It is becoming common to attribute huge changes in any sector to part of the global response to the pandemic. I’d argue that the pandemic has simply accelerated changes that were already happening in this sector. To test this hypothesis, I caught up with Alex Kwiatkowski, Principal Industry Consultant for Banking at SAS, to talk about the current and future state of the Russian banking industry.
Alex, what trends do you see in the Russian banking industry at present?
There is a very interesting mix happening right now. Over the last six or seven years, we have seen a concerted effort to make the industry more stable and consistent. That has meant a big reduction in the number of lenders, from around 900 to around 500. I think this has made the industry much stronger, and that is good for the future. We have seen the central bank trying to stimulate the economy with low interest rates – but that means that saving has become less popular, with more people either spending or investing elsewhere. However, the pandemic has meant that customers suddenly need a loan or the ability to pause repayments to avoid bankruptcy. It has been difficult for banks to predict their customers’ needs and certainly to do anything like cross-selling or assessing risk accurately.
How does the number of banks, and their relative size, affect the outlook?
The number of banks makes the situation quite complex. You have the big players, but you also have large numbers of much smaller and more local banks. They are often more efficient – but the national players are also looking to increase efficiency. I think this is where analytics can really be brought to bear. Banks need to be thinking about how to improve existing systems and businesses processes. This is key to delivering improvements in the sector, and not just in Russia. We have to change what we do, and the major change is to become more customer-centric. However, we also need to move away from seeing customers simply as a way to make money and start to evaluate risk properly.
You need to look at risk and fraud alongside the customer experience and the regulatory relationship. They are not separate islands, but a single entity seen from different sides, and banks will need to use this approach to create real value.
How does that work?
If we look at the most recent statistics from the central bank, from May 2020, you can see that 42% of loans were considered doubtful, with 6.8% a problem and 2.6% a loss. Those figures are frightening, but they don’t really tell the full story, because there has been lots of progress on identifying and clearing out some of those nonperforming assets and making banks much safer. That’s a good thing, but it also means that banks look much less profitable. In the future, they will need to look very carefully at where and how they invest. And on top of that, customer behaviours are changing both now and in the longer term, and this is forcing banks to reconsider their offers.
And that’s where digitisation comes in?
The Russian banking industry is becoming very, very technological. Some of the biggest banks are investing heavily in becoming more customer-focused to provide more and different services for customers. There is a huge increase in mobile applications, and banks are also connecting other projects to mobile applications. For example, it is now possible to submit your tax declaration to the ministry and obtain your tax bill through your banking app. You can also purchase shares or bonds, or even sign agreements for big purchases such as apartments. Mobile is huge right now, but there are also big advances in other areas, driven by fintechs, such as fast payments, the use of biometric technology for security, and so on. All these make services much more efficient and convenient for users. Banks need to continue to invest in these technologies, even as the money available for investment shrinks.
How are these options enhancing resilience?
Necessity is the mother of invention. And so it is with resilience. By learning to adapt quickly, banks in Russia are not only transforming, but adding resilience. Once the pandemic eases and we get back to a steadier economic trajectory, I think we will see even more change. Banks need to find new ways to satisfy customers and keep the regulators happy, but also to deliver shareholder value. These have to be done together. You need to look at risk and fraud alongside the customer experience and the regulatory relationship. They are not separate islands, but a single entity seen from different sides, and banks will need to use this approach to create real value.
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