Eastern Europe Plays Catch-Up

  Card ownership and usage are reaching Western European levels in several of the countries joining the European Union next year, but the development of merchant and ATM networks still lags.
  It is just 12 years since the countries of Central and Eastern Europe, newly-liberated from the constraints of Soviet-style communism, began to apply themselves to the task of developing a modern retail banking system, among many other things.
  In 1991, there were fewer than 200,000 internationally branded payment cards in Central and Eastern Europe (CEE) as well as the Confederation of Independent States (CIS), the old Union of Soviet Socialist Republics. Moreover, three-quarters of those were in what was then Yugoslavia, the region's most economically advanced country. By 1994, there were still only 685,000 Europay- and Visa-branded cards in the region, compared with over 50 million in 2002.
  Whether local or foreign, the banks, supported by the card associations and technology suppliers, have made great strides in bringing the payment systems of the leading CEE countries up towards European Union levels. Now EU membership is imminent in 2004 for 10 countries, including the three Baltic states, Czech Republic, Hungary, Poland, Slovakia and Slovenia. The other two are Cyprus and Malta. Once EU membership is achieved, entry into the so-called eurozone, the countries that use the common euro currency, will follow over time, with 2008 suggested as the earliest date.
  Growth in cards issued, the most basic industry measurement, has been very rapid, led by Poland (Chart 1). Excluding the Baltic states, for which a five-year series is not available, cards issued in the five CEE countries that are EU candidates rose from 9.4 million in 1998 to 30.7 million.
  In every case, investment by Western banks has been a key element in upgrading domestic payment systems. During the 1990s, adventurous banks in several EU countries, faced with limited opportunities at home, latched on to CEE markets as a source of future expansion.
  The resulting access to capital and foreign expertise has been an important factor in the CEE payment-card business. Even in countries where foreign banks have a relatively minor presence, the fact of their presence at all has been enough to galvanize the locals into defending their territory.
  Only one CEE country, Slovenia, has reached card ownership higher than the EU average of 1.15 per capita (Chart 2), although Croatia and Estonia are close. In countries like Hungary, Czech Republic and Slovakia, card ownership of 0.44 to 0.56 per capita represents levels close to several EU countries.
  It is also true that the strongest advances have been made in small CEE countries. The bigger countries, both in terms of geography and population, are much tougher challenges for the card business and for retail banking generally.
  Russia is the most obvious case in point, with a combination of the largest population and largest area leading to low overall levels of per-capita card ownership. However, card ownership in St Petersburg and Moscow is probably close to average CEE levels, so the challenge is to roll cards out more widely.
  Similar comments apply to Kazakhstan, Ukraine, Romania and Bulgaria, of which the latter two are EU accession candidates in 2007. Their card bases expanded extraordinarily quickly in 2001 and 2002, but this was mainly among affluent, urban consumers.
  As recently as 1998, Bulgaria, Romania and Ukraine accounted for 367,000 cards between them, yet their combined card base for 2002 was over 10 million-a classic example of how quickly the card business can grow once the right infrastructure is in place.
  Turning to competition between the card associations, the feature of recent years has been the progressive gains in market share that Visa has made at the expense of Europay-MasterCard. Of the 685,000 cards in 1994, Europay brands accounted for 581,000, or 85%.
  Though market-share figures for individual countries fluctuate more widely from year to year than in Western Europe, Visa has narrowed the gap every year since then, fuelled especially by gains in Poland. Across the region, Visa reached close to parity relative to MasterCard in 2002 (Chart 3, page 50).
  In 2002 over 2001, Visa gained 12 percentage points of market share in Croatia, eight in Russia and five in Poland, while MasterCard gained three points in Romania and two in Slovakia. Overall in 2002, MasterCard lost five percentage points of market share to Visa compared with 2001.
  As in Western Europe, most cards are debit rather than credit, though the dominance of debit is even more extreme in Eastern Europe. Out of 56 million internationally branded cards in the region at the end of 2002, 52 million were debit, over 92% of the total (Chart 4, page 50).
  Of the Visa debit total, 23 million, or 87% were Electron cards, with standard cards making up most of the balance. On the MasterCard side, 98% of debit cards were Maestro-branded.
  Also as in Western Europe, the figures for credit cards should carry a figurative asterisk as very few represent revolving credit card programs in the American/British sense. There has been some revolving credit activity, particularly in Czech Republic and Poland, but the bulk of the 4.5 million MasterCard and Visa standard and premium cards in the region are deferred debit. There was a further small number of Electron credit cards-just 225,000 in the region, most of which were issued in Latvia.
  The main reason for the dominance of debit in the region is that many cards are issued as part of so-called salary projects, where a company pays employee salaries directly into a salary account. Employees then use the cards to access their funds. Employers like the concept, because it can eliminate considerable payroll administration and reduce the need for functions like cash desks and deliveries.
  Employees have been harder to convince. Many simply withdrew their entire salaries as cash from automated teller machines in the early days of salary projects. In recent years, however, as familiarity with cards has grown and as confidence in the banking system has generally improved, there has been increased evidence of the use of cards for point-of-sale payments. Yet ATM withdrawals still continue to account for the vast majority of transactions and cardholder expenditure volume (CEV).
  Figures from Visa International's Central Europe Middle East Africa region show that in the five CEE/CIS countries with the highest level of POS payments as a proportion of total CEV, POS payments averaged 15% of the total. Those countries are Poland, Russia, Czech Republic, Hungary and Estonia. That is a lot lower than the average for the EU, where 69% of transactions were at the point of sale in 2002. But all things considered, it is satisfactory. Moreover, in all five countries, POS payments showed strong growth over 2001.
  Looking at Electron, across the Visa European Union region last year, 29% of Electron transactions were at the point of sale. In the CEE/CIS countries of Visa's CEMEA region, Electron POS payments were well below the EU average, as might be expected.
  In Poland, the biggest market, POS Electron payments were 7% of total CEV. Although more than eight out of 10 Visa cards in Poland are Electron-branded, they accounted for 40% of CEV at the point of sale. In other words, the majority of card payments were made using the relatively small number of standard/premium cards.
  Other countries in the region illustrate the tendency for POS payments to be the lowest proportion of total transactions in markets with the least familiarity with cards. In Kazakhstan and Romania, for example, the values of POS payments were 4% of total CEV and ATM withdrawals 96%.
  The figures for card ownership per capita in Chart 2 measure the level of an individual market's development by showing the proportion of cardholders in the total population. Data for annual transactions per card are another useful indicator, which measures how often cards are used by people who actually have cards. Taking Visa data only, it is clear that several CEE countries have progressed to EU levels of usage (Chart 5, page 51).
  The figures for Estonia are particularly impressive, but it is equally notable that Visa card usage in Slovakia is approaching the level of Spain, while Poland, Czech Republic, Lithuania and Hungary are ahead of the figures for Italy, Germany and Switzerland. The evidence from this table, combined with Chart 2, shows clearly that the leaders in the CEE have reached, or are reaching, EU standards of development.
  Acceptance infrastructure is an area where CEE/CIS banks have made a good start. Visa data are absent for some countries, but MasterCard publishes merchant outlet and ATM figures for the whole CEE/CIS, as well as for Western Europe.
  Taking the broadest picture, there were 4.8 million merchants for the 380 million people in the 15 EU nations, an average of 12,630 merchants per million of population. For the countries joining the EU in 2004 (CEE and the Baltics, excluding Cyprus and Malta), there were 214,000 merchants for 73 million people-2,932 per million, or a quarter of the EU average.
  Like all averages, these conceal as much as they reveal. The EU ranges from a high of 35,000 merchants per million in Greece to a low of 5,000 in Portugal, while the CEE's highest density is over 16,000 in Slovenia (Chart 6). Of the EU 15, only Greece, Spain and Italy have more merchants per million than Slovenia. Croatia, with the CEE's second-highest merchant density, has more merchants per million of population than Belgium, Netherlands and Germany.
  Generally speaking, POS acceptance is sub-par in the CEE region, with key countries like Czech Republic, Hungary, Poland and Slovakia all having fewer merchants per million than Portugal. Moving further east from the CEE, merchant densities are even lower: taking the combined figure for Bulgaria, Romania, Russia and Ukraine, there were 47,000 MasterCard merchants for a population of 220 million, just 210 per million on average.
  ATM networks show much the same pattern, with Slovenia again having the highest density-618 machines per million of population. In the EU, there were 237,000 MasterCard/Cirrus ATMs a year ago, equivalent to 625 ATMs per million of population. For the countries joining the EU in 2004 (again excluding Cyprus and Malta), the average was 240 ATMs per million. As with the merchants, ATMs per million of population fall away even more steeply in the CIS.
  The conclusion on merchant and ATM acceptance therefore has to be that in every case bar Slovenia and Croatia, banks need to continue investing in their networks to achieve higher concentrations. It is perhaps surprising that card use has progressed so rapidly, given low levels of acceptance, but the answer may be that the figures are relatively crude and do not capture the higher levels of acceptance in major urban areas.
  Summing up, several generalizations can be made about the countries of the CEE/CIS region:
  * The countries joining the EU in 2004 have reached the point where their card payments and retail banking systems are ready to integrate seamlessly with other EU members. In many cases, they have the same task as the EU countries-to step up usage of existing cards rather than issue more cards.
  * Bulgaria and Romania, the two countries which are candidates for EU admission in 2007, are less advanced, but the rapid growth of their card base in 2001-2002 shows that development is being vigorously tackled.
  * Croatia is an anomaly within the CEE, since for political reasons, it is not at present an EU entry candidate. However, its payment-card system is one of the most advanced in the region, while according to a Bank of Austria analysis, 81% of its banking assets are under foreign ownership-the second-highest level of any CEE country (after Slovakia) and among the highest for any country in the world.
  * Belarus, Kazakhstan, Russia and Ukraine are achieving reasonable penetration of cards in their main cities, but overall card ownership and usage remains very low. Diffusing cards more widely is now the main challenge.
  * Elsewhere in the CIS, there are countries like Azerbaijan and Georgia where banks have become MasterCard/Visa members, but card issuance is in its infancy. In the CEE, parts of the former Yugoslavia-Bosnia and Herzegovina, Serbia and Montenegro and Macedonia-lag far behind others like Croatia and Slovenia. But banks like Nova Ljubljanska, National Bank of Greece and Bank of Austria are investing in local banks and preparing the ground for development.
  Taking the CEE/CIS region as a whole, the challenge of rolling out cards across large populations and geographical areas will ensure a dynamic marketplace for many years to come.