How to Build a Profitable Digital Bank with Tinkoff
Oliver Hughes is the CEO of Tinkoff Group, one of the world’s most successful digital banking groups with over ten million customers.
Tinkoff is publicly listed, which brings clarity to its operating model in a time when many noteworthy consumer digital banks are pursuing customer acquisition at the expense of profitability.
Oliver has led Tinkoff through three financial crises, so brings experience and perspective to the current COVID crisis.
This is a fascinating discussion about unit economics in digital banking and winning business models with a CEO with thirteen years of experience in this game.
Full transcript:
Will Beeson:
Oliver Hughes, welcome to Rebank.
Oliver Hughes:
Hello. Thanks for the invitation.
Will Beeson:
It's great to connect with you. This conversation like a number that we've managed to have on Rebank over the past couple months now, during lockdown, quarantine and the broader COVID crisis is one that we have been trying to line up face to face for a while and hadn't been able to. And now that everything has shifted to remote, it's easy enough to jump on to a Zoom and connect. So glad we could do it.
Will Beeson:
Oliver, you have a fascinating backstory which I'd love to get into. You're the CEO of Tinkoff Bank which is Russia's largest digital bank and potentially the largest digital bank anywhere around. I wonder if you could quickly just to kick us off, introduce Tinkoff and tell us about what you guys do?
Oliver Hughes:
Sure. So we're actually a group, I'm CEO of Tinkoff Group it's not just a bank. And this is very important for our conversation today, because inside the group we have a bank. Within the bank we have obviously all the consumer services that you'd expect to see. We have an investment broker, we have a business line for a small business, which is mainly a transactional business. We have an online acquirer, merchant acquiring so if you think Stripe. We also have an insurer, an online insurer. We have an online travel agent, we have a mobile network operator a virtual one called Tinkoff Mobile, everything's called Tinkoff in our group so that's easy Tinkoff something rather.
Oliver Hughes:
So it's much more than just the bank and I head all this up. We've been around for quite a while, so we've been around for 13 years. We launched in 2007, which was an interesting time to launch a FinTech, at the time credit card monoline start up. So we've been through quite a few bumps along the way, this is our third big crisis, the coronavirus crisis but we've grown into quite a big business. So we have 11 million customers now in our ecosystem growing very quickly. We now had to grow to 20 million customers and we actually want to step that up and see if we can more than double our customer base over the next few years. This probably makes us one of the largest digital banks in the world, but obviously the Chinese have some pretty large players as well.
Oliver Hughes:
And I was talking to the head of Nubank a couple of days ago who I know very well and they've got a large active customer base as well. So we're up there let's put it that way and growing very quickly. So we're an online financial services and lifestyle ecosystem. We provide a wide range of financial services to consumer and business and we also provide stuff beyond financial services very importantly. So in entertainment, travel, mobile services, content, a whole load of complimentary digital stuff. And we're by far in a way the biggest player in Russia in online financial services obviously, but there's some pretty stiff competition here as well which I'm sure we'll talk a bit about later.
Will Beeson:
All right. So I'm glad that in that very concise intro you nonetheless picked up a few of the pieces that I think can make this an interesting conversation. One is of course the track record and the scale that you guys have achieved. One is the scope, the breadth of the product offering that you guys have developed and as you rightly point out, it extends very far beyond banking. And then one is I think trying to draw some parallels or at least extrapolate elements of this conversation in your specific experience to the broader global digital banking scene. So interestingly, you referenced David from Nubank who joined us on the podcast a while ago now, we're probably due for a catch up.
Will Beeson:
You said you launched as basically a monoline consumer credit card company which is effectively what Nubank has done and then you mentioned some of the Chinese FinTechs and financials and WeChats and the like. And effectively, it sounds like what you've grown into from that monoline credit card business is effectively a super-app. Which is a model that as I think we're all aware has had massive traction in Asia, but a model that generally speaking people in the West don't view as being the natural evolution of the landscape over here. We can probably pick all these pieces apart as we go but to just dig into that description a little bit more. So can you talk a little bit about how banking fits into the broader group offerings? And asked another way, how the banking offering is enriched by the other group offerings?
Oliver Hughes:
Sure. So if you look at our suite of different services in the ecosystem approach, broadly speaking we split our different services and products into three categories. So the first are our locomotive products, so they're the products through which we bring millions of customers each year into our ecosystem. So this is our mobile app plus debit card, very simplified. So obviously you see many of these other types of startups around the world in Europe and the U.S especially recently. We have our suite of services which enable us to monetize customers once they're in the ecosystem. So this is lending products, investments, small business, transactional services, insurance, all sorts of stuff.
Oliver Hughes:
And then we have our third category, which are the services which enable us to drive engagement with existing customers. Drive loyalty, drive transactions, drive cross sell and thereby extend customer lifetime value. So you need to look at all of these together. Obviously there are some overlaps, so some of our business lines are products through which we can bring in large numbers of customers. So for example a brokerage business, which is a mobile app called Tinkoff Investments. We now have two million accounts opened, 600,000 of which have been opened just this year if I thought already more than that and that's a way that we bring customers into the ecosystem but also in monetizing.
Oliver Hughes:
So that's broadly speaking the overview but you have to think back to our origin. So we started as a branchless online credit card company and in fact, back in those days there was no online at all. And then eventually we built out other products, we added deposits, became retail funded, then added insurance services and a load of other stuff so it was quite an evolutionary path of build outs over the last 10 years or so. But because we had a business that generated bottom line return, so we've always been a positive bottom line since basically eight to ten months. And when we came out off the investment phase and we've been profitable ever since.
Oliver Hughes:
And as well as thinking about our customers and what we can offer them, we also think about bottom line so we're a business that has to be profitable and everything that we do has to be profitable. We had a business which was profitable, which then funded, build out our other businesses some of which we can subsidize for example, Tinkoff Black which is our mobile app and debit cards. So if you think I don't know Monzo, Revolut, Chime inside Tinkoff. We've got already nine million accounts opened so it's already a pretty big business and growing very quickly. That's subsidized by some of the other businesses that drive our bottom line. So we have this organic approach and everything is intermeshed.
Oliver Hughes:
So we try and think about this holistically as much as we can. We certainly don't build businesses or buy businesses, we're not an M&A company on the side which we don't see eerie the complimentary within those three categories that I started describing to our existing business or drive our bottom line. So that's kind of how we come to this question.
Lex Sokolin:
So if I can hop in it sounds great to build a profitable business instead of a non-profitable one and I'd always take the one that makes money, that makes sense but in practice it's of course much harder than a mission statement. So the question I have for you is what about your unique circumstance do you think enabled you to take this economic approach rather than what we've seen all over the world? Where we know it costs two billion of burning money just before you reach substantial scale. And an adjacent observation is that in a lot of places in the West, the cost of customer acquisition is just so deeply expensive that getting that equation to work is super challenging.
Lex Sokolin:
If you talk about the Monzos, and the Revoluts, and the Robinhoods, and Stash, and Acorns all of those companies without exception are burning dozens of millions of dollars per year and losing money on every single customer. So the question is how have you been able to do that differently? Is there something in the Russian consumer and the preferences around that and the options around that that made it possible? Or is there something in the banking and capital markets infrastructure in Russia that made it possible? What was the growth engine and why are your marginal economics different?
Oliver Hughes:
Sure. So that's a very big question, I'll try and break it down into chunks because otherwise I could talk for a couple of days and we don't have a couple of days unfortunately. So Russia is a very competitive environment, there are some very good players in Russia in the financial space. So it's not that Tinkoff came along and stole the show because there was nothing happening because they're just drops in the market, it's not like that at all. Number one, number two it's a very heavily regulated market. So when we started it was less regulated, it was probably under regulated but now consumer lending in Russia is over regulated I would argue in many respects so it's not about the regulatory aspect.
Oliver Hughes:
And in fact the margins in Russia are a lot lower than they were and a lot lower than in many other markets including Brazil which we started with, a lot lower. So I would say that we embarked on our journey with a particular mindset. So we're about interface, we're about customer experience, we're about supreme service. We are about growth with a capital G and driving that growth through great product virality, mobile app and having this joined up approach with an ecosystem yes, but we're also about bottom line. So our founder and shareholder Oleg Tinkov is a self-made Russian entrepreneur and he's always been about bottom line as well as providing a great customer experience.
Oliver Hughes:
And in Russia, it wasn't like we took a decision between back in 2007 way before the word FinTech was coined and became very, very trendy. It's not like we chose between the capital market cap route or the profitability route and self funding model. There was no choice, there is no abundance of capital in Russia and it's got worse over the last few years not better. So you can't have a super fueled private equity capital driven model because it's just not possible, there isn't the private equity capsule around. So we have to find a way of earning money, we had to create business lines that generated that income which we could then deploy to grow other business lines which were maybe lower margin but brought in higher volumes of customers.
Oliver Hughes:
And enabled to build our fantastic interface and UX and lifestyle services and all the rest of it. So this was not a choice, this was what life dictated in the circumstances, the operating environment in which we operate. And again, this is our third crisis so we know what crises look like. We've been through the wash several times 2008, 2009 was a vicious crisis for us in Russia especially as a startup in consumer lending. I feel like we got inoculated very early, we learnt how to manage our business, we understood the operating leverage, the different leavers that we have to pull in our business. To manage it not just through the high growth times, but then through the difficult times as well and the next one came in 2014, 2015 the Russian crisis.
Oliver Hughes:
So we understood that you can't run a business where you're burning money because if you do that in Russia there's going to be no White Knight coming to rescue you, you're dead. So we had to find ways of building a business where we made money. So we have a very disciplined approach. Obviously we have a business model which helps us, we're a very strong challenger in Russia so it's all about execution and all the details that go with it. It's a very strong brand which we built up over the years in finance in the financial space, but it's also about the way we think about the numbers in our business. So we apply what we call an NPV based approach and anybody familiar with Capital One will know this very well.
Oliver Hughes:
I would say that arguably we've embedded the NPV culture much more deeply in our organization because it informs everything we do. So we think about horizontal economics not siloed non-joinder vertical economics and so every let's say customer that we book is like a mini investment decision. Taking into account the peculiarities of the channel that we bought in through the sort of cost of acquisition, cost of risk if it's a lending product. Cost of servicing depends on the channel and the customer type, cost of funding obviously. So we think of it as a mini balance sheet business at a mini investment decision and into the NPV model we bake in a 30% hurdle rates.
Oliver Hughes:
So just to wrap this up, it's rather long answer but it was a big question which goes to the heart of Tinkoff. The 30% hurdle rates is so that A, so that we know if we're getting things slightly wrong. Then we're not going to be booking cohort after cohort of loss making customers and the unit economics go wrong. And B because we know what a crisis looks like and you need that extra buffer to make sure that you can ride through a crisis and not eat into cash and go negative in the bottom line. So everything's based on NPV decisions and we have the data we have the analytic capability to apply that NPV based approach and that's all about organizational design as well. So the vast majority of institutions not only just don't think about this, even if they thoughts about it they couldn't do it. And that's I would say probably the medium sized answer to your question as to why we were able to do this in a profitable way.
Will Beeson:
In terms of that NPV approach surely that reflects as you've said, if you look at it on a customer by customer basis. It's not just the credit card product but it's the entire relationship that they're likely to have with you not immediately but over time. And I guess that almost takes me back to some of your earlier answers about this integrated products that extends beyond banking. Can you just help me understand in a very tangible way the average customer. What is their initial touchpoint with Tinkoff? What brings them in? How does that relationship expand? And then, I don't know two years in what role does Tinkoff play in their lives? Which one of your businesses or products are they engaging with?
Oliver Hughes:
Sure. It's a great question, so let's take a typical kind of path into the Tinkoff ecosystem. So you're most likely to hear about Tinkoff if you haven't seen advertising on TV or haven't seen one of our I don't know something in terms of performance on the internet online then you'll probably hear about us from a friend. That friend will probably be 25 to 40, probably be urban more mobile in all senses of the word so it's kind of like a mass affluent professional in Russia, we're only in Russia. That person will have said, "This is a great service, you just download the mobile app and off you go."
Oliver Hughes:
So the word of mouth advertising, the virility of that will probably be your first touch point then you'll go and order yourself a Tinkoff Black Card. There's a very important ride that I have to make here, which is that unfortunately we can't do pure mobile onboarding in Russia because the Russian legislations, the central bank still requires us to have a face to face meeting. So we've got 3,000 what we call smart couriers doing deliveries everyday across Russia. And what they do is they do the fulfillment, delivery, aftercare, cross sell, upsell whatever but also the identification, so the KYC for the central bank. We still have to have a passport check, a signature and all that.
Oliver Hughes:
So we're doing around 30,000 meetings per day, so it's a very big operation as we on board half a million new customers each month sometimes up to a million. So you apply for your Tinkoff Black online, this is your debit card. Download the mobile app if you haven't already done so and off you go. So you've got a meeting same day normally, maybe next day. You've probably taken a couple of extra services, at the time of delivery maybe you've decided to become a customer of Tinkoff Mobile, maybe get your car insured through Tinkoff whatever and you become a Tinkoff Black customer. Obviously everything's remote because we have no physical footprint anywhere, we have no branch and we never will.
Oliver Hughes:
So the customer is already introduced to the main core financial service, payments are free, ATM withdrawals are free which is very important in Russia because most people have got their debit card. It's a very well carded technological market where they got the debit card through a salary program. So this is a corporate relationship that a bank normally a state owned bank has with their employer and you've been given basically with no choice a debit card, it's called the payroll card, salary card. Obviously we don't have any of those corporate business nor corporate relationships so we have self acquired customers who come to us because they like us and this is where they want to have their primary banking relationship.
Oliver Hughes:
So they got the Tinkoff Black Card and off they go. In a mobile app, and we have monthly active users in the mobile app of almost 6 million and it's growing very quickly so it's a very deep penetration of the mobile into our customer base. You can obviously do all of your financial services your payments, your transfers, check your balance and then do whatever else but you can also open up other accounts because you've already been identified. So you'll open an investment account, a brokerage account and become an investments enabled retail investor, so if you think of Robinhood inside Tinkoff. You may be an entrepreneur, you might have your own business and therefore you'll probably go and open an individual entrepreneurs account or small business account.
Oliver Hughes:
You may want a personal loan so you'll apply for a personal loan or you want to transactional credit card. We have an airline independent air mile card called ALL Airlines, lots of people go for that option it's a very big product for us. You'll insure your car because you'll get some kind of additional offerings such as... So there's all these kind of core financial business transactional services, insurance that these people, these customers will take. But also, then you get into the interesting bit, the lifestyle bit. So in our super-app you can book a taxi, you can book a restaurant table, you can buy tickets online for theater, cinema whatever it might be.
Oliver Hughes:
You can buy airline tickets and you can book a hotel, we're the largest partner for booking.com in Russia. You can order flowers, you can book yourself in for a home fitness appointments, streaming whatever so there's all sorts of offers in there. A lot of it driven by cashback, some of it just organic people going into the mobile app because it's all in literally one click all in one place. We're adding services every couple of weeks into the lifestyle super-app, so each week or so something new appears in terms of new categories. We're adding an e-com and a kind of let's say an aggregator of marketplaces so all of your services in one place. Anything that's complimentary and dig, can be provided digitally we'll do.
Oliver Hughes:
So there's more and more reason for you as a customer to become more and more engaged and start using more and more services especially because you get the benefits of being a loyal customer. So the more loyal you are the more you get, the more benefits you get as a member of the Tinkoff ecosystem. And so after a couple of years you're already on three four whatever products of Tinkoff and you're satisfying a lot of your needs within the Tinkoff ecosystem. Which partners with all of the big online companies in Russia and globally as well, but without leaving the ecosystem to do it because we know all your details. So you don't need to go and remember different logins and whatever because it's all single sign on, you can just do it within Tinkoff with the payments piece as well.
Lex Sokolin:
One question on that is how you think about the strategy for the super-app? And this is different by geography, but whether financial services are just a small feature inside of what a tech company does. And finance is just embedded into the Amazon's of the world and the Shopifys of the world and the financial features kind of just disappear. Or as is in the case that you're describing, actually financial services are the super-app and then all the other stuff are features internally to the financial app. What do you think drives that distinction of who owns most of the attention and whether finance's definitional or is just a commodity that's embedded into all of the other things?
Oliver Hughes:
Sure. So it's a great question Lex. And it's still a question which isn't unanswered but it seems to me that different markets have different development paths. So if you look at some of the large scale financial players they all have their own heritage. So if you look at some of let's say the FinTech plays, some of them may have been built around the e-commerce so that's obviously Alibaba with AliPay, Rakuten in Japan, Amazon and Amazon Prime, Amazon Finance. Then you have other financial components within the ecosystem that were built around messengers, so that's obviously WeChat. To a certain extent search let's say Google and in Russia Yandex, the equivalent of Google with a larger market share in Russia.
Oliver Hughes:
It's one of the few markets in the world where there is a situation. And so that trying to build out financial services around other core businesses. In Russia, we're seeing something a little bit different and I believe that this may play itself out in other parts of the world as well in a pretty changing picture. So you actually have financial core platforms, Tinkoff and the other one really is Sberbank who are the largest state owned bank in Russia, but they have a very different evolutionary path who built out into adjacent areas from a financial platform. So we're building an ecosystem around a financial core as opposed to bolting on finances to some of the core for example e-commerce.
Oliver Hughes:
That's not to say that one or the other is better, but at the end of the day financial services requires a certain amount of wear with all and a certain organizational design and a certain mental fit if you like. Because you can't build a successful financial business or FinTech business without a balance sheet. I've just said the dirty word yeah? So it's a balance sheet business and all of the FinTechs the last whatever it is six, seven years that they have been around they've been basically implying that lending is a complete taboo. Balance sheet business is a dirty word and we're going to go and build this huge kind of a financial funnel with a mobile app on a nice debit card and then build a marketplace.
Oliver Hughes:
Well that doesn't work. We tried to build a marketplace as well, it's not scalable. Yeah you can do something with it, there's a bit of life in there but it doesn't have legs to give you a scalable business and certainly won't take you to positive bottom line. So you have to have a balance sheet business, so it's classical banking just done a different way. You take deposits and then you lend them and then there's a margin on those deposits. Not very sexy, people don't like talking about it but that's how the economics work. And so if you want to get it, you have to get into a balance sheet business to have a successful financial business.
Oliver Hughes:
It's not just about interface, it's not just about high frequency in terms mow and dow and all the rest of it all your metrics in there and the output. It's not just about how you onboard customers and managing your marketing funnel and all the other good stuff that we know. It's about how you manage the financials behind it and to do that it you have to go into a highly regulated territory. You can't just make money on payments, if it's highly debatable as to whether you can actually make money on payments sustainably anyway no matter how big your business is. You then get into all sorts of different territories about managing customers if you're starting to lend, and not just being the guys who take people's money and handle their transactions.
Oliver Hughes:
You start being a bank but a bank of a different kind. So we feel that sooner or later all FinTechs are going to become balance sheet businesses which means they have to become licensed. And if they don't then they'll either have to sell and be absorbed by another player, or they'll probably fade and wither on the vine.
Will Beeson:
All right Oliver so on that point, firstly I don't disagree about the relevance of balance sheet longer term. What do you say to the digital challenger with a $5 billion valuation that doesn't have a balance sheet, that isn't pursuing a balance sheet strategy? I think Tinkoff publicly traded currently has like a $2 billion more or less market cap. So what do you say to the digital bank founder who says, "Yeah but look how much more valuable I am because I'm not running a balance sheet strategy. I'm valued as a tech company not priced to book?"
Oliver Hughes:
Sure. I think Tinkoff is around three and a half billion at the moment but it's kind of have been bouncing around so much recently that it depends on when you looked. So not particularly relevant, but just before we went into the COVID crisis we were around 5 billion but obviously we earned last year $550 million of net income. Whereas, the $5 billion valuated company that you're talking about probably lost maybe 50, 100, $150 million whatever. Well not necessarily, but let's say for the sake of argument to make it a bit more dramatic our discussion. So the market let's say investors tend to apply different multiples to different types of business.
Oliver Hughes:
And if it's a pure fee and commissions business then they'll apply a higher multiple because it's deemed that there's less volatility in the income stream of that particular company. Okay, let's take it at face value for the sake of argument. For a balance sheet business particularly if there's a consumer lending element then there's discount supplied because the Cyclicalicty... Sorry I did warn you that my English is going down the tubes after 20 years in Russia. Cyclicality in the earnings of that company is highly regulated et cetera so the certain discount apply.
Oliver Hughes:
Also because we're in Russia, there's a Russian discount applied. But over time I think there's another element which comes to play which is that once that privately owned private equity funded FinTech company becomes public, which a lot of them will do overtime, they'll go and do an IPO. Then they will encounter a very different beast to the one they had been dealing with so far, they're called the public investor. And the public investor have a very different way of valuing you. So sometimes we're asked the question why are you valued at less than FinTech company X in country Y or continent Y?
Oliver Hughes:
When you earn lots more, you've been around a lot longer, you've been through the crises, you've been tested and all the rest of it and you've got excellent growth because we growing like billy-o. And the answer is that we're publicly listed, publicly traded on the London stock exchange as opposed to young and privately equity funded. There's a very different paradigm and over time people are going to start saying, "Okay we've been investing money, where's the butter on the bread?" Your unit economics are going to have to start stacking up. You're scaling up with the unit economics is still not straightening out.
Oliver Hughes:
If you stop growing, you're going to stop making money and as far as I can see certainly that's not the case that applies to the majority of FinTechs that I can see and so there will be the same questions asked of them as well. Obviously it's not black and white, I've over simplified things but the answer is A, once you become a public company the standards apply to you and the paradigm through which you're valued is very different. And B, you can't be a high growth company with no income return, with no return on the bottom line forever. The music stops at some point and it may have stopped in the last couple of months actually during this COVID crisis but time will tell.
Will Beeson:
Do you have a sense of your cost of customer acquisition and how that's evolved over time?
Oliver Hughes:
Sure. Without giving away any trade secrets and numbers which are not in the public domain, on the consumer lending side particularly the credit card side where we go direct to consumer through digital channels the cost of acquisition doesn't really go down over time, so it's pretty constant. It moves around a bit for seasonal reasons depending on what's happening with risks and the external environments and crises and whatever, but generally speaking it's pretty constant. But you can scale it up because you're booking these customers on an NPV basis. So you the expected NPV over a certain period of time that you're going to get from that customer and therefore you know how much you can spend.
Oliver Hughes:
On the transactional businesses, so for example the consumer mobile app and debit card Tinkoff Black or the SME business line that we have which is also transactional. On the brokerage business there over time you get virality because it's not a push product, it's a pull product and virility drives a customer acquisition if you do a good job and execute properly. And so where for example just a data point for you, five, six years ago 80% of customers coming into that Tinkoff Black platform through mainly the internet so online were paid for. That was performance paid for advertising and 20% came in organically now it's the other way around.
Oliver Hughes:
So 85% are coming in organically unpaid and that's pure virality and 15% of paid for. So over time your cost of acquisition goes down in terms of booking transactional customers if you get the right effect, the network effect. But in these debit cards you don't make money so you may have a bit of float, so you're making money on the treasury side but we're losing on a transactional basis money on each of these customers. Just as are all the FinTechs that are out there with a mobile app and debit card and mobile payments. The differences that we cross sell them with our own balance sheet product, be it an insurance product, or a business product, or a brokerage, lending and that's how we monetize these customers.
Oliver Hughes:
If you don't have that then you're just burning money on these customers. They're coming in and it's great, it's great for the customers but we don't understand where endorphins are for the business.
Lex Sokolin:
How did you solve that kind of chicken and egg of having the balance sheet to lend out while you were still trying to build the brand and acquire users in the first place? I know that in the West companies like OnDeck and Lending Club have all gone to alternative credit providers whether it's hedge funds or private equity to get the balance sheet and bring it to acquire the users. How were you guys able to scale that up on both sides at the same time?
Oliver Hughes:
Again, it comes down to execution. So your model is very carefully where you do endless tests, AB tests, market testing and we scaled up both sides of the business in parallel. So at the beginning, the very beginning in 2007, 2008 the idea was that we would be an entirely wholesale funded credit card company. That idea didn't last very long because the world fell apart in 2007, 2008. So we decided we had to go and do a deposit business and fortunately we had a license from day one so a full banking license. So we started taking deposits online, at the time as usual everybody said we were completely mad because an online bank in Russia can't take deposits.
Oliver Hughes:
And it was pretty expensive in the beginning, but we chipped away and worked out how to do it by testing and learning. And we built up our deposit base basically in lockstep with our lending business. And so that meant that we didn't have any mismatch or disbalance and misbalance in terms of the funding side and the lending side. And building out the brand was just a case of being online, having the right positioning, the right product, absolute top notch service and I mean that absolutely genuinely. If you look at all the ratings we're always in the top place, if you look at our mobile app on a partner or wherever you're going to look, you can see that our mobile app is always ranked amongst the very top globally not just in Russia.
Oliver Hughes:
So we're up there with the best of the best even though they have a less cluttered mobile app because they're basically only one horse tricks. So... Sorry one trick pony again, my English has let me down. You know what I mean. So we managed to build out the brand through a very strong proposition and then start doing brand advertising on the top when we had the cash to do so basically. So we didn't do that basically for the first eight years and then we started doing ATL advertising in order to build brand and recognition and confidence.
Will Beeson:
So Oliver you said that this is your third crisis. Firstly, maybe you can tell us what the second one was but you... So in Q1 again, publicly traded company Q1 earnings. In Q1 you were bottom line profitable, you set aside some reserves for potential losses I think specific to the consumer lending business, which makes a lot of sense. And I think that you also guided that there's a bit of uncertainty not surprisingly around what transaction volumes will look like throughout the rest of this year and potentially the next one or two.
Will Beeson:
I wonder if you would have any thoughts for digital banks generally right now. You have a lot of experience having worked successfully through these crises in the past, you're clearly thinking a lot about what the impact of the COVID crisis and the resulting economic fallout is likely to be on your business. What advice would you have for maybe founders who are effectively entering their first large scale economic crisis?
Oliver Hughes:
Sure. Again, nice question going right to the heart of the matter. So crises those are three questions in one there. We had 2008, 2009 crisis, global financial crisis everybody knows about. Then we had the Russian crisis 2014, 2015 which was pretty severe in Russia and that was caused by various geopolitical issues, sanctions, anti-sanctions and cycle in Russia. And so that was a really deep stress test and it actually cleared out probably half the banking sector so it was a big financial crisis. We stayed profitable all the way through it. This is our third crisis, I certainly don't want to say anything prematurely but it looks relatively mild so far.
Oliver Hughes:
We obviously saw when lockdown measures were introduced, it's a relatively soft lockdown in Russia I have to say and it's been done in a stage way. It's very, very well managed, it's not often you hear that about governments in the world today but Russia has handled the COVID crisis and the spread of coronavirus very well so far in Russia. There was a drop in transaction volumes, there was obviously a bit of a spike in delinquency just for actually 10 days and then it came back down again. So far it's been very manageable relatively benign scenario, we just have to see what happens in the autumn when the dust will settle and we really understand what's happening fundamentally in the residual economy.
Oliver Hughes:
Just briefly on the quarterly results which you mentioned, so in quarter one we had yet another fantastic quarter. We grew all of our metrics and we increased our customer base by another couple of million customers. Our investments brokerage business is now in first place in Russia by number of active accounts with two million accounts opened, it's just going and flying into outer space at the moment, it's going really well. We showed an ROE of 37.5% despite the fact that we created significant additional reserves in quarter one knowing that we'd be going through this period of volatility in terms of provisions. So we decided to front load some of those provisions and put them in quarter one through what they call IFRS 9.
Oliver Hughes:
So this mechanism called micro factors which enables you to create provisionally upfront to smooth your provisions going forward. And we made 9 billion rubles of net income which was a record quarter for us so absolutely excellent book. Obviously it's kind of ancient history now because we're in a very different territory. So in terms of advice to other digital players, I think if this is the first crisis that you're going into there's a few things that you should bear in mind. The first is when you think it's not going to get any worse, it often does so that you don't relax too early. And these things tend to play themselves out for quite a long time, and I think this one will as well.
Oliver Hughes:
So everybody understands that when locked down measures are relaxed that doesn't automatically mean that everything returns back to where it was. If you look at what's happening in China and various other places, consumer behavior is taking a long time to recover once lockdown has been more or less relaxed. And then there'll be the tail effect in the economy which nobody understands it, it's going to be a V or U or L or whatever. The other piece of advice I would give is once you on the stand the direction in which your metrics are going and where's the wind blowing, you should act decisively. You shouldn't postpone decisions especially if you have a thin margin and you don't have let's say much headroom or room for maneuver especially if you're in a cash burning business.
Oliver Hughes:
You need to act very quickly indeed and the beauty of being in an online business is you don't have that much fixed infrastructure, you don't have fixed costs. So you're able to pull the lever and cut cost very quickly and you should take advantage of that because that will help you stay amongst the survivors. It's sort of out of the weak from the chaff very quickly and people are going to get blown away by this big time over the next few months. So if you want to survive, be decisive you have to act quickly and cutting those areas where you know that you can and have a plan, a menu if you like approach which enables you to cut.
Oliver Hughes:
Just a little bit that may be into the skin a bit then into the flesh and then into the bone if you really need to. And you know as the manager in this business at what time you need to cut, don't be afraid to cut. And then just finally it's not about growth. So right now obviously your growth businesses, you're being built and you're designed for growth. Right now if you can grow excellent but if you can't no big deal it's about surviving. This is a game of survival right now, if you want to be one of the survivors who can then grow then you need to take that decision and go into a kind of hibernation mode and reduce your costs.
Will Beeson:
So Oliver as the Richard Branson of Russia running this conglomerate which includes a bank and a media company and a whole range of other businesses, you're in a fantastically interesting spot. Now I'm not an expert in accents but yours sounds British, can you tell us a bit about how you ended up as chairman of this massive Russian conglomerate?
Oliver Hughes:
Sure. So I have to say that the founder of Tinkoff and the guy whose name we have above the door Oleg Tinkov, he's the Richard Branson of Russia. So he's a serial entrepreneur, self-made and a complete beacon for entrepreneurship in restaurant actually. I would say one of the most interesting entrepreneurs in the world today so that accolade is definitely for Oleg. I'm the manager, I'm hopefully a manager with vision and I've been with Tinkoff since the beginning, since 2007. In fact the group of managers, entrepreneurial managers let's call ourselves who built this thing from nothing to where it is today it's the same team. So we've got this amazing longevity. So I've got an absolutely fantastic ride in Tinkoff and I wouldn't want to be anywhere else.
Oliver Hughes:
So it's been a real bull and an amazing ride despite the fact we've been through three crises. So how did I end up here? I'm definitely not Russian, I'm from the North of England a little place called Lancaster. But for some bizarre reason I got into Russian history, decided to do a Russian degree so I could learn Russian to read Russian primary sources for my research when I did my degree. Lived in the Soviet Union for a while and had various jobs in all sorts of different sectors after university in various countries. And then wound up in Visa, so I worked in Visa from let's see 1998 to 2007.
Oliver Hughes:
I eventually became a head of Visa in Russia, so I was sent out to Russia in 2000 because I was Russian speaking to open the office for them. Had a great time in Visa for 10 years and built up a big business for Visa in Russia. And then when Visa and MasterCard were pitching for Tinkov's business because Oleg Tinkov previously had a beer business and a restaurant business which he sold and he was looking for his next project which was a challenge bank. I met him in my capacity as head of Visa we had a bit of a difficult meeting because he's quite an abrasive guy sometimes but then that night they called me up and said, "Oliver you don't fancy heading up my business do you?"
Oliver Hughes:
And I thought a couple of minutes, realized that there was something very interesting happening here, this is a business model that I knew could work, Russia was ripe for it. It turned out to be ahead of its time obviously and I moved across and that's the story really.
Will Beeson:
Fascinating conversation, very very interesting company and one that I think the whole world and certainly our global audience can learn a lot from.
Oliver Hughes:
Thank you.
Will Beeson:
Oliver Hughes and Lex Sokolin, thank you very much for joining us today.
Oliver Hughes:
Thank you very much.
Lex Sokolin:
Thanks for having me.
