The Russian payments market is in need of reform, or at least a restructuring of payment service providers. The current structure is confusing and complex; this limits competition and creates barriers for new entrants. It also has functional gaps that need to be bridged. The situation can be remedied by introducing a new type of market participants — payment institutions, which would provide payment services while remaining non-banking entities. A specialized payment regulator needs to be established to supervise and oversee their operation.
The Russian Electronic Money and Remittance Association (REMA) made this proposal in its analytical report Payment as a Commercial Service: Towards Payment Institutions in Russia.
Earlier, the Bank of Russia noted the need to expand the scope of payment intermediaries in its National Payment System Development Strategy for 2021–2023. Among other things, the Central Bank suggested the possibility of establishing, within the next three years, an institution of non-banking providers of payment services. One of possible scenarios of reforming market access for payment organizations was presented in the REMA report.
“We decided to outline our vision of possible development paths for both banking and non-banking payment institutions in one document,” comments Viktor Dostov, the board chairman of the association.
The report states:
“The purpose of the payment market reform is to simplify regulation and to introduce transparent and clear rules of the game for non-banking actors.”
Basically, the scenario opens up access to non-cash transfers (to third parties) for non-banking organizations. The report authors note that any involvement in processing non-cash payments currently requires a banking license.
The only non-banking party rendering payment processing, payment service provider, is only authorized to accept cash. It has been also proposed that potentially, payment institutions could be authorized to issue limited loans for making payments.
It was also proposed in the report that the structure of payment service providers should be simplified — primarily by reducing differentiation among banking payment service providers. In fact, payment service providers could be replaced altogether.
“Regulation must be centered around functionality — that is, around the services provided by an organization but not around its title (which would be an institution-centric approach — ed.),” notes Pavel Shust, the executive director of the association.
A reform of the payment intermediary market can help create more competitive working conditions in the industry and lower the entry threshold. The Central Bank also recognizes the relevance of this task. According to the Central Bank, despite a significant number of payment service providers, one or two largest providers account for the biggest market share. This could be fixed by expanding the circle of market participants with non-banking organizations.
This becomes more apparent as eco-systems develop. At the level of banks, they can use payment services at the level of their infrastructure; tech-based ecosystems have to acquire banks if they want to enter the payment services industry, stressed Olga Skorobogatova, First Deputy Governor of the Bank of Russia, during a strategy presentation. Yandex, Wildberries and several other companies have already done exactly that.
Viktor Dostov notes that the Central Bank’s position used to be absolutely transparent: all payment-related activity must go through banks.
“It seems that this position has slightly changed, due to various circumstances. Specifically, because of the understanding that the payment industry is being rapidly oligopolized and proper competition is taking a nosedive,” Viktor Dostov explains.
First steps in this direction have already been taken. More than a decade ago, the institution of payment service providers, a non-banking payment structure regulated by the Federal Law No. 103-FZ, was created in Russia. There has been a tendency for regulating the activity of various aggregators which are essentially non-cash payment facilitators and a non-banking payment structure in the bud. An industry-focused regulator is also necessary because of an existing conflict of interest on the payment industry market.
“On one hand, the Central Bank acts as a regulator for payment service providers and lending institutions; on the other hand, it is de facto authorized to advance legislative initiatives. It is also the founder of the payment infrastructure that provides services to lending institutions,” Pavel Shust says.
He noted that the new structure could have the power of supervision over organizations providing payment services and of issuing licenses to them. The regulator could also lay down the rules of providing payment services and ensure nondiscriminatory access to the payment infrastructure, including the protection of the rights of payment service customers.
The full text of the report by the Russian Electronic Money and Remittance Association can be found here. According to Pavel Shust, the report will be sent to all market participants and the association is ready to receive feedback. The Central Bank has not received the report yet, but its representatives attended the presentation, he added (all those attending the presentation eventually received the report — ed.).
By Olga Blinova