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
15,5 mln 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 Dont 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 Dont 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