Focus on Fintech: How to be Ready for Evolution
Are fintech startups in Russia ready for investments and collaboration with market leaders? Or they have to try to develop on other markets? Sergey Lukashkin, Director of Digital Transformation at VTB Bank, Vasily Kuznetsov, Founder of SweetCard and Eldar Vagapov, Managing Partner of Larnabel Ventures, discussed these and other questions on GoTech Arena Forum.
Sergey Lukashkin: We see many successful startups in the market, and in Russia too, for example, N26, Revolut, Klarna, TalkBank. Is fintech interesting for investment today?
Eldar Vagapov: Fintech market is very interesting for investors, and it has been for several years. One of the greatest differentiators of Russian market is the fact that we missed in the 70s and 80s a lot of financial infrastructures. We don’t have the technology that the rest of the world has, and that has allowed Russia to create a lot of new innovative companies, like Kiwi, Tinkoff, which could be classified as startups, but are already big companies now that have been able to succeed because of the lack of established infrastructure in the market .
In fact, Larnabel Ventures have several investments, which are doing really well. We have 2 fintech companies that we invested in that returned the fund already.
We try to look at companies that invent, especially in fintech, new business models that are enabled by new emerging technology. One example is a US company that does factoring of wages for people, so people can get access to their own wages immediately when they need them, and that completely changes the dynamic of risk profiling of the clients, because you shift the risk from the individual to the corporation. Another example is the company we invested in Germany that uses the new technology of remote KYC to enable depositories in rich countries, like Germany and UK, to deposit money in banks in poorer ECB countries, like Romania, which offer higher deposit interest rates. This is enabled purely by technology, and it creates a very good incentive structure for the clients, because they are able to get high interest rates with the same European Central Bank deposit protections like in Germany.
In the first case it is absolutely about use cases, and the second one is a use case enabled by technology. It is a technology of a remote KYC, like facial recognition and stuff like this, that allows you to remotely open a deposit in a Romanian bank, because German pensioner will not go to Romania to open a deposit account.
Sergey Lukashkin: From the corporate side I can say that we work with startups in pilot projects and doing, as we call it, foresight projects. For us it’s some kind of proof of technology projects. If we find some interesting technology or some interesting business cases, we can use it for our banking work, and we are happy to work with mature startups, which can give not only technologies, but their own expertise from market.
Vasily Kuznetsov: I don’t see that fintech is something interesting for Russian investors, because, when they say that fintech is interesting, in most of the cases they talk about some other markets, not Russia, you can’t see so many successful stories here. That’s why startups in Russia have to be profitable just at the beginning, and it really limits your ability to grow, because you spend time on getting things done to get the profit, and only after like 3-5 years you can then look at other markets. If you look at other markets, for example US, you can see startups that have a plenty of offers from the investors and they get dozens of billions of dollars in investments. They are not limited with money, so, from the beginning, they look at other markets; they think global, etc. But for Russian startups it is quite difficult to think out of the box.
Sergey Lukashkin: Eldar, what do you expect from a startup when they come to you for funding?
Eldar Vagapov: One of the main questions that we ask, especially fintech companies, is defensibility. A huge bank, like VTB or Sberbank or Tinkoff with a huge customer base, can very easily roll out the same product on the existing customer base and estimate your company. And the question is how you are going to compete with established players, who already have the client base and can roll out new products to this client base very cheaply.
Vasily Kuznetsov: Investors give the money to something they believe in, and they believe that it's quite difficult to fight with the banks in direct flights, face-to-face, so, that's why in Russia we see that B2B models or B2B2C models can be successful for startups in fintech, and only a few companies that are successful who are doing the B2C business; they started like 3 years ago, independent companies that don't belong to some corporations. We see a lot of startups that bring really interesting and ready-to-use ideas to the banks that they implement, like, on a regular basis. So, for the startup the advice’s to find something like this, some solution that can help the existing players, and one field where you can find it is the platform, some marketplace, where big banks can't do something alone, when they need the cooperation with the environment, with other banks. So, if you find the solution that helps them all together to solve the problem, so that is the case. It's our case actually, because we are a platform that helps banks and many retailers to find each other in one place. It brings more value to any bank when they are a group of banks then when they do it alone.
And another advice. I think there are different types of investors in the Russian market. We see many of them. The advice is not to take their toxic money, it is very important. The partner, the investor is crucial for the success. We saw a lot of examples where great teams with the great ideas started a very interesting business, but, because of the investors, they finally failed; because at some stage they didn't find money or they had some conflict. So, it's quite important to have the right partner when you go such a difficult way with your startup.
Sergey Lukashkin: What do you think about the role of startup in fintech and financial ecosystem? Can small startups be useful for a large bank?
Vasily Kuznetsov: I think that big banks are disrupted by big tech companies, and we pay by the phone or by the QR-code not because of Sberbank, but because of Alipay and Apple Pay. The main challenge for them is there. The main fight is not for just the payment and the way you pay, but for the wallet of the customer, for the advertising budget that you can sell to a brand. In this big fight the startup in Russia has to help someone, the banks, to solve the challenges they face in this big battle, and then you can find your niche to be successful.
The role of startup is to bring ready-for-the-market technology to the bank, and in a very competitive environment. If some sphere is interesting, there are several startups, and there is a competition, and very bright teams fight for the right to work with a corporation. Corporations, instead of doing something inside, can bring good startups, give them a chance to implement a technology and see the results in a very short period of time. That’s one of the main ideas of cooperation of startups and corporations.
Sergey Lukashkin: VTB has already launched the second acceleration programme. We see a good effect from the first one and in the last accelerator we had 5 successful projects, so we continue to do this. Vasily, you are participating in our acceleration programme, so what do you think about corporate acceleration projects and products and participation in accelerators?
Vasily Kuznetsov: We worked with more than 20 banks, and they are okay, but it took like 5 years to do these projects, and the average time is from 3 to 6 months, and in some cases, it can be like 2 years long. The champion that we had in this race was Home Credit, it was during one of the accelerators that we participated in. It was for just one month. We think that acceleration helps banks to focus in a certain time, to bring all the participants in one room, so you have the feedback from all the main departments, and you can find a real client that can bring your solution to the company and to the market. I think it is a very interesting and game-changing experience that we see right now. And our advice to all the startups is to participate in accelerators which are launched by the players.
Eldar Vagapov: I’m more skeptical about accelerators. Although they are very useful and provide a very useful service to the startups, sometimes, too much of a good thing might be a bad thing, because you get those startups which focus on the process more than the result, and for them the end goal is getting into the accelerator, not getting a client. When you work with accelerators, you have to be very clear of what you need to get out of it and work very hard to get that thing. Don’t think that getting into an accelerator is a success factor that you can put on your resume. The client at the end is the success.
Vasily Kuznetsov: But I think that accelerators are a part of the environment which spends more time on process rather than the result. The whole infrastructure around the fintech. The number of conferences, the budget of these conferences is much higher than investment in fintech in Russia, so I think that we should cancel some of them and give money to startups, and we will see the results.
Sergey Lukashkin: Which markets look more interesting for fintech: the United States, CIS, Asia, Mena?
Eldar Vagapov: I think there are pluses and minuses in all the markets. Obviously, the US is a huge market and if you can make it there, you can be happy with just being successful there. At the same time, Chinese market is showing that it’s huge, very dynamic, and it produces a lot of innovation, in fintech especially, like Alipay and financial companies like that, which are obviously very successful. Russia is also a very interesting market, and you get companies like Tinkoff here, which have been very successful. We have one portfolio company in Russia called Direct Credit, a credit broker, which is very successful as well.
I think that if you adapt your business model to a market, you can succeed anywhere. From the investor’s point of view, especially, Russian investor’s, I do believe that we have difficulty now going into European and American markets because of the difficult political situation, but there are a lot of good companies here and capital can be deployed here quite successfully. I think that one of the major challenges and opportunities of the coming year will be refocus of the local investors on the local market
Vasily Kuznetsov: From the startup perspective, I need to start to think about it. You might think that CIS is the best choice, and Russian companies very often receive some offers, and you can meet some guys from other CIS countries during the conferences, so they are open. But I don’t think it will somehow affect your business, because it is the same from the valuation point of view, so you are still a Russian company and your valuation will be low. I think that European markets and European banks with them. They are very conservative and very slow. If you think that Russian banks are low, then you should go to Europe, and you will see. US is a quite competitive and mature market. If you can succeed there, then you can be successful globally. Asia is the place to be, I think, because many Russian startups start to build a successful business there, and it became the main part of their business portfolio. So, Asia is number one.
Sergey Lukashkin: I know one company, the friend of mine. They go to Singapore and try to build their business, their startups in security. They said that the Singaporean banks are not so mature in digital projects and process as Russian banks. I think we are really very good and digital today. I talk about digital with European partners and banks, with Asian banks, and I think we are the best. We can say that.
So, we can say that building a digital platform is a mainstream today. Fintech and startups are interesting today, and you can invest in it. You need to collaborate with the banks to be successful, because they are huge players on the market. Of course, banks have resources and startups have ideas, so we can build something interesting together.
And we have the question from the audience: in the battle between big tech and big banks, how do you see next 5 years, and, maybe, next 15 years?
Vasily Kuznetsov: It’s the game named “Music Chair”, you know, when everyone goes around and one chair is being taken. So, they fight. The producer of the phone, the mobile operators. It’s not only Apple and Google with the banks. There are a huge number of companies there, and all of them try to engage customers, to build ecosystems, and it will continue. What I know for sure, any purchase you make, they will make a counter-offer. It will be not only from Google, but from Apple, from any payment mechanism that you are going to use, a QR-code, whatever; everyone will offer you something to buy. It will be somehow accelerated. Apple Pay or Google or mobile phone operator or your bank who will be the first. I think they will do it smarter, more targeted, and they will try to bring more value and less friction to all these things. I think they have more chances to beat in this battle. And some banks will survive. Not all of them. The banks will stay as the source of the clients, because somebody has to do the process, etc., they control this, especially, state-owned banks, so it will be with them in the next 5 years, nothing will change. But the engagement of the customers - this is the real battlefield. Social networks, messengers, some other sources - they know how to engage the customers, and this is something that banks still don’t know, but they try hard to do it right now.
Eldar Vagapov: I don’t believe that it’s a correct way to pose this question: who will survive and who will not. I think we are now in an era where customer is the king, and whoever knows more about the customer will extract more value from the customer. So, banks have unique position here because they have all the transactional data they dispose. Mobile phone operators have the IT usage data. The retailers have the spending patterns. So, there are a lot of different players who have different data, and by merging them together, that’s where the magic happens. I think the future is not in the competition between those players, it’s actually in the cooperation between them, and that’s why we see a lot of ecosystems evolving. Sberbank is working very hard to create an ecosystem just for this, so they can compete with Googles and Facebooks on the level of the deep knowledge about the customer.
Sergey Lukashkin: I agree with Vasily that banks are going to be ecosystems, but we also have a lot of competitors, especially on the payments side - it’s a lot of payments solutions today. But, if we talk about mortgage, for example, or something else, only banks have the knowledge, the history; they know how to do it, how to give mortgage, for example, but nobody knows how to do it properly and with the same risk. So, I think, there will be a mix, with big tech, banks, retailers, and something else, as Eldar says. I think, the future is in ecosystems everywhere: bank going to be an ecosystem, big tech going to be an ecosystem, retailers going to be an ecosystem, everybody wants to be an ecosystem today. So, I think, the 5 year perspective is that all competitors in the market going to be not only an ecosystem, but sometimes they collaborate with each other to give the customer more goods, products, services, and so on.
Vasily Kuznetsov: And under this pressure, everyone is more open for cooperation.
Check aftermovie out: https://youtu.be/lHwkYfW2LHY