Easy Finance

According to forecasts, 96% of all payments and money transfers in Russia will be performed with the help of innovative services by 2035. The financial technology industry is trying to simplify interactions with money as much as possible. In this article, IQ.HSE draws on a report by the Centre of Development Institute to explain current developments in the fintech industry.

Key Industry Aspects

The financial technology or ‘fintech’ industry stands at the intersection of the financial services and modern IT products sectors.

The main market participants here are technology companies and traditional financial organizations: banks, investment and insurance companies, and so on. All create or use third-party innovations to improve their work and simplify life for their customers.

These include, for example:

 mobile banking — remote management of a bank account through a mobile phone, smartphone or tablet;

 making contactless payments using devices with built-in NFC chips — bracelets, key rings, rings, etc.;

 electronic means of payment: electronic wallets and cryptocurrencies;

 online services for credit, insurance, capital management, stock trading, etc.;

 customer identification systems based on biometric data — fingerprints, facial geometry, retina, voice, gestures and gait.

Market Dynamics

Fintech’s growing popularity began in 2008 in the wake of the financial crisis that forced companies to cut costs, and with the progress of mobile technologies that enabled users to operate in cyberspace 24/7.

It is now one of the world's fastest-growing industries. The number of people using financial services increases by 15%-20% annually and the volume of transactions in such key segments as payments, money transfers and personal and corporate finance grows by 20% annually on average. (According to Statista.com, these segments totalled $5.1 trillion in 2019, a 24% increase over the previous year.)

There are no official statistics for the Russian fintech industry, but Deloitte estimated the market at 48 billion rubles in 2017 and 54 billion rubles in 2018—a 12.5% jump.

A Growing Number of Centres Are Developing

American technology companies are considered pioneers of fintech. These include Capital One, that uses big data technologies to sell credit cards, the Kabbage micro-credit platform for business, and various financial products offered by Citigroup. Now, however, other countries are becoming centres of development as well.

In fact, by the end of 2018, 40% of the world’s Top 250 fintech start-up companies were located outside the United States. Most are found in Great Britain (such as Funding Circle and Transferwise) and India (including PayTM and others). China deserves mention for its rapidly developing fintech market, home to Ant Financial and Qudian, the largest fintech companies in the region.

According to a study by EY, in 2018 China, India, Russia, South Africa and Columbia had the highest penetration of financial services (the share of digital technology ‘consumers’ among the total population), at 87%, 87%, 82%, 82% and 76% respectively.

The developing countries achieved this thanks to simplified fintech solutions accessible by almost every segment of the population, a growing share of Internet users and supportive government policies. At the same time, most people still do not make active use of financial technologies to carry out financial operations. By comparison, the U.S. is one of the last in the ranking, at 46%, with France (35%) and Japan (34%) closing out the list.

Russian Reality

Major financial organizations, and especially banks, occupy a key place in Russian fintech. They introduce new technologies most actively and tend to leave independent start-ups very little manoeuvring room. The result is that Russia has relatively few fintech companies—from only 200 to 300 according to estimates. What’s more, Russia does not have a single fintech company that has managed to reach the $1 billion benchmark quickly, as the REVOLUT money transfer system in Great Britain and the Stripe online payment system in the U.S. have done.

The main reason for this is that foreign and Russian investors lack interest in such start-ups and the traditional players on the domestic market command powerful resources.

Funding Problems

Venture capital provides most of the global investment in fintech. In Russia, company founders themselves provide, on average, more than 70% of the funding for each new start-up.

According to a survey conducted by Reed Smith, only 1% of international investors are willing to put money into Russian financial technologies. This is due both to the high geopolitical risks involved as well as the fact that such investors usually join projects in the early stages in Western and Asian markets, but only during later stages in Russia.

Only a handful of venture funds invest in Russian fintech start-ups, including Sk Ventures, Sailing Startup, Starla Capital and Sberbank CIB.

Development institutions such as the Skolkovo Fund, the IIDF, the FinTech Association and others also provide support in the form of grants, participation in capital and soft loans.

Such innovative tools for attracting funds as crowdfunding and crowd investing are only now taking hold in Russia.

That means Russian start-ups must pull themselves up by their own bootstraps and rely almost entirely on contracts with major corporate clients as the only way to find money.

Dynamics of Demand

Domestic fintech is similar to that found elsewhere. An HSE University report released a catalogue of Russian fintech start-ups in 2019. That listing included 205 companies handling payments and money transfers, alternative lending, insurance, asset management, information security, chatbot development, loyalty programs, etc.

Примеры FinTech-решений в России

Examples of fintech solutions in Russia

Alfa Potok (Alpha Stream). An online service of Alfa Bank that enables private investors to provide loans to small and medium-sized businesses.

AI Research Engine from a division of Tinkoff Investment. An AI-based mobile app that helps investors monitor asset financial performance.

AnyBalance. A mobile app developed by Krawlly in partnership with QIWI Venture. Provides a single interface that combines the balances of a user’s various financial instruments: from bank accounts to electronic wallets.

Bepay. Contactless devices (bracelets, keyrings, stickers) with a built-in NFC chip for making cashless payments.

Christofari. A supercomputer from Sberbank and the NVIDIA company designed to develop artificial intelligence algorithms at ultra-high speed.

Phygital format (physical+digital) bank branches. In test mode by Alfa Bank, which plans to turn all of its branches into phygital offices by 2024. Smartphone geo-tagging and facial biometrics will identify and ascertain the needs of each client as they enter.

What Russia Lacks

A number of separate areas in Russia are barely developing. These include financial products for residential real estate transactions, solutions for transforming the social, political and surrounding environment (such as creating an investment portfolio based solely on environmentally friendly assets, and so on) and projects related to asset security. A foreign example of the latter is Rally Rd., a free app by which users can invest in collectables: in particular, they can invest a small amount and become a co-owner of a rare Ferrari or Mustang.

Wanted: Specialists

The fintech industry employs more than 3,600 people, mostly qualified IT specialists. Although this makes it possible to develop complex projects, the industry suffers from a shortage of personnel caused primarily by brain drain abroad.

Russian universities are addressing the issue through education. The Financial University of the Russian Government founded a fintech school in the context of the Internet of Things and fintech is also taught at the Moscow School of Management SKOLKOVO, RANEPA, MIPT, FEFU, etc.

The HSE Computer Science Faculty and Sberbank have teamed up to offer the industry-oriented Financial Technologies and Data Analysis master’s programme.

In 2019, discussion began in Russia on creating professional standards for fintech specialists. Once implemented, it would enable specialists to officially confirm and raise their qualifications, educational institutions to update their relevant courses, and employers to know what to look for when hiring employees.

Export Plans

International experts have taken note of the high level of Russian start-ups. But this has little influence on their opportunities for export: most are not focused on global expansion.

Russian start-ups have had the most success in Singapore, one of the most developed fintech markets, and are making efforts to work in Japan, Pakistan and other countries. For now, political factors have made expansion into the U.S. and British markets unlikely.

Russian fintech products have potential in:

 developing markets;

 territories with which Russia has friendly foreign relations;

 Asia;

 territories containing major system integrators (companies developing complex IT solutions).

State Assistance

World practice has shown (in the U.S., Singapore, etc.) that supportive government policies facilitate progress in the industry.

The state figures prominently in Russian fintech. The Central Bank (Bank of Russia) not only acts as a mega-regulator but also initiates and serves as the platform for national products. It has participated in the creation of the following:

 Unified biometric system. Enables bank clients to open an account, make deposits or process a loan without being physically present in the bank.

 Quick payment system (SBP). The ability to make instant transfers by mobile phone number to any bank participating in the SBP.

 FID Anti-Fraud system. Identifies transactions conducted without customers’ consent.

The Central Bank developed the only industry programme detailing industry trends and plans: ‘The main areas of financial technologies development in 2018-2020.’

As part of that programme, a regulatory ‘sandbox’ was launched in 2018 to provide a testing ground for new fintech technologies and services, leading to either their acceptance or rejection as infeasible.

Market players are generally positive about the Bank of Russia’s participation in the industry. Twenty per cent consider it a highly effective fintech regulator and 42% see it as moderately effective.

Future Outlook

Despite the high level of uncertainty, 60% of fintech companies in Russia are bullish on the future. In fact, 90% expect things to become much better soon.

According to EY, by 2035:

 financial technologies will achieve more than 96% penetration in the payments and transfers segment, 37% in the financing segment and 46% in the private capital management and financial consulting sector;

 fintech insurance service providers will pay approximately 10% of all insurance premiums.

Lack of investment will remain one of the industry’s key problems, but the future belongs to projects working in conjunction with a fund, start-up or financial/technology corporation.

Major banks and payment systems could create even faster technologies for money transfers and try to squeeze fintech companies out of the instant payment market.

Neobanks — full-fledged online banks without a network of physical branches that use mobile apps, sites and social network accounts (with Tinkoff Bank being the largest in Russia) — will continue to develop.

The implementation of technological financial solutions will proceed according to the following general trends:

 the transfer of service to remote channels;

 the personalization of services;

 gamification — the use of gaming elements to increase customer loyalty (games in bank apps for earning bonuses, etc.);

 maximum ease of use — simplified interfaces, ‘seamless’ payments that are faster, more secure and can be made from any channel at any moment;

 stronger cyber defences.

Despite Russians’ low purchasing power and generally conservative attitude (low level of trust in new technologies, bias towards traditional forms of financial services), a segment of ‘digital’ users — potential consumers of financial services — is rapidly taking shape.

IQ

Study author:

Inna Sedykh, Lead Analyst, Centre of Development Institute

Author: Svetlana Saltanova, February 05, 2020