Q&A: Why Russian banks should embrace millennials ahead of Chinese competition

VTB’s head of digital transformation highlights the danger of losing a generation of customers to Chinese fintech startups.

In a trendy fish restaurant in central Moscow, a smartly dressed waiter glides between customers taking payment. He says that roughly half of his young and fashionable diners pay with a credit card, about 40% via smartphone apps and 10% use smartwatches. No one pays in cash anymore he says, arching an eyebrow.

Russians are quickly adopting digital methods of paying for goods and services, disrupting traditional brick-and-mortar banks. World Bank data shows that 70.5% of Russians made or received digital payments in 2018, up from 53.4% in 2014.

This sea change in behaviour offers local banks the chance to know customers’ spending habits intimately if they can build the infrastructure to capture the stream of data from payments. Big Data analytics can analyse behaviour and match consumers with higher-margin products more suited to their current lifestyle, such as insurance and personal loans.

The risk is that someone else moves faster and severs banks’ links with young adults, who are early adopters of new technology. Such fleet-footed competitors are entering Russia from China at a critical juncture in the country's financial development, when the rules governing areas such as payments, cryptocurrencies and privacy protection are still being rolled out or are under discussion.

“I would definitely watch carefully Chinese players entering the market,” said Ekaterina Frolovicheva, who heads the digital transformation department at VTB, Russia’s second-largest bank by assets.

If that happens, banks’ analysis of its customers and product design will be skewed towards the needs of older generations. Banks’ brands will lose their resonance and will not be front-of-mind for products such as mortgages or retirement savings as these youngest grow older.

“If you're not winning over this audience, you will see a degradation of your transactional behaviour database,” said Frolovicheva.


During the 2018 World Cup in Saint Petersburg, acceptance of Shanghai-headquartered bank card provider Union Pay at ATMs and in Russian shops soared to 85% in July, catering to 223,200 Chinese tourists.

It’s not just bank cards. Chinese mobile payment apps such as Alipay and WeChat Pay are also catering to the swelling numbers of Chinese tourists travelling to Russia. The number of visitors from the Middle Kingdom hit 1.5 million in 2017, up from 1.3 million in 2016 and were the most numerous of any nationality to visit the country, according to the Federal Tourism Agency of Russia.

The focus on payments for Chinese tourists doesn’t mean that Alipay and other foreign platforms will limit themselves to just payments in the future, they could also expand into higher-margin financial services.

Alipay is already broadening its relationships and footprint in Russia. It teamed up with local internet provider, holding group USM and Russia’s sovereign wealth fund among others to build a digital payments platform. The joint venture launched in October.

Such nimble Chinese fintech firms have an advantage over Russian banks as their payment apps are embedded seamlessly into a wider ecosystem of services such as messaging. These additional services mean that the Chinese brand is often used frequently by customers, throughout the day.

Russia is also laying the groundwork for a cashless society to flourish and is encouraging its national banks to adopt financial technology to enhance the security of payments, cut cash collection costs and boost the efficiency of monetary policy. The state is making a concerted push to eliminate infamous Russian paperwork, led by the country’s digital tsar, Maxim Parshin.

Speaking at a plenary session of Russia’s State Duma in November, central bank governor Elvira Nabiullina said that five years ago, cashless payments accounted for as little as 30% of transactions, now they stand at 65%.

The government is still drawing up rules for fintech in Russia. In April 2018, Russia’s central bank launched a regulatory sandbox to gauge the effectiveness of new technologies in finance. A bill on ‘Digital Financial Assets’ is still wending its way through the State Duma. Russia’s central bank launched a faster payments system enabling citizens to make cheap payments between 25 banks, partly to make Russian financial infrastructure independent if the West’s sanctions against Russia deepen.

Regulatory restrictions passed by the legislative Duma in July ask payment providers to register as Russian banking payment agents – a lengthy process with additional requirements depending on the nature of the service rendered, according to law firm Baker Mckenzie. Watchdogs are keen to prevent the leakage of personal data.

These regulatory impediments designed to prevent money laundering and to protect citizens’ privacy have slowed fintech innovation in Russia. Consultancy firm KPMG’s annual report of top 100 global fintech firms included just one Russian company this year, compared with ten from China and 15 from the US.

If Russian banks lose contact with their customers the consequences could be long-lasting.

“This is potentially a demographic gap that will have consequences for the forthcoming five to 10 years,” VTB’s Frolovicheva told FinanceAsia.


Russian banks are moving quickly to address changing consumer preferences and competitive threats.

VTB and Russian telecom provider Rostelecom announced plans to invest RUB1 billion ($16 million) to create a big data platform to share, process and merge various aspects of customer information into user profiles in November. Other partners in the platform are VTB-affiliated retailer Magnit and insurer Sogaz.

Frolovicheva is working hard with her new partners in the joint venture to credit score customers in real-time. “We have been given a goal of less than a year to make it happen,” she said.

VTB's Ekaterina Frolovicheva says banks must act fast to stop nimble fintechs severing ties with millenials 

The increased focus on technology adoption is credit positive for VTB concluded ratings agency Moody’s. “Such a partnership, if created, has the potential to materially expand the bank’s customer reach and build an ecosystem to successfully compete with large banks and technology companies in the future,” said Moody’s analysts.

VTB also has local rivals to contend with. The bank's online payment service is regularly used by a quarter of the population, according to a 2019 report by Russian research firm Mediascope, compared with Russia’s largest bank Sberbank’s 80%.

The following conversation with Ekaterina Frolovicheva about VTB’s efforts to employ Big Data has been edited for brevity and clarity, to fit our house style, and the questions have been reordered

Q Do you see a threat from international fintech groups entering Russia?

A I would definitely watch Chinese players entering the market carefully.

The higher the penetration of wallets that can download credit cards from other banks for purchases, the bigger the threat as it will kill the last mile for the banks.

It's really a threat to banks that are currently issuing the cards. They continue to believe that they own the customer contact.

The key advantage of retail banks is that they own the last mile of contact with the customer. If you lose it, you lose the perception of you as the brand and the momentum of cross-selling and up-selling. That will destroy margins; transactions are fundamental but the higher-margin products are loans and commission-based products.

Youngsters are less in banks’ customer base. This is, potentially, the demographic gap that will have consequences for the next five to 10 years. If you're not winning over this audience, you will see a degradation of your transactional behaviour database.

Instead of building a lifelong relationship with customers, data will be skewed closer to the far right part of the journey with little presence in the mid and early part of the life journey.

Q Could you update me on VTB's and your partners’ progress towards building a big data platform? What is the objective and timeline?

A There are many players in the markets and they all have their own customer base; be it a telecommunications company, bank, insurer or food retailer. At the moment, these players aren’t exchanging personal data from customer profiles. 

Each organisation is trying to build customer profiles by itself. Enriching internal sources of data from external sources is only in an on-demand way. For credit scoring in real-time, there is a need to go outside of a company’s data-management platform.

[The joint venture] doesn't store or archive this data. It is only aggregated at the moment when one of the users of the joint venture requires it for a product or a marketing campaign. The data remains with the party that collected it.

You exchange some identifying data and IDs and they are then they are matched on each side of the joint venture.

In banks, the attribute that is dynamic and of value to other participants in the market is your transactional activity. You are depositing money, you're taking the loans.

When you shop for milk, bread and butter, the bank only sees that you went to a certain category of merchant. Well, retailers, like Magnit, have data such as printouts of your receipt showing that you bought milk from producer A, juice from producer B etc. This gives us a better description of your spending patterns, which could indicate a life event. You get a much wider perspective.

To avoid data leaks, the technology behind [the joint venture platform] is multi-party computation, which means that it is aggregating the attributes without truly centralising them. It sticks to a decentralised architecture and you focus on collecting the required attributes, you match and process them and apply machine-learning algorithms to give the consortium insights to be able to apply the most relevant products and services offerings.

It's really about being wise in terms of contacting clients because they are overloaded with promotional SMS messages, calls and emails that are not addressing their personal needs. 

We're very close to building the first use cases for the joint venture. At this stage, we're trying to find the best [software] solution on the market and implement it in real life. We will also have to make sure that we collect the consent from all the customers.

We have been given a goal of less than a year to make it happen.

Q What is the progress towards Open APIs in Russia?

A In Russia, there's only the open API concept, covering the potential benefits of having a more-or-less unified set of services that all the banks provide in standard specifications.

This will solve two pain points: one is in terms of the digital acquisition of customers and the distribution of products. It will allow banks to see what are the other methods of delivering products and having contact with the customer, not necessarily in a controlled channel such as a bank branch.

The other part is about exchanging data between regulatory authorities and state information systems, which would give banks data that is verified and validated and would improve credit scoring.

Currently, an application for a loan requires up to 135 different data fields in an application. If banks were to access data via APIs from state systems – including a verified social security number, pension funds number, passport number and identity number, as well as historical earnings based on taxes paid – it would definitely shrink the number of fields that a customer has to fill in while applying to banks for a loan.

Additional reporting by Xinlan Zeng 

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