Ten years ago, banking for smaller businesses in Russia was a miserable affair.
Even the simplest transactions required reams of paperwork. Getting cash meant queuing in a branch with a cheque signed by the chief executive. Opening an account took a week or more. Payments took days. Customer service was nonexistent.
“Traditional SME banking in Russia was based on a corporate model,” says Roman Zilber, head of small and medium-sized enterprise banking at Raiffeisen’s Russian subsidiary. “Processes were complex and cumbersome – which was fine for corporates, because they have dedicated staff to manage banking, but no good for small entrepreneurs who have to do everything themselves.”
Then at the start of the decade, the IT team at a small Russian bank had a light-bulb moment. While working on an online platform for retail customers, staff at Bank24.ru realized that the product they were building could be adapted for SME clients.
“We started to think of SMEs not as corporates but as individuals doing business,” says Bank24’s chief executive at the time, Boris Dyakonov. “Once we did that, we saw there was a huge niche of smaller firms that was completely underserved by banks, so we started to create a digital product specifically for them.”
Bank24 understood that speed, convenience and customer service were key for SMEs. It focused on slashing times for services such as account opening and payments, as well as offering 24-hour support. It was the first bank in Russia to automate cumbersome processes for international transactions and the first to offer complementary services such as tax accounting to its SME customers.
In the medium term, we’re aiming for a 20% market share. That’s a lot, but we don’t set small targets for ourselves – Fedor Bukharov, Tinkoff
Larger players were quick to spot the advantages of Bank24’s model. Seen through a retail lens, SMEs suddenly became a much more attractive proposition – particularly because, unlike Russian consumers, they were prepared to pay for banking services.
“From a corporate perspective, SMEs were at the bottom of the heap, so they didn’t get much attention,” says Zilber. “When banks moved to a retail model, this was turned upside down. Compared with retail customers, small businesses are much more lucrative, so they got more attention, more technology and excellent service.”
Unsurprisingly, the banks at the forefront of this revolution were those with well-developed retail brands. Raiffeisenbank, which has traditionally had a strong following among mass-affluent Russian retail customers, was one of the first to refocus on SMEs, along with leading local lender Alfa-Bank.
Competition in the segment intensified after 2013, when the bursting of Russia’s consumer finance bubble prompted a frantic scramble by banks to cut costs and boost non-interest income. In this context, transaction-based SME banking became an increasingly appealing option, particularly when combined with cutting-edge technology.
In early 2015, Otkritie launched Russia’s first digital-only bank for SMEs. Created by the team behind Bank24, which had closed the previous year, Tochka Bank pioneered the use of remote account opening for small businesses, fulfilling its know-your-customer requirements by sending staff out to meet new clients in local cafes or their own offices.
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Boris Dyakonov, Tochka Bank |
“In any service business, what customers value is an attitude,” says Dyakonov, who now heads up Tochka Bank. “We put a lot of work into creating a retail-style service experience.” Building on the Bank24 model, Tochka also offered customers a range of ancillary products from third-party providers through its digital platform, from tax filing and managerial accounting to payroll support and guarantees for government contracts. A tie-up last August with Qiwi, Russia’s leading online payments provider, has also allowed the bank to upgrade its payment and acquiring products.
Tochka quickly acquired a loyal following among both small and larger businesses, racking up more than 100,000 clients in its first three years of operation.
It did not have the digital-only SME space to itself for long, however.
In 2016, Russia’s remote-banking specialist, Tinkoff, launched its own small business offering. Originally a consumer finance player, Tinkoff had been digital-only since 2009, distributing credit cards and signing up customers through a network of what it calls smart couriers.
In late 2014, the firm began branching out with the launch of Tinkoff.ru, a financial supermarket offering products such as mortgages, car loans and brokerage services. The following year, as part of a drive to reduce its reliance on wholesale funding in the wake of the imposition of western sanctions on Russia, it stepped up the focus on the Tinkoff Black current account product.
Tinkoff was thus well placed to fulfil SME demand for retail-style banking services. It had experience of creating sophisticated digital solutions, a big team of developers at its Moscow headquarters and a large base of relatively affluent, technologically savvy customers to test the concept on.
Initially, Tinkoff’s SME offering was limited to current accounts, basic payments and online tax declarations. However, the bank quickly added extra services such as acquiring, international transactions and state procurement guarantees and is now looking to further ramp up its product range.
By the end of June, small businesses will be able to access customer relationship management (CRM) and website creation tools via Tinkoff’s online platform. The bank also plans to expand its range of payment services to include invoicing and escrow accounts, and is considering adding recruitment services.
“Whatever SMEs do, we want to help them with,” says Fedor Bukharov, Tinkoff’s head of SMEs.
The platform has already proved very popular. More than 300,000 SMEs have signed up with Tinkoff in just two years, giving the bank 3% of the Russian market. Bukharov is setting his sights much higher, however.
“In the medium term, we’re aiming for a 20% market share,” he says. “That’s a lot, but we don’t set small targets for ourselves.”
We want to add all routine processes and tasks that entrepreneurs face to our ecosystem. It will be a win-win for all parties – Anatoly Popov, Sberbank
To date, most of Tinkoff’s customers have come from the micro segment. The bank is starting to attract mid-sized businesses, and Bukharov says it is only a matter of time before larger firms follow suit.
“Once that happens, we will for sure develop more complex products for those clients, such as FX hedging,” he adds.
Tinkoff faces formidable competition in its grab for market share, however, in the form of state-controlled Sberbank. The big beast of Russian retail was one of the first incumbents to realize the potential of digitization, launching an online platform for consumers in 2011.
Since then, Sberbank has established an astonishing dominance in the digital sphere. By the end of 2016, nearly half the bank’s 83 million active retail clients were using remote channels. Around 80% of Russians banking online or by mobile did so with Sberbank, compared with less than 10% for closest rivals VTB24, Alfa-Bank and Tinkoff.
Sberbank was also an early advocate of the ecosystem concept, quickly expanding its retail digital platform to include a plethora of both banking and non-financial services.
After the 2014 crisis, the bank began adapting this model for the SME market. In late 2015, it went live with a new digital business banking platform and set about building an ecosystem for entrepreneurs. Today SMEs can access more than 20 add-on services via Sberbank’s online bank, including CRM systems, website creation, accounting and legal support.
The response has been impressive. In less than three years, Sberbank has signed up half a million new business customers, mainly from the smaller end of the SME spectrum. Anatoly Popov, head of Sberbank’s corporate business block, says further development of the platform will be key to maintaining the pace of growth.
Anatoly Popov, head of Sberbank’s corporate business block
“We want to add all routine processes and tasks that entrepreneurs face to our ecosystem,” he says. “It will be a win-win for all parties. The bank will have higher revenue; entrepreneurs will have more time to spend on the development of their businesses.”
For some small businesses, such additional services are a boon.
Maksim Metelitsa, head of Samara-based import firm Tachograph Service and an early subscriber to Tinkoff’s SME platform, says a wider product range would be very welcome.
“If I can work with one system from payment to paperwork, that would be much better for me,” he says. “At the moment I have separate systems for CRM, accounting and banking. It’s like trying to connect an elephant with a dog.”
Feedback
Not everyone is impressed by the ecosystem concept, however.
Dmitry Makarov, managing director of online city guide and travel booking service Saint-Petersburg.com, says he is aware of the accounting services offered by banks but has no interest in using them.
He is also dismissive of efforts by Uralsib, one of two banks he has accounts with, to help with lead generation.
“They organize events, but it’s more of a fashion statement than a useful solution,” he says.
Raiffeisenbank’s Zilber also has yet to be convinced of the value of ecosystems for SMEs.
“People who really appreciate complementary services are still in a minority,” he says, “we believe not more than 10% of the market. They may grow in importance in future, but there is still a big question over whether that will be a differentiation point for clients.”
Research among Raiffeisenbank’s own rapidly growing SME customer base – the bank is signing up around 8,500 clients a month – suggests speed and convenience remain the priority for most smaller businesses in Russia.
“Overwhelmingly, the feedback has been that what SMEs want from us are fast payments, a convenient mobile app and a frictionless banking experience,” says Zilber.
Denis Osin, head of mass corporate business at Alfa-Bank, agrees.
“SMEs require simple and convenient daily settlements, plus convenient mobile and internet banking facilities,” he says.
Above all, he adds, they want funds for business development.
They have not always been able to get them. Traditionally, Russian banks have been leery of lending to smaller firms. Repeated spikes in bad debts over the last decade have reinforced perceptions of SMEs as high-risk borrowers.
After the global financial crisis, non-performing loans in the segment more than doubled to 9.7% of the total. In 2015, the ratio jumped again to 15.5% and was still above 14% at the end of last year.
Equally, small businesses have shown little interest in borrowing, deterred as much by cumbersome processes and onerous collateral requirements as by historically high interest rates.
“Borrowing from banks is not possible for a company like ours with no intangible securities, even when we have very high turnover and healthy profits,” says Makarov at Saint-Petersburg.com. “It’s easier and cheaper to go to business partners or friends.”
Mitchell Stoochnoff, general director of WoodSource, a Moscow-based timber firm, agrees.
“I tried some years ago to get a loan,” he says. “It was a big hassle, took a long time and was not very successful. If I need financing now, it’s almost better to just put it on my credit card.”
This negative perception may account for the relatively low figures usually cited for credit demand among Russian SMEs. Bukharov at Tinkoff says, at most, 20% of smaller businesses would be interested in bank loans, while Dyakonov puts the number as low as 10%.
We have clients from tiny towns where there is a lack of banking services – Boris Dyakonov, Tochka Bank
By contrast, a report published in October by Moscow-based researchers NAFI found that more than a third of Russian SMEs had experienced cash gaps in the previous 12 months. Only 26% had used bank loans to cover these gaps, however, with most either cutting costs or borrowing from friends and family. Of the businesses surveyed, just 8% used overdrafts.
These findings are supported by anecdotal evidence. Of the three small business owners interviewed by Euromoney, none had a history of bank borrowing, but all said they could be interested if credit were affordable and accessible.
“I’m sure there will come a time when I’ll need to go to my bank for financing, maybe for a simple overdraft or a line of credit,” says Stoochnoff.
For Makarov, access to lending is the key issue for small businesses.
“Everything else relating to banking – speed, cost, customer service – has been resolved satisfactorily in recent years,” he says. “In any case, none of these is anything like as important as the need for credit on reasonable terms.”
From the banks’ perspective, the main barrier to SME lending has traditionally been lack of information. “It’s been very difficult to expand in this area because it’s impossible to analyse Russian SMEs from their financials,” says Alexander Danilov, a bank analyst at Fitch Ratings in Moscow. “They can be easily manipulated so they won’t show the true picture.”
With the advent of big data, however, banks finally have a chance to fill in the blanks using techniques originally developed for consumer lending. Here again, Sberbank has been leading the way. For more than a year the bank has been using what it calls “smart lending technology”, based on analysis of cashflow and data from customer accounts and open sources to provide loans to small businesses.
The result has been a dramatic reduction in loan decision times – from 8 to 12 days to less than an hour, according to Popov – and a surge in volumes. More than 28,000 loans worth around R45 billion ($789 million) had been issued to SMEs using Sberbank’s new system by early February, contributing to an 83.9% increase in new lending to the segment in the first half of 2017.
Volumes are expected to rise again this year, following the launch in March of a lending function in Sberbank’s online business banking platform. For the first time SMEs can now apply for loans, provide documentation and receive lending decisions 24/7 without having to go into a bank branch.
Zilber is also a fervent advocate of the use of big data in SME banking.
“We believe lending will be the major battleground in this segment over the next two to three years,” he says. “Being able to use third-party information to offer fast and automatic credit decisions to customers will be key to success.”
Raiffeisenbank has already started moving in this direction, introducing automated overdrafts for micro businesses late last year.
“We are extending small facilities based on clients’ transactional histories,” says Zilber. “We will see how they use them and then use that in future scoring models.”
The master of this technology in Russia is Tinkoff, which has been using advanced risk management techniques for consumer lending for nearly a decade. At the time of the launch of its SME platform, the firm said it had no interest in including loans in its product range, but it has since had a change of heart.
“We started with transactional services because we were very mindful of the risks of SME lending,” says Bukharov. “As we’ve grown our customer base, however, we’ve come to understand that lending is an essential product if we want to fulfil our objective of satisfying all of SMEs’ needs.”
Fedor Bukharov, Tinkoff’s head of SMEs
Tinkoff intends to start issuing loans to the segment this summer. Initially, these will be small overdrafts based on transaction history, but in due course the bank plans to add working capital facilities and even collateral-based investment loans, possibly through tie-ups with partner banks.
As with all Tinkoff’s SME products, the emphasis will be on speed and automation. For the smallest loans, scoring will take no more than a few minutes, according to Bukharov, while for loans of R1 million or more, decisions will mostly be made within a couple of hours.
“Everything we do on our own balance sheet we try to do fast,” adds Bukharov. “Speed is one of our competitive advantages.”
Nevertheless, for the moment at least, Tinkoff’s ability to gain traction among SMEs may be limited by lingering scepticism about its remote-banking model. Despite running an online business, Makarov – who is in his late 40s – insists that digital banks are only for younger entrepreneurs.
“For people of my generation, the idea of a bank with no physical outlets is too scary,” he says. “There are always problems that take paper documents to solve, and where would you go?”
Zilber confirms that being able to go into a bank branch is still important for many Russian SMEs, particularly at the larger end of the spectrum.
“Our core clients value brand stability and the fact that they can see the bank in the city centre,” he says.
At the same time, Raiffeisenbank is planning to introduce remote banking. This year, the bank will start opening accounts in cities where it does not have a physical presence.
“In the future, there will be more digital-ready clients, so it’s extremely important to develop the technology,” says Zilber.
Alfa-Bank also introduced “full remote servicing” last year.
Geographical reach
For banks, the obvious appeal of this model is that it allows them to extend coverage to parts of Russia that have traditionally been underbanked. Tinkoff’s proud boast is that it works in every small town and even many villages across the country. Tochka has a similar geographical reach.
“We have clients from tiny towns where there is a lack of banking services,” says Dyakonov.
Among small business owners, it seems likely that resistance to remote banking will weaken as the model becomes more widespread.
Timber merchant Stoochnoff, a Canadian who has worked in Russia for 14 years, says he was initially a digital sceptic.
“I was a bit worried, I wasn’t sure how it would work,” he says. “After so many years of banking in a certain way, you get used to the system and the bureaucracy.”
Frustration with poor customer service and lengthy payment times at his existing bank, however, prompted Stoochnoff to try Tinkoff – and the account opening process quickly allayed his concerns about remote banking.
“Usually you have to go into a bank with original notarized copies of everything; it’s time-consuming and a headache,” he says. “With Tinkoff it took one day. They came to my office, took copies of all the documents, and the next day the account was open. After that, I understood that it’s possible to bank this way.”
Stoochnoff’s experience also gives the lie to claims that technology in the Russian banking sector has advanced to the point where there is little differentiation between leading players. His previous bank – the subsidiary of a large western group – took days to process international transactions. With Tinkoff, foreign currency payments go through the same day.
“It makes a big difference,” says Stoochnoff. “Having our money trapped for three to four days for no reason had an appreciable effect on our bottom line.”
He is also very appreciative of Tinkoff’s customer service, which for SMEs includes the services of a personal account manager.
“I call the bank and they answer the phone every time,” he says. “It’s nice to be able to talk to a person rather than a machine and without having to press 18 buttons.”
Customer service is also a big focus for Sberbank, which is investing heavily in technology such as cognitive assistants, chatbots and biometrics for its SME customers.
“Any potential contact of the client with the bank should be highly professional,” says Popov.
As with the rest of Russia’s new generation of SME bankers, Popov believes that the segment offers great growth potential. As he notes, policymakers have made increasing the role of SMEs in the economy a central plank of the government’s development strategy.
In late 2015, Russia’s economy ministry promised to double SMEs’ share of overall GDP from 20% to 40% by 2030 and to increase the proportion of citizens working in the segment from 25% to 35%.
That might seem an ambitious target, particularly given the Russian state’s relatively weak track record on implementing economic reform. Even without government support, however, Zilber says fundamental trends in technology will drive growth in the sector.
“The rise of online platforms is providing entrepreneurs and small businesses with new ways of selling their services and connecting with other firms,” he says. “This is inspiring a new generation of business people.”
Whether the promised growth materializes remains to be seen. One thing, however, seems certain – Russia’s new entrepreneurs will have access to much better banking services than their predecessors.
