Snapshot of e-banking in Ukraine
February 2014 | EXPERT BRIEFING | BANKING & FINANCE
Retail e-banking started its development in Ukraine before the onset of the financial crisis. By 2009, electronic account statements and web-banking became standard for the industry. The crisis, which halted the double-digit growth of the financial sector from 2000-08, put the further development of retail e-banking into inertia. The e-banking, ATM and payment cards market reached saturation point around 2010 and set its focus on optimisation. Internet-banking now allows, in addition to payments and balance checks, online overdrafts and deposits, filing of application forms and online voice and messenger services for customer support. Such processes have transitioned relatively smoothly to tablets and smartphone devices.
The lively IT sector and 2003 Electronic Documentation Act, as well as 2003 Digital Electronic Signature Act, were the main catalysts for enhanced online services between the first and second waves of the financial crisis. The drivers of technological progress were foreign ventures, but the main educators were state and municipal-owned utilities, which provided little flexibility in their monthly payment routine. Therefore, the first online payment service provider (PORTMONE) that brought together utilities, customers and banks with merchant accounts has become a leader by number of transactions, prompting copycats by banking institutions and their satellites within the payment processing industry. Today, Ukraine boasts more than 10 payment systems, including the NSMEP sponsored by the government. E-money that must be issued by banks are becoming widespread and there are several electronic purses in operation. The industry postponed the plan to start a branchless bank and a branchless consumer loan institution in early 2014 – branded BitBank and BitCredit, respectively. Big foreign and local names are in competition for high-tech innovation and investment into existing branches and ATM networks.
Recent reforms on personal data protection (the amended Personal Data Protection Act becomes effective on 1 January 2014) had eased cross-border data transfer and the processing of personal information in line with Directive 95/46/EC (of the European Parliament and of the Council of 24 October 1995 on the protection of individuals with regard to the processing of personal data and on the free movement of such data) and the Council of Europe Convention. In addition, the National Bank of Ukraine has repealed requirements to the payment processing players and restated the registration procedures for the international payment system.
On the bureaucracy side, the development of paperless technology was slow. Tax declarations can be completed online but everything else is largely remains in paper form and requires the person’s physical presence.
The main restriction on the spread of paperless technologies is the Ukrainian legal framework, which is based on the holistic principle of a single accreditation centre, with the authority of a governmental agency. This centre issues certified digital electronic signature (DES) that have the effect of handwriting. It took a long time for the government agency to start functioning and sub-licence other accrediting institutions; yet still, to receive the enforced certificate of a key, at least one visit and one document signed by the customer in handwriting must be obtained. The practical problems that arose from this domestic-oriented structure extend from smartphone transactions from pre-paid cards (they all seem to be contestable as an unauthorised use of account) to the use of SWIFT technologies (first, the need to be disclosed to the national regulators in payment processing and cryptography; second, whether the transfer initiated and ended in Ukrainian banks can all be contested).
Ukrainian judges are not well-trained in technology and, therefore, institutional support of the e-economy is less than satisfactory. Although the law puts the burden of proof on the defendant – i.e., the defendant must refute that the evidence is incorrect – the courts rarely apply this principle where e-evidence (such as email correspondence, SMS, facsimile, PC data files, etc.) is concerned. Traditionally, therefore, stakeholders and their risk management advisers opt for paper over electronic documents, and for documents with DES over simple files.
In practice, however, DES mostly operates for the government sector and is generally considered to be an inconvenience. The financial sector has only recently been able to reconcile banking secrecy with the single accreditation centre outside the banking sector: the law was amended to allow the National Bank of Ukraine to establish its own accreditation centre. As a side note, many see this move as unnecessary due to the immense authorities and substantial discretion already held by the banking regulator.
Financial monitoring laws and regulations are an additional challenge for paperless technologies in Ukraine. The ‘Prevention of and Counter-Action to the Legalisation (Laundering) of Income Received Criminally Act’, restated in 2010, mandates that all financial service providers identify personally a potential client before any customer relations commence. Institutions risk penalties for non-compliance if they rely on identification carried out by others – even other banks or credit organisations. For instance, if a bank account is opened, the factoring company is obliged, nevertheless, to carry out independent identification of the customer – notwithstanding the fact that the bank and the company belong to the same group. Only late in 2013, some institutions decided to test voice and video identification for a limited number of products. Buyers of non-performing loan portfolios are interested in alternative solutions as non-performing borrowers are rarely willing to show up and sign necessary documentation.
One of the remaining problems on the technical and legal side of cyber is conversion of paper form into electronic form. Although technically savvy, state agencies and notaries do not possess institutionalised procedures to collect, save and store electronic files.
Neither has a suggestion been made for sufficient cross-referencing of electronic files, or between electronic and paper formats. Conversion of paper into electronic format is not a solution as long as the archives and notaries are required by law to keep paper files.
The export and import of capital is heavily regulated in Ukraine. Such rigidness, however, serves as a major opportunity for cashless and paperless solutions, since they simplify the movement of capital across the board. In fact, many foreign companies take the risk of counteracting with individuals and their payment card accounts instead of bothering with the long documentary trail of paper originals required for transfers to and from Ukrainian corporates and private entrepreneurs alike.
The platform for exponential growth would be to decentralise accreditation activities or, in a lighter version, to privatise the accreditation centre under proper regulatory supervision to prevent monopolistic abuse.
Dr Oleh Zahnitko is co-head of Banking and Finance and Olena Nagorianska is a junior lawyer at Gide Loyrette Nouel. Dr Zahnitko can be contacted on +38 044 206 0980 or by email: Oleh.Zahnitko@gide.com.
© Financier Worldwide
Dr Oleh Zahnitko and Olena Nagorianska
Gide Loyrette Nouel