Fintech in Russia: A brief history. Part II.
By 2008 Russian banks had begun to sense that the new electronic payment services and micropayment systems (EPS) were posing a serious competitive threat in a field long monopolised by banks. As the new payment services offered the general public an extremely user-friendly system, they quickly came to garner a large chunk of the market for financial transactions. These included people sending money to each other for a variety of reasons, buying merchandise from online stores and paying for utilities and other services.
The banks’ reaction to this unexpected challenge was initially confused and directionless. They inundated the Central Bank with petitions maintaining that such electronic payment services were in violation of Russia’s banking regulations. They then turned to their vendors, demanding that they should provide innovative software that users would feel more comfortable with. During this same time broadband internet was gradually becoming available to everybody in Russia.
While most Russians had already found access to the internet to be as essential and readily available as television, online banking continued to turn away users as too complicated and unmanageable. Average people believed that so unfathomable a system was surely not intended for them.
Still, the man in the street felt certain that online banking ought to be little more than a simple site with payment functions. Thus, when pitted against electronic payment systems, online banking kept losing the battle for customers chiefly because EPS offered an easier, more convenient interface. Bank customers felt even more keenly estranged from the technology which was offered to them for mobile banking.
This was, after all, a time when people had ceased thinking of smartphones as devices reserved for the limited few. They began to appear more and more frequently in the most unexpected places and came into general use in people’s daily lives. But while mobile internet connection was becoming faster and cheaper, the fintech solutions for mobile and online banking, as provided to the banking sector by the main software vendors, remained on the MIDlet and Java OS-x level.
It appeared that the vendors were simply unable to come up with compelling fintech solutions for banks. The problem within the banks themselves was that their IT departments could not accept the new reality, that bank customers wanted a better user experience. This could only be accomplished by utilising newer approaches to software development, turning to agile methodology, paying far greater attention to design and initiating a revolutionary transformation of standard enterprise platforms.
Then, almost like a breath of fresh air for bank customers, a few banks of a new sort entered the Russian market. Their directors realised that the true future of banking lay in offering the public superior fintech solutions. Guided by that philosophy, they forged ahead by creating a number of groundbreaking services based on genuine fintech solutions.
One of the first was Tinkoff Credit Bank, called TCS Bank. It was originally founded on the rather unusual premise that a bank could operate without traditional departments. The directors believed that the concept would allow Tinkoff to economise on space and staff and then pass the savings on to bank customers in the form of improved services. Walking a fine line between adhering to regulations and flaunting them, the bank gave its approval to such non-Russian methods as sending out bank cards by post. As a result of its liberal approach, Tinkoff rapidly attracted a substantial clientele.
For customers to conduct basic banking operations as conveniently as possible, Tinkoff also opened a highly efficient call centre, and then launched mobile banking and online banking.
Along with banks like Tinkoff, which were willing to gamble their future on business models aimed at pleasing customers with simple solutions, the entire banking market began embracing mobile banking and online banking. However, the adoption of mobile and online banking by virtually every major Russian bank did not lead to an instantaneous rush of new customers nor their being easily convinced to use the new offerings.
The trouble may have been that only a handful of banks succeeded in stirring their vendors out of the doldrums and, ultimately, got them to create products that were, at least to some degree, simple enough for the average person to use. Among the banks that were moderately successful in this endeavour were Alpha Bank, Bank24, Svyazynoy Bank and a few others.
There actually were a few instances in which some of the major banks had exemplary fintech solutions designed for them. But for a prospective user there followed an array of complicated procedures. These included arranging a personal interview in a bank office, gaining access to the service and identifying the user to the bank’s satisfaction, being made aware of the bank’s security concerns and designating a regulator. These and other steps stood between the prospective user and the service.
At the same time, EPS were not lagging behind and remained just as competitive as ever. They kept on moving ahead by adding a whole series of new services. As early as 2007, they had developed new payment services which let customers draw on the money in their mobile phone account. Thus was born in Russia the widespread technology known as m-commerce.
As more and more new services appeared, the number of things online which people could apply them to also grew exponentially. These included making theatre reservations, booking tickets to the cinema, insurance policies sent and received electronically, and music, videos and every other sort of content.
Along with their success and growth, EPS lobbied more and more persuasively for legislation that would legitimise their activities. Their efforts were at last rewarded when the government came to recognise such services officially.
Once EPS firms no longer had to prove their legitimacy, they were in a position to set their own commission rates for their services, i.e. receiving and transferring payment for a vast variety of products and services. And as EPS firms gradually started adding on commission percentages, the big banks quickly seized the moment, for they could afford to conduct such transactions with minimal commissions or without any commission at all.
The end result was that competition rose sharply, and not only between the banks and EPS, but also between the banks themselves. By 2012, the various payment systems had also begun competing with each other in earnest. Finally, when the largest payment processing software vendors entered the contest with vastly improved basic enterprise application patterns, market activity reached an even higher level. The new feverish pitch of competition, as market trends have predicted throughout history, gradually led to a noticeable improvement in the products which the banks offered to the public.
It was around this time that a considerable number of fintech startups began springing up. As they increasingly came to be engaged by the banks, these young fintech firms started to create highly original models for interaction within the banking sector. This occurred even though investment in Russia’s technological service industry was grossly underdeveloped, particularly in comparison to those of Western Europe and the US. It was without question one of the key features of Russia’s centralised government that there was little encouragement or support of such projects and start-up businesses.
To be continued…