Banking: Russia makes its own innovation
Recruited to set up a national payments system, the central bank’s Olga Skorobogatova has overseen initiatives to protect consumers and promote competition in Russia’s banking sector. In her first interview with international media, she talks sandboxes, blockchain and the challenges of regulating bank ecosystems.
Olga Skorobogatova, the central bank of Russia’s first deputy governor
Russia’s central bank is one of the most active in the world in terms of digital innovation. Over the last six years, it has launched a series of big infrastructure projects including national fast payments and biometrics systems, as well as a regulatory sandbox, a financial technology association and a blockchain platform.
The driving force behind all these projects is Olga Skorobogatova, the central bank of Russia’s (CBR) first deputy governor and digital supremo.
Unusually for a central banker in the former Soviet Union, Skorobogatova has strong commercial banking credentials. She moved to the CBR in 2014 after an 11-year stint at Rosbank, Societe Generale’s Russian subsidiary, where she started as director of retail sales development, cash services and remote services. She joined the management board in 2007 as head of the banking and IT committee.
In that role, she was responsible for the creation of a unified IT platform for Societe Generale’s multiple Russian operations, as well as the creation of a department for projects and process organization.
The call to join the CBR came shortly after Russia’s annexation of Crimea. After the first round of Western sanctions was announced in March 2014, Visa and Mastercard restricted service to some banks and clients in Russia, raising fears that the country could be cut off from international payments systems.
In response, Russian president Vladimir Putin announced that Russia would develop its own card payment system, charging the CBR with the task.
I came to the central bank deeply believing that we can do everything. To quote Mark Twain: ‘They did not know it was impossible, so they did it.’ - Olga Skorobogatova, CBR
Skorobogatova was tapped to lead the initiative and joined the central bank in July 2014. In the same month, the national payment card system (NSPK) was registered as a company. By the end of the year, a payments platform was in place and the first Mir cards were issued in late 2015.
“The NSPK was quite a tough and ambitious task,” says Skorobogatova. “It normally takes three to five years to set up a company of that scale, while we had to do it in seven months.”
By December 2019, around 70 million Mir cards had been issued and the system accounted for nearly 25% of total payments in Russia. This figure was boosted by the introduction in January 2018 of legislation requiring all state welfare and pension payments to be made through the NSPK.
Skorobogatova is keen to stress that the system is not just for government-related payments.
“It is a full-fledged business instrument that we provide for market participants as well,” she says.
She admits, however, that further increasing the system’s reach – as targeted by the Russian authorities – will be challenging.
“Each successive 1% of the market is harder to secure than the previous one,” she says.
From the start, there has been much talk of rolling out the system internationally. So far, however, take-up has been mainly limited to members of Russia’s Eurasian Economic Union (EEU) – Armenia, Belarus, Kazakhstan and Kyrgyzstan.
The CBR is trying to persuade leading Russian tourist destinations to accept Mir cards, with some success. Vietnam and Cyprus have signed up for trials, while Turkey and Bulgaria have expressed interest in joining the system.
Skorobogatova acknowledges the difficulties of international expansion.
“Obviously, implementing a project of this kind requires intense cooperation, not only politically but even more so on the technological and financial level,” she says.
Back in its home market, however, the CBR has been able to push ahead with a series of ambitious digital banking projects. Last year it launched the faster payments system (FPS), a national platform that provides cheap peer-to-peer (P2P) payments for Russian retail bank customers.
The initiative was designed to address imbalances in the Russian banking system, most notably widely varying levels of banking service across different regions and the dominance of large state-controlled lenders.
Although Russia has around 450 banks in total, a third of sector assets and half of retail customers are held by market leader Sberbank. Fellow state-owned banks VTB and Gazprombank account for another 24% of the market by total assets.
It is a situation exacerbated by what Skorobogatova calls “salary slavery”, whereby staff are obliged to receive their wages via accounts at banks with which their employers have corporate banking relationships.
P2P systems became very popular very fast in Russia. To get access to innovative services, however, customers had to open accounts with the biggest bank or its closest competitor, which cut off the rest of the banks from the market - Olga Skorobogatova
In 2011, Sberbank moved into digital banking with the launch of an online platform for consumers; within five years it counted around 80% of all Russians banking online or by mobile as customers.
Fears that Sberbank might leverage its dominant market position, deep pockets and technological sophistication to gain a monopoly in retail digital banking were increased when the lender launched a mobile P2P payments service in 2018 in conjunction with smaller rival Tinkoff Bank.
The product rapidly gained traction.
“P2P systems became very popular very fast in Russia,” says Skorobogatova. “To get access to innovative services, however, customers had to open accounts with the biggest bank or its closest competitor, which cut off the rest of the banks from the market.
“Even worse, the dominating banks used their power to steadily raise their tariffs. We believe such operations should be a natural part of the daily routine and should be affordable for everyone.”
Hopes of persuading Russian banks to follow the example of their Swedish counterparts and collaborate on the creation of a universal faster payments platform, however, were quickly dashed.
“They said: ‘It’s a good idea, but we are not ready to invest in what will benefit our rivals,’” says Skorobogatova.
The CBR therefore decided to take matters into its own hands. Developed as part of the NSPK, the faster payments system (FSP) was launched in January 2019. It currently allows instant P2P payments via mobile for retail customers, as well as payments to businesses via QR codes.
Further expansion to cover the full range of payments between consumers, businesses and public-sector entities is planned.
The platform is available to all banks in Russia, and by the end of last year 31 had connected. Sberbank was late to the party, however, incurring a fine from the CBR for failing to meet a requirement for systemic lenders to connect by the start of October.
“Some monopolists are obviously not happy with the introduction of the FPS, but the feedback from most of the banks has been very positive,” says Skorobogatova.
Promoting competition and creating a level playing field for Russia’s banks was also the main driver behind the CBR’s decision to create a national digital biometric identification platform.
“Biometrics is a very expensive technology to implement,” says Skorobogatova. “Most banks in Russia cannot afford to invest in it.
“But if a market features multiple biometric systems, customers will simply never move from one organization to another, because their biometric samples will be different due to different requirements. The Russian market needed a single, secure, high-quality platform.”
Launched in mid 2018, the CBR’s platform allows banks to open accounts, make money transfers and provide loans to retail customers remotely. Around 200 banks in Russia now collect biometric data through more than 11,000 branches.
Take-up of the service, however, has been slow. By mid December, the number of users registered in the CBR’s unified biometric system stood at just over 100,000.
“It will take some time for biometrics to gain traction among the wider population because it is a novel concept for most people,” says Skorobogatova. “Nevertheless, we are absolutely sure that it is the right way forward.
“Today, the platform works for individuals, but we also want to make it available for legal entities, so they can open accounts and carry out operations in a convenient and affordable way. I believe it will take another two to three years before we develop this system to a level we would be satisfied with.”
The CBR is also pushing ahead with the development of a digital profile platform. According to Skorobogatova, this will enable secure and fast data exchange between citizens, the state and companies online through a single interface.
“It will also provide citizens with the ability to manage their data online – transfer it on request or withdraw,” she adds.
A pilot involving 20 banks, four insurers and government agencies, including the tax service and the state pension fund, was launched in December.
All of these big infrastructure projects were included in the CBR’s first digital strategy, which was unveiled in 2017. Even before that, however, Skorobogatova had set the ball rolling on financial technology with the launch of a regulatory sandbox.
Initially, the CBR took a cautious approach to the concept, eschewing the ‘fully open’ model adopted by the UK and Switzerland in favour of a more limited facility in which businesses submit innovations to the central bank for testing.
“Fully open sandboxes have been showing better results, but we stuck to the testing sandbox model in order to minimize risks,” says Skorobogatova. “A real sandbox with real customers and real operations requires considerable human and organizational resources to keep everything in check.
“We are going to switch to the real sandbox model when the testing sandbox project fulfils its objectives. We have been paying close attention to the Swiss experience, which we consider to be the most relevant case for us.”
Applications to the current sandbox are assessed by two committees, one made up of representatives of key state departments – including the finance, digitalization and economy ministries – and the second of market participants.
Technologies deemed to be sufficiently innovative and to have broad market appeal are tested by the CBR. To date, 46 applications have been received, of which 10 have been successfully tested. These cover areas including electronic signatures, crypto assets, insurance technology (insurtech), digital banking and payments.
Lots of Russian banks are highly innovative because they are young and ambitious, and the Russian financial market is still highly profitable compared to developed markets - Olga Skorobogatova
Surprisingly, given Russia’s reputation for technological sophistication and a rapidly growing fintech sector, most applications for the sandbox have come from banks. Skorobogatova says this reflects the unique structure of the Russian banking market.
“In Europe and the US, numerous fintech companies emerged to fill the gaps in financial services that remained out of reach for traditional banks,” she says.
“Russia is different. Lots of Russian banks are highly innovative because they are young and ambitious, and the Russian financial market is still highly profitable compared to developed markets. These banks’ models are closer either to big techs or to startups, depending on their size.”
In theory, the CBR has been working to encourage the development of the local fintech sector. In January 2017, it launched the Russian Fintech Association – however, the organization is also dominated by large lenders such as Sberbank, VTB and Alfa Bank. The tech sector if represented by the likes of payment services firm Qiwi.
The association has, however, provided a useful focus for collaboration between its members and the CBR on digital projects.
The two sides have been working together for three years on Masterchain, the first Russian blockchain platform eligible for use in the financial market. It is already in use for electronic mortgage accounting and there are plans to expand it to cover trade-finance functions.
“Blockchain is a great fit for things like letters of credit and guarantees because it is essentially a technology of trust,” says Skorobogatova.
She is well aware, however, of its limitations.
“Blockchain is not the universal solution that many people believed it to be five years ago,” she says. “I remember being told by some tech companies back then: ‘Olga, in five years everything will be powered by blockchain, there will be no other technologies.’
“I responded that this technology would work in cases when it would create additional value but not as a substitution for everything. Time has proven me right.”
Skorobogatova and her CBR colleagues have been particularly sceptical about cryptocurrencies.
“We do not believe in them as a means of payment,” she says. “They produce major risks for customers due to their high volatility, lack of guarantees for savings, widespread use for money laundering and financing of terrorism, and other aspects.”
The CBR has taken a hard line on the issue from the start. Other parts of the Russian government, however, have been less consistent. A draft bill that would have banned cryptocurrencies was scrapped in early 2017 as initial coin offerings became a hot topic.
Three years later, legislation on blockchain, smart contracts and crypto assets has yet to make it to parliament. When it does, it will likely now also cover stablecoins such as Facebook’s Libra and Gram.
Skorobogatova takes a more positive view of stablecoins than of cryptocurrencies.
“We consider them to be a more reliable type of crypto asset,” she says, “since they are backed by real assets and provide certain guarantees for individuals and legal entities.”
Nevertheless, she is clear that effective regulation of the sector at a global level is essential for consumer protection.
“We are actively interacting with other regulators on issues of global stablecoins,” she says. “At the moment, they see more questions than answers in initiatives such as Libra.”
Meanwhile, like many of its central bank counterparts, the CBR is mulling the creation of a national digital currency. Again, Skorobogatova takes a cautious approach.
“For me, the big question is if there is any added value in using central bank digital currencies (CBDCs) – for the economy, for individuals and for businesses,” she says. “Clearly, people want fast digital payments, but this can be implemented with a national fast payments platform.
“What can CBDCs bring to the table? So far, no one in Russia or elsewhere has been able to give a convincing answer or even to explain the difference between electronic payments and CBDCs.”
Whether a national digital currency will feature in the CBR’s digital strategy for 2021 to 2023, which will be published later this year, remains to be seen. Areas that will likely feature prominently include open banking, cloud technology, security and ecosystems.
The CBR has already started work with Russia’s banks and other financial institutions on setting standards for open application programming interfaces (APIs).
“We are analyzing the experience of countries such as Canada, Singapore and the UK,” says Skorobogatova.
“We have not decided yet what standards should be obligatory and what should be recommended, but the main idea is that there should be a standardized framework, otherwise market participants will not be able to communicate with each other. We hoped that the market would elaborate such standards, but unfortunately that did not happen.”
On cloud technology, Skorobogatova is keen on the concept – the CBR already uses it internally – but is wary of issues around data protection and security.
“This is one of the key topics for regulators today because it is a fantastic technology, but it also has to be properly managed,” she says.
“Clearly, a lot of companies outsource their cloud technology needs because they cannot afford their own cloud storages, so we need to think about how that affects their security. I think it is not clear yet what is the best way to do that.”
More broadly, Skorobogatova adds, data protection is a priority for the CBR.
“The technology used in new products and services is developing incredibly fast, and data protection must keep up,” she says.
“Companies have their own policies, but what we see so far is that those are not enough. There have been a few cases of unsatisfactory data management in our country. It is fairly clear that only regulators and governments can set the standards for the whole industry.”
The CBR is particularly concerned about the implications for both security and competition of the rapid rise of ecosystems in Russia offering an increasingly wide range of both financial and non-financial products.
Unlike in Asia, where development of the concept has been led by big tech, in Russia it is being driven by banks such as Sberbank and Tinkoff. VTB has also recently entered the fray as part of a big ramp-up of digitalization, launching an online car marketplace in February.
Some have questioned the viability of the ‘walled-garden’ ecosystem in Russia, but Skorobogatova is convinced that it will be successful.
“People are ready for comprehensive digital services, because the most valuable thing now is time,” she says. “But there must be competition in this market, which would not just guarantee the quality of the products but also provide consumers with a variety of options to choose from and ensure better prices.
“Competition is also necessary for technological development because any monopoly becomes an obstacle for progress sooner or later.”
As Skorobogatova notes, however, bank ecosystems present unique challenges for regulators.
“They do not fit into the existing model of financial market regulation because they combine financial and non-financial services,” she says. “This blind spot in regulation can carry significant risks for the financial stability of nations and even of the global economy.”
The CBR is therefore mulling a move away from the traditional regulatory model based on licensing institutions towards regulating specific financial activities.
“The development of ecosystems really forces us to focus on the activities of organizations rather than their names,” says Skorobogatova.
Meanwhile, the central bank has become involved in the development of a marketplace for financial services. Another initiative designed to increase competition in the banking sector, the digital marketplace will enable Russian financial institutions of all sizes to reach a broad spectrum of customers.
“Many small or medium-sized financial institutions are not able to offer their products and services nationally, particularly in the regions where only the dominant players are present,” says Skorobogatova. “But the digital space levels the playing field.”
The digital marketplace, which is currently entering the pilot phase, has been developed by the Moscow Exchange with support from the CBR. Initially it will only offer deposits, but the plan is to expand it to include the full range of financial products and services.
Again, Skorobogatova has been the driving force behind the project at the CBR, adding to the already long list of achievements since her arrival at the central bank.
She says her success is partly down to her commercial banking background.
“Basically, I do not think that anything is impossible: my mind just ignores obstacles,” she says. “I came to the central bank deeply believing that we can do everything. To quote Mark Twain: ‘They did not know it was impossible, so they did it.’”