When discussing financial inclusion, the focus typically is on developing countries in Africa, Asia, and Latin America. In particular, Brazil, Russia, India, China, and South Africa – collectively called BRICS – are often referenced as shining examples of developing countries that are quickly becoming economic powerhouses. Evidence of their global influence can be found in the recent announcement by the Russian Chamber of Commerce that the country had completed its part of the work necessary to create the BRICS New Development Bank, which will finance infrastructure projects within the BRICS countries as well as in other developing countries.
Since the fall of communism in the former Soviet Union, Russia has struggled economically as it rebuilds and redefines itself. As in most countries, the level of financial inclusion in Russia is generally a reflection of the state of economic growth and stability.
According to the World Bank, 48 percent of the Russian adult population had an account at a formal financial institution in 2011, rising to 67 percent in 2014. While the latest figure is nearly double that of Sub-Saharan Africa (34% there are currently banked), it still pales in comparison to the numbers that we are accustomed to seeing in Western Europe and North America.
However, it is noteworthy that since the Consultative Group to Assist the Poor (CGAP) first carried out research on the state of financial inclusion innovations in Russia in 2008, there has been considerable progress. In areas like the penetration of bank branches per 100,000 adults, Russia has now moved ahead of some highly developed countries.
Regulatory Environment in Russia
Since September 2013, the Russian financial industry - including financial markets, commercial banks, insurance companies, and microfinance institutions - has been regulated by a sole authority, the Central Bank of the Russian Federation (CBR).
One of the ways to make financial services more accessible to any population is through a robust credit bureau system. The bureaus should have enough records so that financial institutions can effectively carry out Anti-Money Laundering (AML) and Know Your Customer (KYC) checks on their clients. Credit bureaus are still relatively new in Russia, compared with North America and Europe. With recent reports of a major shakeup in the Russian banking industry due to corruption, poor lending decisions, and suspicions of money laundering and terror financing, there couldn’t be a better time to build stronger credit bureaus.
The first Russian credit bureaus were created in 2004 after legislation was passed requiring banks to share their clients’ credit histories with at least one credit bureau. Since then, many credit bureaus have sprung up in Russia, notably among them the Russian Standard Credit Bureau (RSCB) and the United Credit Bureau. The RSCB has over 15 million credit histories, and the United Credit Bureau has access to nearly 30 million credit histories. With a population of over 142 million people, there is clearly still considerable work to be done to improve coverage by Russian credit bureaus.
With international regulatory standards still being set mainly by developed countries, how can we best align the poverty and financial access agenda with the international security and financial stability agendas?
Government Efforts to Advance Financial Inclusion
The Russian government is taking the issue of financial inclusion seriously. In June 2011, it approved an action plan proposed by the Russian Ministry of Economic Development (MED) to further financial inclusion. The MED, Central Bank of the Russian Federation (CBR), and the Russian Microfinance Center are all members of the Alliance for Financial Inclusion (AFI), a network of central banks and other financial regulatory institutions from more than 90 developing countries. In addition, the CBR and AFI hosted a workshop in Moscow in October 2014 on advancing financial inclusion through digital financial services.
Operating in a Cash-Based Economy
Russia still has a primarily cash-based economy, making up 90 percent of its payment volume in 2012. This is due in large part to the fact that Russians typically do not trust card payments. As a result, one of the key innovations that the country has developed is an unmanned payment terminal. Strongly resembling an automated teller machine (ATM), these terminals provide cash-in services only, allowing users to pay their utility bills quickly instead of lining up for hours in traditional banks. Interestingly, the payment terminals often have ATMs located next to them, further proof of Russians’ extreme preference for cash.
Despite having a cash-dominated society, Russia’s digital finance service industry has made considerable progress in recent years. The country has a well-established electronic money (e-money) ecosystem with its own industry association, the Russian E-Money Association, and PayPal as one of its members. Russians have also developed their own mobile wallet and e-money platforms – such as Tinkoff Mobile Wallet, Yandex.Money, and Visa QIWI Wallet.
There is tremendous potential for digital finance in Russia, given the current trends in mobile phone use. A research report found that the number of Russian mobile phone users is expected to reach just over 122 million and the number of mobile Internet users to hit 88 million by 2017. The same report also pointed out a growing number of smartphone sales, from only 18 percent of total mobile phone sales in the third quarter of 2011 to 55 percent by the end of the fourth quarter of 2013. Not surprisingly, mobile Internet use is also expected to rise sharply as more Russians use smartphones. These trends open the door to new opportunities for digital financial services to reach more of the unbanked in Russia.
As mobile technology continues to become more widely adopted and more digital financial services become available throughout Russia, we can expect the rate of financial inclusion to continually grow. This is not to say that there are no challenges to overcome. Building trust among the Russian people to encourage them to use cashless payments will most certainly be the biggest hurdle. Through the use of electronic identity verification and cyber ID data from online sources, the risk from fraud can be mitigated so that greater trust can be established, resulting in wider adoption.
Will basic financial access be accessible to the 46 million underserved people in Russia by 2020?