Inside Kaspi’s Kazakh banking experiment

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By:
Matthew Thomas
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Kaspi.kz is Kazakhstan’s most exciting technology company, its most ambitious bank and perhaps its next international export, but rivals think they have figured out its secrets.

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Everything we do at Kaspi.kz is about simplifying the way people live,” says Mikhail Lomtadze, Kaspi.kz’s chief executive. “Our mission is to improve the lives of people by developing innovative services which transform the way they shop, pay and manage personal finance.”

Lomtadze is CEO in two different ways of spelling out that acronym. He is the bank’s chief executive officer but also its chief ecosystem officer, a title that perhaps provokes a roll of the eyes from weary observers, used to the Silicon Valley practice of giving perfectly normal jobs weird and wacky names. But it is clear that at Kaspi the focus on the ‘ecosystem’ – the totality of banking and other services that should feed into and help each other – makes this title arguably more meaningful than the first one.

Kaspi, founded in 2002, was for many years a rather uninspiring, conventional bank, catering to a mix of corporations and SMEs. Private equity firm Baring Vostok acquired a majority stake in the bank in December 2006, and Lomtadze became CEO in 2007, leading to big changes: Lomtadze says that he and his partners “basically fired everybody” and rebuilt the management team from scratch.

“We had a very clear goal to build our competitive advantage on speed of providing products and services, and constant disruption through innovation,” he tells Asiamoney. “You can achieve this only by being data-driven and technologically advanced. We felt that would be our biggest source of competitive advantage in the years to come.”

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Mikhail Lomtadze, Kaspi.kz

The firm decided not to hire people with banking experience, instead relying on a cadre of young, tech-savvy graduates. Many of them remain with the company to this day, but in the early days they had to be patient. Kaspi’s current high-speed growth is reliant on its mobile app – the central delivery mechanism for all of its services today – but that was only launched in 2017.

After Lomtadze took over, it took about four years to pull off the shift from lumbering corporate bank to leading retail bank, but in many ways the bank is still in a state of transition. It has, however, settled on a few operating principles that seem to guide every business decision.

The most important of these is the use of net promoter scores (or NPS).

NPS became widely known following a Harvard Business Review article in 2003 and ask customers a simple question: ‘How likely is it that you would recommend this product to a colleague or friend?’

Based on scores out of 10, a company can define promoters, detractors and the passive customers who sit in the middle. The use of NPS as a measure of the general health of a business – or just as a nice number to add to the annual report – is common among banks and corporations, but Lomtadze says Kaspi has taken NPS “to the extreme”.

The company has a product head for each of its business lines. They are not benchmarked against profits, revenues or even user growth. The only benchmark for these product heads is the NPS figure. But the best example of how central NPS is to Kaspi comes from the fate of the credit card business, which Kaspi pulled a few years ago. That represented around a third of Kaspi’s revenues at the time.

“We measured the net promoter score and it was negative,” says Lomtadze. “People hated different fees attached to credit cards and that they could not repay the debt over time, due to its revolving nature. A negative NPS meant for us that credit cards did not fulfil our mission. We called it unhealthy earnings. It took us 48 hours to kill the product.”

NPS is still the basis of Kaspi’s business strategy. It makes 50,000 recorded phone calls to its customers each month, asking them the classic NPS question and a simple follow-up: why?

“After we get that feedback, the teams running every individual product come up with improvements and new ideas,” Lomtadze says. “We don’t use net promoter scores only as a simple measurement of the health of our business. It is a real-time feedback that allows us to change our business constantly.”

It has also driven many of Kaspi’s big launches. Kaspi rolled out its payments business in 2012, an e-commerce marketplace in 2014 and the mobile app three years later.


[Kaspi’s story should be] an international case study, not just for Kazakhstan but for the world 
 - Rival

The e-commerce marketplace particularly stands out: the company has essentially pulled off in reverse what Alibaba did in China, starting instead with banking and pushing into commerce.

The e-commerce segment was still a small part of revenues at the end of the first half of 2019, being worth about 6.9% of a KT226.8 billion ($590 million) total. But it has grown rapidly, almost doubling from the same period in 2018.

That is just one example of Kaspi’s dazzling figures. Its first-half financials, released to provide a glimpse to international investors ahead of a mooted IPO, show explosive growth. Its monthly active users at the time were about 4.5 million, but by the time we met Lomtadze in November they had climbed to about six million. The total value of payments Kaspi processed on its platform was roughly $3.5 billion, up 180%. From that it made $24 million of division net income, an increase of 458%.

There is, of course, a limit to how much Kaspi can grow in one country, although quite where that ceiling is remains to be seen. Lomtadze still thinks there is room for customer growth but he also says Kaspi can get more transactions out of each user.

In a small concession to the idea that a country of 18 million cannot provide perpetual growth, Kaspi now plans to expand in Azerbaijan, adding a population of about 10 million to its potential customer base. It is also making a bet on Kazakhstan’s small and medium-sized enterprises.

Kaspi’s story should be “an international case study, not just for Kazakhstan but for the world,” says one of the firm’s rivals.

Evidently, he did not realize that just a few weeks before, it had already become one. Harvard Business School professor Victoria Ivashina and senior researcher Esel Cekin published a case study on the business and its IPO plans in October.

The 28-page report is a sign of Kaspi’s success, but it also points to one of the risks the business faces: the more attention it gets, the more its rivals take notice. Other Kazakh bank chief executives tell Asiamoney they have figured out how to emulate Kaspi’s success.

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Lomtadze says Kaspi has taken the use of net promoter scores, as created by Harvard, “to the extreme”


Focus

Walking into Alfa-Bank’s colourful offices in Almaty is like stepping into a stereotypical Silicon Valley startup: its hip, casually dressed young staffers talk strategy on brightly coloured sofas. The bank, a subsidiary of a Russian lender, may provide a striking visual example of how some of Kazakhstan’s banks are trying to act more like tech companies, but it isn’t the only one. ForteBank, Home Credit Bank and Alfa are among those banks that have tried to make their digital offerings a key part of their business plans.

Andrey Timchenko, Alfa-Bank’s chief executive, clearly respects what Kaspi has managed to achieve. But he tells Asiamoney the firm is not infallible.

“Kaspi has built a very powerful business,” says Timchenko. “Their biggest strength is their focus. They killed all businesses within the bank and left only consumer finance. Later, after years of growth and honing their business, they moved into other retail business like cards. Then they moved into the marketplace business.

“They didn’t think as a bank, they didn’t work as a bank. They made processes very smooth. They simplified marketing. They simplified everything. They made it so easy for customers to take a loan. At the time, it was quite revolutionary. Now many banks have copied them and it’s not so different, but they’ve managed to get a very big share. They have also managed to use the bank as leverage to go into other businesses, such as retail.

“Their strength is also their biggest weakness. They’re building a closed ecosystem, limiting customers’ ability to take money elsewhere or spend it elsewhere. It works for them now, but in the long term, it will be their weakness.”


We’re a complete maniac about controlling the customer experience 
 - Mikhail Lomtadze, Kaspi.kz

Alfa, like Kaspi.kz, puts a lot of emphasis on customer experience, largely through a shift to digital. Most banking operations for its consumer and corporate clients can be done through the app, something the bank has stressed after building a ‘customer journey map’, its own attempt to maximize customer satisfaction.

How does Lomtadze respond to the charge that Kaspi’s closed ecosystem will prove detrimental to its long-term growth?

“People don’t understand our strategy,” he says. “We’re a complete maniac about controlling the customer experience. That’s true. We are like Amazon or Apple. We want to control all important parts of the customer experience… this is our important competitive advantage.

“But how can they call Kaspi.kz a closed ecosystem if any customer can join and any merchant can join, even without having any current products from Kaspi.kz? I can’t understand why our obsession with customer experience could ever be a weakness. It’s one of our most important strategic imperatives.”

Learning lessons

ForteBank is another institution to learn lessons from Kaspi. The most striking example is ForteMarket, its own e-commerce service, but the bank has also gone one step further, launching a travel booking service.

“Many people make a mistake of trying to build these businesses independently, not as part of an ecosystem,” says Guram Andronikashvili, CEO of ForteBank.

Sound familiar? There is a difference, however. Kaspi sees itself as a technology and customer-experience company that provides banking services, as well as other services such as e-commerce.

That Harvard Business School case study opened with a quote from Lomtadze stating clearly: “We are not a bank.”

Andronikashvili shows no such desire to redefine his institution, despite that travel service.

“Forte is a bank, so we will be providing financial transactions to customers,” he says, talking about his plans for ForteMarket. “That’s the main purpose: to assist with the flow of the money. We can also provide funds to help customers buy the goods they need. The different pieces of the ecosystem are built to give the customer the end-product they want – and that end product is not money – and to be able to integrate ForteBank very tightly into this flow of money.”

Kaspi’s eye-catching numbers have set a benchmark for other banks. Home Credit Kazakhstan, a consumer lender, achieved a return on average equity of 40% in 2018, according to Fitch Ratings. When Asiamoney asks Karel Horak, its chief executive, about this high level of growth, he responds: “We don’t think our numbers are out of bounds, because there was one bank that beat us in terms of return on equity in 2018.”

No prizes for guessing which one: indeed, it was Kaspi.


Our customers don’t want our technology – they want to do something with our technology 
 - Mikhail Lomtadze

Lomtadze says that some of the most important innovations Kaspi has made have been done quietly, only yielding obvious benefits after three years. That is because Kaspi is better than its rivals at thinking through all the implications of technology changes on customer satisfaction, an advantage it gets from years of studying net promoter numbers.

“Everybody is launching a card because we did that,” he says. “We launched P2P [peer-to-peer], now they’re launching P2P. We launched marketplace, others are launching too. It might look like our product on a stand-alone basis but it doesn’t work the same way because it’s not integrated with all other services around the customer. We are building interconnected services around customers’ daily lives, and the more services we have, the less incentives customers have to switch. That is why we have a fantastic customer retention rate of 93% – and it’s constantly improving.”

The influence of the bank is clear, both in terms of raw numbers and the technology investments that have followed at other banks. But Lomtadze still thinks his rivals are taking the wrong approach, paying too much attention to tactics and not enough to strategy.

“We are excited that others are learning and growing,” he says. “This is good for Kazakhstan – and what is good for Kazakhstan is good for Kaspi.kz. However, while you can reverse engineer some of our products, you’re still going to be behind.

“Our customers don’t want our technology – they want to do something with our technology, that is, use our final products and services. Our speed of innovation is increasing, not slowing down. How can anyone catch up?”

Kaspi’s rapid growth, its international expansion plans and its many rivals jockeying for position make it hard to predict exactly what the future will hold for the company. But a good bet is that it will look again at a listing on the London Stock Exchange, after abandoning plans to list there in October.

What went wrong? Bankers on the deal say the company and its potential investor base could not come to an agreement on price – no great revelation for a pulled listing. Lomtadze is coy about the deal, although he does suggest a return is likely.

“I cannot comment on the specific future date,” he says. “We have all the documentation in place. The company is extremely well prepared. For example, we do quarterly audits even without being a public company. We have the luxury and flexibility of watching the markets and tapping investors pretty much at any time.”

Timchenko at Alfa says there were a few problems that may have damaged Kaspi’s appeal to international investors. One is the size of Kazakhstan’s population.

“If Kaspi was in China or even Russia, it would probably be a big hit,” he says. “But there is a big discount here because of the scale of the market.”

The other problem is in valuing a business that wears so many different hats, however well. Although Kaspi defines itself as ‘a technology and customer experience design’ company, investors still need to find comparable stocks. That means looking at other banks and e-commerce companies.

“Banks and e-commerce are two different businesses,” says Timchenko. “As a bank, we can be valued and theoretically sold on a standalone basis. They [Kaspi] are building something in between, which is great in a way, but tomorrow if they need to sell, they will find it very difficult.”

There were press reports around the time of the IPO that Kaspi’s shareholders were looking to raise $5 billion from the sale. But Lomtadze rebuffs that figure. He stresses that he has no urgency for a listing.

“I have never talked about the valuation with investors,” he says.

“The rumours in the press did not come from us,” he adds. “I’m obviously extremely bullish about our future and have a long-term view. But I don’t want our focus to be on the valuation.

“We will continue innovating and growing, we will continue delivering on our numbers and we will continue exciting our customers. Should Kaspi.kz become public in the future, investors will follow our progress and educate themselves about our innovative business model. This will hopefully be reflected in our valuation long term.”