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Fintech: A Russian revolution is coming

Russian President Vladimir Putin made digitization a centerpiece of this year’s St Petersburg International Economic Forum (Spief), but it seems the domestic banks are well ahead of him

Aug 02, 2017
Russia is the world’s third largest financial technology market and bankers at the annual sector conference in St Petersburg this year said they are continuing to roll out new cutting edge services as the need for digitization is becoming urgent.

"Russian IT companies are certainly competitive globally," Putin said, speaking to a packed plenary session. "Local professionals are not just offering a top-quality software product, but they’re basically creating a new field of knowledge."

According to consultants EY, Russia ranked third in the fintech services market among the top 20 global markets, Russian daily RBC reported.

"We understand digitization as automation of the entire processes, from the front office to the back office and centralisation of all operational procedures, which will allow the bank to provide services to customers, including provision of loans, without involvement of employees, and within the shortest time possible," said Aleksey Ananiev, board chairman of Promsvyazbank, who hosted the 22nd Banking Conference organised by Promsvyazbank in St Petersburg on July 5-8.

According to Ananiev, Promsvyazbank made its first step towards that goal last year when it introduced a new loan product for private individuals, the decision on which is made automatically within two minutes.

"The product is developing, growing, and we already have a substantial number of issued loans," he said. "The future of the banking business is the ability to provide to customers targeted services that correspond to their demand for quality and time consumption."

"While today a bank has 15 to 20 deposit offers, on a digital platform, it has to have millions of offers for deposits and millions of offers for loans," Ananiev explained. "Doing it with the bank’s employees is impossible. It has to be a digital platform that operates under control of employees, but still independently."

Russians have embraced the new technology, which they don’t view as a threat to traditional banking.

"I don’t share the idea that fintech companies could replace traditional banking," said Garegin Tosunyan, President of the Association of Russian Banks. "It is going to be actually the opposite. We will use what fintech offers for the development of banking."

"For Russian banks, new technologies are an absolute necessity," said Boris Kopeykin, Senior Director of Financial Institutions Ratings at S&P Global Ratings, adding that development of fintech is set to lead to higher competition and a better quality decision-making.

According to Alexei Bolshakov, CEO and board member of Citigroup Global Markets, blockchain as a platform for trade financing and transactions is likely to take off within the next few months or, at most, within a year.

"The Russian banking industry is no longer growing at the same pace it was five to seven years ago," said Sergei Polikanov, Managing Director of Sberbank CIB, adding that the current market conditions are pushing lenders to offer other services and look more closely at the fintech area.

"All financial technologies that have arrived over the last ten years are currently being tested, and we are gradually moving from pilot projects to regular fintech-based projects," he added.

Giant state lender Sberbank recently launched two projects based on blockchain technology for major steelmaker Severstal and electronics retailer M-Video, respectively.

According to Polikanov, Sberbank also has a venture fund that is looking at technology start-ups around the world, accommodating suitable financial technologies in its business. He added that Sberbank also has plans for creation of a blockchain integrator that will offer blockchain-based solutions to the entire Russian banking industry.

"The experience of fintech development in Russia has shown that even in a very competitive environment, it is still possible to find a niche and launch a global product that will be popular and profitable," he concluded.

Meanwhile, there are worries that the introduction of blockchain and related technologies into the banking sector could make transactions less expensive, cutting the players’ potential revenues.

Bolshakov disagreed, saying that the technology should not be viewed as a threat. One example he drew was banks’ transactions involving derivatives, which leave substantial amounts of cash frozen in the accounts for weeks.

As the transaction process becomes more efficient thanks to Blockchain, banks will be able to unfreeze at least 20 billion rubles (ˆ295 million), Bolshakov said.

"New products create much more added value," he added.

However, for new financial technologies to be adopted in Russia, they need to be approved by the Central Bank of Russia (CBR), and so far, the regulator has sent no clear signals to the sector.

"Currently, the central bank is watching the changing situation closely," said Polikanov. "But it is not yet prepared to launch a blockchain revolution or legalize technologies that banks need at this point."

Still, according to Polikanov, the situation is changing quickly, and so may be official attitudes about cutting-edge financial technologies.

"I don’t rule out that legislative amendments that change the situation of blockchain could be adopted already this year," he said.

Although the regulator may see blockchain as a threat, the adoption of the technology may also present an enormous opportunity.

If blockchain technology is introduced in a centralized way, the CBR will have an opportunity to control blockchain-based transactions that will be transparent and protected from fraud, Polikanov said.

Meanwhile, when it comes to the future of existing cryptocurrencies, industry players are more skeptical.

"For every country’s central bank, the best option would be to create its own blockchain-based digital currency," said Bolshakov. "I’m absolutely sure that over the next five to ten years, we will see the launch of digital currencies by all countries."

"We need to watch China closely," he added. "As the world’s second largest economy, it is interested in launching its own digital currency."

At the same time, the existing cryptocurrency only have "a speculative value", Bolshakov said.