We combined compliance with technology, and then the magic happened.

Full transcript:

Ben: [00:01:36] Hasan, welcome to the Structural Shifts podcast. We are delighted to have you on.  I think we’re catching you early in your trajectory. You’re clearly on this massive growth journey; and even though HUBUC might not yet be a household name, I don’t think it’s a question of if, it’s a question of when. We’re so excited to have you on. We’re going to talk all about the next generation of banking as a service.

Hasan: [00:02:03] Thank you. Excited to be here. It’s amazing. I have read through some of your older articles when we were starting, and it’s a pleasure to be here.

Banking as a Service (BaaS) vs Embedded Finance

Ben: A good jumping off point might be to define what we mean by banking as a service. Hassan, what’s your definition of BaaS?

Hasan: Banking as a service, I think there is a trend right now going on that everybody seems to be doing banking as a service. It’s mixed up now. Everybody has a different definition. My personal point of view on banking as services, if you use the word ‘bank’, you should be at least a chartered bank. You can’t be an electronic money institution saying that you’re a bank.

My definition is there’s banking as a service version 1, which has existed for the last four or five years; then there’s the next generation. For me, banking as a service provider right now is normally a regulated entity who has some together on KYC, AML, and the different set of tools from different service providers, slap an API on top of it, and they go out to the market and say this is banking as a service – which worked great for the last four years.

Ben: In terms of definitions, a lot of people use the term ‘banking as a service’ interchangeably with embedded finance. How do you differentiate between those two terms?

Hasan: From our point of view, it’s a clear distinction between two different go-to-markets, two different type of customer bases, and stacks. It’s a completely different thing.

Let’s make an analogy. For example, before Amazon cloud or Google cloud or Azure cloud, there used to be these data center service providers, like they were monolithic systems where you have like a single service provider and they have a couple of data centers and they’re building some layer of software on top. There’s the previous generation or banking as a service provider, which is the Version 1 let’s say, and then there’s an embedded finance.

The Version 1 service providers, it worked great, similar to analogy of data center service providers before the cloud happened. The difference is it works great in your specific use case. It helped a lot of startups to become FinTech, and N26 were built on top of Wirecard and GPS and everybody else. That was great. But embedded finance is talking about embedding these FinTech features and these financial services into your existing products. We are talking about a whole different customer base, if I were to say, especially in the B2B space. It is like having a sleeping majority of people where you have to first educate and also they need to understand what is the value for them – mostly it’s about know monetization and retention for them. If you’re looking at how they access or they want to access the financial services, they’re not looking for signing several different contracts and waiting for a year and setting up a compliance thing. Their business might be freight forwarding, accounting, retail, vendor payout – there’s all those B2B stack companies on the business operating system.

Kind of provide services for these service providers. That’s where I think embedded banking service partners need to come in, like us for example. We target that customer base and help them understand what this can provide, but it’s like a white glove managed service, to be honest. You have to make a single layer, which takes care of compliance and all these different hard tanks, which is settlements and KYC, AML, regulation, and all that stuff.

You need to make sure that the customer is not affected with it, in a way that they want the feature, but they don’t want the hard things about it. How you can build that layer on top, is I think it.

Ben: Essentially the difference between BaaS and embedded finance is really looking from the vantage point of whether you’re on the supply side, whether you’re a license holder; or whether you’re on the demand side, with your brand that’s looking to offer financial services through your existing distribution channels or together with your existing offering. Is that the way to think about it? You are the orchestration layer that sits between the supply and the demand side – you make it possible for existing financial services providers to open up new distribution channels and you make it possible for non-financial services to offer financial services solutions for the first time? 

Hasan: It’s not about providing APIs. It’s more about managed versus non-managed. Just to give you an analogy, there are quite a few in history, but for example, before Shopify or Stripe, banks were giving acquiring channels online, so you could take payments. People were setting up e-commerce stores. I was a software developer, I set up a lot of e-commerce for companies.

The difference is now anybody can do it right. That anybody can do it comes with an enabling through a different take on the risk compliance and making sure that anybody can access that. That’s where you can seamlessly embed in your value proposition those features. If you cannot do that, if you’re going to have set up compliance calls and have to set up a whole department of looking at AML policies and drafting them, then you’re probably not there yet for that. No code embedded happening.

White Labeling vs Embedded Finance

Ben: [00:07:43] If we go back to the early 2000s, there was lots of white labeling that was happening. A lot of supermarkets started to offer insurance products, they started to offer banking products. The difference here is the extent to which this is truly seamless, and the speed with which you can change providers, the speed in which you can onboard. How would you draw the distinction between white labeling and embedded finance?

Hasan: If you see a little bit, even further down back, it seems like now everybody’s doing banking as a service with cards and accounts, which was basically co-branded card programs from the past. Every bank had one, every supply chain had a co-branded card. There are still active ones with big ones, but most of them failed, because there was no real customer pain being sold for the end user but just giving them more and more cards. I think that is very true.

That co-branding worked for some companies, bigger ones. Let’s say, for example, in Spain, there is Zara and these guys who have distribution power and they really enable their customer to use something and in return they are getting rewards and stuff. But that only works for a certain limit. How many more cards do you want?

If you look at now, what is happening, I think it’s not about how easy the access is, it’s deeper stack level features. For example, it’s not about only issuing a debit card or a prepaid card, it’s about, can you enable customers of yours to have access to real IBAN and mapped bank accounts guaranteed by a local banking partner, and they can pay taxes, salaries, receive money, send money, just like a high street bank.

In a nutshell, I think it’s about feature parity with a high street bank. It provided for a new generation like a FinTech or a non-FinTech player to be able to use those features, because normally they cannot get those. It’s about changing the scenario of how banks used to be. They are the best people to do compliance and they’ve saved that for hundreds of years.  There’s no question about it. But I think the scenario has changed in a way that now you cannot go full stack into the market, to the end user, and be also covering the wholesale side of things.

Now there’s an opportunity, I think. In this case, we work with smaller banking partners. For smaller entities who have a smaller liquidity base and user base, I think it makes sense to become the store of value and the store of compliance and safeguarding. That’s the core which they are really experts on; and leave the distribution to providers who can really make better customer experience by embedding them into different ones.

As a regulated entity, you get the deposit, and your value where you store eventually. All the features which you are distributing through your own channels now are being used through an API, and have 10 X or 100 X more reach to customer Bases because you’re getting an aggregated access to those customer Bases/

For example, one of our customers, Wage Stream, they do early salaries. They launched in Spain, and they’re like, “Look, we’re going to need 300,000 accounts.” Now, our banking partner had I think one fourth of those. For them, it was like, “Wait, what?” I think smaller entities; it’s really helped with opening a revenue stream. Indirectly, you don’t have to put your marketing, and also the regulator is happy because you’re holding more balance and you can use it for other accesses.

That is where we see both sides getting some interest. It’s not about only giving prepaid cards.

Ben: [00:11:43] It is sort of driving more of a distinction between manufacturing on the one side and distribution on the other. The reason it seems that people are so excited is because you are now distributing banking through a channel that has higher engagement, lower cost of customer acquisition, the potential for high lifetime value, because it’s easier to cross it onto an app because you understand the customer context. Is that the reason why people are just over themselves with excitement about embedded finance? Because it’s about growing the addressable market and making banking much more contextual?

Hasan: Yes and no. It’s not about only the user experience. You want to give the best features to the user, but in return what are you getting? There’s a saying: if something is free, you are the product. If you have providing the customer something, what is the benefit for the person who is providing it? Why people get excited about us or venture capitalists or investors, or in general? Every company is going to be a FinTech company, let’s say.

I think every company at some point touches the payment stack. The value prop or the USP for the company or the provider, is that I get to see and improve my retention of my customers, or I’m looking for monetization and I’ve happened to land in products and increase my unit economics by user APR by adding an intro deck provider, get affiliates to be on top of itself. If you have a distribution channel, you can add on top features by working with an embedded provider and get on top of monetizing your user base.

Then people like N26, an amazing company, they were the first ones to start overdraft, and then they started noncash to cash conversion from stores in Germany. Now, last time I checked, they were embedding. Grab also does it. They embed Chubb, for example, their insurance company product. They embed seamlessly. Instead of going and filling out forms for insurance while you’re covering for three days, just hit a button and it automatically books.

Yes, the user experience is great, but also the providers getting something out of it. It’s not about just contextual user experience. It’s about what are you getting out of it as a provider? Then of course the service provider in the background always get some revenue. I think it’s both sides of the table: the customer and the user and the provider.

Ben: What you just said there about N26 is interesting because we tend to think about embedded finance as being embedding finance into non-financial channels. But it can also be embedding into existing financial channels. The difference is you don’t have to build everything yourself.

Hasan: Exactly.  You’re not going to start doing underwriting for an insurance company. They do better. You want to work with one of them. They understand probably more risk profiles than a FinTech can, because of their wider data set across multiple services and the history of underwriting all those risks.

You end up working with one, the question is: which is the better one? Do you want to go and spend seven to eight months integrating with one, or you just want to come to a platform which provides different sets of services and pick one and use it?

That is what happened with, for example, you see Amazon web services or Google cloud as well. They started with service for internally; they were built for internal use of Amazon itself. Then they started on top of features. Now, eventually, you just join AWS for the hosting service and end up using Elasticsearch and AI models. There’s a ton of services. You think about, I don’t need to build it. I don’t need to reinvent the wheel, it’s already there. Use it as a service, and the cost is pretty similar of integrating versus managing it.

That’s why people started using a cloud provider instead of having your own data centers. I think there’s an opportunity over there.

BaaS landscape and main players

Ben: [00:15:55] Hassan, let’s talk bit about the landscape for BaaS. A lot of people think that all BaaS providers are essentially the same. ostensibly it looks like it’s just the question of APIs and linking with brands on the demand side and banks on the supply side. Everybody gets lumped into the same bracket. But it’s much more nuanced and layered than people think. Help us out here. Help us, if you can, to provide a schematic of who does what and what the differences are between the different BaaS players?

Hasan: Let’s start with somebody like SolarisBank; they are a fully chartered bank and they have the right to say they are a bank, because they have a charter. Then they have brought in a couple of service providers for KYC, AML, some processor, a lot of different things. Although everybody talks in terms of partners, but we all know the partners behind. Eventually they’ve got a license and some partners, and then stitch it up together and then have a API on the hub.

The value proposition for the customer is good because it gives them security of a full bank license, and they can passport hopefully in other European countries. The lending part, if you think about how they make more money, it’s not only on account basis. It’s more about how – and this came out of our report- I think that there’s a lot of revenue for them. That is also value proposition for the customer, because it’s not only cards and accounts, they have a German IBAN. It’s a very good proposition for the local market in Germany, especially.

Then you have the likes of Modeler, Railsbank, Swan, or older players like Treezor from France; they have powered a lot of good startups who became FinTechs. Everybody knows about them. Then there’s there was Wirecard, the original. What happened over there is bad, but what they built initially was an amazing scalability of the product. They powered the likes of Curve. They have innovative companies who build on top of the N26. Number 26, the original name, came out of Wildcard AG. I was one of the first customers; we had a card transplant and the name of the bank.

That is great. That is regulated on a lower level than a bank charter, but doing similar things – no lending, nothing like that. “Here’s an account and a wallet,” most of the time. If you want to go fast, let’s do a prepaid card instead of a debit card. How your KYC requirement for a debit card versus lower against the prepaid card, that’s where Revolut started. It didn’t say debit on the card, it just was a card for a map class. That is like having any prepaid card attached to a wallet.

Then you have, in the US if you look at Synapse. They are running on top of a banking partner, one partner. They integrated with them and they’re running on top of it. Similar to Synapse, but not having the regulatory and compliance obligations of running the whole stack by themselves.

This is where you see different service providers, but their offerings change as well because they’re mostly in their countries, wherever they are. Synapse in the US or where the partner band has access. On the Baffin, SolarisBank is in German bank eventually. it is a FinTech, but it’s also a bank. You have the likes of Railsbank, and Swan, and Treezor, and everybody else. Then in the US you have unit and bond and all those players doing different things.

This is all what I think as monolithic. Everybody does one of everything: one of service providers, one of KYC, one AML, one processor, one of everything.

Ben: It is kind of monolithic. It can be vertically integrated, like something like Solaris or Marcus, for example; or it can be modular, as you said, Synapse and so on. But it tends to be narrow in the sense that it’s a single geography or a single vertical of banking. Is that right?

Hasan: Yes. That is how it works. Somebody was powering the fintechs of neo-banks, and somebody was starting to focus on expense management software, a little bit on corporate because corporate had a higher interchange fee versus consumer, especially in Europe, they’re not super regulated. There are tons of different things inside, but eventually, if you think from a technology or software paradigm, it’s monolithic. Versus the new way, which is going to come, is how do you have a service-oriented architecture? It’s microservice architecture, for example.

In software terms, monolithic is one single system with one database, one service provider, one of everything. In microservices, it looks like chaos from the outside because you have tons of different services interchanging, but then you have a central message bus or a service process orchestrator, which we think HUBUC is. That’s where we focus, is where you have tons of different service providers. Why it’s happening – I’ll come to that in a minute –there’s tons of KYC providers. There are seven or eight different KYC providers, and we can easily name them. Then there’s different AML providers, anti-money laundering software providers. Then there are manufacturers, big ones, small ones. There’s a few of them, like five or six, ten, definitely.

Then there is the awakening of these old school entities like Treezor, who were doing that co-branding stuff from the past. Now suddenly they’re also calling themselves banking as a service. But they have accounts which are mapped to a proper bank and stuff.

What we see is that there’s this fragmentation in the service supply side. If you look at the theory of marketplaces, a really good moment is when you have fragmentation on the supply side, when you want to build a marketplace on top of it. Your customer is isolated from so much different information; seven or eight different contracts, to build a small use case, you can just provide it as a marketplace, one contract, one compliant, and one commercial relationship, and then they don’t have to do anything directly.

That is how we see the old school versus the new generation.

HUBUC and BaaS 2.0

Ben: [00:22:42] That’s great, we can dig into that. I think that’s a nice segue to talk about HUBUC. Let’s maybe just zoom out for a second and you can tell us how HUBUC started. I think that’s relevant, talking about how you’re different and BaaS 2.0. Let’s start there. How did you start HUBUC? Where did the idea come from?

Hasan: This is our fourth FinTech product, or let’s call it fourth FinTech pivot. We started on the other side of the table; we were the consumers. We started with an initial idea in 2018, me and my co-founder. Of building a high-frequency trading board for the crypto market. It’s like we’re quants build software for the crypto. Didn’t work out, what a crazy idea!

We pivoted towards launching a neo-bank for crypto. That is 2018. None of the European partners wanted to work with us. Went outside Europe to a country called Bahrain, it’s a crypto friendly regulator. They did come a compliance sandbox; it’s a copy of their FCA regulation sandbox. Got in, there was no infrastructure, came back to Spain. Said: let’s build a QR payments app because we believe offline businesses have also the right to understand their customers, and nobody’s built a Google analytics for offline businesses. In order to do that, what you want is a closed loop payment system like Alipay, and WeChat have done it in APAC. Those guys went from nothing to basically directly 4G, or 5G.

We tried to do that. We build it using a QR code library. It was a two-sided marketplace, and merchants could understand who’s coming, what their agenda is, what are their profiles, retention rates and everything, and then he could do segment. On the consumer side, we thought that that was great, to get a deal when you want. But there was not really a lot of pain, in Europe at least. Either we were early or too contrary.

QR versus MasterCard and Visa in 2018, it didn’t work out. People want to pay with cards and iWatch and iPhones and all of that. Changing market habits is very expensive. It failed. We pivoted again, let’s build something which really the market needs.

We started working on a corporate expense card. We build it on top of a banking as a service provider, from UK, Ireland. It’s a great company, but we found out that there’s a lot of work to be done, especially from a customer point of view, when you are a B2B corporate expense card, where your customers are asking questions about: where’s my money going to be safeguarded, where is your bank? Then you say, “It’s in UK. But they have a license in Estonia or Latonia,” and your customer is like, “Why do I have to change all of this just for a card.” They want feature parity.

If they are switching from the old, let’s say high street bank, towards you to get a better experience, they also want the same features. It’s not about giving wallets to kids and cards for neo-banks for kids, it’s about providing service to people like Volkswagen and these bigger, huge corporates who are going to have corporate expense. You want to enable them to do that. The CFO of the company is going to ask you: where’s my money going to be safeguarded. That’s the responsibility. Who is responsible? What is the guarantee? Why is your license in Baltics, why not here? Why are you not working with a local banking partner? It doesn’t work. It doesn’t fly.

It’s good to build an MVP with banking as service providers, but as soon as you raise money, like seed round or something, you’re going to graduate from them. I’ve seen it happen. We see Revoluts graduating from them, everybody graduates eventually because the core business of finances service.

We launched Pigari. It was a great product. Corporate expense in Spain, similar to Soldo or Conto for Spandex for Spain and Mexico. The Spanish speaking market, in March COVID hit, we just launched it the first week, end of March there was COVID lockdown. There’s not corporate expense to be managed. We tried find a distribution strategy for our product, ended up finding out that there’s other companies who want the product but under their own brand, but they don’t want the compliance hassle and everything else, which we went through; to understand and build ledgers and sub-ledgers and how these spending controls and how the CFO can give a virtual card for IT team versus a physical card for a sales guy on the road who just needs to spend in petrol pumps and parking and food and the card shouldn’t work at the end of the day and the weekend the cards should be blocked.

All of this, which is what a CFO wants, the people who have been doing corporate expense software, they understand. But they don’t understand how to make this happen on a FinTech product or with a banking partner. They will probably need expert financial service developers who have built mail banks before to consult, and then it never happens. That’s where we came in.

They reached out to us and said, “We love what you build. Can you give us under our brand?” That’s where we pivoted. We had our first NOYC. This time we were not going to pivot towards the intersection there, but we actually saw signs of real traction. That was May 2020. We are a very young company, if you think about it. It’s like not even a year old. We launched with that one customer on demand and then we built a platform. We looked at all of the market. We looked at how many different FIS and Marquette and GPS and Paymentology – there were all these different service providers who were processing. Then you have KYC providers and AML providers and manufacturers. All of this, and now with PSD 2, you will probably need an FX rate provider, because it’s mandated. It goes on, it goes like way beyond on.

I think I did twenty-four or something interviews with different companies I looked at, when we were looking at how we were going to work with each partner. The opportunity was, what if you aggregate them? There is a higher set of costs for us to work against their APIs and have three card manufacturers instead of one. But for our customer, it lowers the cost 30%, than it was before with one card manufacturer. They have a wider feature set. You can ask us gold-plated cards all the way to organic cards; all the way to dynamic SIB cards, which are for online fraud. It changes the three-digit code of the CVV PIN every five minutes.

We have this wider set because we were able to aggregate it for the insolvent. The mode eventually ended up being, yes, there’s a lot of demand, but that demand needs a white glove service and a managed service. Somebody’s not going to knock on your door to get your API. You’re probably going to go and have a chat with them, have a scope of work session, have a flow of funds meeting to understand what they want to build and if it’s the right thing to build from a regulatory and compliance and everything point of view, and then prescribed them a solution. Then you make sure that your banking partners and everybody else on the other side of the market side is also happy with the risks you are taking. Have you built a mode on manual compliance versus digitalize it in real time? Are you doing sections and transaction monitoring as you should be? Are your partners happy? Are you embedding?

We work with three banking partners right now, and we made sure that we digitalize all of their rules and requirements which they had for us, for our customers, into one policy. That is very hard to do. Our head of compliance, she comes with 30 years of experience, but still it’s an exercise that’s not been done before. You are trying to take three different compliance policies and pull them into one single and making it simpler for the end customer and us, and making sure that it’s in real time and implemented on the technology stack. It’s not about checking in PDFs and putting out PDFs on rules and regulation, it’s about really implementing and enforcing those rules on the platform.

Yeah, that’s where we come from and that’s how we think about the product.

Ben: [00:31:29] If I may try to summarize, the insight came from the fact that you were on the demand side. You understood the pain that sometimes brands go through when they want to embed financial services. Then the other insight was around that fragmentation of the BaaS space. There was room for somebody to do the aggregation. But it sounds like more than that as well. Maybe that’s just the other things you talked about, just a function of reducing the friction for the brand. You’ve talked about being able to operate across geographies, about being able to do some level of compliance. Help us out, if we were to create a list of criteria for BaaS 2.0, what would be in there? Sounds like multiple geographies, aggregation, compliance. What else would you put in that list?

Hasan: Similar to what Amazon had, their three core values. Everybody wants a cheaper product, fastest delivery, and everybody wants the widest feature set.

For us, if you follow it, it’s very simpler. But just add on top of it, which is, we want the customer to have a managed service and cheaper than probably another place. They’re not going to come in for the core feature, they are looking for monetization and revenue, so how can you enable them? You’re giving them wholesale rates, you get them better prices.

Secondly, they want the widest feature set. Okay, I can do cards; can I do accounts, can I pay salaries, can I pay taxes on these accounts? Okay, great, how many countries do you have with these accounts? Okay, you have three different islands, what are you looking for next? Okay, we have seven different countries. Can I go from Europe to US? Because naturally, European startups and companies when they grow up, the natural way is looking at the US market. There are very few who go to other countries, mostly it’s US. Can you build a bridge between both markets? Yes. Okay, what is the capability and feature parity of your service versus a high street bank versus the global scalability of your platform?

Can you do everything that you just said in Spain, Germany, UK, Netherlands? Can you also do this in the US? In US, it’s a whole different way of looking at it. There’s ACH and things, people are still taking paper cheques. There are service providers for cheques. What is the feature set over there? So, the widest feature set, a good price, speed to market is important because people want to launch in 8 to 12 weeks, maximum. They are not waiting for months.

Then it’s about the most important one: compliance. That is included. Your banking partners are looking for it, your customers are looking for it. Customers are looking not to do anything, because they don’t understand it, they are waiting for you to guide them, like managed service. “Don’t worry, you don’t have to become an agent. We will take care of your compliance. We’ll take care of onboardings. You just have to follow these different guidelines and you have to do this, this, this.”

Always, as a program manager as well, you are thinking about different programs. If you’re talking about Cardwell’s, that everything is being followed. Basically, you are taking risks and passing it through to the end customer. This is normally what happened before. With all due respect to our colleagues in the market, there were registering agents and distributors passing along the risk saying, “I’m not the only one doing it. Here’s this guy who’s actually a reseller and he’s also doing it.” When the regulator comes, they can also point to you saying, “He didn’t follow. We told them to follow these guidelines.”

Now you’re saying that HUBUC is taking the risk for you. It’s not only dilated risk, it’s about floats. Can you manage float settlements? How do you manage liquidity when you pass through three or four or five days of Visa float, or versus MasterCard asking you three days sometimes, depending on the use case? Is your customer going to put in like days of transaction volume float for you? No, HUBUC is going to take care of it.

The current customer, you’re looking for that.

The regulator is looking for: are those perhaps sanctions? What is happening to these transactions coming in, going out into ledgers? Are you monitoring them? Fintechs, all of these different things, SCA regulation now coming in – are you following? They want to see from a regulatory point of view. I think when we worked with the Central Bank of Berlin, we learned something, which was working with the regulator is very different from providing service to the market. But good regulators understand and they adapt, but they also want to build trust with you. Trust is a very key factor. To build trust is very hard. You really have to work for it. But you can lose it in a second, like Wildcard did.

Ben: [00:36:21] Yup. It’s interesting, if we continue with the Amazon analogy, you’ve talked about how the customer wants cheaper, they want faster, they want richer feature set. Amazon is also working with a whole bunch of other suppliers in its marketplace and they want fulfillment, and they want certain things as well. It seems to me that you’re doing both, and regulation or compliance is a critical interface between both because the customer doesn’t want to have to worry about it. At the same time, the banking partner wants certain levels of assurance as well. My sense is that, if we talk about BaaS 1.0, I think there was this almost lazy assumption that if I can provide the APIs and the interface between banks and brands, then I’ll always be able to attract banking partners and other BaaS services providers. But I guess it’s going to be more competition on both sites; more competition for demand, more competition for supply. Do you think that it is compliance that’s going to make the difference in terms of winning both sides of the marketplace?

Hasan: Yes. How do you make comfortable your banking partner or the regulator? It comes down to compliance. Can you make a mode out of it?

At HUBUC, the biggest team is product team, the software development team. The second biggest, and the most important one at the core of the heart of the company, is compliance. If you combine compliance with technology, that is where you can build interesting stuff. But you have to know what you’re doing, and it has to be scalable, and it has to go across all of your customer base.

Ben: That’s clear. I feel I’m getting this real picture of what’s different about BaaS 1.0 and BaaS 2.0. When you were talking about BaaS 1.0, it was almost like the tech didn’t really matter, because everybody has great API, everybody can provide a sandbox. Almost like there wasn’t that much differentiation in the tech; versus what you’ve got, which is a new tech stack. You’ve got aggregation and you’ve got compliance. There’s the basis or the kernel of something which is differentiated and defensible.

Hasan: That is very true. We are not only also providing the compliance layer or that as at the heart of the company. With regards to tech, just to give you an idea, when we think about tech (I’m a software developer with 12 plus years of experience), we have unit tests. It’s a test with automated tests, which fail if there’s any part of the platform which does not respond over 100 milliseconds. The SLA is 100 milliseconds. At 100 milliseconds, you feel everything instantly. So that is where we think about scalability from a product and technology point of view. You can build all the compliance and everything, but if your tech stack, for example, is slower, the person building on top of you is also getting that. It’s aggregates.

Ben: The compounds, right? Across the latency compounds.

Hasan: Exactly. We are not only trust-building compliance from a technology point of view, we have to be scalable as a platform, which you can power any number of Revoluts on top of you. The transaction volume, all of them aggregated generate.

We are also in a system of authorization. Just to give you an idea, we are the system of ledger as well and authorization. What it means is, our cards, when somebody touches one of our customers at the point of sale or online payment, is going to come through the scheme rails all the way to us. We have two seconds (normally SLA from the scheme is two seconds) to respond to it, implement business logic on top of it. So, if it’s a corporate expense card, somebody put some spending rules on top of it, that all needs to happen before two seconds. We have to check, that card might be having three different ledgers and three different banking partners for us.

All this orchestration, that is where we come in. I do not want to say that we only care about compliance. We are a product and a compliance company. We combine compliance with technology, and then magic happens. It’s not about just sales – which is great, we have a lot of customers – but this is where you build the mode. You build trust with your regulators and partners. You build trust with your customers by providing a great SLA on services. Then you can also scale out, that is where you build trust with your investors, because you’re not actually having larger churns, your contracts are longer term, you’re betting on the next 5 to 10 years of the market.

The competitive environment for BaaS 2.0

Ben: [00:40:55] You just raised a very healthy seed round through Y Combinator. As I understand, it was very heavily oversubscribed. It seems to me that smart investors get what you’re doing. They understand how you’re evolving into the next generation of BaaS.

My question is: what does a competitive environment look like for BaaS 2.0? Is it people like Stripe treasury? Is it potentially people coming in from different spaces, people that already manage many-to-many orchestration? I would think people like open banking platforms that already provide the routes from customers into many banking providers or potentially even some of the more advanced SAS providers that again provide many to many interactions.

When you look out, where do you see the competition coming from? Is it BaaS 1.0 competitors and step up, or is it a new generation of competitors that maybe coming from adjacent spaces?

Hasan: I think first priority is a validation of our these of one part, which is, instead of competing against the bank, we need to work with them and aggregate them. They’re aggregating or they’re at least staying on the website, their YC Lam is a great company, an amazing company. They’ve changed the internet e-commerce world. But they are talking about aggregating four big banks. We say, “That is great, somebody needs to aggregate the rest of the smaller banks.” But we are both agreeing that it’s time to build a platform which is scalable, trustworthy, and that customers don’t have to go through hoops of how to use it. It’s a management way of doing.

But then their outlook, coming from their businesses, is that: here’s the form, fill up the form. There is no touch point. It’s all automated, digitalized, and you’re going to get an API and you’re going to build it. That’s where we differ. That’s where we are completely opposite. Our approach is: we come, we look at the use case, or we have a chat with you, we understand the flow of funds. It’s a very enterprise point of view. Here we are very similar to Adrian, for example, who has 400 merchants and makes more revenue than Stripe with hundreds and thousands of merchants. It’s completely different go-to-market strategies.

With regards to Banking 1.0 competitions, here’s the thing: when I was like actively developing (I still sometimes do, but from a solutions architect or software architect point of view), if you have built a monolithic system, you’re looking at the rewrite. If you’re happy to do that, you’ll be doing that to rewrite it into a service-oriented architecture or microservice architecture. If you want to do that, that means recordings, reissuing, a lot of which people don’t know.

Ben: In short, it’s going to be hard to go from BaaS 1.0 to BaaS 2.0. But what about the people entering from adjacent spaces? People that are already not monolithic, already have pretty powerful extraction platforms?

Hasan: It’s not like there is no competition. Stripe Treasury just raised 600 million or something and are opening in Europe. They started issuing Euro. But then they are giving you cards, and their go-to-market is their Stripe connect user who is already using the Stripe connect function of taking payments for their marketplace and they’re only doing the merchant payouts with a slapping on top of a card that is a corporate expense card. Then if you have an account, you can hold it for a longer term, and that’s it. That is banking as a service, or Stripe Treasury is focused on their marketplaces business.

We, on the other hand, look at talking about petroleum companies and mobility companies and expense management companies and taxes or vendor payouts. We have customers who are doing B2B payments. It is a very different approach towards what their market is versus what should ours. The market is super huge, and we can talk how we think about marketing, and then there is the markets and there’s players Vodeno and Ion Bank, and Phoenix, for example, in the US, Modern Treasury. They have different players in different go-to markets, but it’s very hard, I still think, to understand coming from acquiring, which is easier, almost commoditized, where aggregators of aggregators and pay facts of pay facts. Aggregating pay facts, like prime ratio; versus payment method. It’s completely different. The KYCs and merchant onboardings for opening accounts for KYB is very, very hard and expensive than onboarding end consumer, which is easy. Anybody can do it. On Fiddle, take a picture, loudness check, there you go. Pass it through compliance Wantage, perhaps in sanctions, that’s it.

Now, onboarding a company, it is a corporate with complicated subsidiaries everywhere else. How do you go along that? That is where you come in. Are you taking emails of zip files of compliance KYBs, or are you actually having an API end point which actually digitalizes, at least giving it a try on first digitalizing a KYB fully completed digitalize, and going through the API, versus sending zip files over emails.

There are very diff different ways of looking at it, but there is definitely competition. But the market is huge as well. To give you a flavor on how we think about the market, there’s the trillions and all of that stuff. We have a very simple thing, coming from YC, you learn something, which is you need to go bottoms up. It doesn’t matter the market size, because that increases. We have seen examples of Coinbase and Stripe YC alumni, we have a Brexit YC alumni, Grump YC alumni, the list goes on. These are the big ones. Then you have Airbnb and everybody else.

Somebody started with air, bed-and-breakfast on air bed, literally air bed, and then it became Airbnb.

What we think about is, the market size is bottoms up we take, it’s very hard to do it because there is so many different features you can add to build a bigger market or a smaller market. We think a base point, good example is the go to the ECB, European Central Bank, and look at the non-cash transactions. If you look at non-cash transactions across the countries where we can operate, for example US, Europe, APAC – almost all of it, 58 countries we can open accounts we can issue in 22 countries MasterCard and Visa. You work with both streams. But if we take across these countries bottoms up approach, take number of non-cash transactions (any transaction which is not cash), that is around 800 billion transactions last year. It’s growing 7-8%, depending on the region. APAC is doubling almost, but Europe is still growing slowly, but not bad. Then there’s the US as well.

If you take this market size and you say: do you charge per transaction? Yes. Hypothetically, if you’re charging 20 cents, divide the total number of non-cash transactions by the total number of cents per transaction, that is around 150 billion of bottoms up market size for non-cash transactions.

Ben: Give us a flavor of how fast you’re already growing.  

Hasan: We joined YC in the stammer with $54,000 of annual recurring revenue. We did demo day in March with a $750,000 of revenue. We are currently at $890,000 revenue, and we have total booking across 11 customers of $3.6 million.

Recommendations: book, recent article, company, influencer, brand

Ben: [00:49:08] Really substantiates what I said at the start, which is you guys are really on a tear. I think those people who haven’t heard of you now will be hearing about you pretty soon. Hassan, this has been a wonderful discussion. I think everybody would have learned a lot and everybody will now have a clear sense of what is Banking 2.0.

Just before we wrap up, I wanted to talk about recommendations. So every podcast we finish with asking our guests for sets of recommendations. If you’re game, I’m going to ask you for five recommendations, the first of which is a favorite book.

Hasan: I have multiple of those.

Ben: I’m sure. You’re a very learned man. Just give us one, if you don’t mind.

Hasan: I’m just a student of trying to understand things. A very good book is, The Innovation Stack, Jim McKelvey. He’s the co-founder of Square. It talks about how to build innovation and compete with companies who have never been competed. I think Amazon and at Squarespace, and then left at quarterly. And I think it’s the only company they left the space so far. That is a very good world to understand.

Ben: [00:50:22] Is Square a company that you particularly admire?

Hasan: Uh, yes. I really like how they think about things.

Ben: I think really understand how you build grossly upon grossly.  

Hasan: Yes. I think the key over there is they take risks, but they take them in a way that they first understand the secrets behind it. For example, if I was to talk about card issuing and if I don’t know what is a APW profile to register the card with MasterCard, which is a basic thing if you do with card recommendations (CNS profiles and stuff), then you don’t really understand what you’re doing. If you don’t really understand what you’re doing, first you need to understand it and then you can innovate on top of it. They have done it multiple times.

In the book they also talk about the banks were not willing to go outside those city walls and give machines to somebody like a merchant in the marketplace, and they needed it. There are two options there: either you can be horribly wrong, or you can be very good and very right. Most of the time if you take risks and you understand the market, you might be right. They have been right multiple times so far.

Ben: Good. First recommendation, Innovation Stack by Jim McKelvey. Next one, a favorite recent article.

Hasan: It’s called The New Mode in Financial Services by Mr. Ben Robinson from Aperture. It is a very, very good read if you give it a couple of times. You have to read it a couple of times – at least in my case, I’m probably slower. I read it a couple of times and I still have it. I think it’s a great piece.

Ben: Well, that’s extremely kind. I want to tell you, I don’t know how many podcasts we’ve done, but it’s lots and nobody’s ever recommended an Aperture article before. Thank you very much, indeed. That’s very kind. The next one is a favorite influencer. Somebody who’s essays, thinking you regularly turn to for inspiration or to learn.

Hasan: There are multiples of them, but there’s somebody very interesting. They are not invested, by the way, it’s Ben Horowitz. He has a particular way of using rap to explain things directly. He also has a great book. If I was to give an option number two for a book read or listen to, Hard Things About the Hard Things from them. It’s an amazing read, especially for CEOs and founders. You feel like you’re not alone, which most of the time happens.

I think that is a very distinctive way of looking at business and entrepreneurship, and he uses those rap lyrics. Which is, if you think about it, they are amazing because in two lines they convey you a message which most of the time I would, or some good entrepreneur would spend three, four days of writing a letter to explain the same thing which they’d just explain in two to three lines. I think he’s amazing to read.

Ben: To paraphrase Ben Horowitz, would you describe yourself as a wartime or peacetime CEO?

Hasan: Uh, wartime.

Ben: That’s good, I think you need to be. I think the growth rates you were talking about, they’re not peacetime growth rates.

Hasan: It’s 39% month over month!

Ben: Yeah. The next one is, a favorite brand.

Hasan: That is hard. SpaceX. Second would be Tesla; I don’t own one and I’m not invested in any way, but it’s like somebody who came in and really disrupted something, which is not building an app for something of something.

Ben: It’s funny you say SpaceX as a brand because Elon Musk is one of these people who says he doesn’t invest in marketing, he doesn’t invest in branding. Is it the brand of SpaceX or is it the ambition that’s captured through SpaceX?

Hasan: If you ask me what SpaceX means to me, it’s the next gen thing – really hard innovation, real innovation. It’s not building just another app for something, which we have been doing as an industry for several decades. What is the big bang which has happened?

This is a cool thing, and where really the next leap lies. We, or our kids, might be able to travel and live on other places. That’s really commoditizing and bringing mainstream that space travel. But from a design and aesthetic and a product point of view, it’s an amazing achievement. It is engineering in general, so as an engineer I’m probably focused as a brand on that side. It’s very hard to make simple things. It’s very, very hard to make simple designs, and you have an example of Apple.

But the designer doesn’t work without robust nest and scalability and service levels. I used to use Ubuntu and Linux, I come from the other side of the table. I was the guy who would not use Windows, thinking, I don’t like it, I don’t want to get logged into their system. I would rather prefer Linux and compile my own kernel and all those different variables needed to use a laptop. Then one day I switched to Apple, and it had the same core, which is the BSD core of Linux. But the product itself just works, the most important part. It’s not only the design, but it also just always works. It never lets you down. That is what changes something from other competitors or other products.

Ben: [00:56:40] I also think that Elon Musk is being a bit disingenuous when he says he doesn’t invest in marketing, because product is marketing and placement is marketing. Having Tesla showrooms at the center of every major city is marketing. Anyway, let’s move on. The last one is a productivity hack. So how do you make sure that you are productive every day in your role as a wartime CEO?

Hasan: It’s really hard. Something I read from a blog from a company, also YC alumni, they’ve built an amazing tool called superhuman and they talk about gated calendars. How to make sure that the years, you have enough time for concentrated work versus just changing context from one lawn to another meeting and now with remote. It’s just going crazy. It’s a very good read about, if you can stack together, for example, in my case, your one-on-ones on Mondays, or your reports, if you have any. They have their one-on-one on Mondays, then it goes down on Tuesdays to a specific set where everybody comes in with a clear idea of what we didn’t talk about, and you have those pizza type small meetings like Amazon. Then Thursdays you have a full committee. Everything which revels from Mondays to Tuesdays can be touched on Tuesday, and then your still have two days away from managing meetings into concentrated work.

Ben: I think that’s an excellent step, particularly in the remote world. The mental gymnastics; jumping between meetings, clients, it’s tough. I think that’s an excellent productivity tip. Hasan, I’ve really, really enjoyed this conversation. Thank you so much for coming on the show, I’m looking forward to doing this again sometime.

Hasan: Thanks a lot, Ben. Really appreciate it.

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.

Full transcript:

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.

M&A

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.