Deposits, Credits, Communication
In the spring of 2016, a new type of financial organization appeared in Russia. Leto Bank, a VTB group company, was relaunched with the participation of Russian Post and took the name Post Bank. The plans include the creation of a large regional network that will make banking services available to small towns and villages. Dmitry Rudenko, President and Chairman of Post Bank’s Board of Directors, explained the logic of the highly ambitious project to BRICS Business Magazine.
To what extent does the name Post Bank reflect the essence of the project?
It is, of course, a true reflection, otherwise our bank would not have been called Post Bank. Looking at post office banks in other countries, that is what they are called as a rule. Sometimes they add another word, such as German Post Bank or Japanese Post Bank, but this does not change the essential character. There are rarer cases in which a post bank has a different name, Kiwibank in New Zealand, for example. However, this is probably something to do with local history.
In certain countries, the post office brand has clearly existed for hundreds of years. It is a very old form of service. Postal services (physical rather than electronic) are intuitively perceived as a large, reliable, and universally accessible part of the infrastructure. This is the first reason why we chose the post office. The second reason is a consequence of capital structure. The postal service, as with all other similar banks, is one of our shareholders. We could have thought up another name creatively, but it was a matter of expediency. We had to choose between launching a new brand and creating new content, or using the popularity of the Russian Post. We chose the second path.
From a global perspective, does the postal service itself provide the impetus for these types of initiatives?
Yes, it does. There are a number of ways in which a post bank can be created. The essence lies primarily in nothing more than providing bank services to the clientele. You and I go to the post office. We receive and send parcels, and carry out money transfers. We can pay certain utility bills (and this in itself is already a financial service), but we can’t open a deposit account or obtain credit, because in order to do so, the post office needs a banking license.
Clearly the solution is to obtain such a license – either in partnership by creating a completely new structure or by devolving the financial department from the post office.
Large-scale banks are now talking about reducing their networks, since they are inefficient and unprofitable. And this is true. In a classical and simple way, it would be impossible to cover all of Russia with a service like the post bank. However, the stars now have contrived to bring together a team that thinks technologically, and in categories which are not typical of classic banking but small retail outlets with a banking license. On the other hand, a post office management has appeared that understands the situation very well and wants to reform it, bring it into order, polish the brand, and improve its image
In those countries where the postal license allows for the creation of a large number of banking products, a new brand is sometimes created. So there is a postal service and financial services provided by it. They can be called a quasi-bank. In reality, it will be the same bank, just with a separate brand. This is not a common phenomenon, but it does happen.
The second alternative is a post office with a financial services department that has developed well but reached its celling. Then the post office can go the National Bank to obtain a license and transform the department into a separate bank, i.e. construct it from scratch. This method is the most common.
However, there is another alternative. The post office also realizes that the time has come to acquire additional revenue from the provision of banking services to its clients and thus starts looking for a partner. There are a number of ways of looking for a partner. Sometimes, this can be a joint venture with a banking group, as in our case. Sometimes, it can be another structure, a virtual joint venture. Russia has such ventures in other sectors, but there are many more in the world. This is actually outsourcing the bank license, services, and products while the brand and distribution remain with the postal service. In Brazil, for example, the local postal service maintained a partnership with Banco Bradesco for many years. At a later stage, a new tender was held and the current operator is Banco do Brasil. However, as I said before, this is a virtual JV, i.e. the provision of banking services under the postal service brand.
In our case, the Russian Post purchased half of the commercial bank from the BTV Group with real staff and finance. The bank is in equity, and if dividends are realized, it will receive them. This model provides the bank and the country as a whole with the only option for creating an operational and, moreover, effective bank. If you decide to apply for a banking license, construct an IT system, employ people, draft a strategy, develop products, and make mistakes during the first three years (banks do not make any profits from day one) without the requisite expertise, and then expand this system, then you should be aware that you will need 10 to 15 years to achieve a stable and profitable functionality.
That can be said for any business in principle. You cannot just invest money and start manufacturing excellent cars. You have to construct a factory, look for engineers, suppliers, do your marketing, and provide maintenance service. It takes years of work. The banking business is no less complicated. Thus, the most sensible thing to do is to find a strong partner with the needed expertise and attempt to create a synergy project in which the postal service’s client base, its network, and client loyalty are combined with technology, experience, and banking group brand loyalty. In recent years, this model of launching post banks has become the most popular in the world.
To what extent is this structure sustainable long-term? The provision of bank services to clients might come up against the problem that with the development of technology these client flows will be exhausted.
I am absolutely convinced that a system which retains a place for personal communication between the client and the employee is sustainable. Mankind has experimented many times in removing human contact in sales and services. This has never been completely successful.
Yes, this is perfectly applicable in routine micro-transactions (for example, in topping up your telephone balance). However, if I want to make a deposit, sometimes I want to see where I’m putting it. With three clicks on the Internet, I’ll get the job done quickly, but it doesn’t answer all my questions. Even as early as the 1970s, banks attempted to set up automated branches without any human staff. However, it turned out that these branches could not sell new services or products. On top of this, there is another specifically Russian factor. It is a huge country with many regions where there are absolutely no banks, just the post office. How can people there save money, pay for utilities, and receive their pension? The only bank that can offer them anything is the Post Bank. In my opinion, the future is the hybrid service model that is technological and mobile, but does not completely exclude live communication.
Now, a couple of words about “exhaustion”. Let’s look at global experience. In Japan, the post bank has been in operation for more than 140 years. Based on that logic, then, in the past 50 years, the client flow should have stopped completely. However, this has not happened. If we were to say that given time, the banks will no longer need a significant part of their infrastructure and physical departments, then this is more of a question about what the bank of the future will look like. This future will affect not only post banks.
In Russia, the post bank has been in the planning stage for 15 years, and the first branch will only open in March 2016. Why today? Is this really the most successful time to launch it?
The need to create the post bank was realized a long time ago. However, certain important features were missing. In my opinion, the postal service did not have a sufficiently competent or reasonable team that could focus upon this mission, define methods of implementing it, or, I feel, choose the best of these. There was no banking team which would have understood how tens of thousands of branches could be filled with the necessary operational products without going bankrupt and maintain control at the same time.
All the attempts I saw were reduced to the idea of replicating a commercial bank within the post office. In my opinion, this was a hiding into nothing. Large-scale banks are now talking about reducing their networks, since they are inefficient and unprofitable. And this is true. In a classical and simple way, it would be impossible to cover all of Russia with a service like the post bank. However, the stars now have contrived to bring together a team that thinks technologically, and in categories which are not typical of classic banking but small retail outlets with a banking license. On the other hand, a post office management has appeared that understands the situation very well and wants to reform it, bring it into order, polish the brand, and improve its image.
It’s true that the task seems unviable; and many people think it is unrealistic. The model is based on 15,000 post office branches, i.e. approximately 20,000 sales windows within them. We have to achieve this in the first three years, so we have to open 250 client centers per month. In April, we opened 250 and we’ll do the same in May. Two years ago, in the Leto Bank project, we were proud that we were opening a new branch every day over a period of one year. Now, we’re opening 250 every month. This means installation of technology, knowledge, and, of course, the ambitions and drive of the team. Our team is unique. I haven’t seen anything like it in the world
Are you sure that there is demand? Is it not falling? Have you jumped the gun, and are you too late?
I’m sure that we’re late. It could have been done more quickly, but we needed all the components in place. Demand in retail banking is the lifeblood. And while there is money, there will be demand. Our model needs to take into account the current demand, expand, and, if necessary, compress, something that is not easy to do without huge expenditure.
Which of the existing models of post banks do you feel is successful and worthy of imitation? To what extent is the Russian Post Bank recreating existing structures, and to what extent will it differ from foreign players?
Japan is an interesting case. Apart from being the biggest deposit bank in the world, it is also, from a conceptual point of view, very similar to us. Here, we have the same idea of the single front line – postal and banking services next to each other. The banking service is just delineated in a different color (in Japan, it’s green; ours is red) inside the postal line. They have the same idea of processing cash through ATMs. They have had recycling machines (with the function of a closed recycling function) for a long time, just like we do. We are not building cash desks in those client centers where bank staff operate. We don’t want to take on this ineffective cost burden. Machines don’t take vacations, don’t fall ill. They work constantly. The Japanese network is even similar in scale to ours – 24 000 points (over the next three years, the Post Bank plans to have 15.000 branches, and within eight years, all 42,000 post office branches will have varying forms of bank presence). In addition, there will be bank outlets without a post office, in the ex-Leto Bank client centers. Judging by size, the Japanese Post Bank is the most successful post office bank.
Our philosophies are similar. The only difference is that we offer credit products, while Japanese banks don’t. The rest is the same. The bank is oriented to providing the basic range of financial services for wide strata of society, the same limited range, and the similar front line. In both Japan and here, you can open a normal or savings account, debit card, or make a deposit.
And, in your case, clients can receive credit as well. Do you provide credit cards and cash credit?
Yes, both. We have all sorts of cards: with a small limit. We’ve just launched an interesting card with a 120-day grace period, and it’s selling very well. There’s another project connected with education credit. But this is more of an investment in financial awareness rather than business. People need to appreciate the idea that a good education costs money.
What existing models do you not like?
We looked at France and Germany, and in both places, the postal service is very influential, but there are questions. My opinion is that there is not a strong synergy between the two structures in France. The French post bank is an office surrounded by solid walls. People see a gray cabin with the words “bank”. In order to gain access, you have to register the day before by telephone or by Internet. So why does it have be located in the post office? They could rent any office. The profits aren’t very high.
It’s the same in Germany, by the way. Our colleagues who went there were left with the impression that the post office hoped that bank would work, and the bank hoped that the post office would work, and in turn the bank would sit there and take control. From a service point of view, it’s not the most convenient bank. We must not make the same mistake. Strong post banks have always paid a lot of attention to relations with post office staff in the branches. The viability of Post Bank as a project is linked to the extent of our success in terms of cooperation and motivation.
In Russia, there are more than 40,000 post office branches, and although the Post Bank has declared its intention to go to every branch, this task seems unviable due to the scale.
It’s true that the task seems unviable; and many people think it is unrealistic. The model is based on 15,000 post office branches, i.e. approximately 20,000 sales windows within them. We have to achieve this in the first three years, so we have to open 250 client centers per month. In April, we opened 250 and we’ll do the same in May. Two years ago, in the Leto Bank project, we were proud that we were opening a new branch every day over a period of one year. Now, we’re opening 250 every month. This means installation of technology, knowledge, and, of course, the ambitions and drive of the team. Our team is unique. I haven’t seen anything like it in the world.
When journalists ask about the volume of investments, first of all, I ask them to define what an investment is. How much will the state give? Nothing. And how much will VTB give? Half of the amount that the shareholders invest in capital. There is another question: How much will VTB give to fund the portfolio? Clearly, Post Bank needs to attract a specific volume of deposits in order to be able to fund its portfolio. It was assumed that some of the deposits to be placed in our portfolio will be borrowed at the commercial rate from VTB24, which operates in the premium segment and attracts large volumes of deposits
What will it be like in three years’ time? First of all, I think that the post office itself will reform its network. There’s a big project with Rostelecom underway to provide communications links in every office. There’s nothing to prevent us from expanding the network further, if the shareholders take such a decision. Secondly, there’s also the possibility of slightly lighter formats. For example, a post office employee who, in addition to postal products, might sell some of our products and accept and issue money. Most of these 20,000 windows are like that. It is a very effective format in terms of costs. What actually is our format? In essence, it consists of a post office employee who is ready to work with us, a software plug-in, and a POS terminal.
It sounds great in terms of costs, but, in real terms – do you know and understand the staff?
I think we understand them. There’s nothing difficult in that. Russian Post staff even now process utility payments, so they will open accounts and accept money in the same way. From a technological point of view, Russian Post Bank is an Internet or mobile bank, located in physical points where people can show their identity, sign contracts, or receive an electronic signature, for example. So, for clients who are used to personal contact with the bank, it is a face-to-face format.
Can you describe in more detail how the sales window with post office staff will look?
It is a small branch with one or two windows. They accept utility payments and letters, plus issue parcels and pensions. Now there will be a “Post Bank” sticker, a little flag with the words, “I work for Post Bank” and tariffs for two products. You can open a savings account or a deposit. If you need credit, you can submit an application, and the bank will get in touch with you and tell you how to fill it in.
It takes seven minutes to open an account. They will ask for your passport, and they will take a photograph of you. Then a card will be linked to the account, and it will be issued to you in situ. From that moment on, you can download an application and receive access to the entire product range of the bank. You can place money in the account, transfer your salary into it, pay utility bills, or withdraw money.
What does the most complicated branch look like?
This is the two-window client center. It has two bank staff and a recycling ATM. You can obtain all credit and deposit products, get insurance policies, legal services, acquire the “Plant a tree for a friend” product, and others. There will be 4,500 clients’ centers (windows) with this format.
The Russian Post’s reputation in cities with a population of over a million is not very good. How do you perceive this problem?
If the post departments were shining and equipped with the latest word in technology, I think the bank would already have been there. But a journey begins with a single step. We were aware of this perception when we chose the name. There was an opinion that we shouldn’t use the word “post”. As a result, we realized that people curse the postal service but know they can’t do without it. “Yes,” they said, “it’s not perfect, but it’s ours and that’s the way it is!” And that was great. We liked it. Post banks everywhere belong to the people. They are not sharks of capitalism. The second thing was that the management of the Russian Post is doing a lot to change its image, for example. by working on its logistics. A good indicator is the market growth of Internet parcels. People choose the post office when they make purchases in Internet shops.
With our banking history, we can help the post office modernize itself. Banks always keep up-to-date with technology. The same recycling machine lets clients not only receive money and make payments, but can also go for a long time without encashment. So there is practically no risk of equipment downtime. It’s grist to the mill for changing the image of the post office. The major banks and the airline companies have been along the same road.
What are your target indicators?
It is a preliminary model. Now, we’re working on the strategy up to the year 2023. When the main segments are defined and the profit pools specified, then we can talk about what we want to achieve. For this year, the aims are completely clear, and they look very ambitious. The shareholders have decided that it has to be profitable in the first year.
It’s understandable on the part of the shareholders.
I think we’ll do it. To our advantage the bank is extremely experienced. It has two million clients, and it makes a profit that is enough to support our development. So in anticipation of the question what investments we need: We don’t need any.
The project doesn’t assume any state investments at all. What is more, we have had quite a successful first quarter and we haven’t even asked for any additional capitalization. We have enough not only for development but for maintaining the capital, which makes the project fantastic. We’re planning an additional emission of five billion rubles this year, which will be purchased by the shareholders. However, it is needed only for maintaining standard requirements and not because we can’t feed ourselves. What we invest, we earn ourselves.
The second part of the story is what profit the bank needs to earn. I think that by 2023, 43 billion rubles per annum is a completely achievable indicator. The specificity of post banks is the so-called payment infrastructure, which the bank pays to the post office to be entitled to operate in its branches. The post office uses it to maintain the service, since in all countries, the post office is the infrastructural foundation of the country. There is a post office in every village. It is the state’s means of communicating with its citizens and the citizens’ way of communicating with each other.
In our case, this payment, confirmed by the government, will be 47 billion rubles over eight years. This is money that the bank must earn and then pay to the post office, and only then will it be profitable. And the profit will be divided between the shareholders. This year, we shall also pay an infrastructure payment, but, of course, it will be small.
How much does the VTB Group plan on investing?
Everything we are doing now is financed out of our own profit. Shareholders’ investments are exclusively in capital, which guarantees asset growth but does not cover costs. There is no secret here. Over a period of three years, both shareholders have been asked for 18 billion to 20 billion rubles for additional capitalization. It is assumed that, after three years, when the physical development of network is completed, the bank’s profit will also be sufficient for asset growth capital. We might even accomplish it sooner. While we planned for a loss, within the first four months of operation the bank’s has become profitable, and the difference is about one billion!
When journalists ask about the volume of investments, first of all, I ask them to define what an investment is. How much will the state give? Nothing. And how much will VTB give? Half of the amount that the shareholders invest in capital. There is another question: How much will VTB give to fund the portfolio? Clearly, Post Bank needs to attract a specific volume of deposits in order to be able to fund its portfolio. It was assumed that some of the deposits to be placed in our portfolio will be borrowed at the commercial rate from VTB24, which operates in the premium segment and attracts large volumes of deposits.
What potholes and traps do you see along the way?
There may initially be problems with the communications infrastructure, but we are working well with the postal service, and all the problems are being resolved by Rostelecom. The main challenge for Post Bank is to develop real partnership relations with the Russian Post. If its staff (particularly the line staff) begin to perceive us as yet another commercial bank or say, “This is another burden which I don’t need,” then the project is doomed. They must feel the mutual relationship between the sale of bank products and their income.
We have already discussed and operationally examined the innovative incentive system where the staff can see online how much they are earning from every transaction. We hope that Russian Post staff will themselves become our first clients. Of course, during the first years, we will be more actively reliant on banking personnel. In the business plan, most of the load has been put upon them. However, if at the moment we have 8,000 vendors, then why can’t we manage another 15,000 staff in the same profile?
Can you describe the reality of the Russian rural areas, those places where there is no banking service? Is it really needed there, and how will this reality change when you arrive?
I suggest you go beyond the paradigm that village dwellers are strangers to progress. We’ve already been down that path, they say. Who needs mobile communications and Internet there? Why try? So? They use Skype, they buy goods online (just because there’s nowhere else they can buy them. In a large town, you can go to the shopping center, while in the small towns, there’s not much choice). Therefore, there is a greater need for the provision of banking services than in the towns.
Will those client centers be super-profitable? Of course not, but our model prevents them from being super-costly. And we have to be there, otherwise we wouldn’t be a post bank. People in the depths of rural areas also want to save money, for a particular event, for example, or perhaps make a credit application. That is life. The post bank, like the post office, must be a natural part of human life. Then it will be a successful and large-scale project. There aren’t any small post banks, are there?