Cash-Loving Russians Give Qiwi an Edge as PayPal Looms; Across Russia, Qiwi has 169,000 machines, more than double the number of any bank’s ATMs

October 2, 2013 Leave a comment

Cash-Loving Russians Give Qiwi an Edge as PayPal Looms

Whether at stores or online, in Russia cash is still king. Just ask Qiwi Plc. (QIWI)

The company has built a lucrative business catering to Russians eager to shop and pay bills electronically yet unwilling to use online banking or reveal credit-card numbers on the Web. Its solution: machines that swallow cash to let users pay their rent or phone bill or top up PayPal-like online accounts. Across Russia, Qiwi has 169,000 machines, more than double the number of any bank’s ATMs.Investors have rewarded Qiwi with an 84 percent share-price gain since its May initial public offering in New York, driven by expectations Russians will stick with it even as competition from online-payment services heats up. PayPal, owned by EBay Inc. (EBAY), and Yandex.Money, backed by Russian state-run lender OAO Sberbank, are both pushing for gains.

“Competition will get tougher,” said David Ferguson, a Renaissance Capital analyst in Moscow. “Still, Qiwi is in a strong position because Russians are used to its terminals — that’s something PayPal doesn’t have.”

Founder Sergey Solonin, 39, introduced the terminals in 2004, just after mobile phones had really taken off in Russia.

“Operators and banks couldn’t handle the increasing number of payments,” Solonin, now chief executive officer, said in August at a Qiwi Moscow office decorated with impressionist paintings. While the company is run out of the Russian capital, it’s registered in Cyprus.

Slot Machines

To keeps costs low, Qiwi’s terminals are assembled by Russian slot-machine manufacturers that supplied casinos before a gambling ban in 2006. Solonin says his terminals can be built for as little as $2,000, while ATMs run $50,000 or more, according to investment bank Robert W. Baird & Co.

The machines proved popular. Several financial crises had wiped out savings in Russia and left people with a mistrust of credit cards and online accounts. Even today, almost 90 percent of Russian credit and debit cards are used only for withdrawing cash, according to Qiwi.

Over the past few years, Solonin brought on investors including billionaire Alisher Usmanov’s Mail.ru Group Ltd. and Japan’s Mitsui & Co., and upgraded the machines to let users do everything from reserving and buying train tickets to making loan payments.

Since 2008, Qiwi has offered a payment service similar to PayPal that it now calls Visa Qiwi Wallet in a tie-up with Visa Inc. (V) The service has attracted 14 million users and is outpacing growth at the terminals, though the machines remain the bulk of Qiwi’s business, with more than 60 million customers.

Banking License

Last year, Qiwi processed 465 billion rubles ($14.3 billion) at its terminals, for which it charged an average commission of 0.61 percent. Its wallet service processed 152 billion rubles, with an average commission of 0.82 percent. Revenue from the two services, plus other income such as ads on terminals, was 4.2 billion rubles in 2012. Qiwi expects that to increase 30 percent this year, expanding profit by 40 percent.

Qiwi rose less than 1 percent to $31.26 in New York yesterday, valuing the company at $1.66 billion. All four analysts whose ratings are tracked by Bloomberg recommend buying Qiwi stock.

Secondary Offering

Mail.ru, Mitsui and managers including Solonin are selling $250 million of Qiwi shares in a secondary offering for $30.50 apiece, according to a statement yesterday. The deal size may rise to $288 million under an option granted to the underwriters.

The challenge from PayPal, which received a Russian banking license in May, is growing. PayPal users can now make withdrawals by transferring money to bank accounts, and last month the company started accepting payments in rubles as opposed to just dollars. Recent deals with popular Russian online stores such as Ozon and KupiVIP mean there are more places in the country to use PayPal, in addition to hundreds of thousands of merchants worldwide.

Russian rival Yandex.Money is the country’s most popular electronic wallet, according to researcher TNS. Sberbank acquired control of the service this year, while Internet company Yandex NV (YNDX) kept 25 percent. The deal allows users to top up accounts at the bank’s 65,000-plus ATMs and terminals.

While Qiwi has a banking license, which it needs to process payments, it says it’s not considering challenging Sberbank or other banks by offering loans, deposits or cash withdrawals at its machines.

International Expansion

To keep growing, Qiwi is expanding beyond Russia. It has more than 11,000 cash terminals in countries including Brazil, Kazakhstan, Romania and the U.S.

The Visa deal “offers us wide possibilities of foreign expansion,” Solonin said. “E-commerce is our fastest-growing category.”

Still, there’s plenty of potential at home. Russian e-commerce will expand 35 percent a year through 2015 from about $12 billion last year, according to Morgan Stanley.

“The share of online payments is still relatively low in Russia,” Yandex.Money CEO Jane Zavalishina said over coffee at the Moscow loft that serves as her office. “We and Qiwi aren’t really competing against each other, we are both trying to convince users to shift to online payments.”

To contact the reporter on this story: Ilya Khrennikov in Moscow at ikhrennikov@bloomberg.net

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Unknown's avatarAbout bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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