Tinkoff Bank is the new kid on Russia’s banking block. At only 11 years old it is a relatively late entry into the sector, but analysts have already made it one of their  “high conviction” stock tips for this year.

Russia’s only purely online bank, Tinkoff claims to be the biggest pure internet bank in the world.

Hot for tech, investors ploughed into its London October IPO in 2013 when the bank raised $1.1bn, floating at $17.2 at the top of the range, valuing the bank at $3.2bn. It was the last IPO before Russia annexed the Crimea the following May and abruptly brought the party to an end. As the political crisis morphed into an economic “perfect storm”, the bank’s share price fell to close to $1.

It's been four years since then but by last November the share price had recovered all the ground lost and was trading at more than $21 at the time of writing at the end of January – one of the few Russian stocks to have listed since the recession started that is trading ahead of its IPO price.

The appeal of Tinkoff is that it is riding the wave of digital transformation. Set up as a branchless bank with a single product, credit cards, the bank has grown since then to resemble more of a financial platform that focuses on spending, not money. Today the offering is still simple and online, but it offers deposit accounts, debit cards, mortgage services and the latest innovation is small-scale investments into things like stocks and bonds.

“Eleven years ago there was no mobile in the way there is today so the strategy was simply be branchless. We started as a distant bank, not an online bank, based on a credit card. The logistics was through direct mail plus one webpage,” Maxim Evdokimov, vice president of Tinkoff and head of mobile told bne IntelliNews in an exclusive interview.

The rationale was clever too. If the bank foregoes costly branches and all physical paraphernalia that comes with opening a traditional bricks and mortar bank then its costs are so much lower than its competitors it can effectively undercut and steal the rate-sensitive Russian consumer business away. The strategy worked spectacularly well.

Tinkoff has had a lot of luck as well as being clever. When it was set up it never intended to be an internet bank but its small size and laser focus has allowed it to adapt quickly to the opportunities created by new technologies.

“Our one product was an advantage as the attention of the customer was not distracted: one product, one card, one loan,” says Evdokimov. “[After the 2014 crisis] we started to offer new products like debit cards, deposits. But we had no old infrastructure. So we built from scratch using the most advanced technologies of the time.”

The bank was doubling in size every year and the crisis worked to its advantage. As other banks began to wobble, the low cost base meant the attractive rates attracted more customers, provided more funding and so made the bank even more stable. Tinkoff’s growth has now reached an exponential stage. The bank today has over 7mn customers and the capital has grown to some $4bn, which still makes it a small bank by Russian standards, but it remains one of the most dynamic.

“The exponential growth started in 2013 or 2014,” says Evdokimov. “We had been growing and were profitable every quarter. Russia had some economic and geopolitical problems and we felt the effects too. When this perfect storm happened [in 2014] we were not ready for the political risks but were ready for the economic risks and that allowed us to weather the storm better.”

The bank’s customers have also been drawn by the bank’s technology and its ability to leapfrog over earlier iterations of technological solutions.

“We were very lucky. Russia has been behind the fence for too long so when the fence came down people were very keen to adopt new technologies,” says Evdokimov. “They have been very open minded. When new banks, new products appear in the market people were keen to use it. When mobile services appeared people were keen to use it. Right now Russia is the biggest market for contactless payments in the world. We are the biggest market for Apple Pay, for example.”

The contactless payments system is a good example. Evdokimov points out that in the US it is impossible to use a contactless card in the majority of stores. Contactless cards need a special terminal and most stores in the US have the old terminals that require you to swipe their magnetic strip. Russia was so late into the game that all the merchants have the new contactless terminals that can read a cards smart chip.

“In New York there is no Starbucks, there is no McDonalds where you can pay contactless. It’s the homeland for Apple pay but you cannot use Apple Pay in the US,” says Evdokimov.

Now Tinkoff is moving into new products, but again it has eshewed the traditional approach. The bank offers financial services with the emphasis on “services” rather than “financial”. Mortgage loans have been one of the fastest growing financial products in recent years, but while Tinkoff is a big player in the game, it doesn't actually offer any mortgage loans of its own.

“We do mortgage as a service. We do all the work with the customer. We help with the acquisition and help the customer to find the object. But our partners provide the credit itself. We reduce the risks and get the commission from this work. We work with the top 10 mortgage providers, except Sberbank,” says Evdokimov.

The bank has a similar approach to its new investment services that are “booming,” according to Evdokimov. Financial literacy in Russia is low and the default place to park savings for most people has either been in a high-yielding bank deposit account or in a jar under the bed. However, with interest rates at banks below 10% the Russian saver is starting to look for something that pays a better return.

“There is no investment culture in Russia. The only investment that is in the blood is bank deposits and some real estate. But now deposits are going down in terms of return, people are starting to look for alternatives, so investments look interesting,” says Evdokimov.

Together with their partners, investment bank and brokers BSC Global Markets, the bank is offering a new investment service for small-scale investors so they can invest small amounts into stocks, bonds, EFTs of any of a number of investment products. There have been many attempts to launch a Russian retail investment business since the first try by former president Boris Yeltsin in 1997 and the ill-fated PIFs (Russian mutual funds), but this time thanks to the macroeconomics it seems to be working.

In general Evdokimov says that the focus of the bank has shifted from allowing customers to manage their money to how they manage their spending. Tinkoff are developing what is in affect a platform where its customer can buy all the things they usually spend money on rather than collecting deposits or making loans.

“What we want to do is build a kind of super app for all those things you regularly spend money on, like cinema tickets, like plane tickets. But the main idea is to give you the feeling that money is not the issue – it can be your money, from a debit card, it can be our money in the form of a loan. The emphasis is on being able to spend money,” says Evdokimov. “[What] you need to focus on is where to spend money to get the most out of this purchase. To help you with this we are creating this new way of banking – lifestyle banking. It’s not about banking any more. It’s about spending.”

 

This is a bne podcast. Listen to the full interview here