The Fintech Landscape in Russia
During the panel “Shake Your Money Maker. Heading to Fintech.”, hosted during the StartupVillage conference in Moscow in May 2019, the panelists discussed the Fintech industry in Russia and focused on the industry's driving factors and challenges.
THE BANKING INDUSTRY IS BOOMING in Russia in May 2019. According to moderator Stuart Larson (Senior Advisor at EY and longtime businessman operating in Russia) if you look back, there were no bankers in Russia mid 90ies; just a Soviet-style banking system. To avoid stagnation and to drive the industry forward, one had to hire inexperienced but motivated and forward-thinking young professionals who were willing and savvy enough to adapt innovative models and new technologies. Since then, technology has changed the banking industry fundamentally. Dynamics that drive banking models forward are shifting; especially regarding the interaction with clients, employees, regulators or general counter parties. Consequently, there are several questions one must ask when analyzing the Russian Fintech ecosystem.
Russia is heading towards digitization of economy - incl. the financial market.
- Are Russian banks able to adapt to the very different culture of highly flexible, non-hierarchical and young Fintechs?
- From the platform perspective – Is it better to attach new entities to existing structures or to fully integrate them into the current environment?
- And if so: What is the risk of losing innovation and adaptability?
- How do these banks redefine customer experience?
- How will data, which plays an essential part in these innovations, be accessed?
- How will data protection, data collection, and data sovereignty be treated and what are the regulations of source and scale of data?
- And finally, how can smaller, independent banks stay competitive?
Stuart Larson firstly asks Sergey Solinin, CEO at Qiwi and Founder of Fintech Association, the most essential question about the relevance of traditional banking models in the time of Fintechs?
ACCORDING TO SERGEY SOLONIN IT IS not so much a question of ‘Fintech vs Banks’. According to him, this rather outdated discussion does not apply to Russia. It is more about the provided service. In the end, there will not be one clear winner but the customer. Nevertheless, he acknowledges the challenges of being innovative to a full extent within the Russian Federation as the economy still functions more or less as a centralized system. As a Fintech, it is impossible to invent new technology outside of the bigger state-owned banks without facing the threat of alienating a huge proportion (approx. 70%) of potential customers. Customers, who are today all clients at these larger banks.
Still, Sergey Solonin is convinced of the high potential for Fintech in Russia. In his opinion, the right solution is to create an open platform by focusing on blockchain (a technology that needs legal frameworks to be considered an option in Russia), open APIs and the deregulation of payments. Forming this open platform will, in the end, lead to more transparency, a higher level of competitiveness and growth for Fintechs in Russia.
It is not in a government's role to be innovative. Their task is to create a framework and offer incentives and therefore enable the flow of innovation.Stefan Heilmann, Startup Village
The State as Innovation Driver?
WHEN ASKED ABOUT THE INNOVATIVE DRIVE of State Banks, Sergey Solonin states that is not wise to force innovation. To give someone an order to think innovative if this is not part of one's mindset will lead to failures. It is rather important for these larger state-owned banks to create an ecosystem that allows other entities to think in a creative and innovative way. Stefan Heilmann takes up this statement and adds that it is generally not the task of a government to be innovative. Rather, it is their responsibility to create a framework that enables innovation and provides incentives for companies or institutions which focus on improving existing structures through innovative methods and technologies. Stefan Heilmann says that it is important to bear in mind that Fintech startups do not need special protection. They operate in a cooperative environment. To remain competitive, banks have to think like Fintechs and Fintech startups have to act like "real" companies.
According to Sergey Malyshev, Head of Retail and Digital Business at Promsvyazbank, in Russia, it is not so much the cooperation between Fintechs and banks that is the reason that there is no real "battle" between the two, but rather the current status quo that Fintechs and banks cannot be separated from each other. The Russian banks themselves are becoming Fintech companies. This can be explained by the fact that the state makes large investments available in this area and since the largest banks with the largest customer base and the most resources are at least partially state-owned, the money flows to them and, therefore, drives the innovative power of the banks.
Data Collection, Data Protection & Data Sovereignty
ANOTHER MAJOR ASPECT WHEN FOCUSING ON THE establishment and further spread of Fintechs is data and its protection. Natalya Kaspersky (former CEO at Kaspersky Lab) evaluates the potential threats of cyber-attacks. There are no regulations within the Russian Federation regarding data collection, data storage, data use, and data protection. This means that any platform in Russia may process and use the collected data without any legal guidelines. Depending on the institution, the objectives and intentions of collecting consumer data are always different. As these are not regulated, this is purely arbitrary. This also affects the sale of data to third parties. Natalya Kaspersky stresses the importance of establishing regulative barriers but limits the extents of the regulations by stating that, in Russia, a well-balanced approach is necessary. However, they must be less strict than in Europe. Otherwise, startups using Big Data will not exist in Russia.
Data collection and data usage is not regulated in Russia. That needs to be changed. The regulations have to be well-balanced though. Rules as strict as the DSGVO wont work in Russia.Natalya Kaspersky, Startup Village 2019
This exclusively deals with consumer data protection. As far as the protection of technology data is concerned, Natalya Kaspersky has clear ideas. Here a strict approach is necessary. In principle, it should be possible within the Russian Federation to use data from third parties and to pass them on to other companies by concluding cooperation agreements. However, the use of data by large technology companies outside of Russia such as Facebook has to be restricted. This leads to the general question of whether there should be barriers in order to protect innovation. Natalya Kaspersky supports the idea of keeping up barriers when it comes to innovation as she regarded the system as quite fragile, especially regarding financial resources. Companies or even states with a high capital base will always have the opportunity to bind technological innovations to themselves. Only by creating barriers can Russia manage to keep this progress and knowledge in its own country.
Does Innovation Benefit From Barriers?
A STATEMENT THAT STEFAN HEILMANN clearly denies. The DNA of any digital company or service, including Fintechs, is designed to be globally applicable. If a company needs barriers in order for the product or service to function successfully, it is not competitive. Ultimately, this situation only results in the company's resources not being used in a targeted manner.
Brian Dixon (COO at Capital Innovators) supports Stefan Heilmann’s view. He is also convinced that it must be possible for innovative (and especially early-stage) companies to further develop without any kind of restriction. Because only innovations that can evolve freely show great growth in the shortest possible time. In this context, he also refers to blockchain technology or to developments in the field of artificial intelligence. Brian Dixon admits that the situation is somewhat different for Fintech companies, whose business models have to comply with certain regulatory requirements and guidelines.
Especially when it comes to blockchain, Brian Dixon is convinced that this technology will be the strongest driver for the future of Fintechs. It doesn't matter whether the focus is on B2C or B2B, more and more companies will build their business models on blockchain technology. Furthermore, Brian Dixon also predicts an enormous growth in cryptocurrencies. Unlike the previous speakers, however, he sees a clear winner: global tech companies can win the battle between Fintechs and banks. As an example, he refers to Facebook, which is currently creating its own cryptocurrency: Global Coin. The moment the currency establishes in the market and Facebook can offer traditional financial services such as mortgages or loans to its users, it will immediately have the potential to become the largest bank in the world. With its 1.5 billion daily users worldwide, Facebook would have a customer base that cannot be compared to any other.
Big Tech companies like Facebook could be the real winner. If they offer financial services one day, they instantly become the biggest player there is.Brian Dixon, Startup Village 2019
When looking at Russia from an investment point of view, Stefan Heilmann with his long-lasting experience as an investment banker, states that Russia has become more interesting over the years. When looking at Russia around the millennium, the environment was not promising especially regarding market and currency risks. Nowadays, the market has stabilized and Russia due to its size and capabilities as well as their improved framework has raised interest as a potential market for investments.
Famous Last Words
AS FINAL WORDS, STUART LARSON asks for advice for future founders of Fintech companies:
Brian Dixon stresses the importance of a well-functioning product at the moment of the launch. Fintech companies deal with highly sensitive customer data. The product must, therefore, be perfect. If it causes problems the first time the customer uses it, there is usually no second chance. The customer's trust is lost.
Sergey Maryshev says it is as simple as that: “Listen to Your Customer!”
Natalya Kaspersky underlines once more the importance of data protection. She mentions that startups need to know beforehand how they can protect their data. Afterward, it is either too late or too expensive to fix the loss.
Sergey Solonin advises founders that it is more important to think about the service offered than about the technology, as there will be new generations who can handle any kind of technology. Therefore, it is more important to know what services the target audience needs.
Last but not least, Stefan Heilmann hints that if one wants to be successful as a Fintech they should make their services applicable to messenger services as this will put this Fintech as the forerunner in the industry immediately.
"Shake Your Money Maker. Heading to Fintech" - The Panelists
Brian Dixon - COO at Capital Innovators
Stefan Heilmann - CEO at IEG - Investment Banking Group
Natalya Kaspersky - President at Infowatch
Sergey Malyshev - Head of Retail and Digital Business at Promsvyazbank
Sergey Solonin - CEO and Co-Founder at Qiwi and FinTech Association
You can see the complete panel here.