The Russian Kiosk Market

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The Russian kiosk market hardly existed in 2005, but saw five digit numbers of kiosks produced and deployed in 2006 alone, with 2007 not lagging far behind. We asked SmartGames how they got to the number one slot in the country, and why they are expecting new legislation to shake up the market again.
 
KIOSK EUROPE spoke to Alexei Kuzmin, Marketing Director of SmartGames, the shooting star of the Russian kiosk market.

KIOSK EUROPE: The Russian kiosk market exploded in 2006 with an enormous amount of kiosks being installed literally over night. What were the reasons for this development?
 
Alexi Kuzmin: As everyone knows our economy is in a phase of very strong development with many extraordinary transitions happening. The recent kiosk boom in our home market can be attributed to a great deal to the fact that it is close to impossible for banks, retailers and other providers to install all the necessary infrastructure to serve the newly arisen consumer demands. If you look for example at the time, expenditures and effort it takes to built a bank branch or supermarket it is very often apparent that it is neither acceptable nor economical to wait until all these have been put in place to start serving the customers. As a result self-service terminals have been booming offering transactions and convenience for many consumers. And I am sure you can imagine not having to stand in line is still a true selling point in Russia. – Furthermore with an estimated 25% maximum of the population having bank accounts Russia still largely remains a cash society, where the vast majority of all payments and settlements are done in cash. The kiosk is the ideal vehicle to do so remotely, which is a big advantage as there is not a sufficient branch network in place.
 
KE: Even so, it is still hard to understand how you have been able to benefit from the developments in such a short period of time, particularly with regard to the very high number of terminals deployed?
 
AK: I believe we simply were in the right place at the right time with the right product. In a way, we have been benefiting from our misfortunes of the past. SmartGames has been founded in 2002 and was essentially a successful supplier of gaming machines. However this market was cut short in 2006 due to new legislation in Russia. We were forced to look for new markets using our existing expertise and manufacturing capacities, so we found them in supplying self-service transaction terminals as well as we expanded our gaming machines sales to other countries. When the market took off we had the right product, capacities and deploying expertise in place to benefit from it.

KE: The Russian government has now passed new laws that will regulate the kiosk market even further. All payments on self-service devices must now be either channelled through a bank, or a kiosk network or payment network operator has to obtain a full banking licence. What is the background motivation of the new regulation and how will it affect the market? Is the kiosk market in Russia going to see the same fate as the gaming market saw four years ago?
 
AK: To answer your last question first: No, I don’t think so. The new regulation basically requires that the terminals comply with high standards of bank industry. This will obviously impact on the low-end market dramatically as there is a lot of manufacturers producing cheap products of poor quality. To give you an example: We estimate there are about 150 terminal manufacturers in Russia today. However, only about five of them have the necessary certifications to comply with the new regulation already in place. Of course a number of better companies will obtain them, for many smaller, low-end producers this will probably be the end of it. How will it affect us? Since we have always aimed to produce only high-quality products and comply with all new regulations we are certainly in a strong position to benefit from the developments even further. Besides, our system of quality control has an international certificate ISO9001.
 
It is expected that the number of self-service terminals in the banking retail sector is going to grow, and the volume of the low-end market will decrease, so the entire market may not grow at all, or at least only very modestly.

With regards to the motivation of the legislation there are a number of elements. The government’s prime concern is about a potential abuse of the terminals for money laundering purposes since they do allow to pay in cash into bank accounts, but there has also been concern about the kiosk market overheating and last but not least of course there is always the issue who is being able to charge a commission on the transactions made.
 
KE: How will this affect your strategy in the market?
 
AK: With the high-end sector of the market well covered and the low-end sector basically ruled out by law, it is quite clear that we will continue to focus where we are strongest: in the middle sector of the market providing high-quality for affordable prices. Our certifications are already reflecting very positively on our brand image and long term success can only be built with satisfied customers who are coming back to buy again. We are also offering our manufacturing capacities and expertise as a contract manufacturer to other self-service companies.
 
KE: If the home market is getting closer to saturation the natural thing do is to look abroad? What is your international strategy?
 
AK: Our home market is Russia, where we will continue to develop aggressively. Beyond this we have already entered the Ukrainian market and are starting to expand currently into Kazakhstan and Belarus on a natural growth basis. As a possible next step we are thinking about Europe but we are still researching that market.
 
KE: Growth of the self-service market in Europe can sometimes be limited by user acceptance of self-service. With you meteoric growth there does not seem to be such borders at all. Do you not ever experience consumer rejection?
 
AK: It may be a luxury, but in all honesty: No, we do not. In many cases the services offered are only available through the self-service terminals so that all consumers, who wish to use the service are required to use the terminals and we have not had any major issues with them doing so. A more complex issue of course is how this will develop as services will also increasingly be offered in more rural areas and to other sociographic target groups than our comparatively young average user.
KE: Are you specifically targeting the young?
 
AK: This may be less an issue of the young being targeted, but rather the other way around of the most widely offered services mainly being used by the young. Mobile phone top-up and loan repayments are the two largest applications offered on self-service terminals in Russia and both happen to be used largely by the young.
 
KE: What about photo kiosks?
 
AK: You are correct that the use of kiosks for mobile phone top-up would make it the perfect cross-selling opportunity for digital printing. However the story is a different one here. Photo kiosks have never really caught on with the Russian consumer. At the same time their comparatively complex technical infrastructure does not go well with high demands of reliability, particularly wherever installed outdoors, and vandal resistance, which have made them ultimately unprofitable.
 
KE: So, which self-service applications are going to be the next big thing in Russia?
 
AK: With the future of the self-service market in Russia being more regulated the growth will rather be in offering more services on the existing terminals rather than trying to install new ones. We expect the biggest potential for applications using the existing payment functionalities such as utilities bills, transport tickets and event tickets, using the existing payment functionalities.