Introduction

Patrick: [00:02:11] My guest today is Oliver Hughes, the CEO of Tinkoff, the leading online commercial bank based in Russia. I found this conversation fascinating and think it will be essential for anyone who wants to understand online financial services or the next generation of Fintech. Our conversation touches on how Tinkoff used direct mail campaigns to become the largest online banking provider in Russia, their last mile delivery platform that combines couriers with door-to-door salesmen, and how they built profitability into every aspect of their business. I hope you enjoy my conversation with Oliver Hughes.

Tinkoff's Origin Story & Early Business Model

Oliver, I was thinking about an interesting place to begin this conversation, and because people probably have less context around Tinkoff than they normally would with a business that they recognize here in the US, I'd love you to begin by just telling its origin stories, what it does, how it began.

Oliver: [00:02:58] We started commercial operations back in 2007. It was actually a story to Tinkoff, or at least the Tinkoff brand, which is named after Russia's leading entrepreneur, Oleg Tinkov, so he's a person. If you think Richard Branson in Russia then that's something akin to Oleg Tinkov. He's a serial entrepreneur, and he had several companies. Immediately prior to the bank, he had a beer business and a restaurant business, also called Tinkoff, which he sold and the proceeds of that sale went into starting what was initially a credit card monoline.

In 2006-2007, he put the initial team together, we launched in early 2007. So I've been with the organization ever since the beginning, as have basically just about all of the senior management team, the whole 14-15 year journey.

We started as a credit card monoline, acquiring customers through direct mail with zero branches, always a cloud-based digital player before the idea of Neobanks came along. We built up a business and broke even just before the global financial crisis of 2008/2009, weathered that crisis nicely, learned a few things along the way, and then went into rapid growth and actually a little bit of diversification until the Russian crisis, our second crisis, in 2014/2015.

So we'd already become quite a large player in credit cards, but we'd also started taking deposits online, we'd moved all of our business to digital channels and online servicing. The Russian crisis comes along 2014/2015 and we also weathered that very nicely, remained profitable all the way through. There was a big banking system cleanup and shakeup in Russia, and we embarked on a process of diversification. So we realized that we had a large inflow of customers, of applicants. We could generate acquisition flows anywhere in Russia using our online model and offline distribution through our smart courier platform, which we'll probably come onto a little bit later. And we decided to go into all the product lines. We started building all the financial service products, such as an SME transactional business, a brokerage business, an online acquiring business, lots of other lending businesses.

And then we went beyond finance and into what we call lifestyle services. So some of these lifestyle services we built ourselves, these are beyond financial services, so we built a virtual mobile operator, an online travel agent, lots of content provision, and then started partnering with other service providers who gave us e-commerce, they gave us ticketing and tons of other stuff, which we now make available to our existing customers; we have a large customer base of now 12 million customers in Russia. We make available to them tons of different digital services, including these partner services.

In our super app, you can order flowers, book a restaurant table, order a taxi, open a credit card, a debit card, book an airline ticket, whatever, so across virtually the whole digital spectrum of services. So, that's where we are today. We've been highly profitable all the way through. We're actually just at the beginning of our journey, because there's still tons and tons to do.

Source: Tinkoff

Patrick: [00:06:18] There's a million questions. Such an interesting unfolding of services and products that you've built. Maybe that last point is among the most interesting that the company has been extremely profitable along the journey as you mentioned. Can you say a bit about that? Most of the, I'll call them Neobanks, here on my side of the world tend to run enormous losses for a very long time. So given how much you've built and done it profitably, just say a bit about why you've done it that way and what you've learned.

Oliver: [00:06:43] There's a couple of things at play here. We have a very disciplined approach to managing capital and managing the bottom line. That philosophy is embedded throughout the whole organization in all of our business lines, in all of our team members. It's the lingua franca of the organization. That's number one.

Number two, we've always been very focused on product lines that produce a positive bottom line result. As opposed to going into, for example, a liabilities-led strategy and then hoping that at some point we'll find out how to monetize the customers that we're bringing in through, for example, debit cards, or our mobile app or whatever it might be. We started with products that we knew were going to make us a bottom line positive return, and then went into other services through which we could build up our volumes of customer inflow whilst monetizing at the same time. And we've always done it in a different order.

The third thing which is very important is that in Russia, it's the only market in which we work currently. Even when we started back in 2007, which was a different world geopolitically, there's never been an abundance of private equity, still less so VC funding. There was some capital but capital's always been scarce. And over the years it's actually become even more scarce. We're not able to take, say, something out of school, but we don't want to take VC and PE money and then hopefully at some time crack the code and be able to monetize. In our case, we've had to live a hand-to-mouth existence, we've been through three crises in a market where capital is very scarce. And so we have to treat it as such, and this means that we've had to be extra disciplined about how we manage the bottom line and manage the capital of our organization.

We've had to live a hand-to-mouth existence, we've been through three crises in a market where capital is very scarce. And so we have to treat it as such, and this means that we've had to be extra disciplined about how we manage the bottom line and manage the capital of our organization.

Patrick: [00:08:17] Can you say a bit about lessons that you learned personally prior to Tinkoff, I believe opening Visa in Russia. And just the background in the credit card business and why credit cards and debit cards was an interesting wedge into the Russian customer at the beginning of the Tinkoff journey?

Oliver: [00:08:33] There are very few similarities to be honest with you between my previous job experience. They were both initially in cards, because obviously Visa was a big payment system. I opened the office, eventually became Head of Visa in Russia and basically built a salesforce and then some product development. But the outpost that I opened in Russia, which was an outpost at the time, is now a very big office. That was more about the sales and business development side.

In Tinkoff, it's about product and platform, and it has been since the beginning. Why did I join Tinkoff in the first place when Oleg Tinkov, the founder, asked me to move over? I knew that the market was ripe back in 2006/2007. It was ripe for a disruptive player. Credit cards was a very small product category in Russia at the time. There was some around but it was just starting to take root.

The cards infrastructure in Russia was very good, so there were probably over a hundred million cards, which were debit cards through salary projects, what they call payroll programs, I think in your neck of the woods. And therefore the rails were there, it was just a case of finding the right product, with the right distribution channels, the right branding, find that magic, and then start knocking them out the door, the virtual door in our case. Which is what we, after a bit of experimentation, a bit of testing and learning, managed to do. And the credit card part of the business really took off, and that was what gave us the fuel to build out all of the other parts of the business on the platform that we created a little bit later.

Patrick: [00:10:01] For those that don't know the credit card business model itself, can you walk us through it in Tinkoff's early version? What exactly was the business model? How did it work? I would love to include the acquisition of customers through direct mail, which I think is such a probably under appreciated way to reach new consumers. Can you talk us through the business model?

Oliver: [00:10:20] I'll have to dust off a few memories here but basically we were a branchless credit card, wholesale funded monoline. Purely focused on credit cards, and the major, but not the only, acquisition channel was direct mail. So in those days, most of the banking was concentrated in the big cities. It was done mainly through payroll channels, so basically have a corporate relationship with a bank who gives the employees of the enterprise debit cards, and then maybe sells a bit of loans. That was it. That was retail banking in Russia.

So along we came with a direct-to-consumer model where we worked with a number of different partners across Russia, which gave us access within the confines of very strict privacy requirements in Russia. So since 2005, 2006, there have been a very strict continental European-like privacy laws, as opposed to, as it were, more liberal Anglo-Saxon privacy and data protection requirements. And using de-personalised data, we were able to do our first direct mails, build up a database, collect data ourselves from potential prospects as they're called in direct mail, and then send out targeted, personalized mailshots to these people.

Unfortunately, over time, direct mail dried up as an acquisition channel, not because it stopped giving us the response rates which made the economics work. So the unit economics didn't stop working in terms of response rates. They stopped working because the Russian postal system, every year, they kept jacking up the rates per mailing. So they didn't give corporate rates, somewhat bizarrely. What we paid was the individual consumer rate. That stopped working quite quickly. And that happened about the same time as we moved to online. So we moved all of our customer acquisition for credit cards and for deposits and debit cards which we started doing back in 2009 to online.

We were actually the first institution in Russia to do anything online at all. After, again, a bit of testing and learning, we found that it worked very well indeed, and so we stopped doing direct mail. I've got this secret hope that one day we'll go back to direct mail because it's a brilliant acquisition channel. It's a little bit unfashionable these days but from a business perspective, it works very well indeed. And if the post office introduces a corporate rate, then maybe we'll go back into it as an acquisition channel. But right now it's all digital.

Patrick: [00:12:35] Before we leave direct mail, any key learnings, assuming that you got that new corporate rate and could start it up again, what were the most effective things you learned about an effective direct mail campaign with high response rates, good acquisition costs, et cetera?

Oliver: [00:12:49] Now we're really going down into the nitty gritty, the nuts and bolts of credit card direct mail business. Every set of consumers is different, every country has its own regulatory framework, every market has its own different partner network. So it's all very different. So whatever I say now is not generic. It's probably more specific to the Russian environment.

It all comes down to how you use data, store data, how you overlay data, do all your intersections, all your data mining, enrich data. So it's all about the data management. So that skill set that we evolved in order to overcome the problems that you've just asked me about and which I'll tell you about in a second, was what then lay at the heart of the success of Tinkoff as a business going forward. And it's actually a very good discipline to have at the heart of your organization.

So, we discovered a law of physics, if you like, which is called the over promotion index, OPI, basically said that if we sent more than X thousand mail pieces to a particular postal index, then the response rate will decline. So basically what was happening physically on the ground was we were overloading the postal hub, and they just started throwing the letters away, I don't know, throwing them in the forest, putting them in the river or whatever. Fortunately it was paper, so it wasn't damaging to the environment.

So it was the OPI, the over promotion index, which which took us a while to figure out because we couldn't understand why, when we started ramping up mailings, all of a sudden our response rates were drastically declining. So it was a certain limitation of the infrastructure that we were using. And it depended on the index as well, so there were different OPIs according to different indexes.

Then we had, for example, after a period of time, you'd start seeing a degradation in response rates, where you'd been sending the same mailshot. So then you'd have to have different variations in order to provoke a response from the recipient. So you'd, for example, have an indentation in dust or dirt on the front of the envelope, which would basically tease their curiosity because they'd see it as probably something card-like inside, but we didn't send cards, obviously, we didn't send plastic, you'd indent it to make it a look like there was a card. You'd change the format, we had hundreds of different formats, colors, with official stamps, non-official stamps, all the tricks that any direct mail organization will know about. We tested all of these. And so you test in different test cells, making sure you're covering different geographies and different segments, it takes a bit of a while for these things to mature, unfortunately, in terms of tests and direct mail. It's not like online where you can do it in a few weeks, even days, sometimes. In direct mail, there's a longer gestation period, but then you work out what works and then you scale that up. You carefully follow the responses until it stops working so well. And then you move on to the next thing. A very interesting discipline.

Capital Allocation Decisions

Patrick: [00:15:35] Seems like a fascinating thing to build the team's early experience off of. Very quantitative, very high-feedback loops, really interesting muscle to develop early on. Once you had that initial base of users, I'm curious how big it was in the first few years, how many people signed on to the service. How did you begin to then branch away from the original core credit card business? So what was the thinking and the strategy around how to move from product to product? You listed off a wide variety almost sounds one of the super apps somewhere else in Asia, in terms of the number of things that you do for customers. I'd love to understand the sequencing and how you made those decisions to move from credit cards to the marginal business.

Oliver: [00:16:16] We built up a customer base of probably about 300,000-500,000. So don't quote me on that, but I think that was about where we were in terms of active customers. And then the global financial crisis happened, and our funding model, which was already quite difficult, which was wholesale funding, mainly from the international markets, because there was no one to borrow from in Russia. Or no one that was willing to lend, I should say, in Russia, to a startup credit card company in 2007, which was an interesting time to be launching a company like that as you can imagine. We had to rethink our funding model. So we went into deposits. I said we were a credit card monoline company but we were a fully licensed bank. So Oleg Tinkov, back in 2006, bought a full banking license.

So we were able to take deposits. And we obviously didn't have any branches, so how on earth do you take deposits in Russia back in 2009? So we did a couple of tests, nothing that really worked, and we decided to try online as I said earlier, and we were the first financial institution in Russia to do anything online. We went into online, took deposits and found out that it was something that was scalable. We could do it at a price that worked for us in terms of funding costs, and we started to scale that up, very cautiously in the beginning because we were obviously very exercised by the idea of liquidity management and obviously the cost of funding as well, because deposits in those days were very, very costly. Gradually scaled that up, that took us into debit cards, and we also around 2013 acquired a small online insurer, it was just an insurance shell license, we created an online insurer ourselves off the back of the license, to be precise, and started building that business.

So we'd just started to diversify away from a credit card pure play and what enabled us to do so was the fact that we had direct to consumer credentials, direct to consumer skillset, data acquisition and data management, remote servicing. And so all the prerequisites were there for us to start moving into all sorts of different directions. And as I said, we were able to generate this huge customer inflow, this application flow from any geography in Russia. Russia is quite a large country, obviously, so not just from the big population centres of a million people, which there are 13, but from any village, literally, anywhere in Russia. But we would just sell them credit cards and a few deposits. So we realized that we really needed to start utilizing the customer flow a lot better, and we started playing with different products to see what worked and where the business was, where the conversion was and what the NPV was.

Patrick: [00:18:45] Can you talk a bit about that process, that capital allocation process, which is probably what I imagine takes a lot of your personal time, is making these bigger strategic decisions both now and in Tinkoff's history. How do you think about, when you mentioned NPV, when to make different competing investments? Is it just the highest potential rate of return that your team has determined a product will deliver? What is the exact process by which you make decisions on what to do next?

Oliver: [00:19:11] If you just think of credit cards because it's an easy example, we understand the cost of acquisition, so the cost of generating an application, the conversion metrics of that application through to a utilized credit card, and that goes through different stages of underwiting all the way through to the first transaction being made on that credit card. So that's the full conversion. The cost of a utilized credit card is the cost of acquisition for us.

Then you have the cost of servicing, and that very much depends on which channel the customer has come through, if they come through online as opposed to offline, or partner or co-brand or whatever it might be they all have different servicing costs because of their different behavioral profiles. You have your cost of risk, which is also very different by different sub channel, and you have your cost of funding, which in credit cards is consistent across all different channels, but for different lending products, obviously depending on the duration of the product, there are different funding curves.

So you plug all of that into your NPV model, we apply a 30% discount rate, so that's a very high hurdle, high requirement in terms of return on capital to our shareholders, and take a decision. So we rank different channels so we can prioritize what we're going to do and where we put our resources in terms of scaling things up. But in terms of actual decisions and underwriting basis, for example, acquisition targeting, then we'll be using this framework to decide where we're deploying our resource and our capital.

It's been very useful because it helps us, as I say, prioritize. It gives us a big loss absorption capacity when we go through different cycles, economic situations, stress tests, of which we've been through three, as I said earlier, three crises in our relatively short history of 14 years. It also gives us a common framework between business lines so that we can decide which of the business lines to invest in.

Patrick: [00:21:00] Brings us two interesting questions about the NPV method. One is how you embed it in an organization, literally whose job it is in each of these groups, to be the steward of that process, and what magic is there on the downside? How has this failed you if it has failed you, this process mentioned, it's not an exact science. So really curious in those two concepts, who is responsible, and how and when it fails.

Oliver: [00:21:25] I'll deal with the first question about stewards. Every single business line and service line in our organization, so this is basically a product unit or a servicing platform, they all have their own NPV models. And so they're developed locally, but the guys who steer them, advise them, have input in developing these NPV models are the risk guys. So the risk guys are the gatekeepers. They're the custodians who make sure that they are consistent and methodologically correct because obviously there are lots of different ways of the building an NPV model. But to make sure that we all have the same currency in the organization, we have the risk team, who are basically all mathematicians and physicists so they're very, obviously, analytical people as you'd expect. We don't have a siloed organization, we have a very flat organization with a very analytical approach steeped in the numbers, and this is one of the insurance policies that we have to make sure we don't make too many mistakes, but obviously we do make mistakes.

So there's obviously going to be a stage where, for example, investing in a new channel or even a product line, we don't have enough data to build an NPV model and so we make an investment decision based on the best available information. And sometimes we make mistakes, so then we have to take a judgment call, do we continue with this and hope that the unit economics will stack up over time, the NPV, or do we kill it? And we've had to make a few decisions like that along the way.

There are also other business lines, for example, where we actually run them. Well, we only have 2 like this out of 20, 25 business lines, but we have 2 where we run them with negative NPV because we know that through those business lines, we bring customers in, and we will then cross sell them and monetize those customers through another product. So this is why I was saying NPV is not biblical and it's not a science, it's a tool that helps us do things in the organization in a consistent way.

And there's maybe one other the thing, which is a big ideological debate if you like. So you look at a lot of the Neo players across the world today, and they've gone out with basically a mobile app and a debit card, bringing in lots of customers, scaling up very quickly, some of them have purportedly already tens of millions of customers, and that's great, they don't have necessarily a revenue model that works or a way of monetizing those customers. The jury is still out. But they grow very quickly. So they don't have this NPV based approach because they have a different revenue model and a different outlook on it.

In our case, maybe we could have grown a lot quicker but we don't because we put ourselves within these constraints, we put ourselves within this ideological straitjacket that every incremental customer that comes into our ecosystem has to be NPV positive. Otherwise we won't bring them in, or we bring them in with a slight negative NPV position as I mentioned earlier in the very exceptional cases and cross sell them. We have to make them positive that way. If they don't come up with a positive NPV, then we don't bring them in. So that puts a cap on our growth, maybe in some cases, but it means that we're always going to be producing a bottom line return, which grows every year.

Door-to-Door Delivery

Patrick: [00:24:23] I think it's so fascinating to contrast a company like yours, which frankly is doing a lot of the same things that I think these other big digital first companies want to do in terms of the suite of services that they offer, but are willing, as the history of Western tech businesses has been, to get the eyeballs first, figure out how to monetize later. So fascinating to have seen you done it, like you said, perhaps your customer count would be bigger had you done it the other way, but surely a unique and interesting way to scale the business.

One of the most interesting little factoids I found in doing research on Tinkoff was that you're also the largest door-to-door delivery service in Russia, which was not expected, given that you're a digital first branchless bank. Can you talk through why that is the case?

Oliver: [00:25:04] We didn't set out to be a large logistics company, as you can imagine, but we've become one, and we're doing today 35,000-40,000 deliveries door-to-door every day, which is quite an amazing number. So we are the largest door-to-door logistics company in Russia. Why? Russia is actually a very progressive country, not just in terms of fintech and in terms of the services offered to the consumer in the financial space, but in terms of regulation. So we've got a very progressive Central Bank who do all sorts of interesting stuff and are actually a big disruptor themselves.

We didn't set out to be a large logistics company, as you can imagine, but we've become one, and we're doing today 35,000-40,000 deliveries door-to-door every day, which is quite an amazing number. So we are the largest door-to-door logistics company in Russia.

However, Russia still requires, by law, to have a face-to-face meeting every time a bank account is opened, including a card. So we can't do what for example, Nubank do or Revolut do or all the star fintech names out there and acquire someone purely through a mobile app, and then send out a card if that person wants a piece of plastic or just give them mobile payments if that's how they want to pay, because according to KYC requirements, we have to have a physical meeting. And that remains true to this day.

So when we started taking the positives back in 2009, the customer would apply online, then we would have to send out or have some way of physically identifying them. And the way we did this was to send out a smart courier. So we developed our own smart courier platform, which was proprietary because nobody else could do it. DHL, Pony Express, whatever, they just couldn't do the last mile for us. They did the arterial routes, now we do it all in-house, as far as I can remember, but the last mile nobody could do. So we did it ourselves. It's one of the many innovations that we've come up with over the years in order to scale our business.

And obviously these guys started with deposits, but then we found out that they could do a lot more for us, so they do credit cards, they do debit cards, they've started doing insurance policies for us, now they can deliver tickets, SIM cards, whatever it might be. We actually started experimenting with third-party products and services that we can deliver through our smart couriers as well.

These guys are very well trained, very well appointed, very young, dynamic, interesting, educated people. They're not couriers in any sense of the word apart from the fact that they do delivery of something. Well, basically they're getting a signature on a piece of paper and a photograph for the Central Bank, while the rest of it is sales. And it's actually become a huge cross sell channel as well as a fulfilment platform for us. And it's become a huge differentiating factor in terms of service, our fulfilment capability, to increase the velocity of our business, so you apply today and you actually get a card today in many places of Russia. If you don't get a card today or product today, then you get it next day anywhere in Russia. And it's also a very important risk management tool because we do physical verification but it's also a fantastic service. So it's become a fundamentally important part of our business.

Patrick: [00:27:52] What a fascinating, interesting, unique aspect of the business. Are those people armed with data going in, especially thinking about cross sell opportunities or sales opportunities, they're given a stack ranking of what to prioritize with each customer?

Oliver: [00:28:07] Absolutely. We developed a mobile app for them called Magent. All of our development is done in-house these days, so most of our staff are tech professionals. So we're basically a tech company with a banking license. There's a logistics platform in the background but each of our smart couriers has a mobile app which tracks them, manages their logistics, their scheduling, enables them to communicate with the people they are going to meet, the prospective customers, tells them which things they are supposed to be cross selling to those customers, gives them all sorts of advice, hints, scripts, whatever, in terms of that routine for selling, a Q&A, and obviously it's just a big information resource for them and tons of other stuff that we do. So we use that data to continually optimize our whole service and delivery platform.

Patrick: [00:28:51] It's a fascinating barrier to entry, I imagine, that makes Tinkoff extremely hard to compete with. Would you say that's one of the largest barriers?

Oliver: [00:28:59] One of them. If you want to set up a banking type operation in Russia today, you need a lot of capital, because we have the highest risk weights from the Central Bank in the world. You have this KYC requirement I've just been describing. If you don't have branches and you don't have access to a decent courier network, which gives you that coverage, then how are you going to do it? There are not many options, basically the only ones, unless you're working through a retail partner and that's a bit clunky, then that means that's a significant barrier. There are loads of others as well, obviously investing in technology. So it means that there's not that many successful startups in the financial space in Russia, unfortunately.

Patrick: [00:29:38] I've seen you mention elsewhere that specifically payments be a very hard business to make money in. Can you talk a bit about your experience with the payments line of business, specifically the margins there and the challenges, and what you think about maybe Western companies like Square or PayPal that seem to have succeeded in that area?

Oliver: [00:29:56] I don't believe that you can't make money in payments. You obviously can, and there's some companies that do it extremely successfully and to scale. What I mean when I say that there are probably challenges around setting up, for example, a digital bank and trying to build a payments business, which provides you with bottom line return, I think that's a bit more difficult.

(a) because you have to have obviously a huge scale, (b) because you have to have the right business model, (c) because if you don't have this entrenched position, then your already thin margin in payments, if you have a positive margin at all, is getting eroded away by regulators, by competition, by consumer behavior as well. If you're setting up the freemium model where you're offering banking services or financial services and hoping to make money on interchange and all payment services, then you're not going to be able to make ends meet, basically. That's what I mean when I say that.

The payments business, we really like. We have an obviously enormous payments business. We have the lending businesses, the largest of which is credit cards, but we have others including secure lending, which are coming up very nicely. We have an SME transactional business, they're going to make a very strong return this year, it's actually been growing all the way through COVID, and we're starting to do a bit of SME lending as well off the back of the data and the existing customer relationships we have. And our, let's say, current account business, it's a mobile app with a debit card. The debit card can be virtual, or it can be physical. We're one of the largest players in Russia, we have one of the largest P2B businesses, P2B transfer businesses off the back of that.

But if we come back to debit cards, which is where we started, on a transactional basis we lose money on our debit card book. And we have, I think the number is currently around about nine million debit cards issued. And all of these are self-acquired customers. They've come to us, not through a payroll program, they made a conscious decision to become our customers, so they want our product, but they are still loss-making because we give a very rich product to our customers.

We get these moves of customers into our ecosystem and monetize them by cross selling. So we sell them loans, we sell them insurance, we sell them brokerage, we sell them SME services, we sell them lots of other stuff. And that's how we monetize them. So for us to just have the debit card business would be really quite deeply loss-making, and there's no way we'd be able to switch on monetization without just losing our customer base overnight in a very competitive market. That's what I meant when I made those comments.

Competitive Frontiers

Patrick: [00:32:25] Fascinating. You mentioned earlier a couple other verticals that I'd love to explore. The first is content. What has been the use of content across the Tinkoff ecosystem? Why do you invest in it?

Oliver: [00:32:35] Content, that's a very important part of our business. We have several different content generation sources within our ecosystem. So we have a resource called Tinkoff Journal, sounds a bit bizarre, but it's the largest independent media resource in Russia. It's completely non-commercial. So we don't advertise, we don't monetize, we don't do anything through it apart from provide useful content in the financial space. So it's financial literacy, it's education on investing, it's how to protect yourself against fraud, how to pay your VAT, how to pay a traffic fine. So anything in financial equator, financial space, lots of tips. And we have eight and a half million MAU on that resource now. So it's an absolutely huge site, and soon to be a mobile app. That's one area.

The next area is what we call Stories. So we were the first financial institution in the world to integrate storyboards into our mobile app. So if you think Instagram, Facebook, obviously they all have these stories. We did something similar, and the idea here was to drive engagement in our mobile app to make sure that people went into the mobile app as often as possible and spent more time there. So, relevant content. So it's based on the machine learning algorithm, which drives customized content, personalized to that particular individual profile of the user. We see obviously their transactions, we see their behavior, we see what they look at, and we see where they travel. We actually have quite a lot of knowledge about that particular person, that customer. So we can drive the right targeted content to them in order to increase their endorphin levels, as we like to say, through shopping offers, through travel tips, restaurants, things to do at the weekend with kids, whatever it might be, local events, but also a bit of cross sell, so we'll try and cross sell and monetize those customers by selling them other products or services from Tinkoff. We give them cash back on their theater tickets, concert tickets, it's really quite a rich, rich offering in terms of content.

There's other stuff that we do around the ecosystem. So for example, we have lots of different recommendation engines, we have a robo advisor, so a lot of the content is where portfolio management or transaction management, or whatever it might be, ends and where useful lifestyle tips begins. And it's difficult to say because we're able to do it and to interweave those things.

And this drives us forward to our concept of an AI bank, so we want to take into the background the boring stuff, the hygiene type transactions, utility payments, mobile top up, all the stuff you don't want to think about, we'll automate in the background. The stuff that gives you these endorphins, that gives you enjoyment, so it's shopping, it's travel, it's entertainment, it's sports, it's whatever it might be, all of this stuff we bring to the foreground, give you offers through cash back, drive relevant content to you, lots of recommendations in terms of, "People like you bought ..." that kind of stuff.

Patrick: [00:35:29] It's fascinating. And it seems like to me, maybe the answer of my next question, one of them is content. I'm curious how you think about the two or three, what I'll call competitive frontiers for Tinkoff, the places where you winning in those areas, content could be one, maybe mobile is another or something, would be the most effective for your overall strategy and for the success of the business. How do you think about what those competitive frontiers are and how often do they shift?

Oliver: [00:35:54] What do we spend a lot of time thinking about? So a lot of time thinking about loyalty, merchant funded loyalty. So we have a platform called Tinkoff Target, which we want to do a lot more with because we have a big network effect, we have lots of users on the consumer side, we have lots of partners on the merchant side, and the retail side and the more we can plug those together, the more it drives value to our merchant partners, the more it drives value to our consumers, who are our customers, and the more it improves our economics.

So there's an obvious area we need to be in. Part of that is the fact that in Russia we can see to SKU level what's happening in the transaction, not just the transaction ID, location, some merchant ID, amounts of transaction and that kind of stuff - the generic payment system stuff - but we actually could go down and see what actually the customer bought because of the way the Russian tax online reporting system works. So we've integrated all that into a mobile app as well, and I as the customer can see what I bought down to SKU level. So the data there is just incredible, as you can imagine, which enables us to all sorts of stuff in terms of targeted offers from brands, not just from retail partners. That's one area.

The other area is around the brokerage business. So, if you think Robinhood, but only better, we are now the largest brokerage operation in Russia by number of active customers. We have over 2.5 million brokerage accounts opened in just a little more than two years. I think we're going to grow five or six times in terms of assets this year, balances and transaction have just skyrocketed, so trades, and it's a very profitable business for us.

There, what we've got to do in terms of building out the product range, segmenting for different types of customers from buy-and-hold retail investors to premium type customers, high net worth, frequent traders in terms of execution in the background, and using sophisticated algorithms to help our investors make better investment decisions, we're just starting there. And it's an absolutely fantastic journey and basically blue ocean territory.

The third area is actually building our lending businesses. Here we have lots of data that we can obviously bring to bear to improve the underwriting decisions that we're making.

And content has a role in all of these in terms of driving engagement, which drives cross sell, which drives lifetime value, which means we can improve pricing for customers over time. It also improves the lives of our customers because we can provide more relevant offers at the right time, as opposed to generic cross sell offers that's aren't particularly interesting to people because we don't get them at the right time or we don't get them with the right proposition. So we're in this positive virtuous feedback loop in terms of the data that we get on more and more customers that we're using in a much better way over time.

Business in Russia

Patrick: [00:38:45] As you think about Tinkoff's future now, what do you think the most effective next chapter might look like for your business? You've talked about the competitive frontiers. So obviously those are key focuses for where you go next, but are there other plans beyond Russia, maybe say a little bit about, we haven't talked at all about just the Russian business environment or doing business there versus elsewhere in the world. How much of it do you think is portable outside of Russia?

Oliver: [00:39:12] We made $36.5 billion of net income last year. This year, we're telling the market that we're going to do 30 to 35 billion in this COVID year, but we've already hinted to the market that we're going to have very strong results and our results are coming out fairly soon. And so they'll be able to see for themselves. The reason why I start my answer in that way is because we know how to grow our business, we know how to grow our customer base, we've currently got 12 million customers, and we know how to grow to 20 million customers in the next three years. We know how to grow our bottom line. And we've been growing our bottom line over the last few years, so 30% to 40% every year, and we're going to continue to do so. So we know how to grow to a billion dollars or so. That's our ambition.

So when you have that growth profile in Russia, anything you do outside of Russia, and it's a conversation we have regularly, introduces a certain amount of opportunity cost or execution risk to the business that we have in Russia, which is firing on all cylinders and has been for a long time and will continue to do so for a long time, because it is a management distraction, it takes out some people from the inside of Tinkoff to go and build Tinkoff India or Tinkoff Brazil or Tinkoff Iceland or whatever it might be. And it's a deployment of capital. So if we're making a year-in year-out 40%-50%, sometimes even higher, return on equity, why would we deploy that capital in, (a) another market where you have all sorts of execution risk? And even if it does come together in three or four years' time, maybe you'll get a 25% return on equity, maybe worse.

So these considerations have always held us back from going abroad. That's not to say that we won't. And we're actually currently doing a little bit of an experiment, if I could call it that, in terms of an investment that we've made. So a couple of very, very strong people from Tinkoff left Tinkoff, didn't go very far from Tinkoff, to go and found a fintech startup in Europe. So this is called Vivid Money. And Vivid Money has a pretty different philosophy, a different approach, and it's a liabilities-led fintech, but it's all about managing money. So it's about investments as well as money management solutions. Very high tech, very AI and very lean. We really like it, like what they're doing, so we've made this investment, and they'll be scaling across Europe and then potentially across the world in the coming years.

So that's, if you like, Tinkoff dipping its toe indirectly into geographical expansion, and we'll see how that works. We are there as an investor, I just repeat that as opposed to operationally. And depending on how that goes and maybe depending on how our thinking evolves, we may look at other markets to expand in but right now we haven't taken any final decisions on that.

Patrick: [00:41:55] Can you describe the state of things, the state of the market, the state of business in Russia today, for those that don't follow that market as closely? I used to be extremely interested in the entire history and just haven't caught up in the last couple of years. How would you describe Russia, just generally speaking, I'll leave it open-ended like that to a listener base, which is more North American?

Oliver: [00:42:17] Obviously there are a lot of misconceptions. There are a lot of stereotypes out there on both sides. Russia is an amazing place to do business. It's a tough place to do business but then I think every single market in the world is tough depending on what you're doing. I don't think there's an easy ride for a business, particularly at an early stage anywhere. The Russian environment is pretty difficult in terms of availability of capital. So we discussed that a little bit earlier in our conversation. So, capital is scarce, there are no huge inflows of inward investment. You have to be a lot tighter about your execution, but there is business to be done.

It's not all about stuff you get out of the ground about oil and gas. There are peculiarities of the business environment, as there are anywhere, but all of the stories of men in gray suits extorting money or whatever is just not the case, because we've managed to build a business like many other people, many other companies in Russia, in the tech space, in retail, in finance, without encountering anything remotely like that.

People unfortunately tend to see ghouls and goblins all over the place in Russia because this is what's being fed to them through the media. And actually even some people I consider to be smart. They tend to swallow lots of this stuff about this being a hostile business environment and corruption and bribery all over the place. It's just not like that at all. You have to be savvy, like you do in any market.

Moreover, the tech space is very vibrant. So when you look at what's happening with some of the leading tech players, some of them are public, so for example, Yandex, Mail.ru, Tinkoff. A lot of them are not public, so these are names that just won't appear on people's monitors at all, there's tons of really world leading innovative companies working in the new economy, not just in Russia, but operating internationally, have obviously some of the best talent available to them in Russia in the labor market because this is where the best programmers, developers, designers, architects, et cetera. Obviously, you guys know that in Silicon Valley a lot of them are of Russian origin, one way or another.

There's just a very different story on the ground with a lot more room for maneuver, room to innovate and the ability to innovate, because of the amazing people here. The fintech space is quite incredible here as well, because you do have some tech companies, you have specialist companies doing different parts of the financial value chain, but you have less of a startup climate here for reasons that I've explained around availability of capital.

However, when you look at what the incumbent banks and some new players have done, new players obviously including Tinkoff, you can see that there are financial platforms and actually ecosystems being built around financial platforms, which is unusual because normally you get financial services appearing around e-commerce platforms, around messengers, around search systems, whatever it may be across the world, but Russia's the only place where you get digital ecosystems being built around financial platforms. And that's Tinkoff and Sberbank, the largest state-owned financial institution in Russia. So there are all sorts of fascinating things going on and when people come here and really look under the bonnet, they're actually quite surprised at how vibrant it is.

Culture, Lessons & Kindness

Patrick: [00:45:27] One of the things that you've talked about is the preference to recruit the absolute most talented, smartest people with math or physics backgrounds, and mold them from a young age inside of Tinkoff's culture. What have you learned about that process? How have you deliberately built a unique and specific culture over the last 14 years?

Oliver: [00:45:46] We're a very flat organization. Genuinely flat, so we are broken down into the different businesses and service lines that I mentioned earlier, who are autonomous. So they're full stack teams, through developers, product people, analysts, people on the business side and sales, marketing, risk, if need be, whatever. So full stack, fully autonomous teams with their own resource, they have goals in terms of annual goals and longer term goals, and we try and keep this very cohesive at a group level so people don't drift apart and we try and keep a lot of the infrastructure shared as well as the conceptual framework and the management tool shared.

But apart from that, people are very independent and we're able to basically delegate authority and decision-making powers very low in the organization. So you get very young people, the average age of our HQ is 26. We have 3,000 people in HQ, 1,000 people in development hubs across Russia. These young people are in charge of ... Well, we don't have budgets so we don't have budgets per se, but we have plans, they're in charge of very large business and service lines, spending tens of millions, sometimes hundreds of millions of dollars and generating these ideas that they can implement. So the distance between one of our employees and the results of the decisions that they're making, testing and learning, and then if they find something that works based on the analysis they do, that they scale up, the distance is very short. The time to market is very collapsed.

So it's a very stimulating environment in which to work. You're delegated to very early. You're encouraged to take risks in a controlled way, in a measured way, very early, you're with like-minded people who are just swimming in data and love analysis. We're tech, we don't buy stuff off the shelf, we don't use outsources, we develop our systems in-house, including our core systems these days. And so the speed of change, the organizational culture, the DNA, which is Tinkoff, is very specific, peculiar, we're very proud of it, we're fiercely independent and proud. It's a place that you can really make things happen, which is why people like working here.

Patrick: [00:47:55] What do you personally enjoy most about your job?

Oliver: [00:47:58] The fact that we can do things as a team, which affects in a positive way the lives of a large number of people. We've shaped the way that the Russian financial sector is developing. I don't want to sound too arrogant or cocksure, but we really have. We just changed the direction of things in Russia. So we've set the pace, we've set the benchmark, and now lots of banks are building ecosystems in Russia. Some will make that journey, some won't. We're constantly finding ways of innovating in our interface and bringing new value to customers, and we can do this in a very quick way, so the rapidity of our business and innovation and bringing out new products and services is something which really gets us all fired up.

COVID has actually been an interesting time for us. Obviously, it's been very tough for Russia, as well as all countries of the world, but it has enabled us to actually speed up as we moved 100% into a home-working regime, where other offline organizations obviously found it extremely difficult, we were online anyway and most of us were in the cloud anyway. So we've actually been able to increase the pace of our innovation and knock out new stuff. It's that ideas generated approach and the fact that you can see the effect that you're having on the society, in which you're living and working.

Patrick: [00:49:14] What's been the largest failure in your opinion, during your time at Tinkoff, and what major lessons did you learn from that failure?

Oliver: [00:49:20] In business there's always lots of failures, yeah? I've talked about test and learn many times. Tests more often than not end in failure. That's how you learn, rather obvious. One thing that would maybe stand out as something that didn't go as we'd hoped. So we had the idea of an online financial supermarket at some point, this was back in 2015, where we thought we would do less balance sheet stuff and do more off balance sheet stuff. So we'd use our origination platform to bring customers in and write them onto a partner's balance sheet. So specifically for mortgage, but we were going to do it with lots of different lending products. So we'd make our balance sheet more light, less capital-intensive and more about a commissions-based income.

So we've grown our commissions-based income for sure, it's now over 35% of our top line from non-credit business lines. So we made huge inroads in that direction anyway, but the thing that we thought would work didn't work. Imagine Quicken Loans in the US, we built a fledgling Quicken Loans in Russia, where we originated customers onto the balance sheets of partners for mortgages.

The problem was that the structure of the Russian market is such that 70% of mortgages originated are done so onto the balance sheets of state-owned banks, the state-owned banks, as a matter of principle, wouldn't work with us. We had a difficult sales funnel. So basically we were attracting a lot of customers, a lot of applicants, but at the bottom of the funnel, where the key conversion takes place, they were going and getting a mortgage from Sberbank and VTB or whatever the other state-owned banks. So our economics didn't stack up.

We tried making it work for one year, two years, three years, kept trying to make it work because it was a fantastic service. The NPS was through the roof, our partners liked it, we had 12 privately held partner banks originating those mortgages through us. But unfortunately the economics didn't work. So we probably took a little bit longer to kill it than we should have done. But eventually we came around to the idea that we couldn't make the unit economics stack up. So we discontinued it, unfortunately. I wouldn't call it a mistake. It wasn't a very expensive mistake, anyway.

Patrick: [00:51:27] I'll remember this conversation for this mindset of an NPV approach, a customer focus and a product focus, and just incredible rigor around how decisions are made with the North Star of creating more valuable products and services for customers. I think it's such a neat and unique story, and I love that the circumstances of the country and the lack of capital availability have, if not forced, encouraged this different model than what we see in the West and find it completely fascinating. So, thank you for taking all the time to teach us about Tinkoff today. I have one final question, which is a question I ask everybody, which is for the kindest thing that anyone has ever done for you.

Oliver: [00:52:06] You know what? It's something I've been thinking about recently, that I really need to return this favor. When I was a student, I came from a background without huge amounts of money, certainly not excess to throw around. And I had a bit of a tough period as a student where I was actually finding it difficult to make ends meet and I needed some new shoes or something, I can't remember. A friend of mine who was a nurse, a male nurse, he gave me 200 pounds just at the right moment when I needed it, completely unsolicited. He just knew that I was going through a bit of a hard patch. And I remember I was saying, "You know I can't pay this back to you, John, for a while. I don't know when." He said, "Oh, one day, you'll buy me a new fridge." I remembered this recently and thought it's about time I bought John a fridge. So that's one of the kindest things that has been done to me, and one that I remember. I'm going to buy John a fridge.

Patrick: [00:52:53] What a funny specific episode I love when it's just in retrospect, smaller than at the time it was large, such a fun example. Oliver, thanks again so much for your time. It's a pleasure to meet you. Love learning about a very different business from what I'm used to talking about. Thank you for your time.

Oliver: [00:53:07] Thank you for great questions.

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