How U.S.-Russia tensions could hurt Visa, Mastercard

Political tensions between the U.S. and Russia threaten to spill over into the payments world, potentially complicating the already difficult regulatory and competitive environment that American card networks and fintechs face in Russia.

"We are already seeing a decoupling of payments and fintech from the U.S. payment industry and card networks in markets like Russia, India and China," said Robert Hockett, a law professor at Cornell University. "And these hostilities will accelerate that."

The Biden administration is weighing sanctions on Russia amid reports the Russian military has amassed 175,000 troops near the Ukrainian border. The sanctions package reportedly includes disconnecting Russia from the Society for Worldwide Interbank Financial Telecommunications (Swift), a Brussels-based organization that operates one of the world's largest financial transaction messaging systems. Other potential measures include sanctioning the Russian government-owned VTB Bank and other Russian institutions.

These moves are designed to make it harder for Russian financial institutions to participate in the international banking and payments markets. But experts say that even a threat of a ban would provoke a response from Russia and other nations that are already wary of the influence of American payment and financial technology companies. This retaliation could include more restrictions on U.S.-based payment firms and greater support for domestic payment options.

"Payment networks such as Swift, Visa, Mastercard, American Express, PayPal and Discover that come to be perceived as instruments of U.S. foreign policy engender distrust," said Eric Grover, a principal at Intrepid Ventures in Minden, Nevada.

Visa and Mastercard did not return requests for comment for this story.

Swift provides messaging and technology that's designed to make it easier to execute payments. Swift serves more than 11,000 financial institutions in more than 200 countries and territories, and has averaged 35 million transactions per day in 2021, a 10% increase over last year. The first bank from the former Soviet Union joined Swift in 1989, and there are currently about 300 Russian banks that are Swift members, covering about 80% of the country's bank transfers.

The European Union, U.K. and U.S. have threatened to ban Russia from Swift before, most recently in April when the EU Parliament introduced a resolution calling for a Swift Russia ban if Russia invaded Ukraine, and there were calls for a ban in 2014 when Russia moved troops into Crimea.

If Russia is cut off from Swift, Hockett said there would be a short-term hit of two to four weeks while Russia moved more of its payment messaging to the System for Transfer of Financial Messages, a Russian messaging platform that handles about 20% of the messaging that supports Russian payments. But STFM is not as robust as Swift — it's only available during business hours and has more limits on the size of transactions. That would create longer-term challenges, Hockett said.

The near-term impact of a Russian Swift ban on U.S. banking is uncertain but would likely be muted, according to Steve Murphy, a director at Mercator Advisory Group in New York, adding there may be more impact on European banks. "Russia does not rely upon the U.S. for trade, but Russia is a big partner with Germany and the Netherlands for energy trading," Murphy said.

The risks for U.S. banks or bank staff in Russia should be minimal, too, unless there's a further escalation, said Brian O'Toole, a nonresident senior fellow at the Atlantic Council, a nonpartisan research organization based in Washington. An example of U.S. escalation would be prohibition on doing business with Russian banks — a more provocative move than a Swift ban, he said.

"If [Russian President Vladimir] Putin started to expel American or European banks or bankers, the international banking community would turn on Russia," said O'Toole. "As long as there's restraint from the Biden administration, that is unlikely."

Russia is already placing economic and regulatory pressure on U.S. payment companies. In response to earlier U.S. sanctions in 2014, Russia has been expanding a domestic payment network to rival Visa and Mastercard. Called Mir, the Russian network debuted in 2015 and controls 24% of the Russian payment market. That has reduced Visa and Mastercard's share of the Russian card market to 72%, according to Statista. 

Earlier in 2021, Putin called for the development of a Russian-backed international messaging service to rival Swift. Russia is courting China and other countries to counter the influence of U.S. card networks, fintechs and large U.S. e-commerce and technology companies. Other Russian moves include a central bank digital currency project and an alliance with China to promote China's UnionPay cards in Russia and Mir in China.

"Cutting Russia off from Swift would push Russia closer to finalizing the allied payment system that it has been working on with China," Hockett said. That system would compete with U.S. firms in Russia, China and Asian markets, he said.

Additional Russian pressure on U.S. payment companies came in 2020 when the Central Bank of the Russian Federation banned payment companies exclusively regulated outside Russia. That led to PayPal halting domestic transfers in Russia shortly after.

It's possible that threatening to ban Russian banks from Swift is a negotiation tactic, Hockett said. But even if that's the case, the dispute potentially contributes to a trend toward countries pushing back against U.S. payments firms, the law professor said.

China for years has expressed an openness to U.S. payment firms, but it regularly changes licensing requirements and is expected to force U.S. payment firms to invest in local data storage. India has also passed laws requiring outside payment firms to store data locally, a requirement that Mastercard and other payment firms contend hinders innovation by cutting off data sharing between markets.

Russia's moves are in line with trends in India and China to "nationalize" payments through the establishment of domestic rivals and tighter regulations that make it more expensive for U.S. and European payment firms, Hockett said. "That could give U.S. payment and fintech companies pause in pursuing these markets because it's becoming much less open," Hockett said.

To be sure, it would also be legally difficult for the U.S. to ban Russia from Swift. "The U.S. has no jurisdiction over Swift," said Gareth Lodge, a senior analyst for payments at Celent in London.

The laws governing how a country could be cut off from Swift are complicated and could conflict with regulations in different countries. The central banks of 11 countries — Belgium, Canada, France, Germany, Italy, Japan, The Netherlands, U.K., U.S., Switzerland and Sweden — oversee Swift. The European Central Bank also has oversight.

Swift's legal policy says the organization is incorporated under Belgian law and must comply with EU regulation as confirmed by the Belgian government. "Swift is a neutral global cooperative set up and operated for the collective benefit of its community," Swift's public relations office said in an email. "Any decision to impose sanctions on countries or individual entities rests solely with the competent government bodies and applicable legislators."

Western leaders in 2014 threatened to ban Russian banks from Swift following Russia's military incursion into Crimea. The Swift ban was never imposed, and Visa and Mastercard temporarily halted payments for a group of influential Russian banks and business people.

Swift in 2012 suspended access to a group of Iranian banks over concerns about financing for Iran's nuclear weapons program. "There is precedence here," Lodge said, adding the majority of G-20 nations voted on sanctions against Iran, including the EU.