Credit Card Market in Ukraine

1. Credit Card Market in Ukraine Alya Guseva Boston University 2005

2. Data • Interviews with bank officers in 15 Ukrainian banks • card processing company • Ukrainian Europay/MasterCard association • The banks varied according to the type of ownership: • State-owned – 1 • Private without foreign ownership – 11 • Private with foreign ownership of 50% or more – 3 • They also varied according to size (based on National Bank own classification): • Large – 5 • Medium – 5 • Small – 5 • 10 out of 15 banks are among the top 20 individual deposit holders • 9 out of 15 are among the top 20 issuers of Visas and MasterCards.

3. Macroeconomic Conditions Protracted recession (no positive growth until 2000). Later start of the card market, compared to Russia (by about 5 years) Similar timing in the growth of consumer credit in 2002, but the rate of growth is more modest: -the number of loans to individuals grew from 5% to 7.9% in 2002 and more than 13% in 2003.

4. Number and Types of Bank Cards Issued in Ukraine 15,5mln international cards in 2004 In five years Ukraine went from 12th to 3rd place by the number of Visas and MasterCards issued in the CEMEA region after Russia (23,7 million) and Poland (16,6 million) 90% of cards are Visa Electron and Maestro cards Total volume of card transactions $8 bln in 2004 Volume of sales in the total volume of transactions 3.8% for all Visa and MasterCard cards 9.84% for Classic/Standard products and up

5. Grounds of Extending Overdrafts or Credit Lines • Social ties (VIPs, bank partners, corporate stock owners) • Overdrafts on salary (pension) cards (50%-80%) – bank evaluates enterprise rather than individual cardholder • Collateral (50%-100% of value): • deposits • non-liquid collateral (not accepted by all banks) • guarantees (from the 3rd persons or the employer) • 4. Cards in connection with consumer loans (two departments are involved – payment cards and loans) • Responses range from: • “We do not work with people ‘from the street’” (1 and 2) • …to • “Anybody can get a loan if they make a deposit” (3)

6. “We Don’t Use Mathematical Formula – After All We Are Not Launching Rockets” • Expert Judgments – (“credit inspector is an unqualified psychologist”) • - no stable socio-economic groups, difficult to classify borrowers based on formal criteria, thus – case-by-case • - credit inspectors use proxies to evaluate unofficial incomes • ~ job description (what is the average salary? how rare is it?) • ~ education • ~ vacations (where?) • ~ unofficial salaries can be factored into the decision even without confirmation, but with a discount • ~ if unofficial salary is confirmed, the bank promises confidentiality • - subjective evaluation of applicants by credit inspectors (“intuition”) • ~ attention to appearance, manners (proxies for honesty and status) • ~ sometimes further formalized • ~ can prompt the inspector to request additional materials hoping the application does not pursue the application further • - credit committees make final decisions based on various pieces of data

7. “We Don’t Use Mathematical Formula – After All We Are Not Launching Rockets” • NO Scoring in the summer of 2004 (at least two banks were actively preparing to develop their scoring models) • Point System • - variables and weights were developed by experts • - variables and weights are rarely changed, usually in response to exogenous changes (in laws or in market conditions) • - focus on social status, financial condition and past history (sometimes include subjective evaluations) • - not reaching a cut off point may (but not necessarily) lead to rejection, but point system never replaces the final judgment (in the case of overdraft cards or credit cards) • Rules • - developed by experts • - enable control over regional branch officers

8. Decision Outcomes • Low or no defaults: • “We do not have any defaults because credit cards are issued to people with whom the bank has stable relations; we do not work with people from the street” • “We give loans to those that will definitely pay” • Little knowledge about defaulters: in order to build a scoring model, the bank needs to have bad accounts. If the bank does not have any bad clients, it cannot learn how bad clients are different from good ones.

9. Interbank Information Sharing • EXCHANGE database organized by the association of Europay/MasterCard issuers • - email-based black list of cardholders and merchants • - mainly geared towards fighting fraud • - information is neither complete nor updated • - used by some banks, but not considered effective • Black list of borrowers, organized by the National Bank • - info entered slowly • - info provided based on a written request from the bank • IMF recently announced its Global Credit Bureau Program to support development of private credit bureaus in emergent markets, choosing Ukraine as one the eight countries targeted in the first year

10. Barriers to Creating Credit Bureaus in Ukraine • Formal (legal) – privacy laws • Trust-related – banks fear free-riding and enforcement of mandatory and comprehensive data submission; data protection • Should only black info be shared? • “Make us share!” (addressing the National Bank) • Unlike Russia, market concentration should not be as much of a problem in Ukraine. Leader of the household deposit market and bank card market, Privatbank, controls 14% and 35% respectively (the second bank, Aval, controls 13% and 14%). Top 5 card issuers in Ukraine control 53.5% of market, while top 5 deposit holders control 74%.

11. Main Obstacles of the Credit Card Market: • Screening: • - early stage of market development • ~ buying scoring models is too expensive and developing their own might be too early • ~ banks are trying to conquer the market preferring to worry about screening later • - no credit bureaus • ~ even if banks are not ready to use scoring, credit bureaus would prevent borrowers from borrowing too much simultaneously from several banks • Card use (cash preference): • - cultural barriers – people are not ready to use plastic cards as payment instrument, and even less as a means of credit • - problem of card acceptance among merchants