Bankovní institut vysoká škola Praha

Non Cash Payment System Bachelor’s degree work

Denis Shaykhutdinov květen 2017

Bankovní institut vysoká škola Praha

Finance and economics

Non Cash Payment System

Bachelor’s degree work

Author: Denis Shaykhutdinov Banking Management

Supervisor: Ing.Marcela Soldánová

Prague May, 2017

Bankovní institut vysoká škola Praha

Financí a economie

Bezhotovostní platební styk

Bakalářská práce

Autor: Denis Shaykhutdinov Bankovní Management

Vedoucí práce: Ing.Marcela Soldánová

Praha Květen 2017

Declaration:

I declare that I elaborated my bachelor´s degree work independently and I stated all the literature used.

I attest by my signature that the submitted electronic version of the work is identical with its printed version, and I am aware of the fact that the work will be archived in the library of the BIVŠ, and further, made accessible to third persons through the internal database of electronic university works.

In Prague, May, 2017 Shaykhutdinov Denis

Acknowledgement

Therefore I would like to thank my supervisor Ing.Marcela Soldánová for her time, instructions and advice that were very helpful and essential during writing of this thesis.

Annotation The thesis investigates the operation of non-cash payment systems. The author outlines the key benefits of non-cash payments, and illustrates why they prevail over cash payments in the modern economy. The key focus of the analytical part of the thesis is put on the investigation and comparison of non-cash payment systems in the Russian Federation and the Czech Republic. It is revealed that the use of non-cash payments is at a considerably higher level in the Czech Republic, but it is also illustrated that positive tendencies have been observed lately in the Russian Federation. The advantages and disadvantages of the two states’ non-cash payment systems are analyzed in detail, and recommendations are provided to both for improving the quality of non-cash payments in them.

Key words: Bank transfer, Czech Republic, electronic payments, mobile payments, non-cash payments, payment cards, Russian Federation.

Anotace Práce zkoumá provoz bezhotovostních platebních systémů. Autor uvádí hlavní výhody bezhotovostních plateb a ukazuje, proč převažují nad hotovostními platbami v moderní ekonomice. Klíčová část analytické části práce je věnována vyšetřování a porovnání bezhotovostních platebních systémů v Ruské federaci a České republice. Ukázalo se, že použití bezhotovostních plateb je v České republice výrazně vyšší, ale je také patrné, že v Ruské federaci byly v poslední době pozorovány pozitivní tendence. V práci jsou podrobně analyzovány výhody a nevýhody bezhotovostních platebních systémů v obou státech a vytvořené doporučení pro zlepšení kvality bezhotovostních plateb.

Klíčová slova: Bankovní převod, Česká republika, elektronické platby, mobilní platby, bezhotovostní platby, platební karty, Ruská federace.

Content

INTRODUCTION ...... 7

METHODOLOGY ...... 9

1 CHARACTERISTICS OF NON-CASH PAYMENT SYSTEM ...... 10

2 EMERGENCE OF NON-CASH PAYMENT SYSTEM ...... 18

3 NON-CASH PAYMENT SYSTEM IN PRACTICE ...... 20

3.1 LEGISLATION GOVERNING THE OPERATION OF NON-CASH PAYMENT

SYSTEMS IN RUSSIA AND THE CZECH REPUBLIC ...... 20

3.2 CURRENT DEVELOPMENT OF NON-CASH PAYMENT SYSTEMS IN RUSSIA

AND THE CZECH REPUBLIC ...... 21

4 DIFFERENCES BETWEEN RUSSIAN AND THE CZECH REPUBLIC (NON-CASH SYSTEM) ...... 38

CONCLUSION ...... 43

LIST OF LITERATURE ...... 46

LIST OF GRAPHS...... 51

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Introduction

The current technological and economic progress in the world develops at a very rapid pace. This promotes more intensive cooperation between different states in economic and political terms. Such cooperation involves not only the direct contracts or mutual programs between governments, but also cross-border cooperation between businesses and individuals within their private economic activities. Economic relations on the international level provide companies and their respective countries of residence with significant benefits and opportunities of commercial growth. Therefore, the steadily growing participation of businesses in interstate cooperation is inherent of the global economy.

Obviously, while people use cash in their everyday payments for buying products or household items, in the case of companies, operating large amounts of cash payments becomes ineffective in terms of financial management. Moreover, most often, entities have a developed system of ties with suppliers which may be located at a considerable distance. In such cases, the use of cash payments becomes ineffective and unjustified: transferring cash would require significant time expenditures, great risks incurred in the course of transportation, significant additional financial costs, and so on. Given the level of technological development and the intensity of economic competition, this would in the long run be simply impossible to operate like this.

Therefore, non-cash payments play an utterly important role as of today, as they constitute the backbone of international settlements. This explains the importance of the chosen topic, and emphasizes the need to investigate non-cash payments more in detail within the course of this research.

The main aim of the thesis is to investigate the specificities of non-cash payments and to compare the operation of non-cash payment systems in the Russian Federation and the Czech Republic.

The research question to be answered based on the findings of the analysis is the following: What are the main differences in the operation of non-cash payment systems in the Russian Federation and the Czech Republic?

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The findings of this thesis should allow answering the abovementioned question, and should allow understanding what implications the existing advantages and disadvantages in the operation of non-cash payment systems in the Russian Federation and the Czech Republic have for the overall economic development of the two countries.

The main practical value of the thesis will be the explanation of the differences in the operation of non-cash payments system in the Russian Federation and the Czech Republic, and the provision of recommendations for improving the current situation.

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Methodology

The main methods used for writing the thesis will include secondary analysis and comparative analysis. Secondary analysis will be used with the aim of investigating theoretical data related to non-cash payment systems and those particular data which are available in secondary sources on the differences in the operation of non-cash payments in the Russian Federation and in the Czech Republic. Comparative analysis will be used with the aim of investigating the data obtained and for comparing the actual benefits and disadvantages in the operation of non-cash payment systems in the Russian Federation and the Czech Republic. Also, deductive thinking will be used in order to provide the thesis author's own vision of the researched topic based on the findings revealed throughout writing the thesis.

Secondary sources used for writing the thesis will include print bibliographic sources and web-based sources in free access. Among bibliographic sources, the following will be used: Summers, B. (1994). The Payment System: Design, Management, and Supervision; Haan, J., Oosterloo, S. and Schoenmaker, D. (2015). Financial markets and institutions; Morgan, K., Brebbia, C. and Spector, J. (2006). The Internet society II; Prins, C. (2002). Trust in electronic commerce; etc. Such sources will allow gathering the theoretical information on non-cash payment systems required for writing this thesis. At the same time, web-based sources will be used primarily for collecting practical information on the operation of non- cash payment systems in the Russian Federation and the Czech Republic.

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1 Characteristics of non-cash payment system

In order to understand the specificities of non-cash payment systems and their operation, it is first worth investigating the definitions of cash and non-cash payments, and the essence of these economic phenomena.

When defining cash, Bridgeland and Zahavi (2009, p. 157) state that the definition given by the American Heritage Dictionary of the English Language: "money in the form of bills and coins; currency." Based on this definition, the authors develop their own definition of cash payments: a cash payment is a "payment that employs cash." Therefore, based on this definition, it can be stated that cash payments are payments made by individuals or companies using bills and coins, i.e. physically tangible money equivalents.

In this context, Hancock (1998, p. 1575) emphasizes that cash assets are created by the government, and depend upon the government’s policies, while non-cash payments are generated within the banking system itself, and thus are more flexible.

Haan et al. (2015, p. 217) point out that the main specificity of cash payments is the fact that they do not require any payment systems with the aim of running settlements between economic actors. Thus, a cash transaction is completed when an actor gives his or her cash funds to the counterparty directly. To the contrary, for running non-cash payments, the operation of special settlement systems involving banks or other similar institutions is required with the aim of transferring funds from one actor to another. In the case of non-cash payments, there is no physical transfer of funds, unlike in cash payments.

Kokkola (2010, p. 28) defines a non-cash payment as “the means by which a payer gives its bank authorisation for funds to be transferred or by which a payee gives its bank instructions for funds to be collected from a payer.”

Thus, as can be seen from the information above, non-cash payments assume the existence of a particular system through which such payments are settled, and namely of a bank or another financial institution which would take part in the debiting and crediting of customer accounts with the aim of implementing the set-off of funds within their mutual settlements.

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Summers (1994, p. 16) emphasizes the importance of non-cash payments in the modern economy. According to him, in the United States, non-cash payments account for nearly 100% of all national payments, while cash payments are mostly limited to the fields of interpersonal settlements and private purchases.

Dimov (2016, p. 7) points out that a typical non-cash payment occurs when a payer's funds are debited from his account and credited to a beneficiary's account. Therefore, two accounts opened at banking institutions are involved, and the mutual set-off of funds between such banks occurs. The main difference from cash payments consists in the fact that no cash is actually involved. Banks only use a non-cash payment, where funds are virtually debited and credited. This provides great advantages to persons making and receiving payments: they spare time and achieve the greatest convenience in their business operations.

The main advantages of non-cash payment systems are associated with the fact that they do not involve any cash at hand, and as a result, allow avoiding the associate difficulties and costs inherent of cash payments, including both time and financial costs, as well as the inconvenience associated with the need to bring funds to significant distances.

By summarizing the data available in literature, we can state the following main advantages if non-cash payment systems:

1. Convenience

Morgan et al. (2006, p. 444) state that convenience is one of the main advantages of non-cash payments. Thus, "Credit facilities can also accompany cashless mediums of exchange, so purchases and payments can be made without the need to have cash actually available at that time." Thus, it should be understood from this definition that settlements can be done without any additional inconvenience. The actors do not need to have any cash funds available at hand, and can still make payments simply by giving orders to their respective banking institutions or other financial institutions where they hold their accounts. With the Internet technologies currently available, non-cash payments can be done from mobile devices or personal computers from home. This means that customers may make their payments within seconds without leaving their apartments, which is definitely an important advantage over cash payments which require physical presence. Therefore, it can be stated that convenience of non-cash systems for customers means the ease of payments on the one hand, but also spared time and any lack of any need to travel across great distances for bringing cash and making direct cash payments.

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2. Global acceptability

According to Blanke and Chiesa (2007, p. 78), one of the main disadvantages of cash funds at hand is the fact that they are not universally accepted. Most countries have their unique national currencies. As a result, when individuals travel to other countries and need to make their payments abroad, they are required to exchange their funds. This means additional time expenditures and inconveniences. To the contrary, with the current level of technological development, all non-cash payments can be made without any additional operation: the conversion of funds is carried out automatically. This allows for the easiest cross-border transactions between both individuals and companies, and therefore this promotes international trade.

3. Opportunity to use credit funds

As stated by Morgan et al. (2006, p. 444), when using credit cards as a means of non- cash payments, economic actors may often have access to credit funds offered by banking institutions or other financial intermediaries. In the case of cash payments, such credit funds are often unavailable and require individual agreements with the counterparties. Therefore, this provides economic actors with greater flexibility in their financial operations through the availability of credit funds.

4. Opportunity to raise business turnover

For companies, non-cash payments represent a particular advantage not only thanks to their ease and convenience in the cooperation with any other parties, but also thanks to the fact that they may help raise business turnover, and thus income in the long run. As stated by Prins (2002, p. 55), the opportunity to pay for particular product or services remotely, and namely via the Internet is one of the customers' main demands in the market as of today. Companies which are able to accept non-cash payments using the widest variety of options available have the best chances to generate maximum customer demand thanks to the fact that they show their focus on customer convenience, and maximize the ease for customers to make their payments.

5. Guarantees of completion

Blanke and Chiesa (2007, p. 78) argue that one of the main advantages of non-cash payment systems is the fact that banks or other financial institutions acting as intermediaries in the respective transactions may also become guarantors of the completion of payment and

12 the performance of all liabilities undertaken by the parties. In the case of cash payments, there are no intermediaries, and thus there are no additional guarantees.

The advantages above are the basic advantages inherent of non-cash payments. However, together with their inherent advantages over cash payments, non-cash payments may also have important disadvantages which should be noted here. Such main disadvantages are the following:

1. Security issues

According to Basu (2007, p. 24), when performing non-cash payments, economic actors are first of all preoccupied by the security of their payments and by their privacy. While in cash payments, there are no security risks associated with fraud or theft of funds by third parties, as cash is transferred directly to the counterparty's hands, the situation is opposite with non-cash payments. Thus, despite the security measures implemented by banks and other financial intermediaries, there are still risks that third parties may interfere and thieve funds from customers' accounts.

2. Privacy issues

As Morgan et al. (2006, p. 444) note, in the course of cash payments, the information on the transaction is only disclosed to those persons who take part in it directly. Unless they deliberately share such information with other persons, it will remain undisclosed. In the case of non-cash payments, the transactions are carried out by third parties (banks or other financial institutions). Therefore, the information on such transactions may leak and may become available to third parties, which would impair the confidentiality of the economic actors involved. As of today, banks pay great attention to the security of their customers' transactions, including the confidentiality of such transactions, but nevertheless, risks of leakage still exist, and they are greater compared to cash payments.

Therefore, overall, based on the information above, it can be stated that the inherent advantages of non-cash payment systems are significantly greater compared to the shortcomings. This explains why non-cash payment systems account for almost 100% of payments as stated earlier in this research.

It is worth noting that the determinants which promote the greater usage of non-cash payments by the population and the corporate sector include both economic and social grounds. Thus, the economic grounds which drive people to use non-cash payments instead of traditional cash ones are the benefits of sparing time and funds. At the same time, social

13 factors such as the growing confidence in financial institutions, growing safety of payments within them, etc. contribute as well to the development of non-cash payments (Witkowski 2015, p. 10).

Taking into account the above findings, the next chapter will be dedicated to the investigation of the main types of non-cash payments and their inherent specificities.

When investigating the different types of non-cash payments and their particularities, it worth noting first that there are different classifications of non-cash payments existing in literature. As a result, depending on the particular criterion adopted for classifying non-cash payments, their different types can be identified.

Balasubramanian et al. (2016, p. 22) point out that non-cash payments can be either credit-based or debit-based depending on how payments are processed within the system. Thus, "In a credit-based system (e.g., credit cards) the charges are posted to the payer's account. The payer later pays the accumulated amounts to the payment service." To the contrary, within a debit-based payment system such as debit cards or checks, "the payer's account is debited immediately, that is, as soon as the transaction is processed." Different types of non-cash payments within this classification have their different advantages and drawbacks either for the payer or for the beneficiary.

Another classification of non-cash payments is given by Schmitz and Wood (2006, p. 11). According to this classification, non-cash payments can be either paper-based (traditional) or electronic. Paper-based non-cash payment instruments are mostly cheques or other non-cash instruments which are based on documentary evidence. To the contrary, electronic non-cash payments are carried out using electronic means and are not based on any documentary evidence. As stated by Schmitz and Wood, as of today, paper-based non-cash payments are used more widely in developing states, while they are less common in developed countries where electronic payments are used most often. Electronic means are more convenient and advantageous, although they require the availability of technologies for processing payments through them.

A typical lifecycle of a non-cash payment as described by Kokkola (2010, pp. 26-27) is the following:

1. Selection of a payment instrument and submission of payment to the chosen financial institution;

2. Payment processing by the financial institution;

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3. Interbank payment processing;

4. Interbank payment settlement;

5. Internal processing of payment by the receiving bank;

6. Information and communication.

Now, let's proceed to a more detailed investigation of the main types of non-cash payment instruments which are used as of today in the practice of settlements. Such main types of non-cash payment instruments are the following:

1. Cheque

As stated by Mukherjee (2010, p. 777), a cheque is "a written order by a depositor on a bank to pay a certain sum of money on demand either to himself or to his order or to his bearer." Thus, a cheque eliminates the need to use cash in transactions, but can be still be treated as near-money, as it is a paper-based instrument which in fact carries a cash value written in it. The person who undertakes to pay under the cheque is commonly referred to as the drawer, while the institution (bank or any other provider of financial services) agreeing to process the cheque and which is directed to transfer the respective amount to the beneficiary is commonly referred to as the drawee. Cheques can be either transferable, which means that the beneficiary may transfer the rights to obtain the amount stipulated in the cheque to another person. They may also be non-transferable. The main advantage of cheques is the fact that they allow running a transaction through bank, and thus with guarantees of payment on the one hand, and that they allow the drawer prolonging the delay of payment on the other hand. Also, cheques may be convenient for avoiding cash payments.

2. Wire transfer

Tan Bhala et al. (2016, p. 214) define a wire transfer as "a transfer of funds across an electronic network... The electronic network links multiple banks, which may be located in different jurisdictions." In order to run a wire transfer, both the transferor and the beneficiary need to have a bank account.

Fischer et al. (2012, p. 555) describe how wire transfers are performed. In the course of a bank transfer, the transferor instructs its bank or another financial institution to debit a particular amount of funds from its bank account at such institution. The bank thereafter notifies the beneficiary's bank, and the latter credits the same amount of funds to the beneficiary's bank account. Therafter, the two banks perform set-off with the aim of closing

15 their mutual claims. Wire transfers are widely used both on the national and on the international level.

According to Stalking (1997, p. 138), the invention of wire transfers allowed gaining significant advantages over cheques, namely in terms of the speed of transactions, time spared and convenience. As of today, wire transfers may be slower in speed compared to modern electronic payments. Nevertheless, they are characterized by a relatively high level of reliability.

3. Direct debit

As stated by Bridge et al. (2014, p. 128), a direct debit can be defined as “an instruction from a customer to their bank authorising a third-party business or organisation to collect money from their bank account when payment for the goods or services they have provided is due.” This type of cashless payments is very beneficial to the seller, as it provides the seller with the opportunity to charge funds from the buyer’s account as soon as a payment becomes due. This means that there are no opportunities for the buyer to postpone the payment for the products or services obtained, and at the same time, there are no opportunities to make any frauds. To the contrary, for the buyer, this scheme is not very effective as it assumes instantaneous payment when it becomes due, and thus no opportunity to postpone payments for greater operability of financial funds.

4. Letter of credit

A letter of credit is a financial documents which guarantees the payment of funds by the importer to the exporter. In order to perform the transaction with this mode of cashless payment, the importer arranges an agreement to open a letter of credit with its bank in favor of the foreign exporter. The letter of credit contains an undertaking of the importer’s bank to make payment in the required amount to the exporter’s bank as soon as sufficient and justified documents confirming the completion of the deal are presented. Therefore, as soon as evidences are provided, the importer’s bank credits the funds to the exporter’s bank, and they are thus credited to the exporter’s account. Letters of credit are important in international trade, as they ensure the trouble-free performance of mutual liabilities between counterparties. However, the main shortcoming of letters of credit is the high value of their performance due to high commission fees. Also, the buyer’s funds are deposited for the entire period of contract, and therefore they are withdrawn from operational turnover (Maheshwari 1997, p. 352).

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5. Payment cards

As stated by Radu (2003, p. 15), a payment card can be defined as “a payment instrument that allows bills in payment transactions to be charged to a designated account, which is linked to the card.” Payment cards are widely used in everyday transactions as they allow for the most effective settlements between individuals and companies. With the use of special POS terminals, payment cards can be used virtually in all shops and supermarkets. When a transaction with a payment card is performed, the funds from the buyer’s associated account are debited, and thus are credited to the seller’s bank account. The full automation of payments allows avoiding cash and the associated additional costs (Kokkola 2010, p. 31).

6. Mobile payments

Mobile payments are even more comfortable as a means of payment compared to cards in terms of speed and convenience. Mobile payments are performed from mobile devices of any kind and are associated with e-banking. For making a mobile payment, no POS terminal or any other physical item is required. The customer may access his or her bank account on the Internet and use the bank’s online banking services with the aim of making payment to the seller (Information Resources Management Association 2014).

7. Electronic payments

Electronic payments are very similar to mobile payments in terms of how they are performed. However, most often, such payments are effected via electronic payment systems such as PayPal which function separately from banking institutions and ensure the most rapid transfer of funds between individuals’ and companies’ personal accounts (Leslie 2014, p. 63).

Therefore, based on the information provided above in this chapter, it can be stated that non-cash payment systems are important in the operation of the global economy as of today, and there are various forms of non-cash payments which provide companies and individuals all over the world with the most convenient payment means and methods. Taking into account those facts, in the next chapter of the thesis, a brief overview of the historical development of non-cash payment systems will be provided.

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2 Emergence of non-cash payment system

When investigating the history of non-cash payment systems, it should be noted that their rudimentary form emerged back in the Medieval epoch. Thus, merchant banks which appeared in Europe in the XII century represented the first form of non-cash payment systems, which was namely observed in the course of the crusades: the Knights Templars established bank institutions in the Middle East, and thereafter, in order not to bring physical funds with them, they used a set-off system for debiting and crediting funds between their European and Middle Eastern banks (Powell 2011, p. 39).

In fact, the system described above is very similar to cheques as we have described them in the previous chapter of the thesis, and therefore it can be stated that cheques as the first form of non-cash payments emerged back in the XII century, even though their use was very limited, and they differed from the modern-era cheques in terms of both their appearance and the specificities of use.

The first ever handwritten cheques which are similar to the modern-era ones and were already used widely in banking appeared in the United Kingdom in the late 1700’s when London bankers had a meeting and decided to run the set-off of their customers’ funds between them. Already by 1810, the first personalized cheque which carried the full name of its owner appeared in the United Kingdom. By the 1840’s, the cheque system in the country already covered over 1850 banking institutions, and similar processes started developing in other countries: with the growing technological progress, the need for cashless payments started significantly growing as well (Arnold 2015, p. 432).

With the growing use of the telegraph around the globe, opportunities emerged for using telegraph connections between banks. In 1872, American corporation Western Union launched its first wire transfer using numbered codebooks between cities. This was the first wire transfer in history, and in contrast to cheques, it was the first ever non-documentary cashless payment. The development of non-documentary cashless payments started gradually substituting the use of documentary cashless systems (Holmes 2015, p. 202).

In the subsequent years, the use of wire transfers started growing thanks to the speed of transactions and the significantly broader opportunities of cashless payments compared to cheques. Also, the invention of wire transfer gave the subsequent impetus to the development of the banking sector on the international scale.

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In 1946, the first bank card was introduced by American banker John Biggins. This payment card acted just as any traditional payment cards which are widely used as of today: as soon as a customer was charged at a seller’s office, his or her funds were debited from the bank account at Biggins’ bank, and were credited to the seller’s account. In 1951, New York’s Franklin National Bank created the first ever bank credit card in history: in addition to the opportunities of using funds available on the customer’s account, such cards also allowed using credit funds at an interest rate, i.e. amounts beyond the ones actually available to the customer. By the mid-1950’s many American restaurants started providing their customers with an opportunity to pay for their meal using special payment card. In 1966, the InterBank Card Association (ICA) was created in the United States, an the national credit card system appeared. This marked a new trend for the growing use of payment cards around the globe (Mastercard.com n.d.)

E-banking initially emerged back in 1981 when four major banks in New York offered the opportunity to access personal bank accounts from home via a videotext system. However, e-banking in its classical form, i.e. as access over the Internet, appeared for the first time in 1995 – when it was launched by the Presidential Bank followed by Chase Manhattan and Wells Fargo. Thereafter, the use of online banking started rapidly growing together with the global access to the Internet worldwide. The years 2000 became the years of the most prominent bloom of e-banking. As of today, the main functionality of online banking systems is the opportunity to access one’s bank account and make payments over the Internet 24/7, and at minimal commission fees. Also, mobile banking is developing rapidly thanks to the growing availability of powerful mobile devices (Asifulla n.d., pp. 34-35).

Therefore, based on the information provided in this chapter, it can be stated that the formation of non-cash payment systems passed through a great number of stages throughout centuries. As of today, the life of people cannot be imagined without non-cash payments, and moreover, the subsequent technological progress on the global scale will contribute to the growing development of non-cash payment systems and their use both in international trade and in domestic everyday settlements both by companies and individuals.

Taking into consideration the previous findings of this thesis, in the next part of the thesis, we will proceed to the practical part of the research.

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3 Non-cash payment system in practice

3.1 Legislation governing the operation of non-cash payment systems in Russia and the Czech Republic

Prior to 2011, the legislation in the Russian Federation governing non-cash payments had relied primarily upon Federal Law 86-FZ “On the Central Bank of the Russian Federation (Bank of Russia)” and the legislative acts adopted by the Bank of Russia. This had constrained the development of cashless payments in the Russian Federation and had complicated the activities of financial institutions making the largely dependent on the Central Bank. However, in 2011, Federal Law 161-FZ “On the National Payment System” was adopted by the Russian Parliament. This law allowed formalizing the activities of financial institutions and stipulated clearly the criteria based on which such financial institutions were allowed to service their customers with non-cash transactions. During this time, the Central Bank of Russia adopts several important legislative acts, namely the 2011 Order 2695-U “On the Requirements to Ensure the Uninterrupted Transfer of Electronic Monetary Funds”, and the 2012 Regulation 383-P “On the Rules of Effecting Money Transfers” (Chugunova 2012).

In 2013, the Bank of Russia adopted Note 249-T “On Electronic Monetary Funds” which is set to provide sufficient information on electronic payment systems to financial institutions, and for the latter to spread this information among the customers. This is seen by the Russian authorities as a prerequisite to raise the level of the customers’ confidence in non- cash payments (Kolesov 2017).

Nevertheless, despite recent improvements, the legislation of the Russian Federation in the field of non-cash payments is still outdated compared to Western countries. It fails to liberalize the operation of non-cash payment operators, and makes them vulnerable to the government’s intevention (Kolesov 2017).

The Czech legislation in the field of non-cash and electronic payments is more developed compared to the Russian one. As of today, the main regulations in this field include Act No. 284/2009 Coll. on payment system, Decrees of the Czech National Bank Decree No. 169/2011 Coll. of 7 June 2011 on the rules for the creation of account numbers for making payments, No. 140/2011 Coll. of 12 May 2011 on payment systems with irrevocability of transactions, No. 141/2011 Coll. of 13. May 2011 (pdf, 680 kB, available in Czech only), on the pursuit of business of payment institutions, electronic money institutions, small-scale 20 payment service providers and small-scale electronic money issuer, No. 142/2011 Coll. of 13 May 2011 on reporting by payment institutions, electronic money institutions, small-scale payment service providers and small-scale electronic money issuers to the CNB, etc. The Czech legislation governing non-cash payments is being constantly updated in line with the EU standards, and is set to provide the local and foreign operators of non-cash payment systems with the best opportunities to develop their business and provide high-quality services to the Czech customers (cnb.cz 2017).

Now, taking into consideration the legal basis for the operation of non-cash payment systems in Russia and the Czech Republic, it is worth analyzing the current development of non-cash payment systems in the two states.

3.2 Current development of non-cash payment systems in Russia and the Czech Republic

When investigating the operation and role of non-cash payments in the Russian Federation, it is worth paying attention first of all to the current share of non-cash payments in the Russian economy.

Non-cash payments; 22,80%

Cash payments; 77,20%

Figure 1. Share of cash and non-cash payments in the Russian economy in 2015 (Golubkova 2016)

As can be seen from Figure 1 above, the share of non-cash payments in the Russian economy is very low as of today, and amounts to only 22.8% against the 77.2% which

21 account for cash payments. As stated by Golubkova (2016), this structure of settlements within the Russian economy is very negative for the country’s economic growth: it decreases transparency, and contributes to high corruption levels. This creates the necessity for the Russian authorities to make legislative and other steps to attract the local companies and individuals to use non-cash payments in their transactions and commercial deals.

Despite the fact that as of today, the share of cashless payments in the Russian economy is low, there have been some positive tendencies observed recently in terms of the growing importance of non-cash payment systems. Thus, as stated by Golubkova (2016), in 2015, the total number of operations using electronic settlements in Russia made up 1.2 billion, and their aggregate amount grew by 29.7% compared to the previous year. Overall, in the period from 2010 to 2015, the total number of non-cash transactions on the part of Russian individuals grew 5 times, while their aggregate value increased 3 times. Also, it is worth noting that as of today, there are 244 million payment cards emitted in the Russian Federation. This figure is 62.7% higher compared to 2010, which proves that non-cash payment systems are indeed growing in terms of their importance within the Russian Federation.

Other positive tendencies testifying the growing role of non-cash payments in the Russian economy include the steadily decreasing number of ATMs and the growing number of POS terminals. Thus, as stated by Grizov (2016), in 2015, the total number of ATMs in Russia decreased by 7.1% compared to the previous year. At the same time, the number of POS terminal installed at cash points dropped by 7.8%, and the number of POS terminals installed at merchants’ locations grew by 27.8%. Those tendencies testify clearly that the demand for cash payments is gradually decreasing among the Russian population compared to the demand for non-cash payments.

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Figure 2. Dynamics of cash and non-cash payments in the Russian Federation in 2011-2015 (Kuchma 2016)

Figure 2 above further confirms and proves the aforesaid assertions. As can be seen from the chart, the share of bank cards in individuals’ settlements has been definitely growing in recent years. Thus, while as of 2011, only less than 4% of all individuals in Russia used only payment cards for their everyday settlements, as of today, this figure amounts to 15%. At the same time, the share of individuals who use only cash for their payments dropped from 82% in 2011 to 38% in 2015. The most popular type of payments as of today is combined, i.e. when individuals use both their bank cards and cash for making payments. As stated by Kuchma (2016), the reason for the growing use of non-cash payments by Russian individuals is the fact that "People choose to pay using the cards due to increasing financial literacy as well as developing acquiring systems, payroll services and loyalty programs." With the subsequent development of the Russian banking system and the growth of confidence in it among the Russian population, the share of non-cash payments in transaction should be expected to further grow.

The total amount of non-cash transactions in the Russian Federation amounted to RUR 5.77 billion in the first six months of 2016, which was 49.5% more compared to the same period in 2015 (finanz.ru 2017). This proves the growing intensity of the use of non-cash payments by the Russian Federation. By 2020, the total amount of non-cash payments in Russia is expected to further grow twice, which proves again the growing popularity of this segment in the country (vedomosti.ru 2017).

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A factor which influenced positively the aforesaid tendencies toward the growing share of non-cash payments in the Russian Federation is the effective policies of the Russian Central Bank for making the national banking system stronger. Thus, the total number of banking institutions in the Russian Federation dropped by 7.8% in 2015 compared to the previous year, and the figures of payment card issuers and acquirers dropped by 7.2% and 6.6%, respectively. This has allowed reducing the number of non-reliable institutions, thus rising the level of guarantees provided to both individuals and companies on the part of the state, which is expected to further raise the local residents’ confidence in Russia’s banking system and non-cash payments in the state. In this context, it is also worth noting in particular that the leading banking institution in the Russian Federation in terms of non-cash payments in the Sberbank of Russia: it accounts for over 40% of all payment cards issued in the Russian Federation (101.9 million payment cards as of 2015) (Grizov 2016).

Credit cards; 13,00%

Debit cards; 87,00%

Figure 3. Structure of the Russian payment cards segment, as of 2015 (Grizov 2016)

Figure 3 above illustrates the fact that as of 2015, debit cards were prevailing in the total structure of payment cards issued in the Russian Federation: they account for 87% of all payment cards, while the aggregate share of credit cards makes up only 13%. As stated earlier in this thesis, operations with credit cards allowing customers purchasing beyond the amount of funds actually available in their bank account have long been popular in developed states. However, in the Russian Federation, the use of credit cards is significantly less widespread, and we are going to investigate the reasons for this more in detail below.

24

Credit cards; 12,10%

Debit cards; 87,90%

Figure 4. Structure of the Russian payment cards segment, as of 2016 (Plusworld.org 2017)

As can be seen from Figure 4 above, in 2016, the structure of the Russian payment cards segment shifted further toward the greater share of debit cards, and the smaller of credit cards. Overall, this situation can be deemed as positive, as the Russian population is less dependent on credit funds, and cards are more often used as tools of payment and not as tools of crediting.

Despite the positive tendencies outlined earlier in this chapter, there are currently major drawbacks and obstacles which hinder the subsequent development of non-cash payments in the Russian Federation, and which require being addressed in order to improve the current situation. Thus, as stated by Kosenkova (2013), the main difficulties in the use of non-cash payments in Russia include psychological and economic factors. The Russian population and the corporate sector are characterized by their great conservatism and the lack of confidence in the national banking system. As a result, where possible, both individuals and legal entities still prefer using cash. At the same time, a major factor which makes Russian companies reluctant to use cashless payments is the high commission fees charged by Russian banks. Such fees are higher compared to European banks, and in the Russian conditions of doing business, they only demote the local companies from rising the use of non-cash payment systems in their settlements. The above factors also affect in a very negative way the segment of credit cards: due to the lack of confidence and high interest rates, the Russian population prefers either to use debit cards, or to pay with cash, which slows

25 down the overall development of the Russian banking sector and the country’s entire financial market.

Local systems; 15%

Visa; 50%

MasterCard; 35%

Figure 5. Shares of international and local non-cash payment systems in the Russian market, as of 2015 (Grizov 2016)

Figure 5 above illustrates the actual structure of non-cash payment systems in the Russian Federation in the breakdown by foreign and local payment systems. As can be seen from the chart, 85% of all non-cash payments in Russia are effected using international payment systems Visa and MasterCard. At the same time, local payment systems such as Zolotaya Korona, Mir, PRO100, NCC/UnionCard, etc. are characterized by a significantly lower share in national non-cash payments, and by a considerably lower level of service compared to major international payment systems. Zolotaya Korona is the leader in terms of the local non-cask payment systems’ market share, holding over 7% of the market, while Mir accounts for 1% of the market. Other local non-cash payment systems’ shares are smaller.

In the light of the information presented above, it is worth noting particular the recent problems which the Russian Federation endured with Visa and MasterCard payment systems. After Russia’s annexation of Crimea from Ukraine and the involvement in the military conflict in Ukraine, a number of sanctions were imposed on Russia on the part of Western states. Among the opportunities which were considered by those states in 2015 in order to punish Russia was its exclusion from Visa and MasterCard payment systems, and also Russia’s ban from SWIFT payments. Although those plans were not implemented, they caused significant panic among Russian individual and companies, as this would have

26 significantly affected the entire national economy, if such sanctions had indeed been implemented (NTV 2015).

In my opinion, the situation with Visa and MasterCard proved the vulnerability of the Russian banking sector and the country’s non-cash payment systems in general. Namely, the low share of national non-cash payment systems in the Russian economy, their low level of service compared to Western competitors, and the overall low level of Russian residents’ confidence in the country’s banking system make the Russian economy much more vulnerable to any exterior factors and events. Addressing those issues and raising the share of cashless payments in the economy could further provide the local non-cash payments systems with greater development opportunities, thereby granting much brighter prospects to the entire national banking sector.

In the context of Russian residents’ confidence in non-cash payment systems, it is worth noting in particular the preoccupations related to the low level of funds and personal data protection. Thus, as argued by rns.online (2016), there is no sufficient information available to the Russian citizens on how their payment cards and bank accounts are protected from third parties’ fraudulent activities. On the average, most Russian citizens are aware only of their card’s PIN code, and try to hide it from the others when making their everyday payments. The subsequent spreading of information on other protection means and methods could raise the Russian population’s interest in using non-cash payments, thus raising their overall share in Russia’s national settlements.

According to experts, there are a number of different ways in which the Russian authorities might seek raising the use of non-cash payment systems by local individuals and companies. Thus, in addition to enhancing the level of cashless payments’ security, additional benefits could be generated by providing tax or other benefits to those individuals and companies which use only cashless payments in their settlements. The payments of utilities using bank cards could be intensified particularly, if the quality of online banking in Russia was significantly raised. Similarly, the subsequent implementation of a developed e- government system would contribute to the growing share of non-cash settlements for the payment of taxes and levies. Reducing the commission fees in the banking system could attract additional customers using non-cash payments, just as the stimulation to use non-cash payments when raising loans. In the long run, the Russian authorities might also resort to direct administrative measures by introducing gradual limits for the use of cash funds in

27 individuals and companies’ transactions, and limits for retail outlets with revenues beyond a certain margin (Korotayeva 2016).

Thus, having investigated the current stage of the development of non-cash payment systems in the Russian Federation, their main advantages and drawbacks and the subsequent development prospects, it is now worth running the analysis of non-cash payment systems in the Czech Republic.

In order to evaluate the actual condition of non-cash payment systems in the Czech Republic, it is worth comparing them with similar systems in other member states of the European Union.

25000 23119,15

19643,46 19789,41 20000

15000

10000

5041,36 5000 2198,82 1073,38 511,02 411,57 0 Germany France United Hungary Romania Poland Bulgaria Czech Kingdom Republic

Figure 6. Comparison of total non-cash settlement transactions in developed EU member states and the Czech Republic’s neighbors, as of 2015, in million transactions (Source: Statista.com 2016a)

Figure 6 above is a comparative chart of the total number of cashless settlement transactions in the Czech Republic and other EU member states as of 2015. As can be seen from the chart, the Czech Republic loses approximately 10 times in terms of the number of cashless payments to major EU member states such as the United Kingdom, France, and Germany. However, on the more local Central European level, the Czech Republic loses only to Poland in terms of the aggregate number of non-cash transactions, standing above Hungary, Romania, and Bulgaria. Overall, this might be a sign that non-cash payment

28 systems in the Czech Republic are developed, but still lag behind similar systems in developed EU member states, and thus require their subsequent improvement.

A major characteristic of the Czech non-cash payments system is the fact that it is well developed, highly technological, and supported by the state. In this context, it should be noted that in the Czech Republic, Act No. 254/2004 Coll. the restriction of cash payments and amending Act No. 337/1992 Coll. on taxes and fees, as amended, has been in force since 2004. Under this Act, it is stipulated that the maximum amount of cash payments for both companies and individuals in the country per day makes up at most CZK 350,000. All daily transactions beyond this amount are to be carried in non-cash form (Czechlegislation.com n.d.)

Therefore, as can be seen from the information, on the legal level, the Czech authorities use administrative tools and methods in order to promote the use of non-cash payment systems, and to the contrary, to demote the use of cash payments. Obviously, based on the previous findings of this thesis, it can be stated that such measures are aimed at limiting the turnover of cash funds, and to raise the use of no-cash payments which guarantee the highest transparency, controllability and reliability to the entire banking system and system of settlements in the Czech Republic.

The high level of reliability is overall one of the main factor which contributes to the popularity of non-cash settlements in the Czech Republic. In addition to the high level of reliability of the Czech banking system, the Czech authorities also constantly invest in increasing the effectiveness of control over the activities of banking institutions, without interfering with their activities. Thus, in 2016, the Czech Republic effectively launched the system of electronic records of cash sales of goods and services E-tržby. Within this system, “Subject of the recording will be all cash payments including means that de facto represent money (tokens, vouchers), payments by card or other electronic mean and payments by meal vouchers or cheques. Payments via wire transfer or by debiting won’t be subject to records.” It should allow revealing any fraudulent transactions within very short time delays, which should therefore further raise the quality of financial intermediaries’ services in the Czech Republic, thereby adding to the total number of customers making their settlements in non- cash form (Financial Administration of the Czech Republic 2016).

The aggregate turnover of non-cash payments in the Czech Republic tends to constantly grow. Thus, in the first six months of 2015, this figure made up CZK 198 billion, and thus grew by 17.4% compared to the same period in the previous year. At the same time, 29 the total number of non-cash settlement transactions grew at an even higher pace on the same time span: +28% (Banks.eu 2015).

18%

82%

Debit cards Credit cards

Figure 7. Structure of the Czech payment cards segment, as of 2015 (Bankovnikarty.cz 2017)

Figure 7 above illustrates the fact that similarly to the Russian Federation, in the Czech Republic, debit cards dominate as well over credit cards. However, the share of credit cards is 4 p.p. higher compared to Russia, which might be explained by the Czech population’s higher purchasing power and thus opportunity to use greater loan funds.

30

17%

83%

Debit cards Credit cards

Figure 8. Structure of the Czech payment cards segment, as of 2016 (Bankovnikarty.cz 2017)

As can be seen from Figure 8 above, the share of credit cards in the use of the Czech population currently tends to drop, which tendency is similar to the one currently persistent in Russia.

32%

68%

Non-cash payments Cash payments

Figure 9. Structure of cash and non-cash payments in the Czech Republic, as of 2015 (Bankovnikarty.cz 2017)

As can be seen from Figure 9 above, currently, cash payments prevail over non-cash ones in the Czech republic, and their share amounts to 68%, while the share of non-cash payments makes up 32%. Thus, the share of non-cash payments is almost 10 p.p. (50%)

31 higher in the Czech Republic compared to the Russian Federation, which proves the greater use of non-cash settlements in the country. Based on the previous findings of the thesis, it can be stated that this fact is positive for the Czech national economy, and provides it with greater transparency compared to the Russian Federation.

0,3% 1,8%

45,4% 52,5%

MasterCard VISA Diner's Club Other

Figure 10. Shares of non-cash payment systems in the Czech market, as of 2015 (Bankovnikarty.cz 2017)

Figure 10 above illustrates data on the shares of non-cash payment systems in the Czech Republic. As can be seen from the chart, the aggregate share of MasterCard and Visa amounts to 97.9%, which is significantly higher compared to the Russian Federation. The third non-cash payment system, Diner’s Club, accounts for a share of only 0.3% in the market, while other systems’ shares are even lower.

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0,2% 1,5%

42,3%

55,9%

MasterCard VISA Diner's Club Other

Figure 11. Shares of non-cash payment systems in the Czech market, as of 2016 (Bankovnikarty.cz 2017)

Also, for the Czech Republic, 2016 data on the shares of non-cash payment systems are available. As can be seen from the chart above, the aggregate share of MasterCard and Visa grew by 0.3 percentage points in 2016 compared to 2015, and now amounts to 98.2%, which further proves the domination of those systems in the Czech market.

Overall, if we consider the most recent statistics regarding the use of different non- cash payment methods in the Czech Republic, it can be stated that the role of cheques and other documentary cashless methods is neglectful in the country. As for the other non-cash payments, the role of credit transfers and direct debits has been steadily dropping in recent years, in contrast to the use of payment cards which has been getting more and more intense among the Czech residents (European Central Bank 2015).

In the payment cards segment of non-cash payment systems in the Czech Republic, the predominant trend is the growing use of contactless payment cards by individuals.

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Traditional cards; 25%

Contactless cards; 75%

Figure 12. Structure of payment cards in use in the Czech Republic, as of 2015 (Businesswire.com 2016)

Thus, as can be seen from Figure 12 above, in the total structure of payment cards currently in use in the Czech Republic, contactless cards account for ¾ of the aggregate number of cards. Their main advantage for both customers and merchants is the fact that they do not require entering the PIN code, and allow effecting transactions just by moving the card closely to the POS terminal. This facilitates all transactions, and minimizes the required time expenditures for performing them. However, in addition to the above data, it is worth noting that despite holding a major share in the total number of cards issued in the Czech Republic, the share of contactless cards in the total turnover of market transactions with payments cards amounts to 48.5%, while traditional cards account for 51.5%. In the years to come, the use of contactless payment cards in trade in the Czech Republic should only be expected to grow (Businesswire.com 2016).

Another tendency in the Czech Republic’s cashless payments is the growing use of electronic payment systems with the growing development of online banking and e- commerce. The most prominent electronic systems which are currently available in the Czech Republic include Paysafecard, Ukash, PayPal, and MasterPass. The latter was launched in the Czech market by MasterCard in November 2014 (Businesswire.com 2016).

The Czech National Bank operates the only interbank payment system handling transaction in Czech korunas. This payment system is entitled CERTIS (Czech Express Real Time Interbank Gross Settlement system). CERTIS has been operating in the Czech market since 1992. It ensures the quickest set-off of funds when performing transactions between banks in Czech korunas, as well as transactions between banks and the Czech National Bank. CERTIS allows only for the direct participation of financial institutions holding a valid

34 license to run non-cash settlements. The system permits no overdrafts, intraday credit is collateralized. The types of transactions supported by CERTIS include credit transfers, direct debits, corrective settlement transfers, ancillary system transactions, and information and technical transaction. Overall, it can be stated that CERTIS contributes to the smooth and trouble-free operation of non-cash payments in Czech korunas within the Czech Republic (cnb.cz n.d.).

In this context, it is also worth noting that mobile payments and online banking are becoming more and more popular and widely used by residents in the Czech Republic.

500

450 429

400

350 319 300

250 212 200

150 124

100 62 50 25 8 0 2015 2016 2017 2018 2019 2020 2021

Figure 13. Forecasts of mobile payments’ growth in the Czech Republic, in USD million (Statista.com 2016b)

Figure 13 above reveals that as of today, the market of mobile payments in the Czech Republic is growing at a very rapid pace. Thus, in 2016, it grew approximately three times in terms of the total turnover value compared to the previous year. Within the next 5 years, the total amount of mobile payments in the Czech Republic is expected to grow over 40 times, thus achieving a figure of USD 429 million in 2021. This evidences clearly that modern forms of non-cash payments are becoming widely popular in the Czech Republic, which contributes positively to the country’s national economy.

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60%

48% 50% 46% 41% 40% 34% 30% 30% 23%

20% 18% 14% 12% 10% 10% 5%

0% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Figure 14. Share of the population using online banking in the Czech Republic in 2005-2015 (Statista.com 2016c)

Figure 14 above illustrates the share of the Czech population using the services of online banking. As can be seen from the chart, currently, the share of the population using e- banking amounts to 48%, which figure is almost 10 times higher compared to 10 years ago. Therefore, this tendency proves again that the popularity of non-cash payments in the Czech economy is steadily growing.

4000

3384 3500 3198 3023 3000 2828 2610 2500 2381 2124 2000

1500

1000

500

0 2015 2016 2017 2018 2019 2020 2021

Figure 15. Forecasts of e-commerce’s growth in the Czech Republic, in USD million (Statista.com 2016d)

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As revealed by Figure 15 above, the current yearly amount of e-commerce turnover in the Czech Republic makes up almost USD 2.4 billion. According to forecasts, by the year 2021, this figure is expected to grow by over 42% - up to USD 3.384 billion. The growth of e- commerce reflects directly the growing importance of non-cash payments and the growing use of cashless payment systems by both Czech individuals and commercial entities.

Therefore, based on the information above, we can state definitely that non-cash payment systems play an important role in the economic growth of the Czech Republic, and moreover, their economic importance should be expected to further rise in the years to come.

Taking into account those facts, in the next chapter of the thesis, we are going to compare the operation of non-cash payments in the Russian Federation and the Czech Republic, and to discuss how they both could be improved, and what benefits this might give to both countries’ national economy.

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4 Differences between Russian and the Czech Republic (non-cash system)

Based on the information presented in the previous chapter of the thesis, it is worth noting that the systems of non-cash payments in the Russian Federation and the Czech Republic differ significantly. Thus, in the Czech Republic, the level of development of non-cash payments is significantly higher compared to the Russian Federation, and as of today, the penetration of cash payments is much higher in the Russian economy. Moreover, another important fact to be noted in this context is that the level of technologies in the Czech Republic is significantly higher. Therefore, in the Russian Federation, the current trends of development rather focus on the shift from the previous forms of cash payments, while in the Czech Republic, the main focus is put on the adaptation of non-cash payments to the current market conditions, and on the use of the most up-to-date and advanced technologies with the aim promoting the subsequent growth in the share of cashless payments in the aggregate turnover of market transactions.

In this context, it is worth noting that the legislative base for non-cash payments in the Czech republic is much more developed compared to Russia: it provides liberalized conditions to all market participants, and at the same time ensures the best operation of non- cash payments under the thorough control of the Czech National Bank. In the Russian Federation, despite recent improvements in terms of the legislation governing non-cash payments, this legislation still remains underdeveloped against Western standards. Therefore, this situation favors the growing amounts of non-cash payments in the Czech Republic, and does not contribute to their rising importance and scope in Russia.

In this context, it is also worth noting that the Czech Republic is constantly updating its legislation governing non-cash payments so as to match it with the progressive standards of the European Union and so as to give a major impetus to the greater use of non-cash payments by all actors within the state. In the Russian Federation, changes are being embodied very slowly, and the country’s pace of adopting progressive legislative standards for non-cash payments is significantly slower as well. Doubled by high corruption levels, this is a major negative factor hindering the growing use of non-cash payments by economic actors in the Russian Federation.

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In terms of the recent statistics of the use of non-cash payments by the population, both the Russian Federation and the Czech Republic have been demonstrating positive growth. In these terms, the two states are similar. However, in the overall coverage of the population, the Czech Republic is significantly stronger, and therefore its non-cash payment systems perform better compared to the ones of the Russian Federation. The development of non-cash payments in Russia is impeded by a great number of factors, and even the access to the use of non-cash payment systems is more limited for both companies and individuals compared to the companies and individuals of the Czech Republic.

Furthermore, Russia is less developed in technological terms compared to the Czech Republic. Therefore, while in the Czech Republic, progressive and up-to-date technologies are currently being used for the development of non-cash payments, the Russian Federation lags behind in those terms, and is implementing those non-cash payment technologies which have long been in use in the West. Moreover, speaking of individuals using non-cash settlements, it is worth noting in particular the limited access of the Russian population to the Internet, and also the overall lower purchasing power due to lower income compared to the Czech Republic. Those factors limits the opportunities for the current use of non-cash payments, and also the prospects for their subsequent growth.

Therefore, we can state that while the trends for the growing importance of non-cash payment systems in the two countries are similar, the actual condition of such systems still differs significantly due to a number of essential reasons. What does this mean for the two states in terms of their economic development? The great importance of cash settlements in the Russian economy leaves great room for fraudulent activities and for the lack of effective control on the part of the public authorities, which is also translated into the growing scope of the shadow economy. At the same time, it also lowers the overall effectiveness of commercial operations performed within Russia’s national economy. In the Czech Republic, the situation is much better in that context, and this reflects in the country’s economic and technological development which is overall considerably higher compared to the Russian Federation.

The drastic differences in the level of development of non-cash payment systems in the two countries’ national economies are due to a range of different factors. Among the most important ones of them, it is worth noting the low level of confidence in the Russian banking systems and overall in Russian financial intermediaries, and the high level of commission fees in the Russian Federation. To the contrary, in the Czech Republic, the local residents’ confidence in the Czech financial system and banking institutions is high, and as shown in

39 this research paper, the commission fees drawn by financial intermediaries for non-cash payments are smaller than in Russia. Those factors contain significantly the growing use of non-cash payments in the Russian Federation both by individuals and companies.

Another critically important factor which preconditions the existence of the aforesaid differences in the development of non-cash payments in the Russian Federation and the Czech Republic is the overall level of the population’s financial education and awareness of the economic processes which go on in the country. In the Russian Federation, the level of the population’s financial education is considerably lower compared to the Czech Republic. To a large extent, this problem is caused by the lack of sufficient efforts on the part of the public authorities aimed at raising the population’s knowledge and thus financial awareness. Often, people in Russia simply do not have any sufficient access to the full information, and thus are limited in their opportunities of choice, which makes them rather prone to use traditional cash payments in everyday life, and, where possible, in all other commercial transactions. In the Czech Republic, people are much better aware of the benefits brought by non-cash settlements. Doubled with the better access to up-to-date technologies, this favors substantially the use of non-cash payments by Czech residents, which in its turn contributes to the effective economic growth of the Czech Republic.

Finally, it should be noted that the effectiveness of public control and monitoring in the Czech Republic is significantly higher compared to the Russian Federation. Moreover, the Czech authorities steadily invest funds in up-to-date monitoring systems for eliminating or preventing any possible fraudulent activities, thus ensuring the local residents’ maximum confidence in the effectiveness and safety of non-cash payments in the Czech Republic. In Russia, no such attention is paid by the local authorities in this context, which further limits and deteriorates the attitude of the local population to non-cash payments within the country. Also, the overall effectiveness of the legislation base governing the field of non-cash payments is lower in the Russian, while in the Czech Republic, greater attention is paid to the legislative promotion of non-cash payments against traditional cash payments.

Also, the level of corruption in Russia is significantly higher compared to the Czech Republic. As a result, this lowers Russia’s opportunities of fruitful cooperation with foreign investors for getting funding and technologies for the development of the country’s non-cash payment system. Also, this is one of the factor which affects significantly the level of the population’s confidence as described above. Without minimizing the impact of corruption, Russia would be unable to ensure the effective development of its non-cash payments.

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Thus, the above factors explain the differences in the operation of non-cash payment systems in the Russian Federation and the Czech Republic. But what steps should the two countries undertake with the aim of further promoting the use of non-cash payments contributing to their overall economic development?

For the Czech Republic, the main recommendation could be to continue following the path of development of non-cash payment systems adopted as of today. As shown in this thesis, the country’s non-cash payments are very effective, and they are expected to become even more so in the near future. Probably, the main focus should be put on the evaluation of the experience of the EU’s most developed countries such as the United Kingdom, Germany, and France, and on the subsequent harmonization of the Czech legislation governing non-cash payments with the legislation of those states, just as on the subsequent implementation of the most up-to-date non-cash payment technologies for the greatest convenience of the local individuals and corporate customers.

For the Russian Federation, more complex measures should be advised. Thus, first of all, Russia should focus on the modernization of its legislation for ensuring the greater use of non-cash payments in national settlements. Following the example of the Czech Republic, Russia could benefit from establishing a soil of daily transactions beyond which no cash settlements would be allowed to the local individuals or companies. This would promote greater use of non-cash payments in everyday transactions. However, this will not be enough. One of the topmost tasks of the Russian authorities is to substantially increase the level of the local residents’ confidence in the Russian banking system and the authorities’ financial activities. With this aim, the Russian authorities should establish the most effective audit and monitoring of the local banking institutions and their activities. At the same time, implementing an up-to-date all-nation electronic system of monitoring and control over electronic transactions could allow minimizing the level of threats incurred by local individuals and companies in association with their possible loss of funds or confidential data due to fraudulent activities on the part of third parties in the course of non-cash payment transactions. Also, a beneficial step could be to provide commercial banks with an opportunity to lower their commission fees for non-cash payments, for instance, through state privileges. Finally, spreading information on the benefits provided by non-cash payments among the population would be an essential step for raising the local residents’ financial awareness, thereby attracting them to use cashless settlements for their transactions.

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The fulfillment of the above recommendations should provide both the Russian Federation and the Czech Republic with opportunities to gain a significantly greater growth pace and more coherent development of their non-cash payment systems, which in its turn would contribute to the subsequent economic growth of the two countries in line with the predominant global trends of technological development.

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Conclusion

As of today, the international financial sector is characterized by the steadily growing penetration of innovations and up-to-date technologies. In order to improve their business activities, companies need to resort to those up-to-date technologies. In the field of payment methods, a major trend on the global scale lately has been the growing use of non-cash payments. In contrast to traditional cash methods, cashless payments allow both individuals and companies sparing their time on payments and making payments from virtually any place.

The research question investigated in the course of this research was the following: What are the main differences in the operation of non-cash payment systems in the Russian Federation and the Czech Republic?

The findings of this thesis paper allow stating that the systems of non-cash payments in the Russian Federation and in the Czech Republic differ significantly in many different respects. Thus, first of all, the two states’ levels of technological development differ, and this implies major differences in the operation of non-cash payments across their territory.

In the Russian Federation, the shift from traditional cash payments toward the greater use of non-cash payments is only occurring as of today. There are many issues and problems hindering this process, and namely the lack of developed technologies, but also lack of effectiveness on the part of the government. Among other factors which impede the development of cashless payments in the Russian Federation, it is worth noting the country’s lower economic development, lack of the population’s sufficient confidence in the banking system, high bank fees for cashless transactions, etc.

43

At the same time, in the Czech Republic, the current trend is the greater use of innovations in terms of non-cash payments, implementation of innovations in non-cash payments across all segments, and so on. In addition to the factors mentioned above, it is worth noting the Czech population’s overall higher level of financial education. Another factor which contributes positively to the development of non-cash payments in the country is the population’s sufficient confidence in the banking system and relatively low levels of corruption, which promotes people’s desire to benefit from cashless settlements. The level of non-cash payments’ development in the Czech Republic is significantly higher as of today compared to the Russian Federation, and the country’s economy benefits from it. The current shifts occurring in the operation of non-cash payment systems in the Czech Republic should only further contributed to the more convenient use of non-cash systems by all actors, thereby improving the economic conjuncture of the Czech Republic and facilitating all monetary transactions.

Another major difference which is favorable for the Czech non-cash payment system and disadvantageous for the Russian one is the fact that the system of non-cash payments in the Czech Republic is monitored and controlled more effectively by the public authorities. Together with the lower corruption levels, this contributes to the population’s and the corporate sector’s greater confidence in the non-cash payments made on the country’s territory, which in its turn favors the overall greater level of the use of non-cash payments in the Czech Republic.

Despite the major differences outlined above, the findings of this thesis prove that both the Czech and the Russian non-cash payment systems have been demonstrating positive growth trends in recent years, which highlights the great prospects which the two countries have for the subsequent development of their non-cash payment systems. However, the development of non-cash payments in the two states and their greater use by the population and the corporate sector will be largely dependent on how effectively the countries’ public authorities perform in terms of the legal and other favorable conditions ensured for all economic actors.

In the Russian Federation, the public authorities have yet to implement large-scale educational programmes in order to raise the local population’s and companies’ awareness of the benefits provided by the use of non-cash payments against traditional payment methods. At the same time, the Russian authorities should also monitor the opportunities to make the financial institutions operating in the Russian Federation lower their commission fees. Also,

44 the country’s non-cash payments should benefit significantly from Russia’s establishment of thorough monitoring and control over the financial sector so as to avoid any negative developments in it and achieve the population’s and the corporate sector’s greater confidence.

The Russian Federation should also focus on the improvement of its technologies in order to provoke greater interest in non-cash payments. Probably, for this purpose, Russia could seek foreign investment, or seek creating favorable preconditions for the successful operation of foreign non-cash payment systems.

The major recommendation for the Czech Republic can be to follow its development course pursued as of today, and to focus on the harmonization of the legislation governing the field of non-cash payments with other EU member states. This should provide the Czech Republic with further greater opportunities of the development of its non-cash payments. For the Russian Federation, improving the national legislation governing non-cash payments is indispensable as well. The Russian authorities should focus on stipulating clearly the rights and obligations of all financial institutions providing non-cash settlement services, and should ensure the maintenance of all their interests in the course of such transactions so as to guarantee the best precondition for the subsequent growth of the share of non-cash payments.

Additionally, Russia could benefit from establishing a soil above which all transactions by companies or individuals should be done only using non-cash payments. Also, vast information support is required for raising the population’s awareness of the benefits of non-cash payments. Finally, complex measures against corruption should contribute to the population overall greater in confidence in the banking sector institutions, and thus in non- cash payments. Reducing the level of corruption is also indispensable for raising foreign investment and acquiring foreign technologies to boost the development of non-cash payment systems in Russia.

Fulfilling the above recommendations could contribute significantly to the subsequent development of non-cash payments in the Czech Republic and the Russian Federation. In line with the ongoing trends, this should provide both states with greater opportunities to boost their economic development in the near future.

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List of graphs

Figure 1. Share of cash and non-cash payments in the Russian economy in 2015 (Golubkova 2016) ...... 21

Figure 2. Dynamics of cash and non-cash payments in the Russian Federation in 2011-2015 23

Figure 3. Structure of the Russian payment cards segment, as of 2015 (Grizov 2016)...... 24

Figure 4. Structure of the Russian payment cards segment, as of 2016 (Plusworld.org 2017) 25

Figure 5. Shares of international and local non-cash payment systems in the Russian market, as of 2015 (Grizov 2016) ...... 26

Figure 6. Comparison of total non-cash settlement transactions in developed EU member states and the Czech Republic’s neighbors, as of 2015, in million transactions (Source: Statista.com 2016a) ...... 28

Figure 7. Structure of the Czech payment cards segment, as of 2015 (Bankovnikarty.cz 2017) ...... 30

Figure 8. Structure of the Czech payment cards segment, as of 2016 (Bankovnikarty.cz 2017) ...... 31

Figure 9. Structure of cash and non-cash payments in the Czech Republic, as of 2015 (Bankovnikarty.cz 2017) ...... 31

Figure 10. Shares of non-cash payment systems in the Czech market, as of 2015 (Bankovnikarty.cz 2017) ...... 32

Figure 11. Shares of non-cash payment systems in the Czech market, as of 2016 (Bankovnikarty.cz 2017) ...... 33

Figure 12. Structure of payment cards in use in the Czech Republic, as of 2015 (Businesswire.com 2016) ...... 34

Figure 13. Forecasts of mobile payments’ growth in the Czech Republic, in USD million (Statista.com 2016b) ...... 35

Figure 14. Share of the population using online banking in the Czech Republic in 2005-2015 (Statista.com 2016c) ...... 36

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Figure 15. Forecasts of e-commerce’s growth in the Czech Republic, in USD million (Statista.com 2016d) ...... 36

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