Today we host Neri Tollardo, Tinkoff’s Vice President of Strategy. In this episode, we discuss about Tinkoff’s entrepreneurial spirit (which has no hierarchy or bureaucracy, and this is something that they plan on maintaining as they scale), about the difference between creating an ecosystem as opposed to a conglomerate of different goods and services, how Tinkoff has managed to create insane customer engagement compared to most banks by combining their content with their technology, and more. Before joining Tinkoff, Neri was a top ranked sell-side research analyst at Morgan Stanley.
In recent years, it has become a trend to call yourself a tech company, even if you are anything but. However, Tinkoff is one of the world’s largest and most profitable independent digital banks, and they really walk the talk when it comes to being a technology company. In 2006, Tinkoff started out as a branchless credit card issuer in Russia, and it now offers a current accounts, tax support for businesses, lending, and a range of other products and services through a super app that any Western bank would envy.
Main topics discussed:
[00:03:52] Entering the Russian financial market
[00:11:34] Tinkoff Business Model and customer engagement strategies
[00:21:09] Tinkoff business strategy and customer journey
[00:32:16] Branding: bank vs technology company
[00:35:24] No-hierarchy, no-bureaucracy culture
[00:39:19] A different value proposition than other digital banks
[00:47:35] Runway for growth within the domestic and overseas market
[00:55:23] Favorite book, influencer, brand and a productivity hack
Against the Tide: Embedding Engagement into Banking w/ Neri TOLLARDO
We are the bank acquirer. We are the payment service provider. We are the payment gateway and we have our own aggregator, so we can offer the entire suite all developed in-house.
Ben: [00:01:54] Neri, thanks so much for coming on the Structural Shifts podcast. This is going to be quite a wide-ranging discussion, but I thought a good jumping off point might be for you to tell us why you were so excited to join Tinkoff bank. As you just heard from the intro, for a long time you worked in bank equity research, so you are very familiar with the market and the different players. What was it about Tinkoff bank that particularly excited you?
Neri: [00:02:20] Hi, Ben. Thanks a lot for having me on this podcast. Great to be here. I worked for Morgan Stanley for seven years in equity research. One way or another, I always covered Russia. Although I’m not Russian, I did spend a large portion of my life there. I do think of it as a bit of a second home and spent a lot of time studying it and getting to know the culture, the companies, et cetera. When I started covering financials, I started covering Middle Eastern financials and then Central and Eastern Europe, then finally I got back to covering Russia.
Basically, as soon as I started covering Russia, I realized that the Russian banking sector and more specifically Tinkoff, was way ahead of anything else that we were seeing in Europe or even in other parts of emerging markets. Tinkoff stood out as one of those financial players that was doing something genuinely different.
I tended to write a lot of research about Tinkoff, and to try to go into their business model and. That then coincided with me looking for something else to do, because I’d done equity research for seven years and at the same time Tinkoff was looking for someone to help them pitch the story and communicate with investors. I jumped at the opportunity because on the one hand, it was a great story that I knew I could be passionate about pitching; and on the other hand, because it was a company that was genuinely different from its culture, from its products, from everything that they were doing. I took it as a very good opportunity to learn something new and to work with a team, which was extremely highly regarded by the market and that has built a business from scratch – which is now probably one of the most valuable fintechs in the world.
Entering the Russian financial market
Ben: [00:03:52] There’s a lot to dig into. Let’s discuss a bit the Tinkoff story, about the Russian market and why you think it’s ahead of the rest of Europe. As I understand it, Tinkoff was the first branchless banking service in Russia. How did it start out?
Neri: [00:04:10] It was founded in 2006, predating arguably when the word ‘FinTech’ was coined. The idea was by our founder Oleg Tinkov, to basically recreate a mini capital one, early days capital one in Russia.
He looked at the US and saw in the US you’ve got two or three credit cards per capita. You look in Russia, you’ve got like 0.1, 0.2. No one has ever done anything like branchless banking before and Oleg is a man of big bets, so he said, “Let’s try and go and do this.”
At the beginning it was a credit card model liner that used something that now sounds very outdated, but which was already very effective and very popular in the US, which was direct mail. Very different company to obviously what it is now, but it did teach us a lot about how to run a business. I’m sure we’ll touch on it later; how to be analytical about your decision-making and kind of being focused on the bottom line and generating profits.
Ben: [00:05:08] What was the point at which the company pivoted from being just a lender without its own balance sheet, if you like, towards being a full deposit-taking bank or digital bank?
Neri: [00:05:19] It was pretty early on, because as I said, the company was founded in 2006; and on the asset side it had credit cards, and on the liability side it had wholesale funding. Turns out that wholesale funding is not the best source of funding during a global financial crisis, especially if you’re in a country like Russia, which was at the time highly susceptible to shocks.
Right around that time, a decision was taken to try to diversify the liability side of the balance sheet – so to try and go into deposits and turn accounts, which also coincided about the time with the ability to start moving the acquisition channels from direct mail to online. Once we cracked the ability to acquire deposits online, which obviously at the time were quite expensive deposits, then we started building a liabilities franchise – which was deposits on current accounts. On the asset, you had credit cards, and that then built the founding blocks for the entire ecosystem to grow.
Ben: [00:06:09] How difficult was it to become a deposit taker? Because you have to do KYC in-person, right? You had to do face-to-face meetings if you want to onboard a customer. How difficult was that to do from the point of view of a branchless or a digital bank?
Neri: [00:06:24] That was something that we had to figure out from the very beginning, because even when we were a direct mail credit card model liner, we still had to have a physical meeting with the customer.
For the listeners that are not familiar with Russia, it’s not like in Europe or in UK where you can download the Revolut app and then do the whole application and get a card and off you go. In Russia, the central bank still requires every new financial product, especially bank accounts, to be certified in person. So there needs to be physical meetings. Most banks will send you to the branch. We wanted to be branchless, so we built what we call a smart courier network of representatives that will meet you anywhere in Russia, within 24 hours. In the big cities, we’re almost down to 30 minutes; to deliver the product, take your picture, get your signature, whatever has to be done for the KYC process, and then off you go, you can start using your product.
That was something that we started using from the very beginning, that we kept using once we started moving online. I think the fact that you had a direct mail start and an offline fulfillment that needed to be very, very optimized, that from the very beginning instilled a culture of, let’s try to optimize every single process that we have, funnel analysis, what conversion is at each stage of the funnel, where it makes sense to optimize it. That was something that was instilled in the culture of the company very early on and helped us to then broaden the product set over time with the same level of analysis and success and eventually.
Ben: [00:07:49] What does the domestic competitive environment, particularly with the smart Korean network you built? You probably have some pretty ingrained competitive advantages or barriers to entry, at least.
Neri: [00:08:03] Russia, to some extent, is a little bit of a walled garden. Maybe not as much as some of the Asian countries that we see, but it’s definitely one of the few countries where Facebook is not the main social network, where Uber is not the biggest taxi, where Google is not the biggest search. You have a lot of local tech companies, and they’ve made it very difficult themselves because they’re very good competitors, for the large foreign companies to build their kind of pseudo monopoly positions, let’s say.
From that perspective, it is a bit of a walled garden, but it’s also very highly regulated. It’s not a playing field where it’s very easy to do anything. There are still rules that you have to abide to, and the rules can be quite strict, especially in the space of financial services. I think what’s different about Russia is that, especially relative to the Western world, is that the banks are very advanced. You do have banks that have realized very early on in their existence (not all banks, but a few definitely) that if you’re just going to be a traditional bank with your traditional banking structure, your traditional bank employee, you’re probably not going to last very long.
Namely ourselves and Sberbank, but also a few others, they realized very early on that they needed to build a technology company. We were that from the start. If you walk around the Tinkoff office, you wouldn’t be able to discern it from a Google office or a Yandex office in terms of the average employee that’s there.
In terms of the couriers and the offline KYC, that of course is an entry barrier. It is something that on the one hand is a big operational feat that we’ve managed to build (because again, we’ve got more than 5,000 smart couriers running around Russia at any one day doing more than 70,000-80,000 deliveries per day), that requires obviously a lot of effort and a lot of investments. On the other hand, it’s very difficult to recreate that. New players that want to come to the Russian market, they would have to figure out some kind of offline KYC, which keeps them out.
Ben: [00:10:07] And like everything, you’ve leveraged that. As I understand it, you have the largest last mile delivery service in Russia as well.
Neri: [00:10:12] One of. I mean, now obviously the e-commerce players are starting to build their own logistics network, so I don’t know exactly who’s the largest last mile delivery. But for quite a long time, we definitely were.
Ben: [00:10:25] I wanted to square something. You said, rightly, that Russia is a bit of a walled garden, but at the same time you said that the banks appreciated very early on the need to be very progressive, invest in technology, make their services digital. How do you reconcile those two things? Where did the pressure come for the banks to be so adventurous?
Neri: I think to some extent, it’s the fact that the banking sector in Russia is much younger. You don’t have the same old legacy systems and legacy banks that you had in Western Europe that have been around for 40, 50 years. The Russian market was rebooted a couple of times during the 90s, and so was the banking sector. There was definitely a possibility for a lot of banks to leap-frog and have a better starting point compared to a lot of European and Western banks.
Then I think I would actually put it down to a few people that were somewhat visionaries from that perspective. Again, Oleg coming up and saying, we’re going to be the first branchless bank in Russia. I think from Sberbank side, their CEO Herman gruff realized very early on that they’ve got a huge possibility to build something very advanced, very digital, very technological, and off they went.
Tinkoff Business Model and customer engagement strategies
Ben: [00:11:34] The company has faced, or been through at least, three crises in its short history. To what extent do you think the crises that you’ve been through have made the business much stronger?
Neri: [00:11:42] The three crises are the ‘08/09 crisis as we mentioned earlier; the 2014/15 crisis, which was Russia specific, it coincided with oil prices halving, it coincided with the whole geopolitical issues around Russia and sanctions being put on, and then led to basically a full-blown banking crisis and ruble devaluation. All the stars aligned for what was a very vicious crisis for the banking sector. Then more recently, obviously, the COVID crisis, which arguably out of the three was the one that was less vicious from a banking sector perspective and from the impact that it had on the company.
Very early on, we realized that we needed a business model that would allow us to accelerate and break very quickly, because we needed to withstand the shocks. Every time that a new crisis came, we already had some experience of hitting the brakes and making sure that we could burn down the hatches and wait for the storm to pass.
Obviously, every crisis teaches you something slightly new. On the one hand, if you look at 2014/15, there was a big liquidity crisis in the market, so you learn how to deal with liquidity. In 2020 with COVID, you learn more to deal perhaps about things that might go off with your credit risk models, because that wasn’t a variable that you were predicting before. Every time you learn something slightly new. But I think the mentality of being able to accelerate and break quickly, that’s something that you learn in the first crisis and then you can adopt over time.
Over time as well, our business also became a lot more diversified with a lot more revenue sources and a lot more customers, and all our eggs weren’t in one basket. That obviously complements to the resilience of the business.
Ben: [00:13:32] Let’s get into to the business model a bit more. You’ve alluded to some of this already by talking about the extent to which the company takes an e-commerce lens when it thinks about customer acquisition and funnel management and so on, which I think is already quite interesting within the context of a banking organization. But one thing that maybe people don’t realize, you mentioned that the company is pretty diversified. For example, you have a travel agency as part of the group. What was the rationale for launching a travel agency?
Neri: [00:14:05] I think again, it’s worth maybe taking a slight step back and realize that we started with credit cards, then because of that we learned how to lend and let’s say we added other credit products. On the liability side, we were getting more and more retail customers coming through deposits and current accounts, and these customers had other financial needs beyond credit cards. On top of the lending products, we developed a retail brokerage platform. We built an SME business, an acquiring business, and insurance business.
But the idea is that if we really want to engage with a customer, build loyalty, get all the data we need to have to offer them a tailored experience, we need to find services that are going to be rewarding for them and that they can use very frequently. One of the hypotheses was that a traveling agency, where we could offer a very neat experience to the customers within the app, and we could offer significant rewards, would be something that would be liked by our customer base and would drive engagement.
It turns out that now about a fourth of all the travel expenditure of our customers – and we can see what they’re spending money on –happens through Tinkoff Travel through the mobile app. It was clearly the right hypothesis and that led us to think about other businesses and other nonfinancial services that we could integrate to drive that kind of engagement. That way we could get people to spend some more of their time and eventually their money on our Tinkoff app, increasing the number of touch points that we would have with them.
Ben: [00:15:34] User engagement. I’m just going to cite a statistic here you’re your most recent investor presentation, where you said that you have 2.4 million daily average users and 7.6 million monthly average users. Basically 25% of your customer base pretty much uses the app daily. That’s an incredible statistic for a financial services organization. Do you think that most financial services organizations are missing this point around engagement? Because without engagement, it’s very difficult to upsell and cross sell. Do you think you’re quite unique in thinking about engagement first?
Neri: [00:16:08] Yes, I can give you some more updated numbers. We’ve got I think about 3.2 million Dow and just over 9 million miles. What we call ‘the sticky factor’, which is Dow divided by miles, it’s about 33%. You have to understand that in our ecosystem, we have a number of customers that are not really active. They might have a credit card or a lending product that is not exactly the kind of customer that engages very much with the app.
If you take, for example, the debit card holders, which are the people that will come mostly for the app for the rewards, for the lifestyle banking, for that customer the sticky factor is already closer to 50%. Meaning that they use the app on average every other day.
I completely agree with your point. That was our hypothesis as well, is that if your banking app can only provide the ability to check your balance and payments, send money to someone, it’s unlikely that you will be able to build a very strong long-term relationship. And that’s a commoditized product experience. You can make it slightly more seamless, but at the end of the day that’s not what’s going to differentiate you from the competition. The way you differentiate yourself, and again, the way we’ve in part differentiated ourselves, is by giving an experience that is much broader, but it’s still very much linked with every single product that we have. The more products you have, the more rewards you will get, the more access to certain products and promotions and services you will get. That bit is a big differentiator for us, and something that a lot of financial services providers not only haven’t figured out, but even if they did figure it out, they probably would struggle to recreate it, because it’s obviously quite a technologically advanced thing to do.
Ben: [00:17:44] You think that’s the reason why we haven’t seen more super apps in Europe, which is it’s a complicated thing to pull off? Or do you think it’s more that people like that same strategic vision?
Neri: [00:17:55] I think that’s probably why you haven’t seen them coming from banks. I don’t think that a lot of banks are capable of doing that. The reason we probably haven’t seen them coming from the tech companies as well maybe that’s slightly more specific to the markets or the culture. I think the first big hindrance is that if you want to create a super app, you need big scale; and if you think about Europe, you’ve got different languages, different countries, perhaps even different regulations. It doesn’t really make sense to have a super app for a small Central Europe or Eastern European country. It doesn’t lend itself to that kind of model. That’s one thing.
The other thing is that perhaps in European and Western countries, people don’t want to have all their data and all their experience in one bucket. Perhaps over time, they’ve already grown with this idea that it’s okay to have one platform for social media, one platform for search, one platform for e-commerce; while in other emerging markets, you’ve had companies that have had the ability to leap-frog and group a lot of these businesses into one, therefore offering that super app experience.
There are clearly some players that are trying to do that. Revolut is probably the one that stands the closest to doing that.
Ben: [00:19:07] And it’s Square in the US, right?
Neri: [00:19:10] It’s Square in the US, correct, but the jury is still out. I think it will be a bit more challenging to do in Europe and the Western world than it will be in emerging markets.
Ben: [00:19:14] How important is content to acquiring customers and deepening engagement and lowering journal? I’m not sure exactly the statistics, but they’re pretty amazing as well in terms of how many people read your content daily, how much time people spend reading that content.
Neri: [00:19:29] Content is a huge part of what we do. It’s maybe something that we don’t talk about as much as we should. We have a business called Tinkoff Journal, which is one of the largest independent personal finance magazines in Russia, that we offer completely for free. There are no advertisements. That’s purely educational and interesting content to tell people how to set up a company, how to maximize their rewards, how to save properly, how to open a brokerage account – whatever it might be that can help people become a little bit more financially educated. And have something like 10 million monthly readers for this platform.
Obviously that platform powers a lot of the stuff that we offer in the app. When you come into the app, again, it’s not just about checking your balances, sending money to someone; it’s about maybe checking if there’s some interesting offers that might be there for you, and it’s about seeing whether there’s any content that might be interesting for you to learn.
The way we push this predominantly in the app is by having stories. A storyboard similar to what you would have on Instagram or a Snapchat, the difference being that it’s not user generated content, but it’s content that we produce mostly, again, through Tinkoff Journal and that we tailor to the customers and we can target based on all the algorithms that we have.
We do notice that over a third of our customers use the stories every month in terms of whenever they go to the app. They would just flick through, maybe find something interesting. It’s also a great way for us to cross sell products. You’ll show them a storyboard about how to save properly, then at the end you might be able to actually say: click here and you will be able to open a brokerage account or you’ll open a micro-saving account. It’s a great way to engage with customers and to get them to do more stuff with you than they would if it was just a regular app.
Tinkoff business strategy and customer journey
Ben: [00:21:09] You talked us through a number of the products that Tinkoff has launched. You made the point that it started in banking and then moved into other areas from there. But what is the strategy? What is the process you run through when you think about what’s the next product to launch?
Neri: [00:21:28] For us it’s very much about customer journey. We put ourselves in the feet of the customer, and we try to understand what this customer might want and what they might be open to trying if we give them that option. For example, in the lifestyle banking, you mentioned travel. Then we thought, what are the other high-frequency services that we can aggregate into one place that would make our customer’s life a lot easier? So we went into restaurant bookings, where we started aggregating a lot of the restaurants and a lot of the abilities to book a restaurant from one place. Cinema was one of the most popular, and it’s coming back after COVID. It was one of the most popular aggregators of services that we were able to simplify the customer journey into one place where they could find a cinema and book a ticket, choose their seat anywhere.
For us, it’s a lot about the customer journey and understanding where it would make sense for them to do a transaction with us.
At the same time, we do have pretty strict principles about how much we want to spend. We don’t want to get into businesses where we’re going to be burning tens of millions of dollars a year without forecasting some kind of profits. So the only reason we would run a business on a breakeven level or even a slight loss at times is because it does grow drive engagement, or it brings in millions of customers. We have a few of those products in the ecosystem, but other than those, every product that we launched, for us has to have a meaning on a standalone basis. That meaning most of the time needs to be some kind of bottom-line generation.
Ben: [00:22:58] Sometimes it’s difficult to think of you as being a digital bank because it’s much more now of a lifestyle service, right? The rigorous focus on unit economics is not normally something that you would associate with a bank. Then, this whole approach to the way you think about acquiring customers and monetizing those customers, again, sets you apart from most digital banks. Do you even consider yourself still to be a digital bank, or do you think your model is difficult to define as a digital bank?
Neri: [00:23:26] I think at the core we still have a digital bank, but that digital bank is part of a bigger and – unfortunately, I haven’t been able to find a non-buzzword to describe this – but it’s part of a bigger ecosystem where the bank provides lots of benefits and lots of good experiences to the customers, but is only part of why people would choose Tinkoff.
Again, the ability to offer content, the ability to offer non-financial services, supercharges that banking experience. We’ve moved beyond that, but at the core we still do think that financial services are our main area of expertise, though we may to be able to monetize our customers. We’re an ecosystem, but it doesn’t necessarily mean that we want to get into everything and anything and spend any kind of money to get there. We want to pick our battles and pick those battles where we eventually will be able to monetize the customer.
Ben: [00:24:17] As a strategist, do you think that the unique part of your business model, the magic, if you like, is the fact that you’re basically an amalgam of semi-autonomous units, all of which wash their own face? They all have to have positive unit economics, but at a group level they’re all contributing to the success of the overall group by sharing data, spreading the cost of IT. Is that the way you think about it, that that’s the magic; it’s this combination of having units that are close to the customer that have to move quickly, that have a lot of autonomy, and then bringing them all together into a synergistic group structure?
Neri: [00:24:59] I think that’s a huge competitive advantage that we have and that’s something that differentiates us from a lot of other banks, and even Russian companies, which can be extremely hierarchical and bureaucratic. We’ve always built our business on a very horizontal level, very flat organization and giving lots of responsibility to the people that can be very close to the customer and to the product.
As you rightly mentioned, every one of our business lines basically is its own mini startup, you can say. It’s got its own management team, its own head of the business line, it will have its own technologists, its own marketing people, its own user experience, user interface, experts, et cetera. These people can fuel ownership of what they’re building, so their motivation to build something that’s outstanding is obviously higher. And they’re very close to the customer, so they can create a product that solves a problem or satisfies some kind of need.
That is supplemented by some platforms that run across all of these businesses, without which obviously then we wouldn’t be able to create an ecosystem. It would just be a bunch of individual businesses that will be working on a standalone basis. The marketing platforms, the acquisition platforms, the servicing platforms – those are all platforms that run horizontally across the organization and that basically ensure that we’re all rowing in the same direction.
Then of course, some business lines will work more closely with some others. For example, our point-of-sale lending business works very closely with our credit card business, because we realized that one is a great acquisition channel for the other business lines. Within also those businesses, there will be some relationships that are stronger and that need to be developed more, but at the core having those platforms that just make sure everyone rows in the same direction is a big differentiating factor between creating an ecosystem and a conglomerate of different goods and services that are just accessible through an app.
Ben: [00:26:51] In terms of artificial intelligence and machine learning, for example, do you share data between all of these different semi-autonomous units in order to train common models for risk, for fraud, to understand people’s context and be able to start them up relevant advice and offers? Presumably at the group level, you’re pulling data in order to create data network effects, is that right?
Neri: [00:27:16] It’s obviously subject to the regulation and what we can do with the data. Any data that is stored within a certain organization can be shared within that organization. The way we thought about AI and the way we’re looking to develop our AI knowledge is to create what we call an AI center, which is basically a repository of all the AI knowledge that we can have at the bank; ranging from all the way to research and development from the kind of back-office optimization and figuring out what the right structure for that should be.
That AI center ends up being a supplier of information and solutions to any other business. Any other business can come to this AI center and say, “I would like to think about doing this, where can AI help us with this?” It’s a central place where all that knowledge is stored.
As part of that center, one of their goals is also to try and instill in everybody a culture of using AI. The idea that we want to develop is that in order for AI to really be used successfully in the organization, it’s something that not only the software engineers need to be able to get their head around, it’s something that the product people need to be able to get around to use, the marketing team and the finance team – everyone needs to be able to use AI at some point, not just people that are super qualified to do it.
One of the best ways that I’ve heard about it said is: it needs to be as easy as Excel, and as powerful as a supercomputer. Something that is just accessible to everyone. Obviously, that requires a lot of education and a lot of pushing that culture and making sure that it is ingrained everywhere in the organization.
Ben: [00:28:49] How does it work with those shared services? You said that it works a little bit like the business units or their clients. But do the business units then have to pay for that service? How does that get incorporated into the unit economics of all of those units?
Neri: [00:29:04] It might not, necessarily. It’s not like every single cost that happens in the bank or in the group is associated to an individual business line. We do have some headquarter costs and some corporate costs that are kept separate, and then they might get allocated at some point with regard to certain decisions, but this is one of those things that I think we wouldn’t necessarily be assigning to individual business lines.
Ben: [00:29:30] I guess the difference here is you consider yourself to be a technology company. I guess that’s the reason why you build all of your own systems. Is that correct?
Neri: [00:29:37] Yeah, pretty much. There are very few instances where we use partner products or partner solutions because we want to control the entire value chain. We’ve historically competed on service and product, and the only way really that you can have full control over that is if you develop everything in-house, because then you’ll know exactly what the user experience is and you can predict in advance where the hiccups might be.
One of the perfect examples of that is our acquiring business, where we are the bank acquirer, we are the payment service provider, we are the payment gateway and we have our own aggregator, so we can offer the entire suite all developed in-house. When a customer or a merchant needs to choose an acquirer, we can always ensure that it’s going to be the smoothest process to integrate ourselves with the merchant., and that if something were to happen, we’re going to be the first ones to fix it because we can see exactly what might’ve happened because we’ve got full control over the entire chain of events.
That’s just one example in acquiring, but that applies to pretty much everything else that we’ve done. We tried to do everything as much as possible in-house, because it allows us to compete on the things that we want to compete, which is service.
Ben: [00:30:46] Why do you think that hasn’t worked for other banks? So many banks historically built their systems and other in kind of a bit of a legacy mess because they’ve added an add-on to those systems and they’ve become difficult to upgrade, expensive to maintain. How are you confident that won’t happen to Tinkoff? Do you think you might start to use the patsy technology as you continue to broaden the ecosystem and move further and further outside of banking?
Neri: [00:31:14] I think at the core we will try to still develop as much as possible in-house. I think the reason why we are able to do that and a lot of other banks aren’t able to do that, is because we can get the talent. We’ve built a culture; an HR culture and an IT culture that rivals those of the tech companies and those of the banks. We compete with talent, not with the banks. But with the Yandexes, mail.ru’s, the Ozones, et cetera.
If you get the best talent, then you can build the best products and the best tech. If you let that opportunity go and you’ve let your culture evolve into something that’s really outdated, then it will be very difficult for you to get rid of that image and to draw the talent that allows you to build those products. You’ll inevitably have to rely on third parties to try and catch up, but then that leads it to all sorts of other integration problems with the third parties, which we try to avoid.
Branding: bank vs technology company
Ben: [00:32:16] You’ve brought up two interesting points that I want to quickly dive into. The first is around how you’re seeing the perception, that branding of Tinkoff. To what extent do you think you’re seen as a bank versus as a technology company, and how does that differ depending on the stakeholder? Potential employees might see it as a tech company, but it might be fair to say that the market investors still consider you to be a bank. To what extent do you think it’s difficult to manage multiple facets of the brand?
Neri: [00:32:47] It’s been something that, especially when I was in investor relations, that took a lot of my time to try and tell people and explain to people why we’re more than a traditional bank. I think from an employee perspective, we’ve got to nail down. We are attracting some of the top talents. We are one of the top three brands in Russia for IT talent, and we get rewarded for our IT culture and IT programs all the time.
We have all sorts of educational programs, where we try to go to the best universities in Russia and sponsor programs and try to pick up people early on and grow them in the company.
It’s more than just empty words or words on the paper, because we do have a track record of people who started very junior in the company and now are running entire business lines because they’ve stayed at the company for 7, 8 years, and they’ve progressed in their career.
From an investor perspective, yes, of course. We do have a lot of our revenues that is still coming from financial services, and mostly credit services. There’s this perception that a credit business in a country like Russia is a high-risk business that does not necessarily deserve a high multiple. But I think we’re finally getting rid of that idea, partly because what we’ve showed, you mentioned at the very beginning that we’ve gone through three crises and we’ve never made a loss despite having a consumer book that on paper looks like it could be risky. Again, we’re showing time in and time out to the market that we know how to lend throughout various cycles.
We now have a number of businesses that are non-credit, that you could argue are more fintech-y in terms of what people would associate naturally with FinTech. Those businesses generate almost 40% of our revenues in net income.
Again, moving a little bit away from that, being a pure financial player, I think that if we were a pure financial player or purely a bank you wouldn’t be able to see the kind of growth rates that we are seeing now and the kind of cheap acquisition costs that we’re seeing now, especially in things like debit cards and Tinkoff investments.
It takes time, but hopefully we’re moving in the right direction in terms of convincing not only our employees that we’re a tech company, but the broader stakeholder base.
Ben: [00:34:54] The profitability is not like a bank either, right? Just looking at the financial report for 2020, you had a return on equity of over 40%, which it’s difficult to find examples of banks that are getting return on equity of 40%.
Neri: [00:35:11] Yeah. I think the bottom line is that there’s different ways in which you can do banking. If you do banking in a very technological way with certain principles, then it looks very little like the traditional banking that we were used to.
No-hierarchy, no-bureaucracy culture
Ben: [00:35:24] The second point I want to touch on from what you said was around culture. I’ve been looking through your investor presentation and you talk about having no hierarchy and no bureaucracy. I remember Dimitri, when we recently did the 4X4 Virtual Salon, talked a lot about how entrepreneurial the company is and how he leverages that entrepreneurial spirit within his group. My question is, how do you sustain that as you get bigger and bigger? Do you think it’s down to the business model and the organizational model? How do you ensure that that entrepreneurial spirit and the flatness of the organization doesn’t get diluted over time?
Neri: [00:36:08] It’s an interesting question, especially as you scale up a business and you have to put some structures in places and some checks and balances, and more and more of those kinds of decisions.
It started off with our founder, who is a serial entrepreneur. Especially when the company started and for the first let’s say, 10 years or so, he was very involved in the business. He instilled in everyone this kind of entrepreneurial culture where you give responsibility very early on and you expect high results, and everyone tries really hard because everyone sees the businesses as their own.
It is an interesting question. Trying to maintain the organization as far as possible and trying to delegate as much responsibility down the chain as possible, is key. So far, we’ve managed, and hopefully we can continue to do that for a long time.
Ben: [00:36:55] Does that make it difficult to hire people laterally? For example, is it quite difficult to hire bankers and bringing them into Tinkoff, and have them adopt culturally to how Tinkoff works?
Neri: [00:37:09] I can say that I’m the only banker that has joined laterally, maybe one of two or three bankers that has joined laterally to Tinkoff. We always prefer to hire young and grow inside the organization. If we were to hire laterally, banks are normally the last place we look.
Ben: [00:37:28] Fair enough. I also talk about, and this is the same diagram from the investor presentation, you talk about a culture of ‘test and learn’. There’s always been this tension in the FinTech space between the tech and the fin – the extent to which you can behave like a tech company, faster iteration cycles; and on the other hand, conform with regulation and be a regulated entity. How do you reconcile the test and learn culture with the need to be a serious regulated entity at the same time?
Neri: [00:38:01] The regulation sets the boundaries for where you’re going to test and learn, of course. You’re not going to go beyond where the regulation tells you, you can’t go. But the test and learn can be applied to so many various parts of the business, from a specific business line where you might want to test the elasticity of your take rate of a specific loan to the interest rate that you charge, all the way to: we should launch a business line, let’s do some tests around whether there’s any demand for that and how much money we would need to start spending and let’s try with an NPV and then grow it out.
For us, test and learn is, again, much more about culture and much more about telling people: look, if you don’t have an idea, here’s the budget, go ahead and try it out. You have certain frameworks that you cannot deviate from, and one of them is regulation, the other one is most likely going to be NPV, and the fact that you need to assess this idea within an NPV framework, and off you go.
That links up very well with the previous question that you asked me, how do you maintain that entrepreneurial spirit? I think giving everyone the ability to try something out, if they have an idea, is by definition what an entrepreneur would want to do. It does tend to attract those kinds of people, and that’s how you keep that culture over time.
A different value proposition than other digital banks
Ben: [00:39:19] We’ve talked about the ways in which you’re different from a traditional bank. The list is pretty long, so I won’t recap it. But you would also differentiate yourself or draw a big distinction between your model and that of a normal challenger bank or normal digital bank. Would you care to elaborate on that and how you consider yourself to be different from other digital banks?
Neri: [00:39:41] Our approach has always been: let’s bring customers in; not just for the sake of bringing customers in, let’s bring customers in with a specific purpose, and a specific path to then potentially monetizing those customers over time. That oftentimes means that we need to bring in a customer and then build a very deep relationship with them. We need to become their primary bank.
If you look at the average balances that we have for our debit card holders, there are multiple times when you wouldn’t find in a UK challenger bank, because once we bring that customer in, we work really hard to make sure that we are their main financial partner. Then we develop a number of other products that can lengthen the relationship that you’re going to have with that customer. While if you’re a one-trick-pony, like a lot of fintechs, then you’ve built a very superficial relationship. Maybe the second, third, fourth, and then at some point you’re going to have to figure out how to make money from that customer and justify your business. We’ve flipped it on its head.
The other thing is that for us, there’s never been a choice between growth and profits. We’ve always married the two, partly by virtue of necessity, because in Russia when we started there wasn’t much in terms of venture capital. There’s probably even less now than there was back then, and we had an entrepreneur who was laser focused on bottom line.
For us, we always had to find a way to grow and make money at the same time. Let’s call it the Holy Grail, of us doing that, has been the NPV approach, where any dollar that we try to spend on acquisition or on developing a certain business line, we tried to do it in such a way that we think is going to generate a certain rate of return over time. And that rate of return that we use internally is at least 30%.
We built models, we built predictive models, we built decision models, scoring models, that all allow us to build some kind of prediction of how the customer is going to behave with us over a long period of time; and to make sure that we can optimize the offering, the product, the channel, so that at some point that dollar that we spent at the very beginning will actually generate something for our shareholders down the line.
We’ve refined that philosophy over time and we still apply it to basically everything that we do. I think that’s one of the key reasons why we’ve been able to grow and make money at the same time.
Ben: [00:42:04] I think the other thing that I would add is, unlike a lot of digital banks, you’ve never been scared to do lending or to lend your balance sheet. A lot of digital banks, I agree with you, I think they don’t have the same laser focus on unit economics. They spend a lot to acquire customers without necessarily knowing how they’re going to generate enough lifetime value for that to make sense.
But the other thing is they often don’t then, right? It seems that if you’re going to have a banking business, lending is really at the heart. Would you agree with that? And do you think that also contributes to a strong lifetime value and unit economics over time?
Neri: [00:42:46] Absolutely. We’ve had a banking license from day one, which enables us to go into deposit, taking and lending. Look, I think the market had a phase where lending was almost like a dirty word, and everyone seemed to be doing fine with e-money licenses and with bringing in hundreds of thousands or millions of customers with a cheap, if not free, debit card product; only to at some point realize that that’s not a product that’s monetizable.
The other thing is that a lot of people focus on breakeven. But a business is not meant to be breakeven, a business is meant to return more than its cost of capital. The only way to do that – okay, there are some non-credit products where you can do that and we have several of them – but one of the more successful ones is definitely lending. You take deposits and you lend them out. If done well, that can be an incredibly high LTV business that can resist shocks.
I think that a lot of investors and a lot of the people in the market have been kind of scarred by some poor lenders and how badly they’ve done in some economic cycles, that now everything just got painted with one brush as something that I don’t want to touch. But I think the tide has started to turn. Partly because in our case, we’ve been able to show that you can do that crisis in crisis out; and partly because a lot of those fintechs, they used to pride themselves on having an e-money license and not having any lending products, they’re all getting banking licenses and they’re all starting to lend. There is a realization that that’s a business that fintechs should have and can be done in a very technological way and in a way that increases LTV.
I was reading about this bank in Brazil called C6, which is one of the few ones that has started out, from what I can understand at least, right off with the lending product, because they realized that lending is the best way to increase the lifetime value of your customer.
Ben: [00:44:47] Just to talk about COVID, just bring it up again, you talked about it in the beginning as the third of the crises that Tinkoff has faced. But in some ways, do you think it might be a Philips for the business, in the sense that it’s accelerating underlying trends and therefore it’s probably making your value proposition even more compelling than it was pre-crisis? To what extent do you think that’s the case, and to what extent is that being borne out by the data, the customer growth and so on what you’re seeing?
Neri: [00:45:14] At first it was obviously a shock, and we had to pull some levers that we knew how to pull in terms of making sure that the business was going to be stable and withstand the shock, which no one really could predict how deep and how long it was going to last.
We’ve obviously benefited from the fact that in Russia, this shock has been short-lived and relatively shallow and V-shaped. It hasn’t triggered that much of a shock to the economy or to the banking sector. But obviously for those few months where you had lockdown, it was all about who could keep doing banking in an engaging way and still open bank accounts with a physical meeting, and still offer products that were relevant to our customer base.
Those companies that could adapt to the situation and tailor their products and their services to the situation, so we started implementing a number of initiatives to make sure that our offering was very relevant to what the customers wanted to satisfy or to achieve. In the case of SMEs, we really supercharged our ability to help businesses build their websites, to install online payments. We could lend them out our call centers, because obviously a lot of companies didn’t have the ability to communicate with customers. To make sure that we had the flexibility and the time to market to really come up with these new solutions and make our offering relevant, that’s something that was noticed by our customers. They realized: these guys can help me out when I need help.
Ever since COVID we’ve seen exponential growth in a number of our products, namely our recurrent accounts and Tinkoff investments, which like a lot of other retail brokers around the world has had a great time over the last year or so. I think we’ve been able to really show off our skillset when it comes to the ability to adapt to the environment.
Of course, from a digitization perspective, things have accelerated. We don’t think it’s been necessarily a seismic shift, so it’s not like every person that used to go to the branch now only uses the app. But some cohorts of the population that were maybe on the fence now have been forced to discover that actually you don’t need to go to a branch. It’s perfectly fine to have a bank that can do everything from your mobile. It hasn’t been a seismic shift, but it has accelerated some of the trends that we have been betting on forever.
Runway for growth within the domestic and overseas market
Ben: [00:47:35] How much runway do you think there is for growth within the domestic market? Ostensibly at least, there seems to be lots, right? You’ve got about 13.5 million customers, there are 144 million people in Russia. But presumably your services are very appealing to a certain demographic, so do you think you can sustain the growth rates that you’ve seen over the last few years indefinitely?
Neri: [00:47:59] This is something that we discussed quite at length during our strategy day. We have a lot of customers, as you rightly mentioned, we have just over 13 million total customers, about 9 million of which are active. We still see not only great ability to grow the number of customers, because Russia still has more than 100 million economically active population, but we still see huge potential to do more business with each customer.
The targets that we talked about are, that had 9 million active customers at the end of 2020, we think we can go over 16.5 million by the end of 2023. And very importantly, we can grow the number of products per customers from the 1.3 moving forward products per customer that we had at the end of 2020, at least 1.7 in a few years.
Another way to look at it is that in terms of the revenue pools that we are attacking in Russia, our net revenues in 2020 were about $1.4 billion. In the main business lines where we are currently present, we see that revenue pool being more than $50 billion. Still almost 40 times our existing revenue. It’s still huge potential. And that’s only with the businesses that we currently have. There’s a number of other businesses that might be adjacent to what we’re doing now, and we’ve mentioned on the strategy day BNPL or leasing or some other kinds of insurance that could bring that addressable market even further.
We’ve obviously grown a lot, but in many respects, we’re still scratching the surface. Again, one way to look at that is that we’ve only got 2% market share of all retail lending in Russia.
Ben: [00:49:37] Is that the reason why you haven’t expanded overseas? At the start of this podcast, you talked about the fact that it’d be very difficult to recreate Tinkoff in another European country because of the scale effect and other factors. If you can’t create Tinkoff in Europe, why not take Tinkoff to Europe?
Neri: [00:50:02] Historically, we haven’t really looked that much outside of Russia because there was so much to do. Over the strategy period between 2016 and 2020, we launched eight business lines. Management’s focus was entirely on scaling up those businesses, making sure that the unit economics made sense, and there were businesses that we wanted to be in. At the same time, we were generating 40, 50, 60, sometimes even 70% ROI, that it felt like there was really no need to go out and look for additional ways to deploy capital.
Russia still remains our main focus. It’s the place where we know how to make business. We know and have the confidence to disrupt, and we’re going to be generating our returns for the foreseeable future. We have looked up outside of Russia before, again, partly because we were very focused on Russia we didn’t, but also partly because some of the markets that we had looked at mostly in emerging markets weren’t quite ready or weren’t quite suited to the Tinkoff business model.
More recently we have started talking about international expansion again. It is still a little bit premature, and to some extent we’re still figuring out what the right framework is in terms of assessing potential opportunities. But it does look like there might be some areas or some geographies where a Tinkoff-like business model could work. I’ll probably leave that as a bit of a teaser. It’s not something that we’ve incorporated in our 2023 strategy, but it could be a little cherry on top of that strategy that we showed up a few weeks back.
Ben: [00:51:40] The beauty of the business model is that you could create a small unit or business line outside of Russia, that would again benefit from all of the group network effects, that you could probably again apply very conservative or very rigorous unit economics threshold to. It wouldn’t be like you’d be taking a massive gamble anyway, right?
Neri: [00:52:05] Yeah, to the extent that we can try and recreate the Tinkoff business model, it means going in with a test and learn approach, with a monetizable product that can help us get to a positive bottom line and make the business self-sufficient. Again, we’re not in the business of going somewhere and spending hundreds of millions of dollars for years perhaps, and then at some point trying to monetize it. I think to the extent that we will decide of going outside of Russia will be very much in a Tinkoff-like way.
Ben: [00:52:39] You’ve recently made a VC investment. Do you think you might be looking to make other VC investments? Is that another way in which you might expand internationally?
Neri: [00:52:49] I don’t think that’s necessarily the base case. This was a specific case, and it was two of the top managers of Tinkoff group that decided to go and start their own business in Europe. Obviously, we knew them very well, we hold them in high regard, and they’re building something quite neat in Europe. I don’t know how many other managers are willing to leave Tinkoff to go and start a startup somewhere. I don’t think they’re that many.
I don’t think that necessarily VC will be the way that we decide to go abroad if we decide to go abroad. But it’s been a very useful experience for us, because obviously we talked to these guys and they’re telling us what they’re seeing, the challenges they’re facing. They’re basically testing the Tinkoff DNA and the Tinkoff culture outside of Russia, and it seems to be working – which gives us some confidence that if we decide to at some point go outside of Russia as Tinkoff then we probably have what it takes.
Ben: [00:53:43] The last question I wanted to ask you was about M&A. Sberbank does a lot of M&A, and you’ve done very little M&A. Do you think that might change or do you think that building everything yourself organically is just so intrinsic to the business model and the DNA of the company, that that won’t change?
Neri: [00:54:03] We’ve done a little bit of M&A in the past, and you’re right in that most of the time we’ve tried to develop everything in-house. More recently, we’ve said that we do think there’s potential for some built-on acquisitions in Russia, but nothing transformational and only those businesses that either can very much complement an existing product that we have, and maybe where it’s a very competitive environment where your time to market could be a little bit too long if you were to do it in-house, and if there’s a good culture fit it might actually make sense to bring it in-house right away. Or maybe something that can supercharge your customer growth, although that might not be the top priority because we are bringing in a ton of customers anyways.
I think there is room for some built-on acquisition, predominantly in the non-credit businesses, but we’ll see. We have suspended the dividend for this year to make sure that we have enough dry powder to perhaps engage in some of these deals. But again, nothing has been formally decided, let’s say.
Ben: [00:55:07] It’s very unusual that you have an extremely fast-growing tech company that pays dividends, right? Even in itself, that’s quite an anomaly. We always finish or nearly always finish the podcast by asking for free recommendations. If you don’t mind, could you recommend a favorite book?
Favorite book, influencer, brand and a productivity hack
Neri: [00:55:23] I don’t know how creative this will sound, but it’s a book that I particularly enjoyed. It was Shoe Dog by Phil Knight, the founder of Nike. I think just, firstly, it’s an incredibly well-written book, but also it’s a great book that communicates what it feels like when you’ve got that itch and that idea that you just can’t get out of your head. I think that all of us in our space, whether it’s as an entrepreneur or as a manager or as an employee, we’re all looking for that one idea that gets us all excited and that we go out of our way to achieve. I think that was a great book to inspire people to look for that idea.
Ben: [00:56:04] Favorite influencer?
Neri: [00:56:06] I don’t know if this counts as an influencer, again, I try to use social media mostly to just keep in touch with family and friends rather than following people I don’t know. But there’s this one guy who’s crazy when it comes to motivation and mostly in working out and physical activity. His name is David Goggins, and he is a former Navy Seal, ultra-marathon runner, just an extreme guy. It’s good to watch his videos when you’re feeling a bit unmotivated, because I guarantee by the time you finish watching his videos, you’ll be either working out like a maniac or going back to your desk and finishing that one thing that you really couldn’t finish before. It’s just great motivation,
Ben: [00:56:45] Fantastic. Productivity hack?
Neri: [00:56:48] I was thinking about this, and there’s just some small things like keeping your inbox clean, that obviously helps. But I think the thing that has served me best is, it’s on the one side a productivity hack and on the other side it’s something that helps me keep my work-life balance. It’s just to make sure that in my mind, or in my calendar, I’ve got some pretty set amount of times that I want to do a certain thing. I’ll say I’m going to work until this time, so knowing that I have this kind of mental deadline that I need to get stuff done by that deadline gets me really productive because I know that after that deadline, I want to do something else.
It doesn’t mean that at that time it’s pens down and then I’ll probably not touch it again, but at least to have boundaries in your head actually forces you to work really hard in those hours. It’s a bit counter intuitive, but it’s worked really well for me.
Ben: [00:57:40] Do you find that’s become more necessary because you’re working from home?
Neri: [00:57:44] Yeah. It’s been one of the challenges, because before that deadline was pretty much imposed to you by leaving the office. Now your office is in your bedroom or it’s in your living room, so you have to be a little bit more disciplined about the fact that: okay, I’m not going to work past 8:00 PM, or at least I’m going to take a break after 8:00 PM and try to step away from your desk and not get close to it for a certain period of time. That’s been something slightly more challenging.
Ben: [00:58:11] Last of all, a favorite brand.
Neri: [00:58:14] I think having told you Shoe Dog as the book, I think Nike probably fits that bill. From Shoe Dog and then David Goggins, you’ve probably realized I’m a pretty sporty person, so I think Nike actually fits a lot of those values that I associated myself with.
Ben: [00:58:31] What about Nike as a business model to emulate?
Neri: [00:58:34] I’m not actually all that familiar with it, but I think the emotional connection that they’ve been able to build with their customer base; we debate loyalty a lot internally. How do you get a customer to be loyal to you? I think there is no stronger loyalty than the loyalty you can build if you share the same values with your customers.
Ben: [00:58:58] Neri, thank you so much for coming on the podcast and telling us all about Tinkoff Bank, which is a difficult business, as you said, to describe and to pigeonhole, but certainly it’s a fascinating financial services company. Thank you so much for sharing the story with us.
Neri: [00:59:12] My pleasure. If anyone wants to reach out, you know where to find us, it’s www.tinkoffgroup.com.
Ben: [00:59:18] Thank you so much.