Instalment finance in Russia: the product, the silent revolution and its champions
A story about a retiree-focussed and predatory loan-originator, that reinvented itself and built a sucessful 2 mio + instalment finance business in Russia
There is a great book by Lisa Servon named Unbanking of America — and many others that tell a sad story of tens of millions of lower-mass-segment consumers waging a life full of daily hardships on a meagre sustenance, often in technical default, so covering it with cash to better manage outgoing payments (and paying for that) and covering shortfalls with payday loans.
These people are not stupid or slow to accept the vagaries of modern and classic financial services — its just that the interfaces and the language used to offer these channels and products to them are wrong.
Hence the proliferation of an industry that has more branches in the US than McDonalds has in the country. But this story is not about US, it’s about Russia and here the situation is not so different. Where the booming years since 2000 have stimulated the consumer credit boom, the curtailing of economic growth is leading to a double-dip recession, with people falling under the bus of credit defaults.
According to latest statistics:
- 2.9 million payday loans are over 90 days due, equalling EUR 500 million;
- Russian consumers owe more than EUR 6.5 billion for utility bills, now under review for possible collection tactics (something that the market does not want to push amid the social sensitivity)
- Russian sent more than EUR 13 billion to refinance old loans — by receiving larger refinance type loans in the 1st half of 2018,
- Total indebtedness equals to EUR 150 billion, half of it generated during 2017, with a sizeable amount of 24.7 million loans been cash point-of-sale ones.
Responding to a looming crisis
The backlash can be severe, so banks have been looking for consumer segments with stable stream of income, with some focussing in the end on retirees, receiving their pensions from state-sponsored scheme that’s universal in Russia.
One such bank, Sovkombank, has basically built itself in Moscow and around capital by focussing specifically on this segment, with visual ads, products tailored specifically to get it. Where original banks used to send money to retirees pension pots shun away from the supposedly risky segment, this bank relished in it. Until the big players saw the market opportunity and have started leveraging their much larger physical footprint retirees in the pre-mobile cohorts relish to receive their paychecks and pay their utility bills: both Sberbank and Postal Bank have eaten into this. So instalment card project came, licensed from a team from Belarus-based MT Bank.
Visuals were basically rendered from the MT original success, where the instalment card disrupted the market and changed consumption dynamics forever: up to 60 per cent of total ecommerce spend in the country were made through instalment product offered — and Sovkombank was up to repeat this in a much larger setting.
2 years forward the banks have amassed over 2 million users (entering the top-5 most active credit card operators) in a project that is cash-flow positive and carries less than 1 per cent default rate due to nature of how instalment finance works — hardly one has option to buy everything for almost tenth of a price and pay no fees or interest. As there is natural credit card glut happening at the moment, banks competing with almost-same terms offered and little to give back to the customer.
Equifax mentioned that banks in Russia have issued 2.7 million credit cards with about EUR 1.8 billion balance available in Q3 2018. — that’s 1.7 times more than a year ago.
Cards, while they are becoming popular are seldom used (limit utilisation is at 30+ per cent, where 2 years ago it was above 50 per cent) due to penalties people would expect if they won’t pay and concerns about repayment opportunities.
What this has to do with Fintech? Everything.
Countries in Latin America won big because of instalments, allowing lower-mass segment to get into middle-class thanks to the merchant-funded credit available that made it possible to buy things through instalments.
Smart merchant network development that banks can’t do, teams behind instalment card projects in Russia can; it’s more of a merchant loyalty platform than a financial product: a different set of competences that helps the card win more users spending responsibly and adding ultimately to the bottomline in a country where credit-fueled consumption is stalling.
Education, information is also important and that is where mobile based apps accompanying these cards carry an educational element.