Though the Russian regulators have amended certain rules in its national payment system, cards giants, MasterCard Inc. (MA) and Visa Inc. (V) are yet to be relieved, given the higher security deposit requirements.
Following the U.S. sanctions over the Ukraine crisis (wherein Russia annexed Crimea) earlier this year, the financial regulators in Russia imposed new rules for foreign card companies, primarily MasterCard and Visa. Both the companies derive about 2% of the annual revenues from Russia. In 2013, MasterCard recorded $167 million and Visa $236 million in revenues from Russia alone.
The new rules had required clearing of card operations through a national payment system and simultaneously, keeping a security deposit in the central bank worth 25% of the companies’ average daily turnover in Russia. Nevertheless, the rules were tightened only when both the card companies halted the processing of Russian transaction owing to the Western sanctions.
Amid the prevailing political conflicts, it is clear that MasterCard and Visa are at the receiving-end as their earnings potential will be directly hampered by both the Western sanctions and Russian mandates. In fact, the possible risks alarmed both the companies to the extent that they even considered quitting Russia in early May 2014.
Easing of Rules
The Russian regulators relaxed the rules in order to leaven the situation for MasterCard and Visa. Accordingly, the new deposit rule is now slated to be effective from October this year. Previously, it was scheduled to begin from Jul 1, onwards.
Moreover, the amount of deposit is now lowered to two days’ worth of the average processing volume in Russia. Both the companies will now require to submit this collateral in eight quarterly installments, which could sum up to $1.0 billion for MasterCard and $1.9 billion for Visa. Thus, the card companies are still wary of the rules in spite of Russia being keen on having the companies’ operations active in the region.
Earlier this week, MasterCard had announced its intention to collaborate with a local partner in Russia to steer clear from these regulations. From observation, it is clear that MasterCard and Visa have been subject to increasing regulatory focus in the global payments industry, which have time and again hurt the companies’ margins and cash flows. Hence, we remain concerned about the detrimental effects of these regulations in the upcoming quarters.
Currently, both MasterCard and Visa carry a Zacks Rank #3 (Hold). Some better-ranked financial stocks like Euronet Worldwide Inc. (EEFT) and Xoom Corp. (XOOM), both sporting a Zacks Rank #1 (Strong Buy), are worth considering.