Consumer lending is booming as Russians trade in their standard televisions for plasma home cinema systems and standard sunglasses for Gucci wraparounds. This protracted shopping binge has been encouraged by growing oil exports and record-high commodity prices trickling down to consumers: average incomes jumped by 15% last year to an average of Rbs5524 ($184), or a four-fold increase on 1998 levels.
Add to this the fact that the average Russian has no debt as utilities are cheap and most people received their apartments during the privatisation process in the early 1990s.
Fierce rivalry
Since the bank Russky Standart pioneered the first unsecured consumer loans two years ago, the business has ballooned and competition become fierce. In the glass and chrome flagship store of M-Video, one of Russia’s largest electronic goods retailers, representatives at more than five financial companies swan about ready to push instant credit on shoppers eyeing up new mobile phones and deep-fat fryers.
Customers can command up to $3000 after spending little more than 15 minutes filling in a form. One-quarter of M-Video’s annual $600m of sales are already carried out on credit, and there is no end in sight. Last year consumer credit was up by 80%, ahead of all bank lending, which in itself is up by 27%, according to the Central Bank of Russia, and now accounts for nearly one-fifth of GDP from next to nothing five years ago. And consumer spending hassoared from $30bn in 1998 to $200bn in 2003, of which only half was spent on food.
New players
Russky Standart is no longer alone in the market, and every bank with retail aspirations has launched some form of consumer credit. In 1998 there were only two banks with more than 100 branches; now there are at least a dozen.
But the bank still has its first mover advantage and commands about half the market in terms of volume of credits extended, a position bolstered since it tied up with the International Finance Corporation (IFC) last year, the World Bank’s private finance arm that bought 10% of the bank and extended a $100m credit line to the bank together with the European Bank for Reconstruction and Development. Russky Standart is also planning to issue a Eurobond later this year. Its average loan has stayed roughly the same in the last two years at $430 with a headline interest rate of 29%, but durations, now standing at 170 days, are lengthening regularly.
Gaining ground
Having solved its finance problems thanks to the IFC and bond issues on the domestic market, Russky Standart has been rapidly rolling out its products. It has $570m in outstanding credits and is moving into the regions.
While most banks are offering some form of consumer credit to retail clients, the only serious competition Russky Standart faces is from Rosbank/1st OVK and the new player on the market, Czech company Home Credit, which between them dominate most of the other half of the market share.
Home Credit has already outgrown its home market of 10 million and has come to Russia in the hope of carving out a piece of its 146-million-strong pie. From a standing start in 2003, it has rapidly moved in on Russky Standart business, providing cheaper loans and in March arranging a Rbs5bn ($166m) credit line over three years from ING to further boost loans.
Thanks to Russia’s growing income levels, banking interests have already shifted from the super-wealthy to the largely virgin regional markets.
Russky Standart already has tie-ups with retailers in 15 regions and plans to open another 50 representative offices in new cities this year: Moscow’s share of the bank’s profits has already fallen to less than 30%, according to Russky Standart’s CEO, Dmitry Levin, with St Petersburg accounting for another 10% and the regions making up the rest.
“The growth of retail business in the regions is an ongoing process,” he says. “We are not linked to the expansion of particular retailers because as soon as we open a regional office, we start cooperation with all the local retailers.”
The ‘killer application’
In addition to its core product of loans to pay for consumer durables, Russky Standart has introduced several other types, such as car loans.
But credit cards are quickly becoming Russia’s new “killer application.” Card issues have ballooned in Russia as banks try to rope in retail customers, but the vast majority are debit cards. Over the last four years, the number of cards issued has tripled to 23.9 million and the volume of transactions have grown five-fold. But the average cardholder (94 out of 100 received their cards from their company’s banks) only uses the card about twice a month.
Of all these cards, only 200,000 are true credit cards. This figure is expected to soar as consumer credit specialists and burgeoning retail bankers turn their attentions to what should be a huge market but at this moment is virtually untouched.
Russky Standart has been planning to switch to the more sustainable credit card business from the beginning and has already offered credit cards to the 200,000 best customers in its 2.5-million-strong customer database.
US competition
While Russky Standart is choosing its customers carefully on the basis of their still-very-short credit histories, Delta Bank, set up with the aid of US government money, has plunged in feet first.
In November 2002 it launched its Visa Instant card. Originally designed by Visa International as a sort of gift certificate, the card is cheap to make as its credit is limited, can be used immediately and given to anyone. Delta is using the cards to rope in customers looking for quick and easy consumer loans.
“It is a unique product,” says Kirill Dmitriev, deputy chairman of Delta Bank. “Unlike normal credit cards, it takes only 15 minutes to get one and can be used right away. Our problem was how to get into what should be a large market without spending the money to build a large branch network. The idea is to go directly to the retail outlets and offer credit cards immediately.”
Credit limit
Card limit is determined by customers’ answers in an extensive questionnaire. As Russians are still not accustomed to credit, they happily provide detailed information about their incomes and possessions, making it easier to score them. The card’s numbers are not embossed and this simplifies processing applications and cuts the issuing costs to one-quarter that of normal credit cards.
Delta cards note cardholders’ passport details and photos. It can be used at any outlet at which a physical card reader exists (but without numbers, it cannot be used to buy products over the phone or online). Credit limits range from $250 to $3000, averaging at $1500.
“There was a fear that no one would pay the credits back or that criminal groups would start busing pensioners in from the countryside to get cards, but it hasn’t happened,” Mr Dmitriev says. “Our delinquency rate is only 3%, a low rate even by Western standards.”
Banking innovations
Russia is becoming a test bed of innovative banking ideas. For instance, Delta and some regional banks are encouraging cautious Russians by providing mobile phone messaging, which sends SMS alerts whenever transactions occur. Customers are reassured to know exactly when and how much is deducted from their accounts at all times.
Delta’s ultimate goal is to build up the business while the going is still easy, then sell it off in a few years to strategic Russian or foreign investors. With one-quarter of the market, it has already issued 60,000 cards and recently scored a coup over its rivals in M-Video’s Garden Ring store by getting the retailer to agree to a co-branded card.
“The market is still wide open, and the first mover advantage is still up for grabs,” Mr Dmitriev says. “We are betting that in the long run, the credit card will be a stronger product than instalment loans. Now we have started co-branding, it will be more difficult to replace us.”
