Friday, January 7 2022 16:03

ArmInfo. Over the last two years, the ongoing global coronavirus pandemic has greatly impacted our customary way of life. However, every cloud has a silver lining – the pandemic has caused the humankind to make a leap into the future of digital reality, making this period at least a decade shorter.

A similar situation can be observed in Armenia as well. People once incapable of using or reluctant to master up-to-date technologies can hardly imagine their everyday life without bank cards, applications or online payments – in short, virtual reality - now, just a couple of years since the pandemic broke out. 

 

Public utilities online payments, online shopping and many other things are turning part of our everyday life. Armenia had for years prepared for this reality, and the Armenian Card (ArCa) national payment system, which was established back in 2000, took the lead in the work. Over the period in question, the system was being technically upgraded and, as it were, prepared for the new circumstances.  The ArmInfo economic analyst interviewed Mr Ishkhan Mkhitaryan, ArCa Chief Executive Officer, who told about the changes in “virtual financing”, particularly in the card market and non-cash transactions.

 

Question: Mr Mkhirtaryan, statistical data show a considerable increase in non-cash transactions in Armenia’s card market over the last two years. Before the pandemic the annual increase was 20 to 25 percent, whereas the years 2020 and 2021 saw an increase of 50% to 60% and even more. Formerly, people would withdraw money from their card accounts, with the cash constituting up to 90% of the total volume and cash payments preferred, whereas the share of cash is 65% now. It is considerable progress. Were you ready for such radical market changes? 

 

Answer: Irrespective of the pandemic, we were preparing for such market growth. Sooner or later, our country had to embark on this path, and we – not only Armenian Card, but also our banks that are system members – showed a serious approach to developing our non-cash payment infrastructure by creating and constantly upgrading our mobile applications, putting more and more virtual services on the list for our clients to receive more services and get more opportunities to operate their accounts without visiting the banks. The Armenian Card national payment system faced the pandemic crisis with an upgraded system, including an upgraded ArCa application. 

   

However, the payments industry is progressing, with the global trends from plastic cards toward non-card technologies, mobile Internet and gadgets. 

 

In fact, a card is an instrument for getting access to your bank account, and over nearly 60 years cards have been used technologies have constantly been upgraded to improve their safety and user-friendliness. Cards have passed a way from paper-based cards and embossed plastic cards to magnetic stripe cards and microprocessor cards (contact and later contactless ones). Infrastructure, payment methods and technologies have been upgraded – all this within the “card ecosystem.” However, rapidly progressing technologies result in gradual transformation of the routine. The payment systems are, as it were, among high-tech leaders.  Over the last decade, the innovations have not much concerned methods and instruments of payment, but have been focused on upgrading interface. However, recent years have seen new trends, which can be defined as “digital transformation”. You may have noticed the pandemic has strongly stimulated this process in Armenia, and the payments industry is now going through it.  

 

Bank cards are gradually giving way to new instruments. And now this process involves plastic cards “moving into” mobiles and other portable gadgets, with new user experience. In the course of time, however, the plastic card concept will give way to that of bank accounts linked to applications.

 

On the whole, the payment process is now less conspicuous, being part of other services using modern technologies, which, in turn, necessitates seamless interaction and interoperability involving all the payment market participants. In fact, a mere web search of information, products or services is most likely to end in a purchase, which confirms the aforesaid. 

 

In cooperation with banks, Armenian Card is now shaping a new user experience: by introducing new services we accustom our clients to mobile applications and payments.

 

We are putting contactless mobile payment services into operation, non-card money withdrawal using a mobile application has been put into operation as well. The technology implies code generation by the mobile application and withdrawal of money from ATMs by means of this code and a confirmation SMS message. In the near future we are going to introduce such services as contact transfers (the client’s phone number rather than the card number at the bank’s disposal will serve as identifier) – by means of both our mobile application and those of banks. ArCa, in cooperation with banks, is exhaustively testing the technology. We are also actively introducing payments using QR codes.

 

Question: Do you think bank clients are prepared for such rapid changes?

 

Answer: I think so. User experience transformation based on interaction between users and automated systems, particularly web applications, will, I am absolutely sure, prove to be a smooth and effective process. Owners of bank accounts will gradually get accustomed to mobile applications and new functionals. In 2022 we plan to launch a new rapid transfer and payment service, which will enable clients using mobile applications and simple identifiers to make account-to-account transfers with instantaneous receipt to accounts. Simply put, knowing the service recipient’s phone number is enough for you to transfer money to his or her account. You do not have to fill in any forms indicating either the account number or the bank. Unlike money transfers by payment orders, the new service allows the money to be instantaneously entered in the recipient’s account. Further retail and public services payments and many other services using mobile applications linked to accounts. All the transfers will be processed by the ArCa processing center employing working risk management mechanisms, with limits and clearing. The Central Bank of Armenia (CBA), which is a clearing bank, will complete clearing between the participants based on the ArCa-calculated positions. All the banks can render this service irrespective of whether they use ArCa or their own processing centers. Payment service organizations are expected to join as well. The CBA plans to approve the standards of the national QR code. Under the project, we are going to launch a new payment service using QR codes and introduce it into our systems. QR codes will also be used for non-cash payments where installing POS terminals would be expensive. Under the new law, no outlet can deny non-cash payments to clients. Thus, we propose an available alternative to cards, with banks actively upgrading their mobile applications, while a simple smartphone with a camera and Internet access is enough for making QR payments. 

 

All the functionals I have told you about will enable our citizens to smoothly pass from card payments to mobile ones.

 

Question: I think we have not been accustomed to the advantages of working with bank cards. In any case, not all companies, including large ones, are ready to render services using bank cards. Filling stations worldwide have been rendering such services for a long period, whereas none of them in Armenia accepts bank cards. On the other hand, almost all stores, including corner shops, are actively trading by means of POS terminals. This “love” for cash with, to put it mildly, dubious motives behind it, may be prioritized over all the advantages.  

 

Answer: I cannot speak on behalf of individual economic entities or of their motives. But I am following the market trends by means of figures. Numerous factors indicate an upward trend in non-cash payments. Specifically, over the last two years the online transactions to the amounts of less than AMD 2,000 have constituted just under 55%, while similar transactions in the “physical environment” constituted about 38%. That is, card holders are ready not only for making major purchases using cards, but they are now paying petty expenses using cards – taxi fares, coffee, fast food, and so on. This is evidence of card holders are ready for mastering upgraded and more convenient non-cash payment methods.

 

I think the new law on non-cash payments will facilitate dissemination of this payment method.

 

Question: Although some are critical of the law, namely those accustomed to “counting and undercounting” the cash as a chance to “write off”, this document may be considered kind of achievement in our country’s lawmaking history as the first bill restricting cash circulation was adopted at least 15 years ago. When the issue of adopting a relevant law was raised, some lobbyists for “cash in hand” invoked high commission charges for payments by cards, which raised commercial expenses and cost of services. What steps are your company and our banks taking to break the stereotype of “strangling bank commissions”?

 

Answer: I disagree entirely with this statement of the question. All that concerns commission, what is called an acquiring fee - I think this topic is just being capitalized on. The lion’s share of bank commissions is used for covering the card issue and service expenses. POS terminals, this expensive infrastructure, participation in payment systems, personnel costs, risk management, security, marketing and, finally, technological upgrades. The payment ecosystem is a separate topic. I elaborated on it in an article you posted two years ago.

 

I am absolutely sure that the market pattern should be viewed from a broader perspective. For example, economic entities with an annual turnover of within AMD 115mln (about AMD 10mln a month) are paying the simplified tax now. Let us assume a businessman has a margin of 15%, which, I think, is unrealistic after 5% taxes are paid, as well as rent and other payments are effected. The net profit is not so large. But the businessman not only has to provide for his own family, but also needs funds for development. It forces him to save funds, including the funds expected to be spent on new technologies. I think it happens not only because of the acquiring fee rates (1.2% to 2% set by different payment systems). Rather, it is because card transactions record the real turnover, which is by no means to exceed AMD 115mln. Otherwise, the businessman will have to work with VAT. So they have to run the risk of “adjusting figures” by not issuing checks, refusing operations with bank cards.

 

As regards our steps to break this stereotype, our main initiatives for the foreseeable future are aimed at making the ArCa products more attractive by technologically upgrading them to their counterparts in international payment systems. The work has been completed to ensure the issue and service of contactless ArCa cards. Banks have started replacing magnetic stripe and chip cards, and the switchover is to be completed by the end of 2024. The work has got under way to create the EMV 3DS 2.0 domain of the Armenian Card national payment system, which will ensure safe payments using ArCa cards for all Armenian banks irrespective of their processing platforms. Work is in progress to afford mobile token payment opportunities using ArCa cards (Android-based). What does it have to do with bank commissions? Operations using cards of the national payment system are less expensive. So the acquiring fee is lower, and interaction schemes are more flexible.

 

Question: Our agency conducted a slap poll recently and arrived at the conclusion that most bank application users perform only primitive operations – public utilities payments, mobile top-up. Further, fine payments, account-to-account transfers. People do not often pay taxes and hardly take out loans by means of applications. That is, the last-named function, which depends on banks’ operation, is not that active. Why? Are we not yet good at algorithms capable of enhancing the functionality of applications? 

 

Answer: Full-scale switchover to online customer servicing is a labor-intensive and, so to say, creative process. Such frequently used concepts as user experience and user interface (UI) come to the foreground. Usability (high speed), intuitive user interface are the top values for users, while banks are responsible for functionality, safety and effective technological solutions.

 

We are approaching a stage when providers of bank services will be selected based on usability and functionality of applications rather than on deposit or loan interest rates. The provider of the most complete “set of values” will be in the highest demand. Moreover, in view of the fact that we are entering a era of open banking (a banking practice that provides third-party financial service providers with open access to consumer banking, transaction, and other financial data from banks and non-bank financial institutions through the use of application programming interfaces (APIs), not only banks will have to compete for users. The philosophy of banking proper is undergoing changes: clients’ desire is to have vital necessities – purchase or renovate their homes, buy cars, telephones, etc. and taking out loans must be a link in this chain. Such concepts as ecosystem, interoperability and seamlessness are becoming an integral part of banking. It is higher-level competition: it involves processes rather than products. The ones to be the first to adjust their work to the new reality will succeed.

 

Thank you for an interesting conversation. I wish you every success in the coming year.