​It is Time for Creative Banking

pogudin.JPGAlexandr Pogudin, a member of the Board of Directors of CFT Group of Companies, talks about prospects for the further development of banking business and technologies, new cooperation models for the banks, providers and customers.

“Banking Technologies”: What is your vision of today’s banking business development? Do you agree with the fact that banking business today is under a serious pressure of nonfinancial institutions?

Alexandr Pogudin: The idea of banking business has always been and remains unchangeable – it is earning money by means of professional risk management. Banks raise and place funds under different terms and conditions and earn money, the amount of which depends on how they can manage to find a balance between gains and losses.

Any other institution can hardly make it better than a bank, and I don’t think that any other institution would ever pretend to perform such functions. Moreover, I think that today we can talk about expanding of the range of banking operations - a mere glance at the reorganization of the Russian financial markets regulation can prove that.

Today the Bank of Russia issues only several types of banking licenses, but a new financial mega-regulator will actually start operating in autumn 2013 and it will issue more than ten types of banking licenses. Insurance, fund, banking markets are so closely connected with each other, that to create a unified regulatory basis became a vital necessity for them. Governmental regulation in the financial market is extremely important – you can’t render financial services without a respective license.

If we talk about negative influence of nonfinancial organizations on banking business, usually there is only one, very specific sphere named cooperation with customers. But let’s consider the evolution of Russian banks system of values over recent few years. What had the highest priority before the crisis of 2008? The network! The more branches the credit institution had got, the higher was its price.

It doesn’t matter how profitable the branch it is, the geographical coverall is of importance. Later the period of Russian banks’ successful sales to foreign investors ended and it was necessary to consider efficiency. We can see a number of large restructuring and optimization projects for branch networks, growth of self-service networks and technologies of RB.

This activity in retail market brought the customer into the center of attention. It is important to reach him by all means and to sell credit or deposit product. Besides it turned out, that banks without any branches or points-of-sale can perfectly succeed in this not worse than their multibranch colleagues!

Prospective customers remain to be the priority target for retail banks today, as retail lending market keeps growing at the rate of 30% a year. Therewith the amount of potential “good” borrowers decreases with increasing competition. And even if the bank can get the prospective customer’s attention and make him respond to the bank’s proposal, it turns out to be more complicated … It results in two parallel trends – widening of customer cooperation channels and enhancing of banking products.

And when it turns out that someone (like, for example, QIWI) has already built its own alternative channel or (like, for example, Euroset) started to use the existing channel to provide financial services, we are getting the impression that interlopers are driving banks out of their rightful territory.

“B. T.”: And what is the real situation?

A.P.: Actually, combination of such factors as integration of financial markets and increase in the amount of alternative channels of bank products delivery, to my mind, gives large opportunities to expand banking business, to search for new banking operating models, to change the quality of banking services, interpenetrate products and services. A bank and a retailer, a bank and an underwriter or even a bank and a social network can offer absolutely different services to a customer using new methods through different channels.

I know that it needs to be technically and structurally developed. But the time of standard products and banking business practices is slipping away; we have nothing to do with that. It is time for creative banking.

Т.” How do you generally estimate the role of the regulator in banking market development in Russia? How does the regulator’s activity correspond to the market situation?

А. P.: I can scarcely estimate it as “good” or “bad”, just because there are no clear evaluation criteria. The present regulator’s activity indicates its understanding of qualitative market change. I suppose that the fact that the Bank of Russia has an active position and does not keep save appearances brings hope that market regulation will correspond to its demands.

“B. T.”:  How would you sketch the new banking business paradigm in a few words?

А. P.: I’ll give you an example: these days every car dealership offers a car together with the financial program for its purchase. Now then, a perfect bank in the measurable future must offer its customers a financial program of their lives at every run, in all the aspects of our existence involving money.

“B. T.”:  How will relations of banks with corporate customers change?

А. P.: Corporate banking is a special category of business, with special rules. There are no specific laws and everything depends on the interests of a customer, which is sometimes larger than the bank itself. If we will talk about small and medium business, we can see the same laws as in retail business – small companies live in good and bad times, fruitful and unfruitful years and have seasonal fluctuation in sales, suffer diseases almost like people. It is important for them, just like for private customers, that the bank would meet their requirements and could render complex differentiated services.

“B. T.”:  You talk about keeping fundamental banking basis by means of risk management and about interpenetration of products and services. Do you suggest the model, where a bank only manages risks and uses the channels only under the terms of outsourcing, plausible? It is just that very model Brett King is talking about in his “Bank 3.0”. Is
it not the way out?

А. P.: In recent years I have been thoroughly investigating into the matter of outsourcing and, honestly speaking, I don’t see a single reason to refuse outsourcing.  Though here in Russia it is developing very slowly and, evidently, there are certain reasons for that. How does classic outsourcing work? Let’s consider the following model: every company realizes a number of business processes, which can be conditionally grouped into several vertical clusters: IT, personnel management, accounting, sales, logistics, customer assistance and the like.

Horizontally any cluster can be divided into three levels – strategy, management and operating activity. Thus, the company’s business is like a patchwork quilt, where every patch means the type of activity and the degree of management. It is these patches that are considered to be prospective objects for outsourcing.  Outsourcing shall be deemed effective if it appears to be possible and profitable to forward each of that patches to be performed by an outside organization.

Ideally, all the patches are being forwarded to the outsourcing, except those that are the core of the company’s business. Why doesn’t that work in our country?  Probably, we haven’t reached the “size effect” yet, when outsourcing appears to be definitely attractive, maybe there is no experience in outsourcing risk assessment, which has been deeply studied in the West (usually it is large specialized law firms’ prerogative).

But, it bears repeating, that I don’t see any material reason to refuse outsourcing models and basically any other way to develop effective business. There will certainly be the time for the outsourcing and, quite possible, that banks will be realizing this very model. Indeed otherwise they will have to develop lots of useless competencies and make those actually useless services work not worse than special-purpose companies.

You have mentioned Brett King. Do you remember, that after a presentation he was asked to tell about an application calculating expenses for taxi, which he brought as an example for a personal banking service of the new type? He just misunderstood the question. Well yes, some company has written and is supporting this application for him. But for him, being a financial expert, it does not matter how it works and what is there inside it. It
s beyond his scope.

“B. T.”: And how is the outsourcing model described by you being developed abroad?

А. P.: The major tendency, at least for large global companies, is decrease in the number of outsourcers. Not 300-500, but 20-30. This helps to accumulate responsibility and mitigate risks by means of partnership enhancement and increase of outsourcer’s interest in the client’s business.

“B. T.”: May be the reason is not-too-high general quality level of services rendered by Russian outsourcing companies? A simple example: despite the fact, that Russia is the worldwide leader in the number of processing centers, the banks keep on buying private processings and refuse outsourcers.

А. P.: Yes, it happens this way, though this is a very special example. I can imagine that in the context of rapid growth of business it is more important for a bank to personally manage functionality and quality of processing, than to cut down that kind of expenses.  Profitability per one customer allows the bank to do that. Well, it is normal, when criteria of possibility to forward a special “patch” of business change and it returns to the bank. All depends on specific conditions. On the other side, I can’t imagine that a new bank aiming to quickly enter the market has engaged into building a personal processing center. The issue is about business needs and not in the quality of services.

“B. T.”: Once CFT Group of Companies has introduced Faktura.ru, one of the most large-scale outsourcing projects, to the market. How can you evaluate today’s results of this project? Did it come out as you predicted?

А. P.: Well, it turned out to be a different thing (smiling). When Factura.ru was being prepared to enter the market we were thinking far not about internet-bank outsourcing and not even about the payments. We suggested a service of creating virtual trading platforms that could be created not only by banks, but also by other organizations and even by individuals.

Payment services were suggested then to be only as an addition. What was the result? One of the most successful projects of RB and payment systems outsourcing. 300 of customer banks out of 135 Russian cities, millions of users. Is
it a success? It absolutely is. But we can’t talk about total realization of a keystone idea of this service. As often happens, the market said its word, and Faktura.ru service started to develop in the way different from that we planned initially.

Why? I think that the idea was ahead of time. As a result we have a very successful large project still containing great outstanding opportunities. I’m sure time will come to evaluate them.

“B. T.”: CFT Group of Companies provides a great number of services to the banks. Have you ever had an idea to offer the banks such cooperation model when you could participate in there transactional revenues? Such
model is quite popular abroad.

А. P.: Yes, it is, this model involves the highest stage of involvement of a supplying company into the client’s business. It requires the utmost mutual trust, but it is not enough. It is also important to have a definite maturity level to estimate the effectiveness of all business processes. What determines success? Is it the bank’s sellers’ qualification? Or is it the principal qualities of its products? Is it the quality of our processing services? Is it our team work? It is crucially important to give clear and distinct answers to such questions in order to implement “transactional” model of relations between a bank and an outsourcer. I make no question of the fact that the market will progress to that stage and we are ready to consider this model. It is our by its mood and its essence.

“B. T.”: Why did CFT Group of Companies not open a personal retail bank? After all, aside from direct revenues you could make a perfect place to demonstrate the effectiveness of your ideas and technologies. 

А. P.: Inside CFT GC this idea appeared from time to time, as among the senior management and average executives we have a lot of professionals with the experience in banking activity. But at the time this is why it never was implemented.

To be a bank is much more complicated than it may seem sideways. We are involved into the banking business to the extent required to support partnership relations with our clients, and considering all said above, this involvement is still growing. We are becoming part of a large system of banking services and we believe that it is better to be a good IT company in it, than to be an ordinary bank.