"Going FinTech is the only chance for Ukrainian banks to break out of the vicious circle"
"Going FinTech is the only chance for Ukrainian banks to break out of the vicious circle"
Journalists of AIN.UA prepared this article following editorial standards and published it under the sponsorship of an advertiser
Oleg Gorokhovsky is a co-founder of Monobank. Previously, he was Deputy Chairman of the Board at Privatbank. After the nationalization, he joined with Dmitry Dubilet, Mikhail Rogalsky and other former executives of Privatbank to found Fintech Band. In November 2017, Fintech Band announced the launch of its first project, the neo-bank Monobank. In two years, the project has attracted more than 1.5 million clients, becoming one of the most successful FinTech projects in Eastern Europe and one of the fastest growing neo-banks in the world.

In an interview for the USAID Financial Sector Transformation project, Oleg Gorokhovsky spoke about Monobank's success, its future plans, and its latest project, Kotobank, a UK-based FinTech Bank project.
— Is Monobank still the world's fastest growing neo-bank?
— Yes, as far as I know. We grow by 100,000-120,000 clients each month. We intend to finish this year having about 1.7 million clients.
— Is it true that half of Monobank's team are programmers?
— Our head office that runs the project numbers about 150 people. We all regard ourselves as IT guys, because we speak the same language. There are 30 programmers who do coding directly. If related specialties, such as designers, testers, web engineers, etc. are taken into account, this would be roughly half of the team.
— What technologies do you use? What makes you different from other neo-banks?
— We work very closely with mathematical models, neural networks, use open data, monitor clients' behavior and strive to determine accurately risk parameters and credit limits, to avoid default. We also do a lot of work "under the hood" with the models focused on a registration funnel. It is essential for us that a client who has downloaded the app ends up receiving a card. The rate is about 50% now, although we think that the distribution rate potentially could be raised to 70-75%. We are experimenting on this, using numerous mathematical tools. We have also made major progress in debt collection, including soft collection, pre-collection, i.e., where a client is not yet delinquent on the payment, but the model suggests that (s)he needs to be reminded of the upcoming payment.

We also work hard on processing the images sent to us by the clients, so that they would look more accurate and in focus. These almost invisible efforts help avoid problems, improve advertising conversion, reduce client acquisition costs and build the capacity for higher profitability. Such "under the hood" operations eventually result in cheaper and more accessible banking transactions for clients and the general public.
— Lending still accounts for 95% of the business profits?
— No, far from it. As of today, the ratio is 5/3 between lending and transactional income that comes from the payment systems' business model. Accounting for commission income, the ratio is 5/4.
— You used to channel a big proportion of transactional incomes to cashback.
— We do it to this day. More than half of transactional income is passed on to our clients as cashback. We get around 1,8-1,7% on a circle, of them 1% is redistributed to the loyalty program.
— Is it hard to build a FinTech business in Ukraine?
— I would not say that. Indeed, FinTech activities are almost entirely covered by the NBU regulations, and liaising with the regulator is definitely a hassle. The National Bank's oversight is a fairly serious entry threshold. However, no one prevents banks from implementing FinTech projects. Banks merely need a right idea to develop a technological case involving acquiring, payments, and transfers.

The classical business model currently pursued by the Ukrainian banks is becoming obsolete. It leads them to engage in large corporate lending, although those large loans, issued at the rates of 18-25%, only entail problems. If you have issued an expensive loan, you should be aware that, most likely, your borrower is running a risky business. And subsequently this risky business is very often forced to make arrangements to avoid repayment of this large loan.

Banks need to go FinTech, because it is the only way for them to break out of this vicious circle. I think the banks will be becoming more technological. Their objective will be to offer simple and convenient services to a customer, rather than entice him/her to its branch.
— What key amendments to the legislation must be adopted to make it easier for FinTech to develop in our market?
— The market would become more promising if such global players as PayPal or Revolut appeared on it. That would set a new bar.

Generally speaking, it would be cool if FinTech were made free from regulations and would not depend on the company's country of registration. The requirement to have local licenses for simple payment transactions is very restrictive. Ukraine is currently not among FinTech or banking business leaders, and it would be logical if the licenses issued to FinTechs by the British, Austrian or German regulators were accepted by Ukraine without any additional licensing. This would quickly bring Ukraine into the European FinTech orbit and remove those obstacles that prevent it from attaining the European and world level. These restrictions obviously inhibit FinTech and are designed to protect domestic businesses.
— What prevents Ukraine from becoming a European FinTech leader?
— It is difficult for FinTech to propagate horizontally, because it is almost universally subject to licensing. It is easier for an imaginary Uber to enter the market than for an imaginary Revolut. Uber is also digital, but it faces fewer regulatory hurdles. If, however, Revolut were to enter the market, it would have to talk to the regulator. Thus, for FinTech the speed of entry into the market is slower. This is true not only for Ukraine, but also in the opposite direction. Should Monobank go to England, it would spend between eighteen months and two years to obtain a payment license.

I do not foresee therefore any particularly rapid FinTech development or entry of major global actors. Properly speaking, FinTech's key driver should be banks, because they hold all the licenses by default. And it looks strange, whenever they avoid FinTech or fail to make their services similar to those that need to be provided in the 21st century via a smartphone or the Internet. There are no obstacles to doing this.
— What will the retail financial services market look like in three to five years from now? What will be new for users?
— Peeking into the future is difficult – if I saw what was there, I would implement it in six months. I see certain trends. One of them is that plastic cards are becoming obsolete. To eliminate the need for them completely, the cash withdrawal infrastructure must become contactless. These solutions are already emerging, and soon cards will migrate into smartphones entirely.

Second, clients will soon be able to open accounts without visiting a bank branch. This will be a landmark moment, signaling high accessibility of FinTech services. In other words, anyone who holds a license will be able to onboard the client without having to meet with him/her. This change is likely to give a great boost to the developing market, since there will be more players.

Projecting any global innovations is difficult, but a very strong intensification will occur "under the hood" in the areas associated with mathematical models, risk assessment. I think, banks will soon be able to make decisions very accurately. This will result in cheaper loans, since any lending business model is based on good customers paying for the bad ones. Improved mathematical tools will make loans cheaper as a result of much higher accuracy in determining the acceptability of risks associated with the client.
— In September, you were planning to launch Kotobank in the UK. Can you tell us, how things are going with it now?
— We have already launched the product for friends and family. We are currently monitoring it under a small load in alpha-test. In December-January, after we pass an audit by the British regulator, we will enable opening cards for all clients.
— How do you intend to grow in such a saturated market as the UK?
— In the UK, we will be relying more on classic promotion techniques. At Monobank, we refrained until recently from engaging an advertising agency to design a serious campaign. The story of Monobank is about the founders' social networks, word of mouth, a capability to generate the right atmosphere around the product. In the UK, clients are not easily amazed, therefore we have been cooperating with an advertising agency right from the start. This is Fedoriv Marketing Agency. They have approached this case in a highly creative manner, because it is a first foray into the UK market for them. I guess, the classic approach will prevail here, with an online advertising campaign, outdoor, context advertising, CPA networks. The market is huge and well-established. Classic advertising would be sufficient to initiate sales, but afterwards, I believe, we will also be employing non-classic promotion techniques. Naturally, classic techniques will also mean much higher promotion expenses. A UK client will cost several times more than a Ukrainian one.

The market is well saturated over there, but we occupy a fairly clear-cut niche. We want to offer a loan product and we hold the relevant license. Revolut, for its part, does not have such license. Of course, life will bring about adjustments in terms of a price per client. We do not have any definite idea of the amount of costs per client facing us in the UK. We nevertheless expect that this venture will be profitable. Time will show whether we succeed or not. In Ukraine, our objective was to develop a convenient banking application. In Great Britain, this is not enough. But once you say that you can also provide loans, this addresses the client's specific headaches immediately. In Ukraine, we mostly resolve an aesthetic problem, whereas here – a practical one. We want to be a financial assistant.
— You are the only bank in Ukraine that offers SEPA transfers. How high is demand for this product?
— For all banks, SWIFT transfers are the primary tool. Using this system, funds in dollars, euros, zlotys or any other major currency may be transferred to a Monobank card from anywhere in the world. The above-mentioned SEPA is a euro payment system connecting almost all banks and financial companies in Europe. With SEPA, Monobank cards may be refilled in more than 30 countries, including Poland, Slovakia, the Czech Republic, Germany and others.

Card details for accepting SEPA payments also allow the card to be refilled via popular online payment services, such as TransferGo, TransferWise and others. Cards may be refilled from a Mastercard or Visa card through an app, thanks to its support of international P2P payments. A card may be refilled directly by its number via any bank's Internet banking service or via online payment services — this, of course, is only possible if they support international P2P transfers. A separate mention should be made of a tool for IT guys who can refill cards using their Payoneer accounts directly through the app. We are also working to enable links to all major money transfer systems, such as Western Union, MoneyGram, Ria and others.
— Do Ukrainians working abroad transfer much via SEPA?
— Our tools are used by more than 10 thousand people in the amount exceeding 10 million dollars a month. Even morein fact, as the cards have been refilled by 300 million hryvnias last month, and we expect 350 million this month.
— Why are other banks avoiding this niche?
— Today SWIFT is the most popular channel both with clients and banks, including those in Ukraine. SEPA is better for payments made across Europe, but other banks apparently do not have it because they cannot see any serious customer demand. We do not have money transfer systems yet, although they should appear soon, so we had a broader look at the infrastructure of transfers based on card details.
— Is this product mainly used by those Ukrainians who work in Poland and other European countries?
— We have not looked that deeply into the matter. Of course, in terms of the payment geography, Polish banks lead in SEPA transfers. I am not sure if it is because the client lives there, or once lived there, or keeps an account there and refills it. Poland is definitely a leader in terms of transfers, and this is why we have started issuing zloty cards recently.
— You mentioned recently in an interview that you are looking for a partner in Poland to enable refilling cards in zlotys. Is the search over and how do you assess this market as a whole?
— Refilling such cross-border cards with cash is very difficult because of the regulations and the Know Your Customer (KYC) requirements. At present, the KYC requirements are not particularly transparent, even within Europe. Even if a client has been verified by the sender's bank, this does not necessarily mean that verification of the same client would not be required by the recipient's bank. It means that KYC must be performed at both ends, whereas KYC performed by Ukrainian banks is unsuitable for European banks, which makes it difficult to find a partner for such transactions, even minor ones. We are currently negotiating with a couple of companies, but this whole story is very complicated.
— Do you think there is any chance to harmonize laws to make KYC performed in Ukraine acceptable for partners in Poland and other countries?
— I think this is a very complicated project and a part of the overall integration process. Should Ukraine ever become an EU member, only then would such a harmonization occur that would make possible payments to Ukraine similar to those made from Poland to Austria, for example. Making small payments within the European Union is much easier than between Poland and Ukraine. On the other hand, money transfer systems, like Western Union or MoneyGram, address those issues, although the price for their services is much higher. Refilling at Western Union rates is no rocket science; making it free or almost free, however, is another matter.
— The National Bank is currently considering potential upgrades to its System of Electronic Payments to enable instant payments, i.e., a 24/7/365 operation, and processing payments in less than 10 seconds. Which types of payments, in your opinion, could be made instant in the first place?
— I believe that all payments should be processed 24/7. Today, it is impossible because of such things as closing balance sheets. Banks are required to close the transaction day and open a new one. This is a processing problem on the banks' part, as well as a matter of governing the liaison between the banks and the regulator, because a closed balance sheet must be delivered to the regulator by the end of the day.

Operating not instantly merely implies a wrong processing architecture. And this is not our problem only – all European banks are unable to work 24/7/365. Globally, this industry is very old-school, with its key regulations stuck back in the 20th century. The requirements imposed on it from above by anti-money laundering-procedures and KYC push it back into the past even more.
The views and opinions of the author expressed herein do not necessarily state or reflect those of the U.S. Government or USAID.
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При использовании материалов сайта обязательным условием является наличие гиперссылки в пределах первого абзаца на страницу расположения исходной статьи с указанием бренда издания AIN.UA. Материалы с пометками «Новости компаний» и PR публикуются на правах рекламы.