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NETE: Net Element Plans to Bring Third Party Bank Processing to Russia in Partnership with Sputnik Bank

By Lisa Thompson


Yesterday Net Element (NASDAQ:NETE) announced a memo of understanding with Sputnik Bank of Russia to launch a new business offering third party processing to other banks in Russia. In return for Net Element’s expertise, Sputnik will give Net Element 25% of its outstanding stock and potentially, a per transaction fee. Sputnik is expected to pay for all the expenses for the venture. This agreement will not be finalized until its passes regulatory approval in Russia, which is expected some time in the fourth quarter of 2018.

Sputnik is a commercial bank founded in 1990 and has $35 million in assets. It is known in the Russian financial market as a universal bank that provides a full range of banking services to both private and corporate clients. These services include payment cards, deposit accounts, wealth management, and interbank cooperation. 

Sputnik will be the first entity to offer third party processing in Russia and it should fill a much-needed demand. To date we believe all the banks in Russia use in-house systems, which are expensive and in many cases aging as many systems were written in the 90s when the banking system was recreated. Sputnik is expected move its own in-house system over to this venture and will sell the processing service to small banks, third-party vendors, value-added resellers, credit organizations and sales organizations. Due to economies of scale of bank and payment processing, one large entity can more efficiently manage a system and the smaller banks will be able to outsource their IT at what is expected to be a much lower cost. Adding to the attraction for many customers will be newer software than they may currently use. A third plus will be that any bank that has merged with another will find their home grown solutions will not interoperate with each other and as a result they will not enjoy the economies of scale a merger should bring. We believe this is the first bank to provide a wholesale service to other Russian banks and if executed properly could be a huge success. In the future, this entity could even be spun off into its own independent fintech company like many of the banks in the US have done.

We wait to see the terms of a final agreement if it passes regulatory approval and reaches that stage as well as the timing on the launch of the business, but on the surface this looks to be a very favorable development for Net Element. Although most of Net Element’s revenues come from US processing sales, NETE gives investors exposure to the Russian electronic payments industry.

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