For many years, cash has been the main – and often the only – payment means in Russia. This certainly added to the costs of financial service provision, and the Russian government has been taking various measures to reduce cash turnover. One of them was the production of plastic cards which were given to most of the salaried employees as well as recipients of state benefits and pensions. This resulted in increased use of the cards over the last few years; in 2012, close to half of all adults were using plastic cards, making them the most frequently used banking product.
But is this really a popular product?
As you will see in the report, 89% of card holders use their cards only to withdraw cash from an ATM – and then use the cash for all their financial transactions. Having spent so much money on the card issuance, it surely wasn’t the outcome that the government had in mind.
The reason why people are not using their cards for financial transactions is twofold. First, in many areas there is no card acceptance infrastructure. In a survey conducted by the National Agency for Financial Studies, a third of respondents said they do not use cards for payments and purchases for this very reason. Will our proverbial Siberian babushka be able to use a plastic card to buy food in her corner shop or medicine in a small pharmacy? The way things currently are, this sounds very unlikely.
The second reason is not so obvious to an outsider. The matter is that usually, neither employers nor state authorities ask their staff or state benefits recipients at which bank or account they would prefer to receive their money. Though formally forcing anyone to open a bank account is illegal, these accounts are just opened for people automatically, when employers and state authorities sign “wholesale” contracts with banks for the provision of services for their employees/beneficiaries. (This practice has led to the existence of multiple bank accounts for many persons which are rarely used – or even used just once to receive a one-time payment.)
Predictably, the banks chosen are mostly state banks; and the accounts offered by the latter are typically basic checking accounts – which yield no interest for the account holders. It is no wonder then that the first thing card holders choose to do upon the receipt of money is to withdraw it – and then decide what to do with it, including, perhaps, placing at an interest-bearing account with another bank.
In addition to numerous dormant accounts which banks have to maintain (there currently are over 622 million bank accounts for the 143 million of the population of Russia; yet only 48% of adults admit to having and using a bank account, which is an indication that many accounts might be dormant), they also cannot rely on having longer-term funding while servicing these many accounts – as most of the money is withdrawn shortly after the transfer.
To address the issue, among the recent initiatives of the Russian Ministry of Finance are a cap on the volume of cash transactions (RUB 600,000 in 2014 and RUB 300,000 in 2015 – which is about $20,000 and $10,000, respectively) and the introduction of irrevocable deposits (currently by law, any deposit can be withdrawn any time, at a depositor’s request). While the former initiative will not affect the vast majority of customers making retail transactions as the ceiling is rather high, the latter raises various concerns. The idea of irrevocable deposits has long been discussed, but there are fears that once allowed, such deposits will be the only option for people as banks would not offer regular deposits any more (or would not disclose this option properly if they were required to offer both deposit types). In the situation when trust to banks is still low (currently only 4% of people trust that saving with a commercial bank is safe), the inability to withdraw money when it is needed looks scary to people.
In our opinion, if such deposit is introduced, this will not help reduce cash turnover, but rather bring about the opposite result, as limiting people’s already limited choices will only further undermine the trust in the financial system. It is clear that there should be other solutions; in our view, widening the infrastructure for card acceptance and cash out – since this will make it easier for people to cash out or reduce their need to cash out in the first place.
Vasily Solodkov is a professor at the Higher School of Economics in Russia.
Olga Tomilova is CGAP’s regional representative for Eastern Europe and Central Asia.