The development of business of exchange offices of Internet currencies in Russia

The first payment system in the Russian part of Internet is WebMoney. Since the beginning of work in Russia in November, 1998, the turn of the WebMoney system (hereinafter referred to as WM) has been growing, and, most probably, will continue to grow with the speed reaching 100 % a year (the statistics doesn’t say about the period before 2001). For more than 7 years of work, the system turned from an unknown group of enthusiasts into a popular tool for Internet money transfers. Even those people who for the first time face the necessity to use electronic means to transfer money, have heard about WM.
Further consideration of business of exchange offices of Internet of currencies is tightly linked to the WM system. The WM system is a ‘landmark’ Internet currency, which (in particular, the commissions) all competitors in Russia are guided by and by example of which it is possible to consider the development of Russian payment systems.

It is necessary to note that Internet currencies (which are called payment systems, as well) began to appear in the USA approximately 10 years ago (the E-Gold system appeared in 1996). Within the course of their development, they began to take more and more means from the turnover of then dominating kind of payments via credit cards through the Internet. When it became clear that the business of creation of own electronic currency was profitable, more and more various Internet currencies started to appear and spawn; nowadays there are hundreds of them in the USA.
In the author’s opinion, the development of the Russian Internet currencies market lags behind the USA market for 3-5 years, though even now in Russia it is possible to easily find at least 15-20 various kinds of Internet currencies (not speaking about game money of online games, which are also bought and sold). The development of the WM system of payments generated a lot of small businesses, which are not connected with the system. One of the first to try to make money on WM were so-called autoexchangers, where users were offered to exchange one kind of electronic currency for another online (another kind of Internet currency which was used at that time was E-Gold; PayPal also existed, but autoexchangers did not work with it). These companies were not distinguished by reliability, and it was regularly heard that ‘this or that autoexchanger had been split open’ (now autoexchangers are much more reliable). Till 2001 it was possible to exchange WM for cash or buy WM only in the official exchange office of WebMoney, located in Sadovnicheskaya street in the center of Moscow. 2001 was watershed; WM went out from Sadovnicheskaya street and began its expansion to all directions of the world. First private exchange offices started to appear; they offered not only to exchange WebMoney and E-Gold, but also to receive money transfers, then just starting to gain popularity. We shall not enlarge upon the point who was the pioneer in the business of exchange offices of Internet currencies, since it is a questionable matter and there is no common opinion. We shall note only that the business started in the capital of the country, in Moscow, and later in St. Petersburg. Alongside with the growth of the turnover of the WM system there was a gradual decrease in commissions of private exchange offices of Internet currencies. In Moscow, first of all, because of low commission fee of the WM official exchange office (1,5 % for withdrawal and 1 % placing, the same as now), private exchange offices never took commission more than 3 %, and even that very quickly lowered to the rate of 2 % for withdrawal. That rate remained until 2004, when exchange offices of Internet currencies began to experiment its reduction.

Now to set the commission of WM at the rate of 1,5 % is not a problem (we offer 1 %). The same tendency is, in general, observed for other kinds of electronic currencies, for example, E-Gold, where the cost of withdrawal decreased from 10 % in 2001-2002 to 4-5 % (to tell the truth, recently, due to failed stability of the system, it reached 20 %). The cost of reception of Western Union money transfers is also steadily decreasing.

As for St. Petersburg, a 3 % and more commission for withdrawal is still considered normal. This is due to either long distance from the official exchange office, or risks, which are 1,5-2 times higher, or this is just conspiracy of exchange offices (by hearsay, the last variant is the closest to the truth).
If to move away from the capital, along with the decrease of competition there is the increase of commission, both for placing and withdrawing money via WM, amounting first to 4-5 %, and then to 10 % in small cities. Approximately in the same proportion the commissions for other electronic currencies increase.

Last year, due to development of the WM system, the opportunity appeared to purchase WM at post offices, offices for the top-up of WM-purses with cash, which should lead to a significant decrease in the commission for placing money via WM in the remote cities in the near future. WM is very popular outside Russia as well, including Ukraine and other CIS countries

At the beginning of the article, the annual growth of more than 100 % of the WM system’s turnover was mentioned. Therefore, it is easy to guess that there was a similar growth of the turnover of exchange offices. Once 3-5 thousand USD was enough for opening of a successful exchange office, moreover, due to the small quantity of exchange offices of Internet currencies, it was not difficult to inform potential clients about a new office. However, as in the case of the systems of Internet currencies, at a certain moment it became clear that the business was profitable, and a lot of new exchange offices entered the market.

There are more than a hundred official offices nowadays (and 10 times more small and unofficial ones). The necessary initial capital (it can be estimated as 10-15 thousand USD) also increased. Nevertheless, even today it is possible to recover value in a year.

Summarizing the written above, it is possible to say, that operating an exchange office is a very favorable investment, requires a comparatively small amount of initial investments, and has a short pay-back period.

However, this business has a lot of underlying potential problems and requires a sound management experience. To be singled out from among many competitors, it is necessary to differ from them, at least by the amount of commissions for operations. Any operation involves some costs, but they decrease along with the increase of turnover. This is the main idea of the development of the TrainEx business. At present the opportunity to attract investments into TainEx is being worked out.
Certainly, it should be more economically advantageous than investment into bank deposits.

Peter Kuznetsov, Financial Analyst of TrainEx

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