The Russian consumer credit landscape, with Igor Propopenko

I've always been interested in emerging markets, which early in my career meant the BRICs - Brazil, Russia, India, and China (and, yes, South Africa, but I've always felt we squeezed ourselves a little uncomfortably into that one.

But I digress, my main point is that today it seems that we're hearing from Brazil (with Nubank) and India and China (with a bag full of unicorns each). But Russia, I think after a few fingers got burnt on failed entries earlier in the century, seems to have slipped into the background.

To address this, and just because I've always been fascinated by the country, I speak to Experian Russia's Igor Propopenko. We chat about the current consumer credit landscape, about the growth that has shaped the market as it is today, and about the trends likely to shape its next twenty years.

You can learn more about myself, Brendan le Grange, on my LinkedIn page 

If you have any feedback, questions, or if you would like to participate in the show, please feel free to reach out to me at brendan@howtolendmoneytostrangers.show

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Regards,

Brendan

The full written transcript, with timestamps, is below:

Igor Propopenko  0:00 

Also, in terms of the data, without analytics it's just a waste of time and money

Brendan Le Grange  0:18 

After reading the first draft of our undergraduate thesis adviser said we didn't need to be so stayed with the title. So we changed it to 'Where's Wally Investing Now?' which in hindsight was probably pushing a little too far in the opposite direction. But it was about investing in emerging markets, something I've always been interested in, so in 2010, when I was living in Copenhagen and working as a consultant in the Nordic Region, I jumped at the chance to pick up a one week project with our Moscow office, flying out on a Friday evening to give myself a little sightseeing time.

The twist was, I needed to apply for my visa by the end of the next day in order to get it processed in time. And to do that I needed a hotel confirmation. My colleagues were all staying centrally, but I didn't have time to get the corporate wheels turning, so I had to make my own booking. And the only hotel replying at that hour was on the edge of Moscow's outer ring road.

To get to Red Square on the Saturday morning, then I needed to take the number seven metro line in. This could have been tricky given my lack of Cyrillic comprehension. But the station next to mine had a number in its name. So while this is a story about getting lost in translation, it's thankfully not a story about getting lost.

Instead, what happened is that at every station along the way, more and more military personnel boarded the train. I tried to remain open minded, but when I surfaced and found the streets filling with banner waving crowds, I figured this might not be the best day to be strolling around with an ice cream in hand. But I still wanted to see St. Basil's in the rest, so I spent my Saturday doing the most circuitous walk of the city imaginable, taking the long way around every crowd or clump of soldiers I came across. And that plan worked in a way, I got back to my hotel that night tired, but happy to have ticked off all the big sites.

And when I did, so I flopped onto my bed and turn the TV to CNN, the one English channel on the menu, only to find out that the soldiers hadn't been there to control the crowds... the crowds have been there to see the soldiers. It was a parade of 1,000s of Russian soldiers, military cadets, and veterans who all gather every year to mark the anniversary of the parade when Soviet soldiers marched out to meet the Nazis. And I feel like Bill Clinton had been there as a special guest of honour, though my reason Googling fails to confirm this.

In any case, I just spend my entire day actively avoiding one of the biggest draw cuts of the year. All of which is a long way of saying that if you're like me, you may have a nuanced view of the Russian market. I wanted to correct that. Welcome to How to Lend Money to Strangers with Brendan le Grange.

Igor Propopenko  3:04 

So my name is Igor Propopenko. I'm the Sales Director at Experian (Russia and CIS). So basically, it's the ex-Soviet republics. And thank you for this invitation and the opportunity to speak about the lending landscape in Russia. So I'm more than 10 years with Experian and have been through a variety of different roles there, starting as a solution analyst for implementation, product consultant, to a wider sales management role. So Experian has been in Russia is for about 20 years and so we actually entered this market at the very beginning of the development of lending here. So actually, I was an observer of - and to some extent an active participant in - these market developments, I will try to share some interesting insights.

In regards to our business in Russia, we focus on the financial sector, for different banks and micro lending organisations. Roughly speaking, it's quite close to 100 million credit histories, and the total Russian population is 140 million - so most of its eligible population is covered. Our portfolio covers full cycle of retail lending, starting from onboarding/ originations and going through customer management and collections, also covering the fraud prevention area. We have additional services related to data analytics, data modelling, etc.

We have a joint venture in the credit bureau space in Russia. This is United Credit Bureau, we have a share of that together with Sberbank Bank, the top bank in Russia and Interfax, an information and business data company.

Brendan Le Grange  5:06 

And the Bureau environment there, is it a full comprehensive credit bureau or negative only data?

Igor Propopenko  5:12 

Thanks to legislation here, from the beginning of the credit bureau was established in the form of both negative and positive data. And from my perspective, it's supported a lot the rapid growth so far this market. And it's also competitive market - there are three main credit bureaus that compete on the quality of the service, United Credit Bureau being indeed a leader here. But yeah, basically, it's quite competitive.

Brendan Le Grange  5:43 

This Russian market overview is actually a episode I was looking forward to from the time I started this show. It's a market that I briefly got to work in and have kept an interest in, but from an outsider's point of view, we don't really have a good understanding, I don't think, of what's happening there. And there was a time early in my career, when several big international banks tried to make inroads into the Russian market, and then had to withdraw.

It's a market with a lot of skills and technology behind it. And I had an episode earlier when I spoke to Joffre in Georgia and he talked about the expansion of Russian banks into Georgia and these are just names that are very unfamiliar to to the rest of us. I think, I know Tinkoff, because I like to follow professional cycling, but could you maybe start by giving us all a little bit of a background at some high level context of what the consumer credit landscape is in Russia? What, what does lending look like?

Igor Propopenko  6:46 

Yeah, sure. Great question. I will give the market view in several dimensions. First in size, then history, and structure. So starting with the specifics about the Russian financial sector, there's quite a large number of financial institutions that have a licence to do the banking business - currently, it's about 150 organisations. There was a quite long-going programme from the regulator to consolidate the business and clean up to, let's say, only the healthy businesses, so if we were to take a five year look back, it was almost double this number.

So, about the history... actually, Russian retail lending is relatively young, it started less than 20 years ago and it made a huge jump from where we were - just basic stuff 15 years ago - to the state that we have now.

There's a positive outcome of this short history, we don't have much of the legacy technologies, etc, that some of a large international group experience that, take core banking systems, they don't have something that was developed 50 years ago, they're in a more or less modern state.

In terms of the structure, I would say, we have three or four types of the players in the market. First, we have a number of large banks with direct or indirect government share. Second segment is the large privately owned banks, some of them are universal bank, some are focusing on retail part of the business only, Tinkoff is one example of that. And certainly, still, we have few international groups present here with quite a stable business: so I can name Unicredit, Raiffeisen Bank, Citibank is also doing business here. Those of them that did it in the right way, and more importantly gave time. So they find the niche, the clients segment, and most of them are continue to invest and develop the business. And another aspect that I would like to add that we have quite large number of microfinance organisations, that actually takes quite significant market share as well ~ so say each fifth unsecured loan goes to a microfinance organisation. Microfinance organisations are mainly providing loans for the private individuals, not for micro businesses, probably due to the size of the grey economy and many people can't actually take the loan from the banks, because they can't prove their income, etc, etc.

Brendan Le Grange  9:44 

Thanks for that overview. You mentioned how Russian lenders are typically unencumbered by the oldest legacy systems. Since the development of these legacy systems is inherently linked to the development of the products they support, and can support, I suppose it's also possible that Russian lenders have an altogether different product suite. Is this the case or would the product landscape be relatively familiar to a Western lender, with credit cards, personal loans, mortgages and the like?

Igor Propopenko  10:14 

Well, product-wise, it's the same as you mentioned. The most popular one in terms of volume and value is unsecured cash loans. The second one is credit cards. Just to give you some idea of the numbers, it's roughly 80% share of unsecured loans is a cash loan. 20% is for credit cards.

Mortgage is developing more rapidly. Currently in roubel value it's almost a similar size as unsecured loans, and auto loans being about 10% of that. So to some extent, that is quite similar, that you can have in some other markets. We probably have a bit less credit cards, a bit less mortgages due to current state of social and economic development in Russia.

Brendan Le Grange  11:09 

I was just reading up a few articles before the call. And the numbers I looked at were all pre COVID but showed pretty strong growth in consumer credit, and a bit of debate about whether it was too fast or not. And then obviously COVID hit, which would have shaken up everything. In terms of growth, what was the market looking like? And maybe if we can also talk a bit about COVID, how that's perhaps changed people's outlook on risk and maybe outlook on product?

Igor Propopenko  11:42 

In terms of growth: currently, it's in the stage of rapidly growing and accelerating post-pandemic. For this year, they expected the growth rate of 25% which is a similarly high growth rate as we saw in 2018, 2019. Versus 2020, the most the most dangerous from pandemic perspective - the growth then converted into flat. So pandemic definitely affected profitability of the retail business. Mostly it was related to significantly increased provisions.

Secondly, the restructures, many of borrowers as asked for it in mortgages and unsecured loans respectively. Currently, profitability is back to the positive and primary driver for it has been growth in in volumes, and second is a significant decrease of the provisions made last year. Currently, cost of risk is reduced. And for the retail lending, it's roughly about 2%. So quitee, low historical rates.

Brendan Le Grange  12:57 

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Igor Propopenko  13:10 

In terms of in indebtedness, it is relatively high and it is a concern for the regulator with a high risk or with a high PTI loans and they put rules in place and policies that requires banks to have more provisions - kind of an indirect limitation to slow down the growth a bit. In terms of the product, we might expect some slowdown in mortgages this year due to cutting down this government programme of support and subsidising interest rate. And inflation rate is going up quite similar to many other countries. So, the interest rates get higher and higher and is becoming less affordable for for population to get the mortgage. So, for instance, the property price in Moscow raised about 30% in just over one year. And partially it was the outcome of this government programme because it allowed more and more customers to get mortgages and the demand increased dramatically. Immediately the market reacted - that was one factor. Construction material also raising in cost across the globe.

Brendan Le Grange  14:39 

Igor, you mentioned the relative youth of the Russian lending market. So I suppose that means for many years, lenders would have been able to grow without too much concern about over lending. But you also mentioned that that is no longer the case. So as lenders now look to regain growth momentum post pandemic - touch wood we are still post-pandemic with the new COVID strains - but yes, as lenders now look to grow post-pandemic, but also post-a-two-decade-lending-boom, where are they looking for that growth - from the same customers or new customer segments, or they're exploring new niches, maybe even going into that grey economy?

Igor Propopenko  15:19 

Well, I would say, mixed actions in the market to address overall, I would say, indetedness. So if you look from top layer, they're now focusing on the customer management aspect, trying to serve with relevant and timely upsells cross sells, or additional products to be offered to the clients and customers, and basically find in the new profitable niche through their existing clients. Some of the banks that have acquired a large portion of the payroll clients, or have, let's say, some insurance data from the group. They're trying to convert these clients into, say, credit clients. Other players are trying to find other niches. And some of them go through digital, trying to find some alternatives data sources, to have some kinds of pre-approved offer to be delivered via different channels.

In terms of going into that grey economy, I believe it's quite well limited by the regulator. And that is the reason then that microfinance organisation are popular in Russia, because microfinance are less regulated. You can do something disruptive can still be in a bank with with a licence, but micro finance are less regulated and I would say, typically, more disruptive.

I believe this buy now pay later in Russia is quite well behind Europe, but I would expect significant growth here, just related to rapid development of the e-commerce space in Russia. And it is great the opportunity to grab the space and then enter it.

Brendan Le Grange  17:23 

Speaking of disruption and disruptors, how and where are the fintechs, the challenges the innovators in general, changing the Russian market?

Igor Propopenko  17:32 

One recent example of entering the market is Yandex - kind of Russian Google. So a huge company with service and products line quite similar to Google. They just recently acquired a small bank and launched in Yandex bank and are trying to build a synergy between the data they obviously have from internet searches, etc, etc, and build, let's say, some interesting product on top of it. It's just a very recent story, probably a couple of months, so we don't have clear visibility of product direction, etc. And we'll be keeping an eye on it.

Brendan Le Grange  17:39 

So it sounds a bit like the Chinese model where Alibaba and Tencent came in and used their data from their other businesses, from their search engines, all of that, that they sort of combined, and used to score consumers.

Igor Propopenko  18:34 

Yeah, absolutely quite similar story. And while other top players on the market, they're trying to expand and diversify their business to non-financial revenue, and Sberbank is probably the largest example of its. If you'd look at Sberbank 10 years ago, it was just an financial group/ entity. And if we look now, there are lots of different services for the private individuals they offer. So they've expanded it, their traditional apps, like into the form of super apps that incorporates different lifestyle application: taxi app, some kind of local equivalent of Netflix, like food delivery, car subscription, so an ecosystem and you can have additional interest rate from deposit, you have an account to buy movies, etc, etc. And they're trying to attract as much time of the consumers as possible. On the other hand to promote the services.

Brendan Le Grange  19:41 

Yeah, I think that's interesting coming from the banking side - because we've looked at the Chinese super apps, but they came from the super app background and added financial services to it - because normally, why would anybody care about their bank? So yeah, to hear that a bank is doing this and able to attract people to the ecosystem, keep them there with these partner offers is good news and something that many lenders around the world might have a little look at. Because that's where the traffic's gonna be.

Igor Propopenko  20:13 

Yeah, absolutely. The most rapid growth doesn't lie in the financial service and products only, and for this reason many top players are trying to build up a tech company on top of the financial institution, because retail lending is quite overheated at the moment. So you can't double your retail business by finding some new population. So going from fin to tech. While most commonly we see tech companies just bringing some financial product, but from cash available for the investment, financial institutions are probably in the preferred position.

And due to some geopolitical reasons, they're not going to other countries in Europe, to expand and scale there. So I just expect them to go to the east, to Asia, in the developing countries like Indonesia, Vietnam, Cambodia, etc. And having quite solid digital business model, it can be done relatively quick. They test and learn, and they have quite a large appetite for risk, so they quite quickly can enter one market, say for a couple of months, see the current state of it, and if it's profitable to stay, if not, they close and open in the nearest market.

If we look at the other big trends, what would you say are there two or three in Russia right now, I would definitely mention open banking, it's not yet in Russia, we see some sure steps to establish it. And it could be a game changer that could potentially change the structure of the current market, because currently the large players enjoy the variety of data they have. And that's why they're so difficult to compete against. So being prepared for it and they can their advantage, early days can significantly change the market.

Second, is alternative data sources is quite common topic or different markets, the telecoms sell some kind of scoring or risky indexes. But still, there are more and more potential data that can help for better risk assessment.

There is also privacy. Yeah, so we don't have a GDPR. But we have some personal data protection, etc. There is always a balance.

I also see continuous trend on digital. Of course, it was really boosted with the pandemic. But there's still some barriers. If a bank needs to onboard a new customer for them. And we'll see remote authorization and all the checks - that's not yet fully in place, from a technology perspective and legislation wise. And consumers expect everything to be digital and frictionless.

Brendan Le Grange  23:27 

Yeah, well thank you very much. It's been really enlightening to have you on. You've also nicely set up next week's episode because I'm speaking to your Experian colleagues about data expansion at the credit bureau looking at open banking in the UK, your Boost model and incorporating alternative data into scorecards in Indonesia. But yeah, Igor, thank you so much for your time. And thank you all for listening. And indeed for your wonderful reviews. Please do keep those coming in. And if you haven't done so already, like share and subscribe to the show.

How to Lend Money to Strangers is written, hosted, and edited by myself Brendan le Grange and recorded outside the actually not that rainy city of Maidstone, England. The theme tune and show music is by Iam_wake. You can find show notes written transcripts, more in-depth articles, and details on how to book me for speaking engagements at www.howtolendmoneytostrangers.show.

I'll see you again next Thursday.

It's me again, just in case you've had your full of lending talk. Did you know that I've also published two pulpy action adventure thrillers. Drachen and Butterfly Hill are both available as ebooks, paperbacks, and audiobooks from Amazon and other online retailers. They're not Shakespeare, but they're not expensive either. And Ford Clarion reviews compare Drachen to "Clive Cussler turning Raiders of the Lost Ark into a shoot 'em up". Full disclosure, that was in a three star review so I'm not sure it was meant to be a compliment, but I think you get the picture...