Russian E-Payments Leader Qiwi Takes Flight With Visa

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Russia may be big and emerging, but it still seems locked in the communist era when it comes to credit cards and bank accounts.

Suspicious of credit card fraud, more than 90% of Russians use cash to pay bills and make purchases. And less than half of Russians over age 15 have bank accounts.

EnterQiwi ( QIWI ), the largest operator of nonbank self-service payment kiosks in Russia. Account holders deposit cash into the kiosks to store value and choose screen options to pay bills or top off mobile-phone minutes.

More than 165,000 Qiwi-branded kiosks and terminals operate across Russia and other former Soviet Republic states.

But that's just the basic business. Qiwi also offersVisa ( V )-branded virtual wallets to make it easy for customers to pay bills and make purchases using their cellphones in the small but growing e-commerce market.

Unlike credit cards, mobile-phone penetration in Russia is high, with more than 235 million cellphones in use, or about 1.65 per capita.

Cellphones Abound

In a country where consumers distrust credit cards, "It's the more interesting part of the business," said analyst David Koning of Robert W. Baird, referring to Qiwi's digital wallet.

"Consumers can make payments to thousands of places using their cellphones without ever having to have a credit card," he said.

Since Visa Qiwi Wallet allows consumers to load an electronic wallet and later make e-payments, it essentially acts as a prepaid debit account, Koning points out.

Qiwi rolled out a digital wallet in 2008, a year after the company was formed. It forged an alliance with Visa in November.

Visa Qiwi Wallet can't be used at physical stores' checkouts, but Koning says that might happen eventually, "which may be why Visa is participating."

Koning says Visa Qiwi Wallet is similar toeBay 's ( EBAY ) PayPal in that customers enter their mobile phone numbers and passwords to make purchases or pay bills.

The wallet can be funded using a Qiwi kiosk, bank account, credit or debit card or money transfer.

"Russia is still in its early development of moving towards electronic payments," Koning said.

Still, Qiwi says that more than 47,000 merchants accept payments over its network and that more than 60 million consumers use the network at least once a month.

Third-party agents actually buy, run and service the kiosks while Qiwi operates the network that connects the kiosks to the merchants and bill collectors, the latter of which include utilities and banks. That business model limits capital outlays as the firm expands its network.

Merchants and other recipients pay Qiwi a processing fee. Qiwi passes on a portion to its agents.

Qiwi, which went public in early May, is growing at a brisk clip. Revenue in the first quarter grew 50% over the earlier year to $41.3 million. Adjusted net profit jumped 216% to $14.7 million, or 28 cents per American depositary receipt, or ADR.

Visa Qiwi Wallet made up $16.2 million of first-quarter revenue, or about 40%. Payment volume on the wallet jumped 107% to $1.73 billion. Average volume per wallet in the quarter was $133.

The number of active accounts as of March 31 stood at 13 million, up 49% from the prior year.

Qiwi's kiosk payment volume grew 14% to $3.77 billion, driven primarily by a rise in Visa Qiwi Wallet users reloading their wallets through the Qiwi kiosk network, the company said.

The company grew "extremely well in the first quarter, better than expectations," Koning said. "The company's guidance implied some slowdown over the next few quarters, but our sense is that management is trying to be conservative given they just had their IPO."

Management said it expects 2013 revenue to increase 23% to 26% over 2012, while profit is seen rising 27% to 33%.

One of its biggest rivals is Yandex.Money, an e-wallet that lets customers load money on their cellphones. But Yandex doesn't have a kiosk network.

However, Russia's largest bank, Sberbank, bought a 75% stake in Yandex.Money, which is operated by Russian-language search engine Yandex. "So over time, they could end up offering loading at (Sberbank) ATMs," Koning said.

While PayPal has received approval to enter Russia, it might be tough for it to compete with Qiwi, which has strong name recognition, Koning says. Qiwi also has the home-country advantage.

Qiwi's operations are based in Moscow, though the firm is incorporated in Cyprus.

Possible Partners

Rather than rivals, PayPal and Sberbank could become partners. Qiwi's management confirmed reports that "there is an opportunity to partner with its potential competitors," including PayPal and Sberbank, analysts from William Blair & Co. wrote in a recent client note following a conference it held that included Qiwi.

"We believe any partnership agreement would essentially help leverage Qiwi's distribution network," the analysts wrote.

E-commerce in Russia is still hampered by shipment issues: subpar postal service and costly private couriers. According to various industry figures cited by Koning, Russia's e-commerce market accounts for no more than 2% of retail sales.

But e-commerce should grow 44% annually on average from 2012 to 2014, noted William Blair analysts.

"We believe there is potential for new important partnerships to be announced over the next several months," the analysts wrote in their recent note on Qiwi.

"We also expect to see new investments in talent to drive the data analytics and loyalty programs business over the next few months since Qiwi views this as a major long-term opportunity."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas

Referenced Stocks: EBAY , QIWI , V

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