Invest Like the Best with Patrick O'Shaughnessy - Oliver Hughes – The Secret FinTech Giant – [Founder’s Field Guide, EP.16]

Episode Date: January 14, 2021

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 build profitability into every aspect of the business. I hope you enjoy my conversation with Oliver Hughes.   For the full show notes, transcript, and links to mentioned content check out https://www.joincolossus.com/episodes/72486324/hughes-the-secret-fintech-giant   This episode of Founder's Field Guide is sponsored by Klaviyo.  Klaviyo is the ultimate marketing platform for ecommerce. With targeted segmentation, email automation, SMS marketing, and more, Klaviyo helps you create your ideal customer experience. See why Klaviyo's trusted by more than 50,000 brands, like Living Proof, Solo Stove, and Nomad to help them grow their business. For a free trial check out https://www.klaviyo.com/founders.    This episode is also sponsored by Vanta.  Vanta has built software that makes it easier to both get and maintain your SOC 2 report, at a fraction of the normal cost. Founders Field Guide listeners can redeem a $1k off coupon at vanta.com/patrick.    Founder's Field Guide is a property of Colossus Inc. For more episodes of Founder's Field Guide go to https://www.joincolossus.com/episodes.    Stay up to date on all our podcasts by signing up to Colossus Weekly, our quick dive every Sunday highlighting the top business and investing concepts from our podcasts and the best of what we read that week.  Sign up here - https://www.joincolossus.com/newsletter.   Follow Patrick on Twitter at @patrick_oshag Follow Colossus on Twitter at @JoinColossus   Show Notes [00:02:44] – [First question] – The origins of Tinkoff [00:06:18] – How they started and stayed profitable, and lessons learned [00:08:18] – Bringing Visa to Russia and what he took with him to Tinkoff [00:10:02] – Overall Credit card and Tinkoff's specifically business model [00:12:35] – Running an effective direct mail acquisition campaign [00:15:45] – Branching off from the original core credit card business into other spaces [00:18:45] – How he thinks about when to make competing investments [00:21:00] – Embedding into new businesses and how it goes wrong [00:24:50] – How they became a large door-to-door business in Russia [00:27:55] – Why that door-to-door business makes it hard to compete with them [00:29:38] – Challenges in the payments business [00:32:25] – Using content to help them grow their business [00:35:29] – Competitive frontiers for Tinkoff and how often they shift [00:38:45] – What the future of Tinkoff might look like and the Russian business environment [00:41:55] – State of the market in Russia today [00:45:27] – Recruiting talent and building culture [00:47:55] – What he enjoys most about his job [00:49:14] – Failures and lessons from them [00:52:00] – Kindest thing anyone has done for him    

This episode of Founders Field Guide is sponsored by Clavio. Want to deliver marketing moments that last a lifetime, Clavio is the ultimate marketing platform for e-commerce. With targeted segmentation, email automation, SMS marketing, and more, Clavio helps you create your ideal customer experience. See why more than 50,000 brands, like Living Proof, Solo Stove, and Nomad, trust Clavio to grow their business. Keep your customers coming back.

Get a free trial at clavio.com slash founders. That's K-L-A-V-Y-O.com.com. slash founders. Stay tuned at the end of the episode where I talked to Clavio customer Nomad on their origin story and how they work with Clavio. This episode is also brought to you by Vanta. Does your startup need a SOC 2 report to close big deals? Or do you already have a SOC 2 report and want to make it easier to maintain? Vanta has built software that makes it easier to both get and renew your SOC 2. With Vanta's continuous monitoring solution, you avoid hosting auditors on site and taking hundreds of screenshots to prove that you are compliant so you can focus on building your

business. Vanta partners with audit firms who file your SOC2 report directly inside of Vanta at a fraction of the normal cost. Hundreds of companies, including more than 100 Y Combinator businesses, are leveraging Vantas today to streamline compliance and focus on building their businesses. Founders Field Guide listeners can redeem a $1,000 off coupon at vanta.com forward slash Patrick. That's vanta.com forward slash Patrick. Hello and welcome, everyone. I'm Patrick O'Shaughnessy and this is Founders Field Guide. Founders Field Guide is a series of conversations with founders, CEOs, and operators building great businesses. I believe we are all builders in our own way, and this series is dedicated to stories and lessons from builders of all types.

You can find more episodes at investorfield guide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Oshonosi asset management may maintain positions and the securities discussed in this podcast. My guest today is Oliver Hughes, the CEO of Tinkov, 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. So 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 U.S., I'd love you to begin by just telling its origin stories, what it does, how it began. We started commercial operations back in 2007.

Well, there's actually a story to Tinkoff or at least a Tinkov brand, which is named after a 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 Tinkoff. 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 Tinkov, which he sold and the process of that sale went in starting what was initially a credit card monoline. So in 2006, 2007, we put the initial team together.

We launched in early 2007. So I've been with the organisation ever since the beginning, as I've 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 financial crisis, the global financial crisis in 2008, 2009, weathered that crisis nicely and 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, and we'd move 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, clean-up and shake-up 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 flow. anywhere in Russia using our online model, an offline distribution through our smart career

platform, which we'll probably come on to a little bit later. And we decided to go into other product lines. We started building other 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.

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's 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. 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 it throughout

the whole organisation in all of our business lines, in all of our team members. It's a lingua franca of the organisation. 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 monetise the customers that we're bringing in through, for example, debit cards and mobile app or whatever it might be. We started with products that we knew were going to make us a bottom line.

line positive return and then went into other services through which we could build up our volumes of customer inflow whilst monetising at the same time. We've always done it in a different order. The third thing which is very important is that we're 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 has 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 P money, and then hopefully that at some time we'll correct the code and be able to monetize.

In our case, we've had to live 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, manage capital of our organization. Can you say a bit about lessons that you learned personally prior to Tinkoff, I believe, opening Visa in Russia and just sort of 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? There's 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 sales force 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 Tinkoff, 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 were some around, but it was just starting to take root. The cards infrastructure in Russia was very good. So there were probably over 100 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, which is what we 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. 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 underappreciated way to reach new consumers. Can you talk us through the business model? 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's been a very strict continental European-like privacy laws as opposed to more liberal, as they were, more liberal Anglo-Saxon privacy and data protection requirements. Using depersonalised data, we're able to do our first direct mail, build up a database, collect data ourselves from potential prospects as are called in direct mail, and then send out targeted, personalized mail shots 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 kept jacking up the rates for mailing. And so they didn't give corporate rates somewhat bizarre that what we paid was the individual consumer rate. That stopped working quite quickly. And that was about this, that happened 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. So we're 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 before we leave direct mail any key learnings assuming that you got that new corporate rating 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. 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. 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 just asked me about, and I should I 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 organisation. So we discovered a law of physics, if you like, which is called the overpromotion index OPI, basically said that if we sent more than X,000 mail pieces to a particular postal index, then the response rate would decline. So basically what was happening physically on the ground was you were overloading the postal hub,

and they just started throwing the letters away. They throw them in a forest or, I don't know, put them in the river, whatever. fortunately it was paper, so it wasn't damaging to the environment. So there's the OPI, the over-promotion index, 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 declined. And that was why. So there's a certain limitation of the infrastructure that we were using.

And it depended on by index as well. So there's different OPI according to different indexes. Then we had, for example, after a period of time, you'd start seeing a degradation and response rates where you'd been sending the same mail shot. So then you had 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 there's probably something card-like inside. We didn't send cards, obviously, we didn't send plastic. You'd indent it to make it a little like there was a card. You'd change the format. We have hundreds of different formats, colours, 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, it takes a while long gestation period. But then you work out what works, and then you scale that up. You carefully follow the response until it stops working as well, and then you move on to the next thing. A very interesting discipline. Seems like a fascinating thing to build the team's early experience off a 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 like one of the super apps in 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. We built up a customer base of probably about 300,500,000. 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 Tinkoff, 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 the do 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, take deposits, and found out that that was something that was scalable. We could do it at a price that worked for us in terms of funding cost. 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 it up, that took us into debit cards. We also around 2013 acquired a small online insurer. It was just an insurance shell license when we created an online insurer ourselves off the back of their license, to be precise, and started building that business. So we 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 skill set, 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. So Russia is quite a large country overseas, so not from just the big population centers of a million people, which are 13, but from any village, literally, anywhere in Russia. But we were just selling the credit cards and a few deposits. So we realized that we really needed to start utilizing that 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 where the NPV was. Can you talk a bit about that process, that kind of

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? 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 utilised credit card, so that goes through different stages of underwriting,

all the way through to the first transaction being made on that credit card. So that's the full conversion, the cost of a utilised credit card is a 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, because if they come through online as opposed to offline or partner or co-brand or whatever it might be, they'll have different servicing costs because of their different behavioral profiles. You have your cost of risk, which is also very different by different subchannel. And you have your cost of funding, which in credit cards is a constant.

It's consistent across all different channels. But for different lending products, obviously, depending on the duration of the product, there's different funding curves. So you plug all of that into your NPB model. We apply a 30% discount rate. So that's 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

resource in terms of scaling things up. But in terms of actual decisions, an underwriting basis, for example, acquisition and 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. Brise has two interesting questions

about the NPV method. One is how you embed it in the organization, like 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 I'm really curious in those two concepts, kind of who is responsible and how and when it fails. Well, they were the first question about stewards. So 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're consistent methodologically correct, because obviously there's lots of different ways of building an MPV model, but to make sure that we'll have the same currency in the organisation, we have the risk team who will basically all mathematicians and physicists, they're very obviously analytical people, as you'd expect. We don't have a siloed organisation, 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 two like this to be out of 20, 25 business lines, but we have two 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 say NPV is not biblical and it's not a science. It's a tool that helps us do things in the organisation a consistent way. And there's maybe one of the thing which is, this is a big kind of 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 at works or a way of money.

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 very different revenue model and different outlook on this. In our case, maybe we could have grown a lot quicker. But we don't because we put ourselves within these constraints here. 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 a very exceptional cases and cross-sell them. We have to make them positive that way. If they don't come in 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. I think it's so fascinated 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 to, the history of Western tech businesses has been get the eyeballs first, figure out how to monetize later. It's 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? We didn't set out to be a large logistics company, as you can imagine. But we become them, and we're doing today 35, 40,000 deliveries door-to-door every day, which is quite an amazing number. So we aren't 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 a financial space, but in terms of regulation. So we've got a very progressive central bank who do all sorts of interesting stuff and they're actually a big disruptor themselves.

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, New Bank do or Revolut do or all the staff intech 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 deposits back in 2009, the customer would apply online.

Then we would have to send out, have somewhere physically identifying them. And the way we did this was to send out a smart career. So we developed our own smart career platform, which was proprietary, because nobody else could do it at DHL, Pone Express, whatever. They just couldn't do the last mile for us. did the arterial routes. Now we don't 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 the credit cards, they do debit cards, they 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 a delivery of something. Well, basically, they're getting a signature on a piece of paper and a photograph of the central bank, but the rest of it is sales, and it's actually become a huge

cross-sell channel as well as a fulfillment platform for us. And it's become a huge differentiating factor in terms of service, a fulfillment 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 fantastic service. So it's become a fundamentally important part of our business. What a fascinating, interesting, unique aspect of the business. Are those people armed with data going in, especially thinking about cross-sale opportunities or sales opportunities,

they're given sort of a stack ranking of what to prioritize with each customer? Absolutely. So we developed a mobile app for them called M-Agent. 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 careers has a mobile app which tracks them, manages their logistics, their scheduling, enabling them to communicate with the people that are going to meet to the prospective customers, tells them which things 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.

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. 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? One of them. So 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 that 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's 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. I'm seeing investing in technology. So it means that there's not that many successful startups in the financial space in Russia, unfortunately. I've seen you mention elsewhere that specifically payments can 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 have seen, to have succeeded in that area. 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 absolutely huge scale, B, because you have to have the right business model. see because that if you don't have these kind of 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 kind of freemian 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 enormous payments business. We have the lending businesses, 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 the 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 P2P businesses, P2P transfer businesses of the back of that. But if we come back to debit cards, which is where we started, yeah, on a transactional basis, we lose money on our debit card book. And we have, I think the number is currently around about 9 million debit cards issued. And all of these are customers who are self-acquired customers. They've come to us not through a payroll program. They made a conscious decision to become our customers. they want our product. They're still loss-making because we give a very rich product to our customers.

We get these millions 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 a debit card business would be really quite deeply loss-making. And there's no way it would be able to switch on monetization there without just losing our customer base overnight. in a very competitive market. That's what I meant when I made those comments. 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?

In content, that's very important part of our business. So we have several different, let's say, content generation sources within our ecosystem. So we have a resource called Tinkov 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 or quasi-financial space, lots of tips. And we have eight and a half million amounts. on that resource now. So it's an absolutely huge, huge site and soon-to-be 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. As if you think, Instagram, Facebook, obviously they'll 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 a 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. We actually have quite a big, 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 monetise our customers by selling them other products and services from Tinkoff. We give them cash back on their

theatre tickets, concert tickets. It's really quite a rich, rich offering in terms of content. Just other stuff that we do around the ecosystem. So for example, we have lots of different recommendation engines. We have a railroad advisor. So a lot of the content is kind of where portfolio management or transaction management or whatever it might be ends and where content, useful lifestyle tips begins and is difficult to say because we're able to do it 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 of all stuff you don't want to think about will automate it in the background. But the stuff that

gives you these endorphins, it 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 kind of stuff we bring to the foreground, give you offers through cashback, dry relevant content to you, lots of recommendations in terms of people that you bought, that kind of stuff. It's fascinating and it seems like to me, maybe the answer of my next question is 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? 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 Tinkov 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 more we can plug those together, the more it drives value to our merchant partners, the more it drives value to our

consumers, and the more it improves our economics. So there's an obvious area we need to be in. Just a 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, i.e. location, so merchant ID, amount of transaction and that kind of stuff, the kind of generic payment system stuff. But we actually can 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 as a 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 Robin Hood, but only better. We are the largest now brokerage operation in Russia with a by number of active customers. We have over two and a half 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. So 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 year 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 in basically Blue Ocean Territory. And 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 kind of cross-sell offers that aren't particularly interesting to people because we don't get them at the right time or 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 a much better way over time. 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 and business environment or doing business there versus elsewhere in the world. How much of it do you think is portable outside of Russia? 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 a very strong results and our results are coming out fairly soon. And so they'll be able to see that for themselves. The reason why I'll 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. 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 kind of growth profile in Russia, anything that 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's a management distraction. It takes out some people from the inside of Tinkov to go and build Tinkov India or Tinkof Brazil 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 a higher percent return on equity, why would you 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, 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 invest. I just repeat that as opposed to operationally. And depending on how that goes, maybe depending on how we're thinking goals, we may look at other markets to expand in. But right now, we haven't taken any final decisions on that. Can you describe the state of things, the state of the market, 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 sort of open-ended like that to a listener base, which is more North American. Obviously, there's a lot of misconceptions. There's 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 it's tough, depending on what you're doing. I don't think there's an easy ride for business, particularly at an early stage anyway. 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's no huge inflows of inward investment in. 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 to 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 grey 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

are considered to be smart. They tend to swallow a lot of this stuff about this being a hostile business environment and corruption and bribery all over the places. 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, Roo, Tinkoff. A lot of them are not public. So these are, 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.

I have obviously some of the best talent available to them in Russia in the labor market, because this is where the best programmers are developers, designers, architects, etc. Obviously, you guys know that in Silicon Valley. A lot of them are 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 tier 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 are.

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 is the only place where you get digital ecosystems being built around financial platforms. And that's Tinkov and Bear Bank of the largest state-owned financial institution in Russia. So there's 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. 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 sort of 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? We're a very flat organization. genuinely flat. So we're broken down into the different businesses and services lines that I mentioned earlier, who are autonomous. So the full-stack teams through developers, product people, analysts, people on the business side and sales, marketing, risk, if we 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 in decision-making powers are very low in the organisation. 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 at hubs across Russia. These young people are in charge of, but we don't have budgets because we don't have a budget per se, but we have plans. They're in charge of very large business and service lines spending tens of millions, sometimes hundreds and millions of dollars and generating these ideas that they can implement so that 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 is very short. Time to market is very collapsed. So it's a very stimulating environment in which to work. You're dedicated to very early. You're encouraged to take risks in a controlled way, in a measured way, very early.

You'll be 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. What do you personally enjoy most about your job? The fact that we can do things as a team, which affect in a sense. 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 change 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, you know, 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 this has enabled us to actually speed up as we moved into 100% at homeworking regime where other offline organizations obviously found extremely difficult. We were online anyway. Most of us were in the cloud anyway. So we've actually have 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. What's been the largest failure, in your opinion, during your time at Tinkoff? And what major lessons did you learn from that failure? 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're going to do it for lots of different lending products. So we make our balance sheet more light, less capital intensive, and more about 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 US. We built a fledgling quicken loans in Russia, where we originate customers onto balance sheet of partners for mortgage. The problem was that the structure of the Russian market is such that 70% of mortgages originated are done so on to the balance sheet of Staten banks.

The state-owned banks is 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 Spare Bank and V2B or whatever, the other state-owned banks. So our economics didn't stack up. We tried making it work for one year, two, here's 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 these 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. 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. I love that the circumstances of the country and the lack of capital availability have sort of,

if not forced, you know, encourage 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. 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 a huge amount of money, certainly not excess to throw around. And I had a bit of a tough period as a student where it was actually finding it difficult to make ends meet and they need some new shoes or something. I can't remember. A friend of mine who was a nurse, a male nurse,

so he gave me £200 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, well, you know, I can't pay this back to you, John, for a while, I don't know when. He said, no, one day you'll buy me a new fridge. I remember this recently. I thought it's about time that I bought John a fridge. So that's one of the kind of things that's been done to me, and one that I remember, I'm going to buy John a fridge. What a funny, specific episode. I love when it's just, in retrospect, small that at the time was large. Such a fun example. Well, Oliver, thanks again so much for your time. It's a pleasure to meet you.

I loved learning about a very different business from what I'm used to talking about. Thank you for your time. Thank you for great questions. This episode was brought to you by Clavio. In this four-part mini-series, I sit down with Clavio customer Nomad and discuss their origin story, why they chose Clavio for their business, and how your brand can grow online sales with Clavio's e-commerce marketing platform. In this week's episode, Nomad co-founder Brian Hahn and I discussed the expansion of Nomad and the decision to partner with Clavio for e-commerce growth. So talk me through the progression from the first product and all the way through to today. So how did you start to add products? What do those things look like?

And what would be a snapshot of the business today in terms of how it's grown and what it offers consumers? Yeah. So we started with a credit card size cable that went in your wallet. And the whole idea was you'd have something. on you that in an emergency, you could find a TV in a bar or a keyboard or whatever, you know, a printer and you could find a USB port and you can get some juice in your phone so you're not stranded. And then we realize that keys phone wallet. Okay, let's make a cable that goes on your

keys. Let's make a wallet with a battery built in. And we just started making products that kind of revolved around this like kind of keys phone wallet. You leave the house. You've got tools completely on you that you don't have to think about that integrate into your life. And that's where the brand nomad and the ethos of nomad really came from. But through changing technologies of what Apple's doing and requirements for lightning plugs, things started to just get a little bit too big to really kind of meet those demands. So we kind of changed the brand a little bit to really more focus on extremely well-made products that help you travel with. this sense of reliability. It's like my cable will not break on me. And so we've come out with a

whole suite of products and cables and cases and wireless chargers and leather goods. And we're really proud of the lineup that we've built over the years. I'm fascinated by the marketing challenge of a business like this and especially on the e-commerce side. And this is a great bridge into how you first found Clavio. So just to say a bit about what the problem was or what your solution was, I guess, for things like people that put something in a basket on your website and went away or what were the holes in the leaky funnel that you had early on and maybe tell the origin story of how you found Clavio. I think at the time, the very beginning, we had a bit of an easier hand than I think that people have right now. And the reason is, is back then, that was when

Facebook first started doing advertising. So advertising was extremely cheap. So we were cranking on Facebook. ads and we had a ton of traffic and a ton of people come into the site. We were just experiencing like this surge of traffic and we were using a simpler email provider at the time. And it wasn't able to do anything interesting. We were really into trying to do these creative kind of like marketing campaigns where we would like to like send people these like post follow up emails where they could get a free product. If they did something silly, like change the Wi-Fi of their house to hellonomad.com or like yell on a bus that this is the favorite product they've ever had or just kind of we had these list of like outlandish things

that people could do to get free product and it was great and one of the only ways we could find that did that well that allowed us to have that logic and control was through clavio we were like wait, this is one of the coolest products in the e-commerce space. We should really look into this. At the time, in e-commerce and in our space, there was only these really basic providers. So the whole pitch that we got was that we're bringing enterprise-grade features down to kind of like the masses. We were hooked immediately.

We totally saw all the potential of the flows and the different logic gates we could use and the integrations with Shopify. And we were hooked. And we just started building out funny flows and different marketing stunts and really helped us kind of take our traffic that we had and turn them into kind of fans, you know, these real nomad of fans that engage with the brand. To find more episodes or sign up for our weekly summary, visit investorfield guide.com. Thanks for listening to Founders Field Guide.