MTS banks on fintech for future growth

By:
James Pearce
Published on:

Russian operator MTS plans to invest 10% of its capex in digital services, including fintech and banking. CFO Alexey Kornya tells GTB about these plans

Alexey Kornya is talking money. Though this is perhaps not a surprising discussion to be having with the CFO one of Russia’s leading telecoms operators, MTS, it is not the financial situation at his company that he’s on about. Nor is it my finances – nor even his own.

Kornya is talking about banking in Russia, a market, he says, that MTS has identified as a key opportunity for its future growth strategy. Really, what he is discussing is diversification, but it all starts, and ends, with money. 

Overall, financials at MTS have been stable. In its Q2 2017 results, released in August, overall group revenue was flat at 106 billion roubles ($1.8 billion), up 0.7% year on year. There were more positive signs when it comes to operating profit, however, which was up 16.4% on 2016 to 23.9 billion roubles ($395 million).

Though part of this is undoubtedly linked to a stabilising of the Russian economy, it gives MTS scope to explore new sectors, Kornya says, most notably fintech.

“When we disclosed full year results we carried out a refresh of our strategy,” he tells me as we meet in the restaurant of a London hotel. “We took on a threefold strategy: data, which relates to our core business; differentiation/digitalisation – transforming the company into the new world of digital. What it means is going into new products, new services and new value propositions for the customers. You need to have more products and offer them more. And, finally, dividends.”

The most dynamic one of these three, he adds, is digital, which includes fintech. MTS already has “a minority stake in a bank, but with our controlling shareholder we hold 100% of the bank”, but it is looking at ways of developing this market.

The stake in MTS Bank isn’t new – MTS first ventured into the financial services sector five years ago – but the crisis in the Ukraine and troubles in the Russian economy have slowed progress. This year, he claims, it will “see good development”, with Kornya expecting to see “some income”. The bank now contributes around 500 million roubles ($9 million) to MTS’s net profits, with more than three million debit and credit cards issued.


Money wallet

It recently launched its Money Wallet app, allowing users to make payments and contactless payments using a bank card issued by any Russian bank, or a pre-paid card.

“Right now we have both traditional banking customers – between 1 and 2 million customers – but then you look at those customers using our fintech services,” he adds. “We’re developing products within MTS such as payments – we already have around 8 million customers using this kind of product.”

So what is the goal? Kornya says the market will see MTS develop “mutual products together with the bank, which we expect to be successful” as the telco takes the former Moscow Bank for Reconstruction and Development (MBRD) into a digital future.

“This type of digital player is already on the market but there are other examples,” he explains. “We are trying to become a different type of bank which includes all of the benefits of being part of a telecoms group. In the consumer banks, in the future, I think banks will merge with telecoms groups. We want to get our fair share of that.”

This type of digital overhaul takes investment. Kornya tells me that MTS has increased its capex budget for digital services significantly this year, with around 10% of its overall 75 billion rouble ($1.3 billion) investment fund earmarked for fintech and digital services.

“We have intentionally moved our investment top down into new products and services. This year we wanted there to be a higher share going into new products with new ideas. That also relates to non-organic growth.”

So, does that include acquisitions, I ask. He nods and points to two investments: MTS recently announced an investment in retail software developer Oblachny Retail, operating under its trademark name LiteBox, priced at 620 million roubles ($10.6 million) for a 50.8% stake. He also points to a deal for a 30% stake in Sistema Capital, a large Russian asset management firm.

The latter deal, valued at 356 million roubles, gives MTS a blocking stake and means it can “enrich its portfolio with contemporary investment products” it said when the deal was announced in September.


IoT and cloud 

The LiteBox deal, he explains, is part of another key aspect of MTS’s digital strategy – IoT and cloud services. He claims the Russian operator has been “very successful” in launching cloud products into the Russian market, citing British American Tobacco as one tender it has already won.

On LiteBox, which does cloud solutions for point-of-sale retailers, he says it means retailers “can stop counting in stores”. 

He explains: “If you go outside of Moscow, there are many shops that don’t have stock counting systems or are closely managing their margins. It is a very simple business model and we are substantially simplifying this for them through this new product.

“We think it is very complementary to our overall strategy but it is also a very fast growing market and an interesting product in itself. So we will keep on developing technology or buying it in this space.”

All of this diversity comes at a time when MTS’s rivals in Russia are also broadening their portfolios. Take VEON, for example, which rebranded from VimpelCom in order to position itself as a digital service provider instead of a telco.

This approach – building a comprehensive solution in which users can access a range of digital services – is not the route MTS plans to go down, Kornya tells me. Instead, he compares it to Facebook which, despite owning Instagram, continues to allow the photo-messaging app to operate independently.

“We have a different philosophy [to VEON] and we don’t want to put in place a full OTT solution. We have about 24 applications for different products and our ideology is that you don’t have to put in one solution for a value proposition. 

“If you need TV or cyber security you can have different applications. We are building it like bricks rather than building a comprehensive solution.”