Russian fintech market — a short history
As told from Fintech Finals stage in Hong Kong on Jan 31st, 2018.
The Russian fintech market is virtually not seen by the global fintech due to several factors: the number and quality of projects, adhering to local bank demand and requirements (not enough market to scale to survive and become profitable or scale to become noted), the overall vision for what constitutes a good fintech project (the market being regulated, not enough angels available with big capital stemming from corporate conglomerates more interested in buying existing banks and focussing them on corporate relationships rather than retail market that has been too often discarded as unprofitable.
As with many leapfrog countries, the retail fintech in Russia started with the consumption drive: people having good selection goods they can buy — when in 1999 unsecured lending supplied the economic growth Russia was experiencing after the 1998 default with capital: POS based lending and online scoring became the two great technologies pioneered by the Russian Standard Bank, built by a vodka magnate. The volumes — buoyed by fast followers (Czech based PPF launched what is now a big bank, Home Credit) — required a repayment network, where the branch based model still remained too costly, banks loved to install bulletproof glass — feeling insecure to deal with cash without them. Cash even today pose a problem and tallied in over RUB 10 trillion per year in volume and USD billions in lost revenue (cash in ATM is not available for overnight financing or lending, and it also incurs cost of distribution and collection). Digital payments are progressing (2013 was the year digital transactions surpassed cash-based), using two major platform effect to be told about a bit later in this post.
Taking out POS loans enabled millions of Russian users to start generating behaviour history banks starting to use the data to issue credit cards en masse. Coupling cards and cash allowed another wave of tech innovation to happen: ATMs and the redesign of the branch: relying on ATMs (then upgraded with recycling to delay replenishment / service) banks could radically cut costs for branch planning — Alfa Bank was one of the first to offer a new format, where tellers were also taught to sell products rather than service payments and collect money — that being relegated to the ATM.
Reliance on the ATM network and the subsequent boom of card distribution (banks have started to issue salary / payroll cards that were effectively credit (debit with overdraft), but the usage education was not there — not was originally the interest, banks issuing credit cards earned much more money from people taking cash from credit cards at ATM). That slowly created a level of mistrust to greedy banks, so people receiving salary stood in front of the ATM on their payday and took all salary. But, they were already savvy users of personal tech: computers and mobile phones and to pay for both affordable broadband and top up their mobile phone balance they have relied on scratch-cards. They have also started gambling — with one-armed bandits assembled from commuter components and installed in thousands all over the country — a reverse ATMs of sorts with cash compartment and a touch screen to play roulette and card games. Government took note and at some point instituted a ban on the business, leaving many hardware manufacturers on the brink of bankruptcy.
The scratch card were costly to distribute far away — smart entrepreneurs decided to use the infrastructure people knew how to use — the gambling machines — and turn them into prepaid payment terminals. As both knew how to connect to the web and handle cash, they became the perfect weapon. Numerous stories about retail payments you can read here (blog.danielgusev.com). Payment kiosks formed a very profitable business of retail payments (normally fees being 3–5 per cent on average) with the lean structure allowing the leader to have only sub 1 per cent profit margin — but business rose to achieve billions of US dollars in turnover — and so banks notice. Too late as it was the kiosk business that enabled two other major innovations — in 2008 and 2009:
- The prepaid wallet was originally a store-value purse to allow consumers deposit cash and then pay from a kiosk, yet as mobile broadband — and smartphones proliferated (and 2007 was the year of the iPhone) — the entrepreneurs saw little difference between a kiosk in a store and a portable kiosk — a mobile phone. The wallet made business mobile and added to the activity, as the business started encroaching on the bank business.
- The blockbuster product launched in fall of 2009 became a virtual prepaid card. The world’s first — it allowed people savvy with the experience of kiosks to render their cash, with incumbent banks paying little attention to the need of friendly and consumer oriented interfaces and behavioural use-cases.
The combination of two launched the challenger banking wave — and that was in 2011–2012. It also allowed banks to get back on track, thanks to their lack of legacy — and rebuilt their offerings around consumer-oriented payment needs — and so a wave of solid mobile banking offerings happened. The response from incumbents and the speed and efficiency they went at building slick and simple mobile banking apps countered the copy-paste phase from Silicon Valley, with clones of Moven and BankSimple offered by Instabank and Rocketbank respectively in 2012–13 achieved little and wounded down.
Ultimately the root cause of digital payment adoption was hidden in two things:
- On the issuing side the P2P technology rendered through prepaid as a platform allowed people to transact and send money between wallets and formed proper digital payment behaviour;
- On the acquiring side banks went back to promoting acceptance (since 2011 both international payment schemes in Russia started favouring acquiring in their interchange fee tables). That in turn allowed banks, that control the market with no ISOs present — to upgrade and buy new models — paving way for contactless payments — and them NFC (coming as a combination of mobile wallet form-factor and acquiring as a platform).
The end result is that Russia is currently in top-5 by Apple Pay tokens issued and volumes processed, Sberbank being the global 1 tokenisation agent of Apple as well as the fact of Russia trailing only South Korea for Samsung Pay. One worthwhile lesson for the global market — platforms are important as they help you scale.
Leveraging prepaid platform, mobile delivery and formed behavior, credit-based products appeared, using lean infrastructure to support profitable models in a heavily competitive market:
Reading the tea-leaves about the future is hard, but banks in Russia are two battered by the commoditisation of traditional business, so they invest in tech helping them to cut operation and compliance costs (regtech is even more important as several private banking corporations were saved by the Central Bank due to various irregularities in lending and reserves calculation). To address mutual problems, the banks have joined forces with the regulator to start the Russian Fintech Association through which they wrestle with commune problems with regards to universal B2B services provisioning (like digital identity, a blockchain standard for financial and trade / corporate finance messaging, real-time payments platform etc.).