MasterCard Inc’s New Russian Play Could Give It an Edge Over Visa Inc

Visa maintains its stance against Russia’s escrow plan as MasterCard seeks to partner with the locals

Jun 18, 2014 at 10:36AM

Credit
Flickr / Sean MacEntee.

Less than one month ago, payments giants Visa Inc (NYSE:V) and MasterCard Inc (NYSE:MA) decided not to exit the Russian market after a tiff with Moscow over processing stoppages during U.S. sanctions imposed earlier this year in response to the Ukraine crisis.

As a result of that disruption in Russia's credit card payment system, the government is requiring both Visa and MasterCard to put down large security deposits as a prerequisite to a continued business relationship.

Further negotiations have put off the new requirement until October 31, but both companies are facing the real possibility of having to place substantial sums of up to $1.9 billion for Visa and $1 billion for MasterCard into escrow with Russia's main bank this fall. 

In an effort to avoid this impending rule, MasterCard has put out the word that it wants a new payments partner within Russia, noting that it wants to "decrease the volume of cash turnover in favour (sic) of electronic transactions".

Visa: plan still "unworkable"
MasterCard's move is in apparent response to a government statement published earlier this month in a Russian newspaper. The announcement said that both Visa and MasterCard could likely skirt the deposit rules if they agreed to process Russian payments within the country – mainly by partnering with local processors. 

Visa isn't jumping in, however, and still maintains that the idea of such a large security deposit is untenable. With 90% of all Russian credit card transactions involving the two payments companies, Visa may believe that Russia will eventually soften its attitude toward the escrow issue.

Russia has a plan of its own
Russia is moving forward with its own planned national payments system, however, and is holding a conference on June 18 to discuss having such a program up and running by mid-2015. The new system will include Visa and MasterCard, but will also use China's UnionPay and Japan's JCB. No doubt, this move will seriously dilute the two U.S. companies' influence in Russia. 

For its part, it looks like MasterCard doesn't want to take that chance. From the sound of its public statement, MasterCard also is averse to leaving a country where electronic payments are gaining ground, holding the promise of new profits on the horizon.

Now that Russia has set the wheels in motion on a national payment system, it seems unlikely that it will back down. If Visa continues to stand pat, MasterCard might be the only U.S. payments processor turning a profit on Russian soil in the very near future.

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Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends MasterCard and Visa. The Motley Fool owns shares of MasterCard and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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