Fintech in Russia: A brief history. Part I.
In both Soviet and post-Soviet times, bank cards were a thing of wonderment to the average Russian. Getting one’s wages or making purchases by using a plastic card, whether a credit card or a debit card, was nearly unheard of.
As people found themselves increasingly dependent on mobile phones and the internet, making such routine payments meant travelling to an out-of-the-way office maintained by a mobile service provider or standing in queue at a bank. At the time, the acquiring firms needed to process credit cards for merchants and service providers were nearly nonexistent. By the early years of the third millennium, the Russian market was expanding exponentially. Ordinary people clamoured for a simpler way to handle minor transactions. As a result, rivals sprang up to offset the snail’s pace provided by banks. Specialising in the electronic transfer of funds, operators like Web.Money, Yandex.Money and Qiwi, found a ready market for their services. These firms provided an easy alternative to manage such daily expenses as paying for mobile phone calls, internet service, utility bills and purchases from internet stores.
Thus, between 2000 and 2004, when the first companies to specialise in the electronic transfer of money came into being, they instantly garnered the lion’s share of the market for such transactions. Web.Money, Yandex.Money and several others became the public’s happy alternative to queuing up in the bank. These insightful firms quickly found themselves handling payments for mobile and internet services, for purchases from internet stores and for exchanging among themselves the collectively vast sums of money that individuals began sending to each other.
It was around this time that the first non-bank payment terminals came to be a common sight along every major avenue and in all public areas. Such automatic payment terminals let everybody pay for nearly everything by the simple act of inserting a few bank notes.
Just a few years later, these enterprising concerns became the first entities to extend their sphere of activity to mobile payments and mobile commerce. I believe we are justified in calling them the original pioneers of Russia’s fintech market. And as pioneers, the path they chose was not without risk, as in many respects they were treading into fields traditionally reserved for banks. But by no means did they wish to become banks.
Had they applied for bank licences and been accepted, they would have been compelled to act according to the directives of Russia’s bank regulatory authority and submit to the guidelines of the Central Bank of Russia. Such a radical change in their operating strategy would have made them no different to ordinary banks: they would then have lost their competitive edge, which was what had made them overwhelmingly successful in the first place.
In our view, the appearance of such firms as Yandex.Money and Web.Money marked the first momentous stage of fintech innovation in Russia. They dared to prefer ease of use for their customers over bureaucratic, judicial and economic considerations. These pioneering firms offered not simply improved technology and easy interfaces but, for a nation wary of anything new, a pleasantly satisfying user experience as well.
These and similar companies began experiencing the pangs of growth even as their businesses increased far beyond expert predictions.
With each passing day, the directors of such pioneering firms put themselves in harm’s way as targets of judicial allegations that they were conducting bank dealings without a bank licence. At the same time, the banks themselves began to feel the heat of unwelcome competition.
Whatever banking technical solutions existed were virtually a proprietary right of Russia’s three or four major banking software vendors, for whom these products had been created in the late 1990s. The average user was puzzled by their ridiculously complicated interfaces and exasperated by their slow performance. This was the situation as it continued until quite recently.
The inconvenience of poorly designed web and mobile services was compounded by banks continuing to demand antiquated bureaucratic procedures for their installation and use. Russian banks remained committed to the frustrating practice of insisting that customers fill in page after page of application forms in order to sign on to the service, receiving the pin code in a wax-sealed envelope, the absence of technical support, the tediously slow response of the interface and the extra time required to complete each transaction.
This was the way Russian banks continued to plod along until about 2010, by which time the social networking websites had already existed globally for more than five years. It was a time when all large organisations, other than banks, were relying heavily on the internet, aggressively competing for customers and honing their skill at creating simplified systems largely based on a readily usable interface. Since 2008-2010 banks and banking software vendors started to improve their online banking solutions and services. The era of the struggle for the client’s convenience has begun.