There have been a fair few direct banks launched in the past decade or so. Few though can boast the success of Russia’s Tinkoff Credit Systems. Billy Bambrough met up with TCS President and CEO Oliver Hughes to find out what’s next for the Russian challenger
Launched in 2006 by serial entrepreneur Oleg Tinkov, Tinkoff Credit Systems (TCS) turned a quick profit of $18m in 2009, with an ROE of 85%. TCS is now the most profitable bank in Russia on ROE.
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Russia’s number one direct bank hit the headlines worldwide over the summer of 2013 when a customer re-wrote the details of his credit card contract which the bank duly signed without reading.
The bank has since resolved the legal miss-step, coming to an agreement with the individual involved but not before many aspects of its and other banks practices were called into question.
Oleg Tinkov, who owns 61% of the company and named by TCF president Oliver Hughes as Russia’s answer to Richard Branson, turned his hand to financial services after selling his brewing company for 167m ($228m).
According to the Moscow Times, Tinkov is already looking to sell on the bank to fund the start up of an airline.
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By GlobalDataHis plan could be about to come to fruition after the fledgling bank’s IPO in London on 22 October with the company raising $1.1bn giving it a value of $3.2bn.
Hughes told RBI: "TCS are fully regulated by Russia’s central bank, we have a full banking licence and all the accoutrements of a bank but we are not a bank. We’re strictly a credit card company and a payments provider, providing banking services."
According to Hughes TCS is almost more like an IT company than anything else, with the majority of core staff working as IT specialists.
Tinkoff Credit Systems President, Oliver Hughes
Hinting at the company’s future Hughes says: "We also have more mobile developers than web developers. We’re very much a virtual operator, providing a range of financial services, with a focus on credit cards."
Hughes describes TCS as a bank aspiring to be Capital One in Russia, using direct mail as their main customer acquisition channel back in 2007.
We are building up to deposits," says Hughes. "To take deposits in Russia, as a virtual, branchless bank is a bit of a challenge. People are not keen to put money into a bank that they can’t see."
The problem for the direct bank goes further though as Russian regulation says that in order to take deposits from a customer a bank must have a physical meeting with the depositor and secure a signature.
Hughes explains: "TCS tested a few models and found that the online customer acquisition approach for deposits worked best, using a network of couriers to distribute cards.
"We now have the largest courier network in Russia, with 1,000 couriers covering 600 cities and can guarantee that we can get you set up with a card and a current account in two days, anywhere in Russia."
Banks in many developed economies have only recently begun moving towards instant issuance and before that were often unable to boast quicker card delivery times in countries far smaller than Russia.
Hughes is proud of the fact that TCS is able to serve the whole of Russia despite not using branches.
"We have a long reach. Our customer channels gives us access to the entire market with none of the upkeep cost," says Hughes.
"We have just recently begun using the physical retail space through a third party broker."
If TCS find their established channels to be insufficient to get their products to peoples doors they have a working relationship with Russia’s post office network that they have teamed up with to access the more remote areas of the country.
The small payments and repayment infrastructure in Russia is not well developed. TCS solved the problem by using kiosk payment provider Kiwi to receive repayments from areas that lack permanent facilities.
"For small value credit card repayment’s we see the vast majority going through this channel," says Hughes.
Small value is a space that TCS is comfortable in, mortgages are off the table and seem to have little chance of ever being added to the product list.
"We’re only interested in ‘light’, loans. Small ticket stuff, but a lot of it. We’re not going to go in for car loans or mortgages or anything like that, it’s not our area of expertise."
Looking at how TCS compares with other national banks in the country, Sberbank has 20,000 branches across Russia while the post office, with TCS piggybacking has 42,000 branches, combined with the 350,000 strong payment kiosks.
Hughes straight forward about TCS’s plans to expand outside of Russia: "We’re not thinking about it. We’ve got a model that works, our growth is strong, and we’re very profitable. There are plenty of underserved opportunities within Russia to keep us busy."
Hughes explains that the TCS model works in Russia because of the county’s size. "Looking outside Russia, there are plenty of markets similar to Russia where we think the model could work.
"With a business like this you have to be able to reach a large number of people. In a country like, for example, Slovenia with 2.5m people there isn’t the leverage to make something like this work.
"To take this exact model and stick it in another market won’t work precisely the same way, it would need a lot of work."
TCS has teamed up with Yandex Money and Mail Money for their credit and debit cards which has taken the bank into the mobile wallet area.
Hughes tells RBI that the work that TCS is doing around mobile and payments is way ahead of what the other Russian banks, bogged down in legacy systems, could hope to achieve.
"We live very comfortable in the mobile and can use the income from our lending operations to subsidise the mobile wallet, drastically reducing our margins and making our prices far more attractive than our competitors."
Hughes explains that TCS don’t have any direct competitors in Russia, in terms of companies with a similar business model.
"We compete directly with the traditional banks, there are not really any other direct banks in Russia, which works well for us."
"Once we more fully develop our e-wallet capabilities we will be competing more directly with some of our current partners like Kiwi."
When asked about the threat could be posed to their business model though large tech or telecoms companies moving into the space, Hughes is not worried.
"It would be a complement to how well we’ve done if these guys decided to move into the market. If someone like Google begins to start using their massive hoards of data as an underwriting tool then that could work.
"People say to us regularly that Sberbank is too big and we won’t be able to even make a dent in them. If some big players came in and invested heavily in the market then TCF would still see a net benefit from that."
Tinkoff Credit Systems at a glance
– Attracted over $977m of deposits in less than 4 years after the launch of online deposit programme
– More than $2bn of customer transactions in 2012
– Total assets of $2.42bn (as of 30 June 2013)
– Almost 1,000 couriers and sales agents covering almost 600 cities and towns in Russia
– Total personnel 5,900 people (as of 30 June 2013)
– 3.5m credit cards issued
– 300,000 debit and prepaid cards
Russia’s answer to Richard Branson, TCS founder Oleg Tinkov
Tinkov: From beer to banking
– Tinkov quit studying mining in the 80s and opened a business called Technoshock importing electronics
– Tinkov sold this in 1997 to open a convenience food company
– Expanded to the brewery and brewpub business, under the name Tinkoff Brewery
– In 2006, Tinkov sponsored a Russian cycling team under the name Tinkoff Restaurants, later re-christened as Tinkoff Credit Systems
– Tinkoff breweries grew rapidly by introducing international standards along with aggressive marketing
– In 2006 Tinkov sold the brewery and formed Tinkoff Credit Systems, one of the largest credit card companies in Russia, currently known as Tinkoff Bank
– Tinkov often appears himself on ads for the company
– As of 2012, Tinkov has been looking to sell his banking business and possibly create an airline
– Tinkov uses the -ff version of his name for his business, to give it a more upscale image
