Implications of Russian Sanctions on the Payments Market
Read Time: 5 Minutes
Just as SWIFT’s banning of Russia from the global bank messaging system has hampered the nation’s banking system, including its central bank, and its corporate borrowing markets, moves by Mastercard and Visa to ban the international use of Russian-issued cards that carry the international brands as well as domestic acceptance of cards issued abroad — and by American Express, which banned use of its card within Russia and globally — will have severe implications for Russian consumers.
Within Russia, the Mir electronic funds transfer system, established in 2017 and run by the Central Bank of Russia, may still be allowing Mastercard and Visa cards issued by Russian banks to be used domestically. But turning off the use of American Express, Mastercard, and Visa outside Russia makes it very difficult for Russians to access their funds while traveling, or to buy goods and services online at foreign websites.
For U.S. card issuers, Russian sanctions should have a minor business impact. Mastercard has estimated that shutting off Russia would decrease volumes by about 4% and revenue by about 2%. Visa is likely to see a 1% decline in revenue.
A big question, though, is whether Russian banks will resume issuing Mastercard and Visa cards once or if sanctions are lifted and the networks resume their normal operations in Russia. We should remember that there are local switches in most countries. These switches send transaction data from merchants to card-issuing banks to get an authorization for the transaction (i.e., approval) and then clear and settle transactions between the merchant’s bank and the cardholder’s bank.
All of this happens domestically without the involvement of the international schemes. These local schemes are essentially local versions of Mastercard and Visa but operate on proprietary code. A likely impact of these moves is that some central bankers and commercial bankers around the world may be looking at what Visa and Mastercard just did in Russia and decide that cardholders in their country need more protection. As a result, we could see a shift back to a more nationalistic approach, with the creation and management of local payment schemes. We might see more domestic “pay by bank” schemes pop up as a result. A good example of a domestic scheme gone big is China Union Pay.
A Financial War
But the implications are even broader. For the first time, we are engaged in a war financially, not militarily. And if we are using our payments systems and banking systems to fight a war, people around the world may start to think about reordering the global financial system that has been in place since the 1970s. With new technology and a shift in geopolitics, a lot could change in international payments. The Bretton Woods system, which ruled after the Second World War, lasted for almost 40 years.
For example, consider that Russia has a company called Yandex, which is a kind of Google/eBay that also offers a wallet like PayPal (which emerged from eBay) or Alipay (from Alibaba in China). If this “wallet” is tied to their bank account, it could be used instead of a credit card by running on local banking “rails.”
A key development to monitor is what happens if or when Russian banks go ahead with their announced intentions of linking their Mir domestic system to China Union Pay’s global acceptance network, which would be an avenue by which consumers with Russian-issued cards would have global access to merchant acceptance points in close to 180 countries (according to the latest figures released by CUP). But that presumes China sees value — both economically and politically — in doing this and possibly risking its own relationships with the West. It also risks violating sanctions, which might impact its trade relationships as well.
Then there are cryptocurrencies. Of course, few companies now accept them as a form of payment since the on- and off-ramps for cryptocurrencies continue to be mired in complex compliance issues and are very expensive. But there is always the possibility that an innovative solution could pop up that would make their use easier and more convenient.
For the moment, however, cards and current local and international payment systems have so many advantages that the threat of an imminent replacement seems slim. Transaction volumes and earnings are both up strongly at Mastercard and Visa, largely because economies are springing back and people are spending and traveling again. But they are aware of the challenges.
One would be true interoperability among the world’s domestic wallet and banking systems. That could be quite disruptive to the dominance of Mastercard, Visa, American Express, and Discover. Imagine for a moment if Bitcoin could be used to pay at online merchants in the U.S., or the Pix wallet from Brazil could be used to buy a coffee in New York using XRP. That is what true interoperability would look like.
If cryptocurrencies are considered an asset of stored value, like say gold, then they pose little threat to the current payments system. If they are currencies, albeit decentralized, then they could potentially be added to the currencies recognized by today’s payment networks with little effort. But if cryptocurrencies are considered their own “ledger” and become centralized interoperable payment systems, then they could pose a serious threat to Mastercard and Visa.
The networks are essentially their own blockchains — just “centralized” and interoperable. Mastercard and Visa are essentially distributed ledgers, managing credits and debits (via smart contracts), but are centralized — i.e., they are controlled by a central authority and are governed by a clear set of rules and bylaws. These “blockchains” are owned by public companies, are regulated, and follow U.S. laws. The cryptocurrency blockchains are unregulated (like Ethereum and Bitcoin), and we know that could be home to a lot of illicit activity. Just look at the special investigative unit the FBI set up last week to monitor the funding of illicit activity via cryptocurrencies.
The Russian sanctions have only served to underscore the current mood of our nation’s card issuers and networks: optimistic about current business conditions, yet alert to threats coming from cryptocurrencies and their regulation, as well as developments in financial technology that are coming from everywhere at an ever-increasing pace.
About Daniel Cohen
Daniel Cohen is the General Manager of Simple Payment Solutions, a cross-border payments company he cofounded in 2019. Previously, he held several senior roles, including Chief Credit Officer and Global Executive Vice President for Credit, at Mastercard. Earlier, Cohen was the head of digital and innovation for Mastercard’s Latin American region, where he was responsible for a team that worked on the development and commercialization of innovative payment solutions used by consumers at checkout counters, via the web and on mobile phones and tablets. He also established Mastercard’s office in Tel Aviv, Israel, and established a fintech and innovation center in the country.
This financial industry article is adapted from the GLG teleconference “Implications of Russian Sanctions on the Credit Card Market.” If you would like to speak with experts like Daniel Cohen or any of our approximately 1 million Network Members, please contact us.
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