecast due to continuing economic turbulence and volatility in commodity prices.
And if some of the world’s major economies like the US, UK and Japan slip into full-blown recession, as is looking increasingly likely, commodity and energy prices will fall further, as demand for exports drop – at present, oil accounts for 60 percent of exports from Kazakhstan.
This is already causing problems for Kazakh banks, which previously didn’t hesitate to extend large US dollar loans to customers while times were good, but which are now faced with significant foreign debt repayments as refinancing opportunities shrink.
Following a year of credit crunch-driven nervousness among Kazakh banks, in mid-November 2008, Kazakhstan’s government agreed a $3.5 billion bank bailout package in order to help them cope with economic volatility and public concern over bank safety.
Under the partial nationalisation plan, the government will buy into the country’s four biggest banks, which should help restore some semblance of confidence in the banking system.
However, the bailout came too late to save several of Kazakhstan’s banks which succumbed to acquisition by larger players, some of which were foreign. Texaca Bank was bought out by Russia’s Sberbank, and ATF Bank was acquired by Bank Austria, a subsidiary of Italy’s UniCredit.
Also, South Korea’s Kookmin Bank acquired a 30 percent stake in Bank Center Credit in March 2008 with a view to becoming majority owner in due course.
The IMF recently cut its forecasts for Kazakhstan’s GDP growth to 4.5 percent in 2008 and 5.3 percent in 2009, down from 5 percent and 6 percent respectively. However, the revised rates are still far higher than many Western economies, meaning that there still could be rich pickings for payment players in the region.
Payment card usage in Kazakhstan
As of November 2008, the total number of payment cards issued in Kazakhstan amounted to over 6.9 million, an impressive growth of 30.2 percent compared to November 2007. The vast majority of cards are debit/ATM or cash cards. The number of cardholders amounted to 6.5 million, growth of 26.8 percent.
However, the number of active cards is far lower, amounting to 3.06 million in September 2008, suggesting that Kazakh banks need to do a much better job in educating customers about card features and security benefits once they take delivery of their cards.
Kazakhstan’s banks have for some years issued their own proprietary ATM and cash cards, which are for domestic use only. According to the National Bank of Kazakhstan, as of September 2008, 19 Kazakh banks were issuing payment cards in the country, the vast majority of which are international scheme-branded cards from Visa, MasterCard, American Express, China UnionPay and Diners Club.
Indeed, international scheme-branded cards have a market share of 97.3 percent compared to domestic ATM/debit card market share of 2.7 percent as of November 2008, compared to 96 percent and 4 percent respectively in September 2007.
It is Visa which is the dominant international scheme in Kazakhstan – of the 6.9 million cards in circulation as of November 2008, 5.4 million were Visa-branded, with 1.27 million being MasterCard/Europay-branded.
American Express is also present in the Kazakh market, although its cards are solely aimed at high net worth individuals and corporates.
In September 2007, Amex teamed with Kazkommertsbank, the exclusive issuer of Amex in the country, to launch an Amex-branded gold and platinum card, denominated in KZT and US dollars.
True revolving credit cards are still a rarity in Kazakhstan, and credit cards offered by banks are technically charge cards, as they are linked to a cardholder’s current or salary account with the balance paid off in full on a monthly basis.
As is common with Russia and most former Soviet states, cash remains the most popular form of payment, but it appears that in Kazakhstan cash withdrawals, whilst still popular, are gradually decreasing and the growth rate slowing.
In terms of non-cash transactions, for example transactions other than ATM withdrawals, these are growing as Kazakh consumers become more comfortable with electronic payments and services.
In terms of transaction value, this too is showing healthy double-digit growth levels. In October 2008, total payment card transaction value totalled KZT226.9 billion ($1.9 billion, a jump of 35.3 percent compared to the year-ago period, while the volume of transactions was 9.1 million, a rise of 17.5 percent.
Cashless payment transactions amounted to 1.5 million transactions by October 2008, a jump of 22.1 percent, while cashless payment transaction value amounted to KZT48.1 billion. The volume of cash withdrawal transactions rose by 16.6 percent to 7.6 million transactions, amounting to KZT178.7 billion.
ATM development a key growth factor
A key factor driving growth in card payments is undoubtedly the enhancement and extension of the country’s payment infrastructure, notably ATM channels.
ATMs were first introduced into Kazakhstan in 1997 by commercial banks. In 2002, the number of ATMs in the country totalled 702 – by November 2008, this number had shot up to 5,981. POS terminals across the country numbered 5,285 in 2002 – by November 2008, this figure had grown to 19,586.
High levels of card issuance are spurring the country’s banks and independent deployers into rolling out functionally advanced ATMs, with 2007 being a particularly good year for growth.
According to data from payment consultancy Retail Banking Research, the Central and Eastern European (CEE) ATM market grew by an impressive 34 percent in 2007, with Kazakhstan accounting for a staggering 93 percent of that increase, helped by oil income and foreign investment which has helped to increase bank ATM expenditure.
However, as more ATMs are deployed throughout the country, this will likely reduce the average ATM withdrawal value. According to RBR, in the CEE region, Kazakhstan has the lowest level of cash withdrawals per ATM per month at 1,417, compared to 5,719 in Estonia.
A low level of cash withdrawals typically translates into high average values of cash withdrawals, with RBR citing Kazakhstan as having the second-highest average cash withdrawal value.
An increase in the number of ATMs will likely have a diluting effect on transaction volumes and values over the next few years.
In relation to credit cards, Kazakhstan has become infamous over the past few months for being the launch-pad for a new credit card, ‘Diamond’, embedded with gold and a real diamond.
Needless to say, the MasterCard-branded card, issued by Kazkommertsbank, is only available to high net worth individuals for an annual fee of $1,000.
This card looks to be taking the notion of consumer segmentation to a whole new level, as it is also available in ‘his and hers’ formats – the male format comes with a picture of a winged horse, while female customers will receive an image of a peacock on their cards.
The bank only plans to issue around 1,000 of the cards at a rate of 30 a month, each with a credit limit of $50,000, about $20,000 higher than the highest limit on some MasterCard platinum cards.
More than 2.68 million Halyk Bank payment cards are in use in Kazakhstan, giving it a market share of 48 percent as of September 2008. Halyk’s branch network comprises 706 branches, along with 1,655 ATMs and 4,114 POS terminals.
Its stated aim is to win or maintain a market share of at least 20 to 25 percent in all key financial services segments and at least 50 percent market share for payment cards and payroll projects.
As part of its ongoing 2008-2010 growth strategy, Halyk is placing more emphasis on cross-selling various service offerings through its branch network and aims to bolster its position in payment cards, payroll banking, ATMs, mobile banking and remittances.
Halyk has set a target of selling an average of five products per retail customer, specifically payment cards, deposit accounts, loans, insurance and pensions to name a few.
Going forward, Halyk is aiming to implement an IT system to support sales through its branch network and a risk management system that fully conforms to European standards, along with a computerised customer relationship management system.
In 2007 Halyk and Chinese national card network China UnionPay (CUP) signed a deal enabling Halyk to issue CUP cards to residents of Kazakhstan, marking the first time that CUP cards were issued outside China. Kazakh CUP cardholders are able to withdraw cash and make purchases with their CUP card while in China, and also use their CUP cards through Halyk’s ATM and POS network in Kazakhstan.
In September 2008 Halyk announced that over 270,000 users had registered to use its mobile banking service which was established in conjunction with Visa CEMEA. Any Halyk charge card customer can connect to the service.
In November 2008 the bank, along with Visa, launched an international money transfer service via mobile phone. The new service allows card-to-card money transfers in four currencies – KZT, euros, US dollars and Russian rubles.
Halyk also recently launched a prepaid gift card in Kazakhstan on the Visa Electron platform.
Kazakhstan’s largest bank, as seen above, is not shy about stamping its mark in the retail financial services area. Established in 1990, Kazkommertsbank until recently focused solely on corporate banking, but the last year saw the bank announce plans to rebrand its retail arm as Kazkom, coinciding with an aggressive investment programme in order to bolster its retail banking market share.
The bank has undertaken a branch modernisation and extension programme in order to heighten the customer service experience, and as of June 2008 had a network of 181 branches, compared to 111 in 2006, 860 ATMs and around 8,000 POS terminals. As of October 2007, credit cards comprised around 1 percent of Kazkommertsbank’s retail loan portfolio.
In its financial results for 2007, commissions from payment cards increased by 61 percent compared to 2006, while fee and commission expense rose by 62.3 percent in 2007 to KZT2.7 billion, compared to KZT1.7 billion in 2006.
Bank TurenAlem (BTA)
BTA was the first bank in Kazakhstan to become a principal member of Visa in 1994 and MasterCard in 1998. BTA also opened the first card processing centre in the country and installed the first ATM.
BTA, with over 970,000 debit/ATM cards issued as of March 2008, views payment cards as a major strategic priority in Kazakhstan, and has enhanced the functionality and features of its proprietary ATM card, Alem Card, alongside its international scheme-branded offerings. BTA offers cards denominated in KZT, US dollar and euros, and allows card accounts to be funded by the cardholder or third parties such as friends and relatives.
BTA also allows utility, mobile phone and cable TV bills to be paid via its ATM network and via automatic bill payment from cardholder accounts. Discounts are also offered to customers who use card to pay for goods and services.
According to the bank’s 2007 annual report, it is the leader in the credit/charge card market with a share of 19.6 percent. In 2007 the bank focused on expanding its credit card market share with the number of cards in circulation almost doubling.
Lending volumes reached KZT2.6 billion by the end of 2007, representing 33 percent of total lending volumes in Kazakhstan. According to the bank, as of March 2008, it had 688 ATMs, 1,852 POS terminals and 312 branches across Kazakhstan.