Mastercard assignment

8/7/2019 Mastercard assignment

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SAINT PETERSBURG STATE UNIVERSITY

GRADUATE SCHOOL OF MANAGEMENT

MasterCard - An Analysis of

Entrance into the Russian

Market

Essay on the course:

International Business Strategy

Students:

Anastasia Egorova

Claire Locker

Klemens Anderl

Felix Volker

Saint Petersburg

2009


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Table of content

INTRODUCTION .............................................................................................................. 3

1. GENERAL INFORMATION ON MASTERCARD .................................................. 4

1.1.DEFINITION OF PLASTIC CARDS .................................................................................. 41.3.MASTERCARD HISTORY ............................................................................................. 61.4.INTERNATIONALIZATION OF MASTERCARD ............................................................... 6

2. CURRENT SITUATION OF CREDIT CARD BUSINESS ...................................... 8

2.1.CURRENT MARKET SITUATION OF CREDIT CARDS WORLDWIDE................................... 82.2.MARKET SITUATION OF CREDIT CARDS IN RUSSIA .................................................... 112.3.EFFECTS OF FINANCIAL CRISIS ON CREDIT CARD INDUSTRY...................................... 12

3. MASTERCARD ENTRY STRATEGY IN RUSSIA ................................................ 13

3.1.HISTORY OF MASTERCARD IN RUSSIA ..................................................................... 133.2.MASTERCARD ENTRY TO RUSSIA ANALYSIS ............................................................ 14

Networking approach ................................................................................................. 14Porters 5 Forces Analysis......................................................................................... 15Bargaining power theory ........................................................................................... 17Transaction Cost Analysis ......................................................................................... 19Behavioral approach ................................................................................................. 20Strategic approach ..................................................................................................... 21Dunnings OLI (-MA) theory ..................................................................................... 22

3. RUSSIAN PERCEPTION OF MASTERCARD ....................................................... 23

3.1.BEFORE THE CRISIS .................................................................................................. 233.2.AFTER THE CRISIS..................................................................................................... 243.3.USE OF MASTERCARD IN GENERAL .......................................................................... 253.4.SURVEY FINDINGS .................................................................................................... 26

4. CULTURAL DIFFERENCES IN USE OF CARDS ................................................ 27

Internet (e-commerce) ................................................................................................ 27Free movement of goods ............................................................................................ 28E-Cards future in Russia ............................................................................................ 29Varieties in the world ................................................................................................. 29

5. FUTURE OUTLOOK FOR MASTERCARD IN RUSSIA ..................................... 30

CONCLUSION ................................................................................................................ 32

REFERENCES ................................................................................................................. 33

APPENDICES .................................................................................................................. 35

APPENDIX 1.THE FOUR-PARTY PAYMENT SYSTEM ...................................................... 35APPENDIX 2.PAYMENT SYSTEMS IN RUSSIA MARKET SHARE ....................................... 36APPENDIX 3.GROWTH IN THE NUMBER OF CARDS IN RUSSIA,2002-2006 ....................... 36APPENDIX 4.MASTERCARD SURVEY QUESTIONNAIRE .................................................... 37


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Introduction

Who is MasterCard? It is a very simple question that should involve a an even

simpler response, but unfortunately this is not the case. MasterCard isn't just a line of

credit, a means to electronically pay for products, or a financial magician; MasterCard is away of life, a means to simplify life's greatest burdens.

At a time when consumers, businesses and governments are striving to exercise

greater financial management, MasterCard offers an array of payment solutions that make

commerce easier, safer and more efficient. Payment cards give people the power to

purchase items in stores, on the Internet, through mail-order catalogues and over the

telephone. For merchants, electronic payments are opening doors to hundreds of millions

of consumers, making it easier to do business locally or globally. At the same time,electronic payments help prevent fraud and loss and create a seamless experience that

drives consumer loyalty by offering the best way to pay foreverything that matters.

In this paper we focus on the analysis of MasterCard company operations in Russia.

In the very beginning, we give a short introduction about the plastic cards varieties in

general and the definition of MasterCard business, including the brief history of the

company. In the second chapter we make an overview of the current situation on the

plastic cards market both in Russia and worldwide, while also considering the effects of

the financial crisis. Later on, in the main part of the paper we discuss the MasterCard

entry strategy in Russia from the point of view of different internationalization concepts.

Meanwhile, in order to get a better understanding of MasterCards position on the

Russian market we analyze the Russian perception of MasterCard and point out the main

cultural differences in the use of cards in different part of the world. Finally, we provide

our personal opinion on the future of MasterCards strategic presence in Russia.

This paper is based on the secondary data that was found on the companys website,

in various Russian and foreign language business journals, and the information from

international databases, for example Datamonitor and Global Market Information

Database. The primary data used in the paper includes the survey that was conducted

online with the aim to discover the image of MasterCard in Russia. Furthermore, we were

lucky to get some useful information from the company representatives in the form of

recently published interviews.


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1. General Information on MasterCard

1.1. Definition of plastic cards

A plastic card is a thin card that contains identification information such as a

signature or picture, and authorizes the card holder to charge purchases or services to the

card holders account. Today, the information on the card is read by automated teller

machines (ATMs), banks, and the internet.

It all started in the 1920s, when individual companies (such as oil companies and

hotels) issued these plastic cards for purchases made at their businesses. However, these

cards could not be used outside of the company.

In the 1950s a universal card was introduced by Diners Club, INC. this was

when credit cards were made. These cards allowed the card holders to use the cards invarious locations and businesses. The way the cards worked was that there were annual

fees, and depending on the plan, the card holders were billed either monthly or yearly.

Later on the bank credit card system was introduced. Under this system, the

bank credits the account of the merchant at each sale and bills to the card holder at the

end of the billing period to account for the sale. The card holder, in turn, pays the bank

either the entire balance or in monthly installments with interest. This is the system that

all credit cards are under today.

1

. Now there are three different types of cards: creditcards, debit cards, and prepaid cards.

Credit cards are cards that offer customers and businesses short-term lines of credit.

This allows for the customer to pay for unexpected/large expenses without actually

paying for the product that second. Instead, when using the credit card, the card holder is

borrowing money that they must pay back over a short period of time. Credit cards also

can be used for every purchases and it builds up the customer's credit history. This credit

history is actually quite important. If the customer has a good credit they can apply for

mortgages, vehicle loans, etc. Businesses and insurance companies sometimes even look

at the customer's credit history to see if they are a good candidate for their organization.

Without a credit history, one cannot do any of the things stated above.

What actually goes on in a transaction through a credit between and a merchant

and card holder is quite interesting. First, there is a limit set on how much the card hold

can borrow. This limit is called the credit limit and is decided by the card issuer's on the

1

How Credit Cards Work [Electronic resource] Oct 2009. US, HowStuffWorks, Inc., 1998-2009 -.-: http://money.howstuffworks.com/personal-finance/debt-management/credit-card.htm, . .
http://money.howstuffworks.com/atm.htmhttp://money.howstuffworks.com/atm.htmhttp://money.howstuffworks.com/bank.htmhttp://money.howstuffworks.com/personal-finance/debt-management/credit-card.htmhttp://money.howstuffworks.com/personal-finance/debt-management/credit-card.htmhttp://money.howstuffworks.com/bank.htmhttp://money.howstuffworks.com/atm.htmhttp://money.howstuffworks.com/atm.htm


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basis of the card holder's credit history. To pay using a credit card the card holder's or

merchant swipes the card through a terminal. This terminal transfers information to the

financial institution that issued the card to the card holder. If the amount is not over the

credit limit and the security technology doesn't suspect fraud, the transaction is approved.

This approval happens within seconds. After this approval, the credit limit is reduced by

the amount that the card holder just 'paid'.

Just about every month, the financial institution that issued the card mails the card

holder a 'statement'. This statement tells the card holder about all the transactions that

took place over the previous month. The card holder can do two things at this moment,

he/she can decide to pay the balance in full for the month or pay a little bit of the

expenses and pay the rest the over the next couple of months. If the card holder pays in

full that month then they do not get charged any extra fees and just partook in a free loan.

If they decide to pay over the next few months, they are charged various fees on top of

the expense for the good or service. These are the fees that give MasterCard its revenue.

Compared to popular thinking, the debit card was not created before the credit card,

but actually many years later. A debit card is like a credit card but the things the customer

is paying for is coming straight out of their deposit or brokerage account. This means that

when the customer is using their card they do not pay off the money that the card just paid

for. Instead, the money is directly taken out of the customer's checking account (in their

bank) and directly deposited into the merchant's account. The Customer can also access

their checking account through these cards by using an ATM. This allows for easy access

to cash anywhere the customer is. (MasterCard)

The first debit card transaction, using an ATM card and personal identification

number (PIN), occurred in the 1980s, and the first debit transaction authorized by a

signature rather than a PIN was processed in 1988.(MasterCard: All About Payment

Cards). No matter how new these debit cards are they are still much more popular today

than credit cards. Actually, by 1995, debit cards overtook credit cards in popularity, and

the use of checks started to decline in 1998.

A prepaid card is a card where a set amount of money is deposited into the card

prior to its first use. During a transaction the money is directly taken out of the card's

value. There are two types of prepaid cards: single-purpose and multipurpose cards. A

single-purpose card, also known as a closed-loop card, is only used for a certain place

such as a certain department store or a telephone card in which one can only use it to callpeople. Multipurpose cards, also known as an open-loop card, are cards that are bought


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through banks and has the bank's logo branded onto the card. The only difference

between these cards and credit/debit cards is that there is a set amount of money in the

card. The card holder accesses the money at any ATM and can pay for goods and services

anywhere he/she pleases. As soon as the money runs out, the card is worthless.

1.2. What is MasterCard?

But what does MasterCard exactly do? It provides credit, debit, and prepaid cards

from over 25,000 financial institutions. However, MasterCard is primarily a credit card

company and specializes in the innovation of these cards throughout the world. It is a also

a payment solutions company and through its three tiered business model as franchisor,

processor and advisor, the company has developed a new world for its card holders and

merchants. The company provides marketing, approval, and transaction services for a

variety of payment products in more than 210 countries and territories.

Regardless of the type of card, all of them act under the four-party payment

system. Under this system there are obviously four types of people, the card holder, the

issuing bank, the merchant, and the acquiring bank. First, the issuing bank provides their

customer with a card that they market and issue throughout their locations. Then the now

card holder buys a good or service. But before there are even cardholders buying goods or

services at this said business, the merchant's bank (or acquiring bank) must first enroll the

merchant in a program that accepts MasterCard (Cirrus or Maestro) cards. The merchant

(or the salesperson) then (can and does) accepts the MasterCard payment in exchange for

that good or service instead of cash. The transaction is over, the card holder receives the

good or service and the merchant receives the cash a few days later.

MasterCard manages a number of payment card brands, including MasterCard,

Maestro and Cirrus. MasterCard generate revenues from the fees that it charges its

customers for providing transaction processing and other payment-related services

operations fees, and by assessing its customers based on the dollar volume of activity on

the cards that carry its brands.

1.3. MasterCard history

MasterCard was established in the late-1940s when several US banks began

exploring alternatives to cash transactions. In 1951, the Franklin National Bank in New

York created the first formal credit card, and through the 1950s, the system expanded.


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Later, in 1966, a group of banks under the name Interbank Card Association entered the

business. Instantly this company spread and went global. In the 1970s it changed its name

to MasterCard.

MasterCard was the first to introduce a few things. This included a gold bankcard

program in 1981, the use of laser holograms to prevent fraud in 1983, and by 1987 was

the first credit card company to penetrate the Chinese market.

MasterCard took a number of key steps during the 1990s. The company launched

Maestro in 1991, a partnership with counterpart Europay International, which was the

worlds first global online debit program. The first coast-to-coast national online debit

transaction in the US was completed by Maestro in 1992. In 1996, it introduced the

MasterCard Global Service, the first program to offer customers telephone access to core

emergency and special services around the world.

MasterCard merged with European counterpart Europay in 2002, to facilitate the

merger transaction with Europay. Europay was integrated into the global organization as

MasterCards Europe region.

In 2004, the company announced plans to become a public company in 2005.

MasterCard made its initial public offering on the New York Stock Exchange (NYSE) in

May 2006. In the same year, MasterCard introduced new corporate name, MasterCard

Worldwide, and adopted a new corporate signature and tagline, The Heart of

Commerce. These two new concepts were established to express the global nature of

MasterCard.

1.4. Internationalization of MasterCard

It has already been stated that MasterCard is quite a global country. Two years

after MasterCard, or Interbank Card Association, was founded (1968) they entered into

the global market by making their presence known in the Mexican, Japanese, and

European markets.

In 1987 Russian entered the Chinese Market. This was very special for

MasterCard because this was the first ever payment card accepted there. A year later, in

1988, MasterCard entered into the Soviet Union. Now, MasterCard is in any area that one

can think of and with the help of its other cards it owns (like Maestro) it dominated most

of its competitors in all areas.


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MasterCard reported recently that it already generates half of its revenue outside

the US, making its revenue sources more geographically diverse than those of major

competitor like Visa. Part of MasterCards gain came from the gradual conversion of

some European debit cards to Maestro over the past five years.

Now, MasterCard currently has 37% of card payment transactions in Eastern

Europe. This is a huge percentage because the company is up against American Express

and Visa as well as other lesser known European credit card companies. It does this by

taking advantage of its strong Maestro position in Western Europe. (powerpoint and the

rest of this section)

Although MasterCard is doing quite well in the European market it is having some

issues with his Maestro brand. This is due their late entry into the European market. It

now has to compete with well established brands like Germany's 'ec-Karte' card. Both are

almost identical in use so it is hard to market Maestro over these cards.

MasterCard has more cards/card holders than its competitors in the fast-growing

South Asian markets including Indonesia, Malaysia and the Philippines. Although

MasterCards card payment transaction value share is higher in only in the Philippines,

growing card usage in South Asian markets will translate into greater value share for

MasterCard in the long term, particularly in the Philippines and Malaysia.

MasterCard also has great stakes in the Latin American region. It has almost 50%

of debit transactions in Brazil. This is due to its recent conversion from is partner's debit

cards (Redecard) to its Maestro debit cards. MasterCard is also one of the biggest card

issuers today in Colombia. They see great potential in this market due to increasing use of

their credit cards. In Mexico, MasterCard is dominated the prepaid card industry.

All in all, MasterCard, internationally, is a huge competitor. It has first movers

advantage in some areas, speciality advantage in other areas, and even preference

advantages in the remaining areas. With more advertisement and understanding of the

countries they work in, MasterCard will fully dominate the plastic card industry.

2. Current situation of credit card business

2.1. Current market situation of credit cards worldwide

The current financial crisis has severe effects on the business of companies in the

credit card business. MasterCard is of course not excluded from these economicaltroubles (more about the situation of credit card companies in the financial crisis in part


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2.3). For a long time, the credit card business has been regarded as one of the most

profitable businesses in the financial services industry. MasterCard was one of the most

successful companies with its business model differing in one important point from its

competitors. Most of the companies in the business issue their cards on their own

(including market leader American Express), whereas MasterCard and its main

competitor VISA operate through a franchise system which allows its partners (banks) to

issue cards of MasterCard. The company is therefore not a direct business partner of

cardholders but with the banks which have the right to issue its cards. MasterCard itself

states that it is more a franchisor than an issuer of cards. It is therefore not directly

exposed to the possibility of defaulting borrowers.

The last 10 to 15 years saw rapid growth rates of revenues of credit card companies.

Aggressive advertising which was intended to outline the advantages of payment with

credit cards against traditional payment forms like cash and check (especially in the USA)

led to big rises in revenues and processed transactions. MasterCard increased the number

of its total transactions from $ 18.7 billion in 2007 to almost $ 21 billion in 2008, which

represents a rise of 10.56%.2 The increasing importance of this payment method was

furthermore supported by the increasing number of outlets worldwide which accept credit

cards. Recent security improvements in order to prohibit card fraud are another advantage

of this payment form.

There are four companies in the credit card business whose cards are supposed to be

accepted globally. We will focus on these four companies in this report, as there are

admittedly numerous other credit card companies but none of them are of that worldwide

importance. MasterCard and VISA are the only two companies which are not direct issuer

of cards but franchisors which allow their customers (issuing banks) to issue their cards

and use their processing utilities. American Express which is the market leader by

revenues and Diners Club are sole issuers of their cards. The competition in this industry

is very intense. It is often stated that these companies make most of their strategic

decisions and steps at one time. A typical example is the launch of a new security system

on credit cards which prohibits misuse of cards. This new system was first introduced by

VISA with MasterCard inventing a very similar system only short time afterwards.

MasterCard and VISA are also on pretty much the same level when it comes down to

2

MasterCard Annual Report [Electronic resource] 2008. US, MasterCard, 1994-2009 -.- : http://investorrelations.MasterCardintl.com/phoenix.zhtml?c=148835&p=irol-reportsannual, . . .


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acceptance of their cards. Whereas VISA has more outlets accepting its cards in the USA,

MasterCard has a little advantage in the European and Eurasian market. American

Express is the number one in the USA but lacks acceptance in Europe and Asia.

Credit card companies usually generate their profits through fees that issuing banks

(in case of MasterCard and VISA) or merchants which accept the cards (in case of

American Express and Diners Club) are paying to offer this form of payment. These fees

are usually called interchange fees and have been under heavy criticism and scrutiny by

various financial regulating institutions.3 The European Commission for example has

reviewed MasterCards and VISAs interchange fees several times, as forbidden

agreements on pre-set fees are assumed. Credit card companies have been under scrutiny

because of their fees for the last several years and all of the big four have already been

sentenced to pay damages because of their practice of prohibition of competition through

predetermined fees. MasterCard for example has accounted almost $ 2.5 billion for

litigation settlements in its Annual Report for the year 2008.4 This huge amount shows

the importance and severance of juridical decisions which are directed to punish

anticompetitive behavior.

Despite these drawbacks, credit card companies have been extremely profitable and

successful throughout the last recent years. The business model of these companies and

surveys of researchers which indicate that payment by credit and debit cards (which are

also offered by all of the big four companies) will gain market share from payment by

check or cash, lead to the assumption that the established companies in this industry will

enjoy a successful future.5 The negative effects of the financial crisis are of course a

severe problem but the long term prospects still seem to be very promising. Especially the

growth rates in transitional economies like the BRIC countries (Brazil, Russia, India and

China) seem to be very promising. Expansion to these regions is absolutely vital to stay

competitive as market growth in the USA and Europe is at a relatively low level.

3 Lyon. J. M. The Interchange Fee Debate: Issues and Economics [Electronic resource] / J. M. Lyon // TheFederal Reserve Bank of Minneapolis. Jun 2006. US, The Federal Reserve Bank of Minneapolis, 2009 -.- : http://www.minneapolisfed.org/publications_papers/pub_display.cfm?id=3235, . .4 MasterCard Annual Report [Electronic resource] 2008. US, MasterCard, 1994-2009 -.- : http://investorrelations.MasterCardintl.com/phoenix.zhtml?c=148835&p=irol-reportsannual, . . .5

Hayashi F. A puzzle ofcard payment pricing: why are merchants still accepting card payments?[Electronic resource] / F. Hayashi // Review of Network Economics. 2006. Vol. 5. - RePEc, 2009. -.-: http://ideas.repec.org/a/rne/rneart/v5y2006i1p144-174.html. . .


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2.2. Market situation of credit cards in Russia

Payment with credit cards is a relatively new system for Russians. A country which

had a communistic financial system and an artificially stable currency for a long time of

the last century is of course not immediately prepared for all the different paymentmethods that have been established in the West. The system of credits is also a relatively

new one for Russians. The financial collapse of 1998 which saw banking savings of

Russians being vanished within a few days because of the plunging Ruble had also severe

impacts on the trustworthiness of the financial industry and financial services companies.

Guseva and Ron-Tas described the Russian credit card industry in their paper in the

year 2001 with the following:

Payment cards were unheard of in the Soviet era, consumer credit was in an

embryonic stage, and credit reporting did not exist. [] Finally, ongoing economic

instability and the unpredictability of Russias recent reforms make future extrapolations

on the basis of the past extremely difficult.6

This quote emphasizes the difficulties that credit card companies and banks were

facing over the last several years. The introduction of a completely new system of

payment is nothing that happens in a short time. It is therefore not very surprising that the

credit card business in Russia is still not comparable to the European or American

business. Russia is still lacking outlets which accept cards, even though this number has

increased throughout the last years because of massive lobbying and incentives from

credit card companies. This is especially true for the two biggest cities, Moscow and St.

Petersburg. Furthermore, many Russians are still without credit cards and seem to be not

interested in getting one in the very next future.

Another big problem is the lack of cooperation between different financial

institutions. Banks were not used to cooperate with their potential competitors. This

cooperation is however absolutely vital to share information about creditors and the

possibility of defaulting customers. This lack of thrust is also very much responsible for

the nonexistence of any institutions which spread risk.

6

Guseva A., Ron-Tas A. Uncertainty, Risk and Trust: Russian and American credit card markets compared[Electronic resource] / A. Guseva, A. Ron-Tas // American Sociological Review. 2001. Vol. 66. -JSTOR, 2009. -.- : http://www.jstor.org/. . .


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2.3. Effects of financial crisis on credit card industry

The financial crisis has enormous effects on companies across all kinds of

industries. The credit card industry is especially affected as many customers of credit card

companies are dealing with severe problems to maintain their liquidity. A rise in bad debtand defaulting customers are first of all a problem for the card issuer which is usually a

bank. Banks, however are now trying to renegotiate their interchange fees as they are not

willing to bare all the risk of defaulting debt. A once successful business model now turns

out to be very dangerous for a lot of financial institutions. Customers who roll over a

portion of their credit balance each month are called revolvers, these customers and the

interest that credit card companies gained from them were the industrys cash cows.

Nowadays, however these customers are very often struggling to redeem their credit. The

increasing number of unemployed people is also closely watched by all financial

institutions which are obviously afraid of any more bad debt and defaulting customers.

American Express already reacted to the severe situation with dramatic job cuts and

dramatically reduced marketing expenditures.7

But write offs of customers which eventually also affect companies like MasterCard

are not the only problem the industry is facing right now. The US-government is

preparing a law which prohibits the rise of interchange fees. All around the world, the

industry has constantly been under scrutiny and criticism for its interchange fees for

almost the last ten years. Class action suits against all of the big credit card companies

have very often led to companies paying damages for their routine of predetermined fees.

These fees are supposed to curb competition. The interchange fees have now also been in

the spotlight as the US-government prepares legislation that will prohibit rising

interchange fees. The European Commission has also announced that a cap of interchange

fees may be introduced within the next few months.

Moreover, credit companies have been under scrutiny for their interest rates and

their policy in case of defaulting borrowers. The US-government has introduced new laws

which have severe effects on the credit card industry. Punitive fees and increasing interest

rates which are a necessary reaction to the worsening customer payment behavior

according to credit card companies are now almost impossible to introduce. The

government has furthermore backed defaulting borrowers through legislation which

7

Credit cards in America [Electronic resource] / The Economist. 21 May 2009. US, The EconomistNewspaper Limited, 2009 -.- :http://www.economist.com/businessfinance/displaystory.cfm?story_id=13714206,. .


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makes it more difficult for lenders to gain damages after customer default for example

through loan securities. This step has led to massive criticism by credit card companies

which argue that it is their right to price the risk that they are facing and that these

imposed obstacles will lead to declining loans to customers. The US-government, on the

other hand, is trying to boost lending through incentives for banks. This two-sided policy

has come under heavy criticism from credit card companies. This situation is also

comparable to the European Union and many other countries like Russia or Japan.

Governments all over the world are trying to protect their borrowers. This is of course a

very difficult situation for the entire industry which is trying to maintain its independence

and its freedom from governmental intervention.

3. MasterCard entry strategy in Russia

3.1. History of MasterCard in Russia

The story of MasterCard in Russia begins in the 90s of previous century. One of the

first banks that got MasterCards accreditation was Credobank, DialogBank and

Mostbank, the latter starting to issue MasterCard/Eurocard plastic cards in year 1992. At

the same period of time the Association of Russian banks members of Europay and the

Cardcentre processing company were created.The Cardcentre company was expected to be a single processing center for all

banks that were cooperating with Europay. Europay was working as a consultant during

the process of creating the processing system. However, in 1994 the idea collapsed.

Banks that have been engaged in building the united processing system finally decided to

have their personal ones.

Only in the year 1997 the official representative office of MasterCard in Russia was

opened. Before that such form of presence on the market was convenient for Europay.Later on the scale of operations and the variety of challenges on the Russian plastic cards

market forced Europay to establish its own operations in the country.

An important step in the further development of MasterCard in Russia was in 2004

when the Association of Russian banks members of Europay became the Principle

Member of MasterCard. This was extremely beneficial for small and middle-sized banks

that got the technological platform for the effective emission of international MasterCard

products.


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The most widespread among Russians are the MasterCard cards Cirrus Maestro that

are used for keeping the salary. Those cards that actually account for 80% of Russian

plastic card market8 are still going to be the main business in the sphere of plastic cards

for most of the banks. Now there are more than 120 banks members of MasterCard

payment system in Russia.

According to the Central Bank data in the year 2007 MasterCard in Russia almost

reached the market share of Visa and together they were controlling more than 80% of the

market9. This was due to the biggest banks in Russia actively issuing plastic cards of the

international payment systems. The number of MasterCard cards in use was growing

steadily during the years 2002-200610, with debit cards leading the market. However, it

was in the number of credit cards issued where MasterCard could actually overcome Visa

since 2004 and was able to keep this position until now on.

3.2. MasterCard entry to Russia analysis

Networking approach

According to the networking approach internationalization is seen as a process in

which relationships are continuously established, developed, maintained and dissolved

with the aim of achieving the objectives of the company11. Relationships are developed

through interaction in which the parties build mutual trust and knowledge. These

relationships are connected by networks that consist of several companies including

customers, competitors, suppliers, distributors, agents, and consultants as well as

regulatory agencies.

In the plastic card business the networks that payment systems establish are

particularly important. In order to develop operations in any country the payment

processor needs to closely cooperate with banks and various merchant locations, not only

during the period of market entry, but even when the operations in the country are already

established. Before MasterCard representative office in Russia was opened in 1997 the

issuing banks and MasterCard were doing their common business via the special

8 . [ ] / . // . 2007.- 61. .: , 2009 -.- :http://www.vedomosti.ru/newspaper/article.shtml?2007/04/06/123676. . .9 See Appendix 2. Payment systems in Russia market share10 See Appendix 3. Growth in the number of cards in Russia, 2002-200611

Johanson, J., Mattson, L.G. "Internationalisation in industrial systems a network approach" [Electronicresource] / J. Johanson, L. G. Mattson // Strategies in Global Competition. 1988. JSTOR, 2009. -.-: http://www.jstor.org/. . .


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processing company12. Banks that used this processing agent to make the MasterCard

transactions became part of a network. Therefore, each party was interested in

maintaining good relationships within the network, while MasterCard was also struggling

to get new banks and merchants to join the network.

This was the case when MasterCard was just starting its operations in Russia. Later

on banks started to withdraw from cooperating with the processing agent and established

their own processing facilities. However, it does not make any change to the importance

of networks for the MasterCard business. The company still has to interact with all the

entities within the four-party system. As the company states in its annual report: We

operate the MasterCard Worldwide Network, which links issuers and acquirers around

the globe for transaction processing services and, through them, permits MasterCard

cardholders to use their cards at millions of merchants worldwide.

Porters 5 Forces Analysis

Intensity of competitive rivalry

MasterCard is an actor in a very competitive industry. Currently, there are

numerous companies that offer payment with credit cards. However, we can say that only

three competitors are at the same competitive level of MasterCard. American Express is

the biggest player in the market (regarding its revenues). The company is not only a credit

card company; it is one of the worlds biggest providers of financial services. Diners Club

is the smallest company of the big four. It is primarily acting in the premium and business

card segment. The biggest competitor of MasterCard is VISA. This company is not only

using a similar business model to MasterCards, it is also on a similar level regarding

outlets accepting its cards.

The credit card industry itself is characterized by pretty same products that are

offered to customers. It is quite hard for actors in the industry to differentiate themselves

from their competitors. All of them offer a method of payment which is more or less

differentiated through fees, acceptance of cards and additional services for the cardholder.

The intense competition has led to the situation that most fees for cardholders are at a

pretty comparable level. For example there is no competitor trying to gain market share

through extremely low fees. This is also a result of the very saturated markets. Credit card

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companies are currently eagerly trying to establish their business in economies in

transition, as these countries offer high growth rates. The American and European

markets, on the other hand, offer very little growth rates and are very competitive.

Threat of entry

The threat of market entries from new companies seems to be quite small. However,

the threat of companies that are already established players in the financial services

industry entering the credit card business is quite big. Market entry barriers are pretty

high for companies that are yet not established in this industry. For instance, it is very

expensive to get access to distribution channels, which are outlets accepting the

companys cards. First of all, the distribution channel itself has to be set up; furthermore,

it is quite expensive and tough to attract customers, as the saturated and competitive

market has already led to very similar products and offerings. To sum up, it is almost

impossible for a new player in the market to gain a unique selling proposition. All these

points, however, do not count to companies that are already in the financial services

industry. Banks, for instance, are seen as one of the major threats for companies in the

credit card industry. They already got a channel of distribution and have existing

customers. It is indeed quite easy for them to lure customers away from credit card

companies. MasterCard and VISA reacted to this fact with their business model, with

banks as their major customers instead of cardholders.

Bargaining power of suppliers

The bargaining power of suppliers does almost not exist in the credit card industry.

Suppliers of credit card companies are usually producers of cards and companies that

provide the IT-infrastructure. Card producers are heavily relying on their customers,

vertical integration of card producers is not a realistic threat for credit card companies.

Even though that the products of credit card companies are not diversified and the costs

for change of products are quite low, it is not in the interest for the suppliers to enter the

industry. This is partly because they are dominated by credit card companies because

their industry is less concentrated, saying that emitters of credit cards are less relying on

their suppliers than vice versa.

Bargaining power of customers

The bargaining power of customers of credit card companies is not considerably

high. Understanding customers and their needs is of course very important for all players

in the market. However, the bargaining power of customers itself is not very high, as theyhave a wide range of different needs. Admittedly, it is not very costly to change from one


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contractor to another (switching costs) but this is more than outweighed by the fact that

the offers of credit card companies are often very similar to each other (standardization of

products). The industry has reacted to the price sensitivity of customers, leading to almost

similar offers from all players in the market. Moreover, the distribution of information is

far from being perfect for customers, as there are a lot of different offerings which differ

only in small aspects from each other.

Threat of substitutions

The identification of substitutes for credit cards is not as simple as it seems to be on

the very first glance. Paying with cash is of course the most common payment method.

However, cash is distributed by the state and is therefore not a product that is in direct

competition to credit cards, according to the theory of the 5-Forces analysis. The use of

patents is not that important for credit card companies, except security features. However,

customer loyalty is probable not that high, as credit card companies hardly offer the same

feeling like well known brands like Harley-Davidson or Prada, which are able to entice

their customers through their well-known brand. Switching costs are at a very low level,

therefore increasing the possibility of customers changing from one product to another.

Bargaining power theory

Bargaining Power is exactly as it sounds. It is the abilities of one party to have

influence over another party. There are two ways that two (or more parties) can bargain.

They can either have an equal footing and neither is more dominant than the each other.

Examples of these are perfectly competitive markets and equally matched monopolies.

Or, one can have an advantage over the other party. This is usually due to influential

abilities, power, size, or status. The easiest way to avoid a single party's dominance is by

making a contract between the two parties. When this happens, if anything goes bad or if

one party is asking two much the other party can just take out the contract and say that

things are not as they are written and everything can be resolved. If there is no contract

than obviously one party's dominance can't be controlled.

There are two different types of bargaining power, bargaining power of suppliers

and bargaining power of customers. Bargaining power of suppliers is when advantages

happen because 1) there are less goods than buyers 2) a supplier's goods are unique 3) the

cost is too high to switch to another supplier. With all these advantages in mind the there

is an average supplier advantage with MasterCard and its Russian market. There are not

less goods than buyers. If you look at it, MasterCard has an infinite number of goods:


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their cards. They can make as many as they want, whenever they want. There are far

more 'potential' buyers that MasterCard wants. Yes, the supplier's good is unique.

MasterCard's credit card doesn't have many competitors besides Visa in the Russian

market. So if a Russian person wants to buy a credit card they have to pick between two

companies, either it is Visa or MasterCard. This is definitely an advantage. And finally,

there are not high costs for Russians to switch from MasterCard to Visa. There could be a

termination fee, but it isn't a huge amount of many. The only thing that Supplies have

over their customers is their unique brand, but regardless, this is the most important

advantage. MasterCard, because of this, has a minor advantage.

Bargaining Power of customers is when the customer have advantages because 1)

their purchases are a major portion of the supplier's sales, 2) their purchases represent a

large portion of their own costs and 3) there are too many suppliers for each good. In this

case, customers usually put huge pressure on the suppliers by demanding for better, yet

cheaper, goods. With all these advantages in mind the customers also have a bigger

average advantage over MasterCard. That MasterCard has over them. They actual are

MasterCard only profit. Without customers (such as organizations and individual card

holders) MasterCard is nothing. With this in mind, MasterCard need to advertise and

reward its customers constantly to keep them. Customers also make up their own costs.

When they buy, they must pay back MasterCard. So if the customer does more

MasterCard makes more and if the customer does less then MasterCard makes less.

Again, to keep its customers MasterCard needs to reward them if the spend enough on

goods and services. Finally, there really isn't too many suppliers for each good because

MasterCard can make and terminate as many cards as they want when ever they want.

With all this said, the customers definitely have a bigger advantage of MasterCard, and it

can be perceived as a high advantage.

From analyzing the Bargaining Power Theory, it can be inferred that MasterCard

works to help its customers and changes itself for its customers more so than its

customers change themselves for MasterCard. MasterCard's whole identity is based off of

it's card holder. They do not make products they make lines of credit. Without customers

that need these lines of credit, MasterCard disappears. They, MasterCard, cannot change

it's identity and conform to a different idea, it is strictly a company that gives people

borrowed money. Customers are the master in the Game called MasterCard.


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Transaction Cost Analysis

Transactions happen as the time. It is when a good or service is transferred from one

hand to another. No matter what type of transaction, there are always costs, even with free

goods and services. These costs can be search and information costs (those costs that are

incurring learning about the product, its advantages, etc.), bargaining costs (those costs

that are incurring when two bodies come to an acceptable agreement), and policy and

enforcement costs (those costs that one entity uses to make sure the other entity is

sticking to their contract). When these external transactions costs are higher than their

internal transactions cost then the company will grow. If the opposite happens, then the

company will downsize.

If we look at these three transaction costs between MasterCard and it's Russian

expansion we do not come to any surprising results, though most of these question (such

as how much did it cost to bargain with the government?) aren't available to people

outside the company. This next bit about Transaction Cost Approach is strictly based on

speculation, but well thought out speculation.

Search and information costs are costs that have to do with one company learning

about another company, product, or service. It is no big surprise that MasterCard

researched the Russian market. It is almost preposterous for a company, that is looking at

expanding, to not look into the market. These cost, however, had nothing to do with

changing the brand image. MasterCard is a global company and it does not wish to

change who it is from one location to another. These cost, more or less, were looking into

how Russians would react to them, what places to first penetrate (such as Moscow and St.

Petersburg over Vladivostok), and because Visa entered this market first, what Visa did

and if it was successful or a failure. These costs for searching and researching were

probably average. MasterCard probably stayed within the budget and what information

the expected to get the got.

Bargaining cost are costs that have to do with compromising with various

organizations. MasterCard doesn't have to deal with franchising, state run organizations

(that the government has to protect), or plants that to be built to make a product. These

are the big bargaining costs. So in theory, MasterCard really didn't have to deal with this.

They did of course need to negotiate with the government, but the Russian government

isn't against MasterCard. The only time the government really worries about foreign

entities entering into the Russian market is when the foreign entities dominate over the

Russian Companies. There are obviously none. And because MasterCard could


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potentially boost the Russian economy, the government was probably really welcoming to

MasterCard. With all this in mind, the bargaining cost were probably quite low.

Policy and enforcement costs are costs that are involve the enforcement of policies

etc. There most likely isn't much external policy/enforcement costs because there are no

organization that MasterCard is connected with in their Russian market entry. MasterCard

does own other organizations such as Maestro and Cirrus but both of those companies are

partnerships with other European organizations not present in Russia. If they need to

enforce anything is has to be their customers that use MasterCard services such as

organizations and individual card holders. They also might have to enforce policies with

the government. All in all, these costs are fairly low compared to other organizations such

as Knauf and Catepiller who are in the Russian market. These organizations had to form

joint ventures are partake in FDI, and because if this have a lot of contracts they need to

keep up with. With all that said, MasterCard's policy and enforcement costs are quite low.

From all this, it can be concluded that MasterCard has very little external

transaction costs in there penetration into the Russian market. It can also be concluded

that because there external costs are so low, that they are expanding and not downsizing.

Behavioral approach

The experience of MasterCard is long lasting, so their knowledge for subscribing

cards, develop payment strategies and supporting costumers with technical standards and

service is very well developed. In behavior, the know how is to handle with their

customers. The experiences they made during the years are multisided. There were some

financial crises, the golden 50s years of stock market growing, inflations, depressions

and years of making money. All these times were managed by the MasterCard Company,

so they seem to be very well prepared for the future. These experiences indicate that they

have a very good risk management. I.e. for cheating card data they developed new

technology and have every time experts which care about costumer problems13. Every

year the cheating of card data makes about 10 bill. Dollar. It is paid partly by encashment

companies and partly by some insurance for finance companies14.

13 Risikomanagement [Electronic resource] Oct 2009. GTS Online Limited, 2007-2009 -.- : http://www.g2s.com/de/risk-management.mhtml, . .14

Vergleich Inkassounternehmen und anwaltliches Inkasso [Electronic resource] Oct 2009. Finanztip.de, 1999 -.- : http://www.finanztip.de/recht/wirtschaftsrecht/verglanwink.htm, . .


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The culture of the MasterCard Company is their outcome and so their payoff. It

keeps the stakeholders in its company and the company is working for its stakeholders. It

is as well important as to fit into the culture there are going to. The best example for this

is Russia. The culture until now was to pay in most cases bar. But the culture is going to

change like the whole country is in a change. MasterCard is going to change the mentality

and Russia is going to change MasterCard15.

All in all MasterCard keeps it control about the company but have to fit into the

environment they are going to. The consequent involvement into other cultures and the

showing of advantages in using cards makes MasterCard to one of the leading cards all

over the world.

Strategic approach

Strategic goals, thats the key for competence. In competition with MasterCard,

Visa is the biggest opponent. Other opponents are PayPal and American express. All

these have to come along with the same situations. Today it is possible to pay with

MasterCard in 210 countries and more than 35 mill. Points. This brings MasterCard in a

leading position to its competitors. MasterCard is one of the most attractive paying

systems and a market without MasterCard seems to be unbelievable. In going abroad and

going into Russia MasterCard show its dynamic in adapting to other markets. The

orientation, which is all over the world, makes MasterCard world leading. For

MasterCard it is possible to leave each market and quit the work there. But this is just

theory, because if they do so, they will go into bankruptcy. Some contracts they signed to

support some institutes or to support private households inhibit them to leave some

markets. The commitment they made keeps them on the markets16. MasterCard offers a

lot of programs all over the world. The Debitkarten Maestro (especially in Europe), Debit

MasterCard/MasterMoney (only in the USA), the MasterCard electronic (especially

eastern Europe and Asia) and Cirrus. (just for getting money from an ATM). For

payments in the Internet they have the MasterCard SecureCode. As well they offer

services like blocking cards for gambling and prepaids for grownups.

15Unternehmenskultur als Treiber fr den Unternehmenserfolg [Electronic resource] Mar 2007. 2.-KMU-Magazin, 2009 -.- :http://www.wissen.org/a/images/stories/wissen-org/docs/kmu-magazin2007-02kultur1.pdf; . .16

Bedingungen fr die MasterCard[Electronic resource] Apr 2004. Bankschilling, 2009 -.- :http://www.bankschilling.de/content/pdf/10.42_bed_MasterCard.pdf, . .
http://de.wikipedia.org/wiki/Debitkartehttp://de.wikipedia.org/wiki/Maestro-Cardhttp://de.wikipedia.org/wiki/Cirrus_(Bargeldbezugskarte)http://de.wikipedia.org/wiki/MasterCard_SecureCodehttp://www.wissen.org/a/images/stories/wissen-org/docs/kmu-magazin2007-02kultur1.pdfhttp://www.wissen.org/a/images/stories/wissen-org/docs/kmu-magazin2007-02kultur1.pdfhttp://www.wissen.org/a/images/stories/wissen-org/docs/kmu-magazin2007-02kultur1.pdfhttp://www.wissen.org/a/images/stories/wissen-org/docs/kmu-magazin2007-02kultur1.pdfhttp://www.wissen.org/a/images/stories/wissen-org/docs/kmu-magazin2007-02kultur1.pdfhttp://www.wissen.org/a/images/stories/wissen-org/docs/kmu-magazin2007-02kultur1.pdfhttp://de.wikipedia.org/wiki/MasterCard_SecureCodehttp://de.wikipedia.org/wiki/Cirrus_(Bargeldbezugskarte)http://de.wikipedia.org/wiki/Maestro-Cardhttp://de.wikipedia.org/wiki/Debitkarte


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Dunnings OLI (-MA) theory

The OLI framework, developed by J. Dunning, contains three deterministic sets of

variables: ownership, location, and internalization advantages. Ownership advantages are

to be found within the firm and are the ones that differentiate a firm from its competitors.

For the financial cards industry, the ownership advantages may include private

information on the cardholders, innovative operational technologies, better management

skills and global brand recognition. MasterCard invests a lot into the marketing of its

brand all over the world and has built a powerful image of convenient and secure

payment processor. Thus, when the company was entering Russia, it could exploit the

above mentioned advantages. The expertise of MasterCard in promotion of payments

with cards helped the company to increase significantly the amount of plastic cards

owners among Russian population.

The location advantage is arising from the fact that different locations have

different resources, institutions, and level of development. MasterCard decision to enter

Russia was based on the fact that the country was a fast growing emerging market with

over 17 mln. population, were people were not used to making payments with plastic

cards. Even now, after more than 10 years on the market, MasterCard still has about 90%

of Russias citizens as potential customers17, because they are not using plastic cards in

their everyday life.

The internationalization advantage is the third and the most complex factor, because

it explains why the firm should be offering a service in the foreign location itself, but not

with licensing or franchising. At the times when MasterCard was entering Russia, the

country was a very attractive market, where the infrastructure was steadily developing

and the consumer expenditure was rising. Therefore, MasterCards goal was to capture

the opportunity to gain the biggest market share in order to successfully compete with

VISA. In this case it is important to get a foothold on the market, which is possibly only

with FDI strategy.

All in all, considering the OLI framework, global payment processors look for

increased profits through geographic expansion by employing ownership advantages

(their existing networks, technologies and brands) to leverage location-specific advantage

17V. Volkov. A Long Story [Electronic resource] / Received by e-mail from MasterCard Russiarepresentative.


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such as closer relationships with clients, and the opportunity to capture internalization

advantages such as attainment of global economies of scale.

Considering a more extended version of the OLI paradigm OLMA, where the

Mode of entry and Adaptation factors are added, we can still explain the MasterCard s

internationalization process in Russia. As far as the mode of entry has already been

discussed in the internationalization part, the adaptation of processes to the Russian

business environment is a real challenge for any company, entering Russia, and for

MasterCard as well. The legal and tax systems in the country, government restrictions and

income profile of consumers are very complex and unstable, which forces companies to

be extremely cautious in the choice of adequate investment strategy. As for the cultural

differences in using plastic cards between Russia and the rest of the world, we will be

exploring them later in the paper.

3. Russian perception of MasterCard

3.1. Before the crisis

Since the launch of MasterCard in Russia, the Maestro brand of debit cards became

one of the most widely spread in Russia. Until the times when the economic crisis struck

there was a stable growth in the number of cards issued with MasterCard logo. The rate ofgrowth of the plastic cards emission in Russia was higher than in the other Eastern

European countries. By the year 2007 half of the MasterCard cards issued in Russia were

credit cards, most of them being issued in 2 largest Russian cities18. However, the volume

of bank loans in the regions was increasing, therefore there was a great potential for the

use of plastic cards in the other parts of Russia.

MasterCard strategy in Russia focused on understanding the needs of the consumers

and offering them the types of products that would be particularly useful for them. The

company tried to make plastic cards available to anyone and ensure people would be

using those cards in their everyday life. The advertising campaign, launched by

MasterCard in year 2005, was aimed at educating people in Russia about all the

opportunities that plastic cards offer. For the first time in the MasterCard history the TV

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commercial was made locally, in Russia, therefore it included some aspects of Russian

reality. The results of such actions appeared to be beneficial for the company.

According to the survey of the IMCA Company, conducted in 2006 in Moscow and

St. Petersburg among people with the income above average, the aided recall of

MasterCard brand reached the number of 95%, with recognition being 72%19. Almost half

of those surveyed unintentionally associated the plot of the Priceless advertisement

with the MasterCard brand. This clearly shows that MasterCard commercial was

appreciated and remembered by the customers.

Many Russians consider MasterCard being a very comfortable card to use. People

mentioned a wide network of places, where the cards are accepted, the simple procedure

of paying with the card and the tendency to take MasterCard when travelling abroad. Also

people noted that MasterCard is a very secure way of keeping their money. 44% of people

were ready to start using MasterCard due to the positive experience of their friends and

38% were willing to advise MasterCard to their friends20.

All in all, at that time the MasterCard division in Russia was growing fast and got

more financing from MasterCard Europe than any other country in Eastern Europe.

3.2. After the crisis

Nowadays, the situation has changed. During the crisis, people start thinking about

how to minimize their expenses rather than getting a new credit card. In the end of 2008

the amount of purchases made by plastic cards decreased by 65,7% 21. Now banks again

started to focus on the emission of debit cards as opposed to what they did before the

crisis.

It has been several years in Russia since most of the companies started to pay the

salaries to their employees with the help of plastic cards. Nevertheless, many people in

the country still use their cards only to get cash in the ATM machines. The part of middle

class Russian population that was only getting used to making purchases with plastic

19 - . MasterCard [ ] /AdMe.ru. 2005. 23 . .: AdMe.ru, 2009 -.- :http://www.adme.ru/adnews/2005/12/23/4782/, . . .20 MasterCard [ ] / McCann Erickson WorldwideRussia. 2005. 23 . .: "-", 1999 -.- :http://www.advertology.ru/article22506.htm, . . .21 . " " [ ] / .

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cards, under the influence of all the promotions developed by both VISA and MasterCard,

had to return to its ordinary way of life because of the economic crisis.

Meanwhile, this helped to reveal that MasterCard in Russia is perceived to be more

of a premium card. The company itself clearly understands its image. For example, during

the crisis MasterCard launched the loyalty program for the premium users, unlike its

competitors promoting social or co-branded plastic cards. Moreover, by changing its tariff

system in Russia, MasterCard became a more expensive card for taking cash in the

ATMs, while being cheaper for making purchases in the merchant locations. However, it

might take long time before Russian middle class citizens will again start decreasing the

amount of cash they use. Therefore, those changes in tariffs are aimed to stimulate

premium card users that are used to go shopping with their cards.

3.3. Use of MasterCard in general

Many Russian people tend to think that MasterCard is more widely used in Europe,

so only those, who frequently travel to different European locations start thinking about

getting a MasterCard plastic card. Furthermore, people in Russia are still not used to

having several plastic cards, because they do not use them as often as their overseas

counterparts. Only 12% of Russian plastic card users have more than 2 cards, while 2%

have more than 3 cards. Considering the fact that most of the cards, used for keeping

peoples salaries, are those of VISA payment system, middle class Russian people are not

at all interested in having an additional MasterCard plastic card.

Another problem is that Russian middle class consumers usually buy products in

discount stores, where there is no infrastructure for paying with cards. Therefore after

getting their salary on the plastic card, they tend to withdraw all the money and convert it

into cash. In the Russian peoples minds this contradicts the urge of MasterCard to be

used for their everyday shopping. Hereby, the image of MasterCard becomes familiar

only to those Russian citizens that can afford making purchases in hypermarkets and

mega-malls.

What is more, the MasterCard Priceless advertisement initially used to show

people buying some expensive things with MasterCard, which cost more than 10 to

15 000 rubles. Considering the fact that for many Russians this amount equals to their

monthly salary, they cannot associate themselves with MasterCard users.


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All in all, the perception of MasterCard in Russia as a more premium brand

compared to VISA comes from the fact that VISA is more widely spread among Russian

citizens, while MasterCard is being considered a rather rare type of card. And what is

typical for Russian mentality if something is rare, it is certainly expensive and not

available for everyone.

3.4. Survey findings

In order to get a better understanding of the perception of MasterCard among

Russian people we conducted a short 6-question survey22. Surprisingly, the survey

revealed some interesting results.

From the very beginning it should be mentioned that people who participated in the

survey are mostly the citizens of Moscow, aged 25-45, with the income level above

average. We did not ask our fellow students to participate in the survey, because

according to the current strategy of MasterCard in Russia they are not considered to be

their target audience.

54% of those surveyed believe that MasterCard business is about being a substitute

for cash, while only 24% know that it is actually a payment processing system.

Meanwhile, 20% consider MasterCard to be a financial provider. The majority of people

appreciate MasterCard for its convenience, one forth for the flexibility and only 4% for

the security. As for the benefits, that people get when using MasterCard, 26% answered

that there are no benefits for the cardholder and there are some only for the banks.

When compared to Visa, 42% of those surveyed see no difference between the two

systems, 28% believe it is all about the quality of service and the way it handles situations

to help its customers, while 18% noted the price difference. All in all, over 80% of survey

participants see themselves using MasterCard in the future.

This surveyed helped us to figure out that people in the western part Russia are quite

positive about using MasterCard in their everyday life, however, most of them dont

understand the security aspect in the use of plastic cards. Moreover, many people dont

see the difference between the two biggest players on the market, which reveals that both

the payment systems failed to develop their own image that could give them a

competitive advantage.

22 See Appendix 4. for the sample questionnaire.


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4. Cultural differences in use of Cards

Internet (e-commerce)

Men between 30 an 39 years state the biggest experiences for consumption in using

cards. Furthermore belongs to the group, which uses e-cards persons with a highereducation, self-employed persons, executives and employees. The group of persons,

which is about 50 years, is more cautious in using e-cards. One of the reasons for this is

the less use of internet in this age. This is instantaneous related to the network structure of

the internet, which still captures the younger target group in a superior way while the

older target group stays underrepresented. But the generation of internet users between 14

and 19 years exhibits because of lack of configuration a low use of cards. But the newer

trend is more likely to show that the older generation catches up in this trend and getsaccessible for this trend23.

According to Sinus-Milieus is the internet used to modern and high

environments. The more conservatively one environment is settled and the lower the layer

classification is, the more slightly is the spreading of the Internet. In the traditional-rooted

environment or the conservative environment the Internet is not at all presented.

As a forerunner of the Internet use are valid the modern Performer, to postal-

material and experimentalists. The online use and the consequently use of e-commerce

depends on environment24.

In Europe books and CDs belongs to the most ordered goods in e-commerce. Also

the selling of more expensive goods over internet increases, i.e. holiday travelling and

luxury goods.

It seems that the first big shyness in using the e-card and using the internet are

related to each other. The Skepticisms of European buyers bit by bit are diminished (is

more and more) and decreasing more and more of course the personal purchase habits of

the people are integrated.

The main problem for most consumer and customer is the security. In Percent 73%

stated they are afraid to pass their personal data via internet down to so. But in developing

of the years the skepticism is decreasing not least because of the developing positive

experiences of using e-cards25.

23 Rogers E. Communication Technology / E. Rogers. US: The New Media in Society, 1986.24 Hradil S. Alte Begriffe und neue Strukturen - Die Milieu-, Subkultur- und Lebensstilforschung der 80er

Jahre / S. Hradil. - Vaskovics, L. (Hrsg.): Subkulturen und Subkulturkonzepte, Opladen, 1990.25 Schenk M., Wolf M. Nutzung und Akzeptanz von E-Commerce / M. Schenk, M. Wolf. E-Commerceund die Brger, Stuttgart, 2000.


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Europe in and the USA are the most developed countries in using e-cards. Income

of the B2C e-commerce supplier in Europe in 2001 between 18.7 bill. EUR (IP

Internationally Key Facts) and 19.7 bill. EUR (eMarketer). In comparison with the USA

there lies the sum, which investigates for the same period more than twice as high,

namely 40.8 bill. EUR26.

Especially in Germany raises the development of the internet market like Ebay the

use of credit cards. These ways of selling goods is getting more and more popular all over

the world.

The development in Russia for using the internet and by goods there is the second

fasts in the world (number one is China). Nowadays the dealings via the internet are

around 1.5 bills. EUR and growing27.

Free movement of goods

The picture, which is stated for the free movement of goods, is not much different in

development. Russia is one of the fasts growing markets in the world (next to China). The

turnover with visa maps in trade and in service companies grew in the same period about

61 % in 4.5 bill. EUR. The total number of the transactions with visa maps amounted

during the first nine months of the year to just 502 bill. This is about 57 % more than in

January. In September 2005 86.3 million transactions (a plus of 78 percent) were

cancelled to trade and the service area28.

But a lot of people are afraid in using e-cards. The number of misusage is high, so

that there were cases, where people trust in the companies and paid with their credit card

and then the company took all facts and misused the credit card in the internet. Often the

owner of the credit card recognizes it very late or too late. So some people lost a lot of

money. Now, the banks developed systems to prevent fraudulent use with creating a user

profiles for every consumer.

E-cards are the modern trends of the modern society.

26Schmidt I., Dbler Th. E-Commerce: A Platform for Integrated Marketing / I. Schmidt, Th. Dbler, M.Schenk. - Mnster& New Brunswick & London, 2000.27Russlands Internetwirtschaft wchst weiter zweistellig[Electronic resource] Apr 2009. GermanyTrade and Invest, 2009 -.- :http://www.gtai.de/fdb-SE,MKT200904278011,Google.html, . .28

Kreditkartenumsatz in Russland am wachsen [Electronic resource] 6 Dec 2006. Der LeuMund.ch,2009 -.- :http://leumund.ch/kreditkartenumsatz-in-russland-am-wachsen-00956, . .
http://www.gtai.de/fdb-SE,MKT200904278011,Google.htmlhttp://www.gtai.de/fdb-SE,MKT200904278011,Google.htmlhttp://www.gtai.de/fdb-SE,MKT200904278011,Google.html


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E-Cards future in Russia

In Russia true credit cards boom are expected during the following years. Quite in

the medium term is to be calculated on hundred thousands to millions. The

Raiffeisenbank has begun last year with emitting and holds with 30,000 credit card

owners currently29.

American Way of Live released the real estate crisis and makes clear that this life

style is not necessarily advantageous and is built on sand. The lacking paying habits of

the Americans leave the back property with MasterCard & Co. on 900 bill. EUR in the

meantime rise. Experts already warn since weeks about the next big bubble. In the USA

the loan institutes estimate up to 50% of interest. Then there it is no miracle that it too

many US citizens hard falls the accumulated debts to pay off. This affects the whole

financial world and will breed a new crisis, a credit card crisis30.

Varieties in the world

The differences of using e-cards are related to the disparities in the level of

development of the country. The access to the internet is a main factor. Related to this is

the demand and supply of e-cards.

For students and younger people credit cards mean the freedom to get money or to

pay all over the world. It is getting more and more popular, studying abroad and this is

also a factor for students and younger people to get e-cards.

For some people it is difficult to deal with the payoff of credit cards, because it is

only one time at the end of the month and sometimes they lose the control and buy things

without having the money - credit institutes give often to high limits for the credit cards

and so much households get bankrupt, which is a problem all over the world.

In changing of the society there will be and is also a changing of payments31.

29 Kreditkarten-Boom in Russland erwartet [Electronic resource] 20 Apr 2007. Cardscout., 2004 -.- : http://www.cardscout.de/business/Russland-Kreditkarten-Boom-in-Russland-erwartet_205668.html, . .30 MasterCard globales Geldautomatenverzeichnis [Electronic resource] US, MasterCard, 1994-2009 -.-:http://www.MasterCard.com/de/personal/de/privatkunden/unsereservices/geldautomatensuche/index.html#, . .31

Wege zu mehr Konsumentlnnenvertrauen in den E-Commerce [Electronic resource] OsterreichiscgeAkademie der Wissenschaften, 2004 -.- :http://www.oeaw.ac.at/ita/ebene5/WPecommercevertrauen.pdf, . .
http://dict.leo.org/ende?lp=ende&p=5tY9AA&search=disparitieshttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=inhttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=thehttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=levelhttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=ofhttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=developmenthttp://www.cardscout.de/business/Russland-Kreditkarten-Boom-in-Russland-erwartet_205668.htmlhttp://www.cardscout.de/business/Russland-Kreditkarten-Boom-in-Russland-erwartet_205668.htmlhttp://www.mastercard.com/de/personal/de/privatkunden/unsereservices/geldautomatensuche/index.htmlhttp://www.oeaw.ac.at/ita/ebene5/WPecommercevertrauen.pdfhttp://www.oeaw.ac.at/ita/ebene5/WPecommercevertrauen.pdfhttp://www.mastercard.com/de/personal/de/privatkunden/unsereservices/geldautomatensuche/index.htmlhttp://www.cardscout.de/business/Russland-Kreditkarten-Boom-in-Russland-erwartet_205668.htmlhttp://www.cardscout.de/business/Russland-Kreditkarten-Boom-in-Russland-erwartet_205668.htmlhttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=developmenthttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=ofhttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=levelhttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=thehttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=inhttp://dict.leo.org/ende?lp=ende&p=5tY9AA&search=disparities


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5. Future outlook for MasterCard in Russia

Although MasterCard is doing quite well in there penetration into the Russian

market, there are still a few things that MasterCard can improve on. These improvements

include expanding the usage of MasterCard in Russian cities, making MasterCard morefor the ordinary person, expanding regionally and finally redesigning its website.

Russians tend to use MasterCard only to withdraw money from the ATM. This

almost defeats the purpose of the credit card. The first step in this form of expansion is to

get more companies to accept credit cards. Most businesses just accept cash in Russia. As

soon as these businesses start accepting cards, and more specifically MasterCard, then the

usage will go up instantaneously. This is most important for MasterCard because when

Russians withdraw money from ATMs they know how much they are withdrawing.When paying for items in say a shopping market the card holder does not pay attention to

how much they have spent. This means that the card holder will spend more money and

in return will increase MasterCards revenue.

Another problem that MasterCard has is its image. Most Russians believe that

MasterCard is for the rich person. This can be seen mostly through its advertisements.

When MasterCard names off prices of item, the prices are outrageous. Most Russian will

not pay for (nor be able to afford) sun glasses for 20,000 rubles. MasterCard needs to

downgrade itself to the average person. They should first do this by changing their

commercials to lower class people. If the same sun glasses is said to be 500 rubles, more

Russians will feel more inclined to start an account with MasterCard.

As of right now, there are twice as many Visa Credit Cards on the market just for

this reason. Visas image is based off of the ordinary person. MasterCards presence in

the Russian market is completely towered by Visa. They need to change their image to

even start to think about competing in this market.

More over MasterCard should change its advertisements in different regions of

Russia. In Moscow, where Russians are richer, these advertisements of 20,000 ruble

sunglasses can stay the same. In smaller less rich areas in Russia, the advertisements can

have cheaper products. Other, common people towns welcome MasterCard.

Expanding is a very hard thing to look at in the area of Russia when it comes to

MasterCard. It is a scary thing wanting to expand into more remote areas in Russia. The

profits can go two ways; they can increase or dramatically decrease. MasterCard should

try to expand but in cities/areas with over one million people. This lessens the chances of


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a decline in revenue because there is bound to be people willing to buy and use

MasterCard. As for smaller cities, MasterCard should not expand there yet. It is best to

make Russians in Moscow and St. Petersburg more accustomed to MasterCard and has

them push MasterCard into more remote areas instead of MasterCard pushing itself into

those remote areas.

Finally the website needs some maintenance. The about me section on

MasterCards corporate website is only in English. When a Russian, who speaks only

Russian, wants to know about MasterCard they cannot. As soon as the Russian, who is on

the Russian MasterCard site, clicks on about me they are redirected to the English

about me page. It almost makes MasterCard seem like a conceded company for not

conforming to the Russian language. To get more potential clients, MasterCard needs to

translate all of their pages into Russian.


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Conclusion

In this paper we tried to provide an analysis of the internationalization strategy of

MasterCard in Russia. Although the company started its operations in Russia about ten

years ago, it has managed to gain a considerable share in the market. However, it stillcannot get ahead of its main competitor the Visa Company.

The Russian market is very prospective in terms of plastic cards because most of the

Russian population still does not use them in their everyday life; however, this becomes a

real challenge for MasterCard. While operating in Russia, the company has to not only

deal with all the competition and regulations, but also has to develop the so called culture

of electronic payments. These are two very different problem, but as the same time, two

issues that need to be addressed and solved for MasterCard to have success in Russia. Thecompetitors have a great share in the Russian market as well and this cultural will help

MasterCard triumph over them.

Nevertheless, there are still many options the MasterCard Company can implement.

The growth potential of the Russian financial cards market lies in offering the population

a wider range of services and creating convenient solutions for their usage. Moreover, if

MasterCard wants to increase its share, it needs to develop an image of a more affordable

payment solution for all groups of customers, regardless of their income or way of life.

This has been something that the Visa Company has been able to understand and

implement much better (and faster) that MasterCard has.

Regardless of the problems and concerns, MasterCard has made quite an impact in

the Russian market. It wasnt even 10 years ago that most Russians didnt even know

what credit cards did. It cannot be said for certain if MasterCard will ever out do its main

competitor or address their main problems, but it can be said that their potential is just

outstand. Just make sure to remember that foreverything else there is MasterCard.


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References

1. Credit cards in America [Electronic resource] / The Economist. 21 May 2009. US, The Economist Newspaper Limited, 2009 -.- :

http://www.economist.com/businessfinance/displaystory.cfm?story_id=13714206, .

.

2. Financial Cards Russia [Electronic resource] March 2008. US, EuromonitorInternational, 2009 -.- : http://www.portal.euromonitor.com. p. 16.

3. Guseva A., Ron-Tas A. Uncertainty, Risk and Trust: Russian and American creditcard markets compared [Electronic resource] / A. Guseva, A. Ron-Tas // American

Sociological Review. 2001. Vol. 66. - JSTOR, 2009. -.- :

http://www.jstor.org/. . .

4. Hayashi F. A puzzle of card payment pricing: why are merchants still acceptingcard payments? [Electronic resource] / F. Hayashi // Review of Network Economics. 2006. Vol. 5. - RePEc, 2009. -.- :

http://ideas.repec.org/a/rne/rneart/v5y2006i1p144-174.html. . .

5. Johanson, J., Mattson, L.G. "Internationalisation in industrial systems a networkapproach" [E

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