The sanctions imposed on Russia by the European Union and the United States against a number of public and private Russian companies earlier this year have generated substantial noise across the payments industry news channels throughout 2014. The effect of these sanctions was most prominent on the financial sector, when, without any prior notification, Visa and MasterCard stopped processing bank cards from some of the country’s largest banks. Though the primary targets of these actions were the owners of the financial institutions, it was the banks’ cardholders that suffered the most; with more than two million cardholders left stranded without access to their own money. Another indirect casualty of these actions was the retail sector, whereby in excess of 5,500 retail outlets processed by these banks were unable to accept card payments from their customers.
The effect on the Russian financial sector was temporary however. Due to the network of processing centres connecting various banking groups and the establishment of interfaces between the largest banks, transactions could still be made using blocked cards within the Russian Federation.
Russia isn’t the only nation to have suffered this fate; restrictions have been imposed on numerous countries, enforced by the public authorities, predominantly those of the United States. Countries such as Iran, Sudan, Syria and banks in Azerbaijan, Jordan and Cyprus have all been affected. These sanctions don’t only affect the countries on which they are placed, but also on the companies that choose to continue to interact with them. American JPMorgan Chase & Co had to pay an $88.3 million fine for violating several US sanctions related to transactions in Cuba, Iran, Sudan and Liberia. The Dutch ING Bank incurred even more losses with a $619 million penalty for similar actions; during the summer of 2014, the French bank, BNP Paribas was ordered to pay more than $8 billion to the Ministry of Justice as compensation for processing transactions in countries blacklisted by Washington.
Not all international payment systems are as fiercely dependant on their national jurisdictions in terms of foreign economic activity. However, the approach of the international companies that do has an effect on the reputation of international payment systems as a whole.
As a natural reaction to the efforts meant to restrict national economic activity by these giants, countries are beginning to look for solutions to these problems. Russia has very publicly announced that they are rolling out plans for the implementation of their own national payment system and they aren’t the first. Algeria, Indonesia, Qatar, the Congo, Malaysia, Nigeria, Saudi Arabia, Singapore, Sudan, Tunisia, Ethiopia, and Japan are just a selection of other examples. Then there are countries like Latvia, who have closed their internal market and process local transactions using international cards themselves. The most successful are those who have taken their national payment system international. The success of China’s UnionPay and Japan’s JCB is undeniable. According to the Nilson report (2014), the use of UnionPay debit cards for purchases tops those made by Visa debit cards by US$500 billion, whilst purchase volumes from JCB’s credit card have doubled those of Diners Club.
The benefits of implementing a national payment system are clear. For starters, the stability of the national economy will increase and the payments market will be safeguarded against external influences. Foreign exchange flows and the settlement of payments will be regulated and all transaction fees will be distributed amongst the local market players. Whether the success of Russia’s payment system will lend it to become international and truly rival giants like Visa and MasterCard remains to be seen, however it is clear that other countries are watching Russia closely to see what happens, and that we shouldn’t be surprised if they decide to follow suit.
