Working steadfastly under what were for many
years the most trying of economic circumstances, the Ukraine’s
central bank has built the foundations of a modern electronic
payments infrastructure. The big challenge ahead is to break the
entrenched dominance of cash in the economy.
years the most trying of economic circumstances, the Ukraine’s
central bank has built the foundations of a modern electronic
payments infrastructure. The big challenge ahead is to break the
entrenched dominance of cash in the economy.
An independent country since the dissolution of
the Soviet Union in December 1991, Ukraine’s turbulent transition
to a market economy has meant that development of a modern
electronic payment system has been a more recent phenomenon and one
still in progress.
the Soviet Union in December 1991, Ukraine’s turbulent transition
to a market economy has meant that development of a modern
electronic payment system has been a more recent phenomenon and one
still in progress.
Ukraine’s immediate post-independence years
were characterised by two seemingly contradictory developments: a
rapid expansion of the country’s banking system during a
catastrophic economic slump. According to the country’s central
bank, the National Bank of Ukraine (NBU), there were 76 banks in
1991, a number that increased to 125 in 1992 and to a peak of 230
in 1995. Facilitating this growth were inadequate regulation and
minimal equity capital requirements.
were characterised by two seemingly contradictory developments: a
rapid expansion of the country’s banking system during a
catastrophic economic slump. According to the country’s central
bank, the National Bank of Ukraine (NBU), there were 76 banks in
1991, a number that increased to 125 in 1992 and to a peak of 230
in 1995. Facilitating this growth were inadequate regulation and
minimal equity capital requirements.
The economy, meanwhile, was in dire straits,
Ukraine’s GDP having entered a decline immediately
post-independence that lasted for eight consecutive years.
Indicative of the severity of the economic situation, Ukraine’s
real GDP in 1998 was a mere 37 percent of what it had been in 1989,
according to the International Monetary Fund (IMF).
Ukraine’s GDP having entered a decline immediately
post-independence that lasted for eight consecutive years.
Indicative of the severity of the economic situation, Ukraine’s
real GDP in 1998 was a mere 37 percent of what it had been in 1989,
according to the International Monetary Fund (IMF).
During the period of economic collapse
extension of credit to the private sector by Ukrainian banks was
virtually non-existent with most banks, according to the IMF,
investing instead in government bonds.
extension of credit to the private sector by Ukrainian banks was
virtually non-existent with most banks, according to the IMF,
investing instead in government bonds.
Clearly this was not a situation conducive to
the adoption of electronic payments. Indeed, the IMF noted that in
1999 barter accounted for a third of sales in Ukraine.
the adoption of electronic payments. Indeed, the IMF noted that in
1999 barter accounted for a third of sales in Ukraine.
However, the tide had began to turn in the
mid-1990s when the NBU began introducing regulations more in
keeping with international standards including more stringent
capital solvency and liquidity requirements on banks. The NBU also
imposed a restrictive monetary policy in a move aimed at curbing
inflation that had soared to over 10,000 percent.
mid-1990s when the NBU began introducing regulations more in
keeping with international standards including more stringent
capital solvency and liquidity requirements on banks. The NBU also
imposed a restrictive monetary policy in a move aimed at curbing
inflation that had soared to over 10,000 percent.
Not surprisingly many banks found the going too
tough and numerous bankruptcies ensued, 28 alone between 1994 and
1998. The latter part of the 1990s also saw other measures taken to
stabilise the Ukrainian including the introduction of a new
currency, the hryvnia, in 1996. Moves to stabilise the economy
began attracting foreign banks and by 2000 the share of foreign
banks of the Ukraine banking industry’s total assets reached 15
percent, a level that stayed almost constant until 2004.
tough and numerous bankruptcies ensued, 28 alone between 1994 and
1998. The latter part of the 1990s also saw other measures taken to
stabilise the Ukrainian including the introduction of a new
currency, the hryvnia, in 1996. Moves to stabilise the economy
began attracting foreign banks and by 2000 the share of foreign
banks of the Ukraine banking industry’s total assets reached 15
percent, a level that stayed almost constant until 2004.
A new wave of foreign investment began in 2004,
spurred on by a retail lending boom in Ukraine. Reflecting this
boom total assets of the banking industry increased from UAH7
billion ($1.5 billion) in 2000 to UAH100 billion at the end of
2007, a CAGR of 46 percent, In 2007 alone the NBU reported a 74
percent increase in credit extension taking the CAGR of credit
extension since 2002 to 55 percent. Extension of credit to
individuals has been the big growth driver, increasing by 97.9
percent in 2007 taking the CAGR since 2002 to 109 percent.
spurred on by a retail lending boom in Ukraine. Reflecting this
boom total assets of the banking industry increased from UAH7
billion ($1.5 billion) in 2000 to UAH100 billion at the end of
2007, a CAGR of 46 percent, In 2007 alone the NBU reported a 74
percent increase in credit extension taking the CAGR of credit
extension since 2002 to 55 percent. Extension of credit to
individuals has been the big growth driver, increasing by 97.9
percent in 2007 taking the CAGR since 2002 to 109 percent.
Increased foreign involvement in Ukraine’s
banking industry has been characterised by a number of significant
acquisitions. In 2004 these included the acquisition of a 94
percent stake in Agio Bank by Swedish bank SEB Group and a 67
percent stake in Kredyt Bank Ukraine by Polish bank PKO Bank
Polski.
banking industry has been characterised by a number of significant
acquisitions. In 2004 these included the acquisition of a 94
percent stake in Agio Bank by Swedish bank SEB Group and a 67
percent stake in Kredyt Bank Ukraine by Polish bank PKO Bank
Polski.
Significant acquisitions
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In 2005 significant acquisitions included that of a 94 percent
stake in Ukraine’s second largest bank Aval by Austrian bank
Raiffeisen for $1.03 billion. The trend continued during 2006 and
2007. According to the NBU, of Ukraine’s 176 banks 17 were
wholly-owned by foreign banks in 2007 compared with 13 in 2006. In
2007 foreign banks had a stake in 30 Ukrainian banks, up from 22 in
2006.
At the end of 2007 the NBU reported that
foreign banks’ accounted for UAH15.1 billion or 35 percent of the
banking industry’s total statutory capital. This was up from UAH7.4
billion, or 27.6 percent of total statutory capital, at the end of
2006.
foreign banks’ accounted for UAH15.1 billion or 35 percent of the
banking industry’s total statutory capital. This was up from UAH7.4
billion, or 27.6 percent of total statutory capital, at the end of
2006.
The rapid expansion of the banking industry
since 2000 has been accompanied by a number of key developments in
electronic payments, the foundation for which had been laid by the
NBU as early as 1992 when it began computerising its own
operations. That same year the NBU produced its Concept of
Electronic Monetary Circulation in Ukraine in which it proposed the
establishment of an electronic inter-bank settlement system. At
that stage manual inter-bank settlements took between 20 and 30
days to complete.The NBU undertook a close examination of the
operations of Germany’s central bank, the Bundesbank, and German
commercial banks in 1993. Following this a decision was taken to
adapt the principals of the German system to Ukraine’s emerging
banking system.
since 2000 has been accompanied by a number of key developments in
electronic payments, the foundation for which had been laid by the
NBU as early as 1992 when it began computerising its own
operations. That same year the NBU produced its Concept of
Electronic Monetary Circulation in Ukraine in which it proposed the
establishment of an electronic inter-bank settlement system. At
that stage manual inter-bank settlements took between 20 and 30
days to complete.The NBU undertook a close examination of the
operations of Germany’s central bank, the Bundesbank, and German
commercial banks in 1993. Following this a decision was taken to
adapt the principals of the German system to Ukraine’s emerging
banking system.
As an initial step in 1993 the NBU established
the National Payments Council, a body that acts as a coordinator
between the NBU and the commercial banks in the development and
oversight of the payment system. In the following year the first
phase of an inter-bank settlement system called the System of
Electronic Payments (SEP) was launched.
the National Payments Council, a body that acts as a coordinator
between the NBU and the commercial banks in the development and
oversight of the payment system. In the following year the first
phase of an inter-bank settlement system called the System of
Electronic Payments (SEP) was launched.
The SEP in its
initial guise was, however, not a real-time settlement platform
with settlement being executed in cycles of about 20 minutes. The
SEPs gradual transformation into what the NBU terms the ‘new
generation’ real-time settlement platform began in 2003 with 2007
being the first full year during which SEPS offered banks full
access to a real time settlement service as an alternative to batch
settlements.
In 2007 the SEP accounted for 99 percent of
domestic interbank transactions, according to the NBU. In total 320
million transactions were processed with a total value of UAH5.76
trillion. Compared with 2006 this represented increases of 13
percent and 42 percent, respectively. Transactions of under
UAH1,000 accounted for 70 percent of SEP volume but less than 1
percent of value.
domestic interbank transactions, according to the NBU. In total 320
million transactions were processed with a total value of UAH5.76
trillion. Compared with 2006 this represented increases of 13
percent and 42 percent, respectively. Transactions of under
UAH1,000 accounted for 70 percent of SEP volume but less than 1
percent of value.
Though a small part of total SEP settlements
real time processing increased significantly in 2007, the volume up
twelve-fold to 1.65 million transactions and the value up 705
percent to UAH109.1 billion.
real time processing increased significantly in 2007, the volume up
twelve-fold to 1.65 million transactions and the value up 705
percent to UAH109.1 billion.
Payment cards
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By GlobalDataAmong the most significant features of Ukraine’s transition to a
market economy has been the adoption by consumers of payment cards.
According to the NBU, by the end of 2007 the total number of cards
had reached 41.2 million, an increase of 8.7 million (26.8 percent)
compared with 2006 and equivalent to 1.03 cards per Ukrainian over
the age of 15. Debit cards comprised 75.6 percent of cards in issue
at the end of 2007.
At the end of 2007 127 banks were members of
payment card systems of which the most significant is UkrCard which
provides processing and settlement services for UkrCard, MasterCard
and Visa transactions for its 30 member banks that represent about
a third of the country’s card market.
payment card systems of which the most significant is UkrCard which
provides processing and settlement services for UkrCard, MasterCard
and Visa transactions for its 30 member banks that represent about
a third of the country’s card market.
In tandem with the rapid uptake of payment
cards, the volume and value of card transactions has also displayed
significant growth, rising at respective CAGR’s of 37 per-cent and
56 percent between 2002 and 2007.
cards, the volume and value of card transactions has also displayed
significant growth, rising at respective CAGR’s of 37 per-cent and
56 percent between 2002 and 2007.
However, indicative of the dominance of cash in
the Ukraine the NBU reported that in 2007 of the 532 million total
payment card transactions cash withdrawals accounted for 486
million (91 percent) and payment for goods and services only 45
million transactions. In value terms card transactions amounted to
UAH225 billion of which cash withdrawals accounted for UAH217
billion, or 96 percent of the total.
the Ukraine the NBU reported that in 2007 of the 532 million total
payment card transactions cash withdrawals accounted for 486
million (91 percent) and payment for goods and services only 45
million transactions. In value terms card transactions amounted to
UAH225 billion of which cash withdrawals accounted for UAH217
billion, or 96 percent of the total.
Ukrainian banks, in line with their
counterparts in other Central and Eastern European (CEE) countries,
have responded to cash demand by increasing the number of ATMs
significantly. Ukraine had 20,931 at the end of 2007, up 42 percent
compared with 2006, a year in which the number of ATMs rose 28
percent.
counterparts in other Central and Eastern European (CEE) countries,
have responded to cash demand by increasing the number of ATMs
significantly. Ukraine had 20,931 at the end of 2007, up 42 percent
compared with 2006, a year in which the number of ATMs rose 28
percent.
Preference for cash in Ukraine is
understandable given high levels of card fraud.
understandable given high levels of card fraud.
Notably, the US Department of State warns:
“Credit card and ATM fraud is widespread. It is strongly
recommended that visitors and permanent residents of Ukraine
refrain from using credit cards or ATM cards except at major
international establishments.”
“Credit card and ATM fraud is widespread. It is strongly
recommended that visitors and permanent residents of Ukraine
refrain from using credit cards or ATM cards except at major
international establishments.”
The NBU is addressing fraud by encouraging the
introduction of EMV-compliant PIN and chip smartcards though at the
end of 2007 magnetic stripe cards still accounted for 94 percent of
all cards in issue.
introduction of EMV-compliant PIN and chip smartcards though at the
end of 2007 magnetic stripe cards still accounted for 94 percent of
all cards in issue.
The banking industry is, however, responding to
the NBU’s call for a transition to EMV smartcards. The most
significant development in this respect has come from UkrCard which
in October 2007 appointed German smartcard technology developer
Sagem Orga to supply EMV smartcards to all its member banks.
the NBU’s call for a transition to EMV smartcards. The most
significant development in this respect has come from UkrCard which
in October 2007 appointed German smartcard technology developer
Sagem Orga to supply EMV smartcards to all its member banks.
The transition to EMV smartcards has been
spearheaded by the NBU with the development of its National System
for Mass Electronic Payments (NSMEP). First mooted in December 2000
the NSMEP is, according to the NBU, “the final stage in building up
a system of electronic payments in Ukraine”, and is intended to
promote the use of cards for payments for goods and services.
spearheaded by the NBU with the development of its National System
for Mass Electronic Payments (NSMEP). First mooted in December 2000
the NSMEP is, according to the NBU, “the final stage in building up
a system of electronic payments in Ukraine”, and is intended to
promote the use of cards for payments for goods and services.
The NSMEP programme was officially launched in
2004 in cooperation with member banks of the Ukrainian Union of
Members of the National Mass Electronic Payment System. The card,
for which users pay UAH20 on issue, has two memory sections termed
purse and e-cheque by the NBU. The purse is intended for
small-value purchases and the e-cheque for larger value purchases
including utility services payments. Credit balances earn
interest.
2004 in cooperation with member banks of the Ukrainian Union of
Members of the National Mass Electronic Payment System. The card,
for which users pay UAH20 on issue, has two memory sections termed
purse and e-cheque by the NBU. The purse is intended for
small-value purchases and the e-cheque for larger value purchases
including utility services payments. Credit balances earn
interest.
Rollout gradual
Rollout of the NSMEP card has been gradual. In 2007 385,000 new
cards were issued taking the total to 1.78 million, an increase of
28 percent compared with the end of 2006. Last year a further five
banks join the programme taking the total to 40, including the
NBU.
Of note, the NSMEP cards achieved the highest
average annual transaction value per card in 2007 at UAH12,336,
double the average of UAH6,114 of all cards. Averages achieved by
MasterCard and Visa cards were UAH5,807 and UAH 6,039,
respectively.
average annual transaction value per card in 2007 at UAH12,336,
double the average of UAH6,114 of all cards. Averages achieved by
MasterCard and Visa cards were UAH5,807 and UAH 6,039,
respectively.
NSMEP cards also achieved the highest average
value per transaction at UAH707. Average value per transaction on
Visa cards was, for example, UAH430. Total payments using NSMEP
cards in 2007 was UAH18.1 billion, up 45 percent compared with
2006.
value per transaction at UAH707. Average value per transaction on
Visa cards was, for example, UAH430. Total payments using NSMEP
cards in 2007 was UAH18.1 billion, up 45 percent compared with
2006.
The NBU, which
has as its ultimate target to have at least 10 million NSEP cards
in issue, is using the versatility of a smartcard to intro duce
enhancements. In 2007 enhancements included a card which combines
the functions of payment and student card. A pilot mobile phone
banking project based on NSMEP technology was also launched in
2007.
NSMEP cards are also being promoted as the
payment method of choice for internet banking and commerce, areas
where Ukraine lags behind many other CEE countries. This was
highlighted by a study conducted in December 2007 by Factum Group,
a CEE-focused research company, in conjunction with Ukrainian
research company InMinds.
payment method of choice for internet banking and commerce, areas
where Ukraine lags behind many other CEE countries. This was
highlighted by a study conducted in December 2007 by Factum Group,
a CEE-focused research company, in conjunction with Ukrainian
research company InMinds.
According to Factum, the internet is used at
home by 25 percent of Ukrainian’s over the age of 15, a
considerably lower level than, for example, in Lithuania (76
percent) and the Czech Republic (75 percent). Ukraine rates equally
poorly in the use of the internet for banking and commerce.
home by 25 percent of Ukrainian’s over the age of 15, a
considerably lower level than, for example, in Lithuania (76
percent) and the Czech Republic (75 percent). Ukraine rates equally
poorly in the use of the internet for banking and commerce.
Compared with 45 percent of internet users in
Lithuania and 30 percent in Czech Republic who use the internet for
banking only 11 percent of Ukrainian internet users bank online. Of
all CEE countries internet banking has been most enthusiastically
adopted in Poland where, according to the National Bank of Poland
69 percent of internet users banked online at least once a week in
2007.
Lithuania and 30 percent in Czech Republic who use the internet for
banking only 11 percent of Ukrainian internet users bank online. Of
all CEE countries internet banking has been most enthusiastically
adopted in Poland where, according to the National Bank of Poland
69 percent of internet users banked online at least once a week in
2007.
In terms of online commerce Factum found that
only 10 percent of Ukrainian internet users have made at least one
purchase from an online retailer. This compares with about half of
internet users in Czech Republic.
only 10 percent of Ukrainian internet users have made at least one
purchase from an online retailer. This compares with about half of
internet users in Czech Republic.
In part Factum attributed the low penetration
of internet banking in Ukraine to a low level of service provision
by the banking industry. A similar problem exists in Ukraine’s
internet retail commerce market which, according to the United
States Trade Representative, is served by only about 100 domestic
online retailers.
of internet banking in Ukraine to a low level of service provision
by the banking industry. A similar problem exists in Ukraine’s
internet retail commerce market which, according to the United
States Trade Representative, is served by only about 100 domestic
online retailers.
The USTR noted most Ukrainian internet retailer
sites consist of price lists or advertising with an option to place
an order that can be delivered after a cash payment or bank
transfer. Few internet retailers accept online payments and then
only via their partner banks.
sites consist of price lists or advertising with an option to place
an order that can be delivered after a cash payment or bank
transfer. Few internet retailers accept online payments and then
only via their partner banks.
Undoubtedly these are all signs of an economy
still in a developmental stage and one viewed as presenting
significant growth opportunities by newcomers still entering its
banking industry. The most recent of these is Netherlands
bancassurer ING Group. In June it announced plans to establish a
retail banking operation from scratch in Ukraine.
still in a developmental stage and one viewed as presenting
significant growth opportunities by newcomers still entering its
banking industry. The most recent of these is Netherlands
bancassurer ING Group. In June it announced plans to establish a
retail banking operation from scratch in Ukraine.
“This initiative is in line with our retail
strategy for countries with a significant growth potential,” said
ING board member Eli Leenaars.
strategy for countries with a significant growth potential,” said
ING board member Eli Leenaars.
