If application fails at 10, you lose a client

VTB Capital Investments CEO Vladimir Potapov on products, risks and investments
Retail investors are entering Russian stock market in huge numbers. Now there are more than 7,4 mln of them in total. It changes the market infrastructure significantly and makes brokers develop mobile services, among other things to take part in IPO and SPO. How brokers make money today, why they invest billions of rubles in IT-infrastructure and how they limit clients’ risks, Vladimir Potapov, VTB Capital Investments CEO told in his interview to the Kommersant.

— In 2020, the influx of funds from private investors into the Russian stock market accelerated. According to the Moscow Exchange, more than 7.4 million individuals have already opened accounts on it. Is the trend here to stay?

— The influx of funds is sure to continue. Today the share of investment products in the total amount of the nation’s savings has reached 18%. With low interest rates on deposits, the percentage will keep growing. The brokerage market as a whole is amounted to a bit more than 4 trillion rubles of individual account balances now. I suppose this number will double in 3 years. VTB Capital Investments has more than 1 million clients with brokerage accounts. The assets in them are estimated at around 1.2 trillion rubles. Since the beginning of the year the number has risen more than 1.5 times.

Major players managed to ensure a complete change in the clients’ way and ease acquisition of investment products, which drives growth. The clients’ way has become transparent; transactions are now made with a single click. Another important factor is personalization. Based on the customer data analysis, the “next best offer” is prepared, in other words, the product that suits the customer and their specific case best.

— Such an influx of retail investors is going to change the entire infrastructure of the market profoundly. Some say that in its current form it will fail, both in the technological aspect and in terms of the quantity of products. What do you think?

—We have enough products, and we should not forget that the stock market is global, and there is an opportunity to invest in foreign stocks and other financial instruments. We’re developing an open platform VTB My Investments, where a client can purchase a whole range of tools, both Russian and foreign.

—You mean foreign shares that are listed at St. Petersburg and Moscow stock exchanges?

—We provide both exchange-traded and OTC tools. The access to 33 exchanges around the world is granted. Although for unqualified investors only deals on Russian platforms are available.

- If not on brokerage commissions, how are you going to make profit?

- Let me explain to you the structure of our business model. It’s wrong to say that broker's only goal is to make the client trade as often as possible, if the client is focused on saving money, not on speculative income. The basic task is to ensure that the client invests successfully in accordance with the set goals. And for us, it’s a business that works on economies of scale. We builв a platform and invest a certain sum in it, business costs don’t grow proportionally to its volume.

The Advisory service is another source of extra profit. It provides clients with consultations on money management, which is often needed. We have also launched the roboadviser service in our mobile app: according to the client’s risk profile, it selects security portfolio and gives management recommendations. For now the service is free, but at some point we will start charging money for it, as is happening all over the world. Most likely, this will be a subscription model, when you pay 300 rubles and get a robot that accompanies you.

Also we have our income from margin lending, сommissions on short sales transactions and a percentage we earn on balance placing. Taking your fixed costs into consideration, trying to earn maximum from the client at a particular moment and make him trade a lot is not the task. The task is to make sure he uses the platform for successful and profitable investments.

- What revenue does this strategy generate? How much are you going to earn by the end of the year?

- VTB Capital Investments’ commission income has more than doubled in the first nine months of 2020, and reached a mark of 13.5 billion rubles.

- Do you invest much in IT, particularly in the mobile app?

- The app itself is an investment platform. The application should be convenient, work well and solve the client’s main task by helping them earn money through investing in accordance with the risks that they are ready to take. Our goal is to understand the client's risk profile and give them the product that meets their needs. This is what we invest billions of rubles in.

- A year?

- Our IT-development budget for 2020 is over 1 billion rubles. It covers not only mobile application maintenance and adding new functions. We also attach great importance to reliability of all trade systems and invest a lot in infrastructure development and server hardware.

There is a concept of “peak load”.

We understand that unlike any regular mobile bank, investors are likely to use a mobile application much longer and more often, as it’s a platform for trade, news, analytics, market studies and investment – all in one.

When do clients want to check the market? When it opens. So, if your app fails at 10 a.m., you lose your client. When some interesting news circulates through the market, or an interesting placement is held, and everyone wants to submit a bid, the load on a certain service in the app gets absolutely abnormal. Or, for example, if the system fails when you want to see your account balance, you see zeros there. It totally destroys the client service.

About 70% of our budget is invested in infrastructure and server development to secure the reliability of the service. The margin of safety is about 60-70% at the moment, so if another 600-700 thousand clients join us, the service won’t fail. We’ll be trying to increase this figure while introducing new products. For example, we are the first in Russia to launch participation in placement.

- Are you really the first?

- VTB My Investments app is the first in Russia to make it possible. There’s a difference between “a product” and “a tool”. For me buying something at shares placement is a tool, but the ability to systematically participate in new placements and buy anything I need with a single click at any time, is a product. In this sense, we were the first among our competitors to implement the product in a mobile application. And it skyrocketed — within a few days after the placement of Sovcomflot’s shares, we received about 40 thousand bids.

- How many investors participated in the placement of Aeroflot and Samolyot shares?

- We had over 6.1 thousand transactions with Aeroflot and about 4.76 thousand with Samolyot.

- Is it possible to participate in IPOs abroad via the app?

- We will add this feature by the end of the year. But I need make sure that our customers will be able to get good locations with a decent volume, at a reasonable price and without the requirement not to sell anything for a certain period of time. For example a client submits a $100 000 bid and gets shares for $3-5 thousand. This situation can be disappointing, but the result doesn’t depend on us. Now we speak not about the conventional placement, when the order book is collected manually, but about DOM, which is more transparent.

- How have clients’ stock market preferences altered this year? What do people invest in?

- Over the past nine months, we have seen a significant increase in foreign stocks (from 2.5% to 11%). The share of Russian stocks (from 18.2% to 19%) and mutual investment funds (from 1.4% to 2.6%) have also edged up. With low interest rates, more and more investors are willing to make their portfolios more risky. This leads to greater demand for structural products and increased share of stocks. We expect this trend to be long-lived, as well as the demand for foreign securities and the expansion of the geography of investments.

- A number of your competitors actively sell structural products to retail investors. You were late to start doing it. Why so?

-Under certain circumstances structural products can give you extra profit. But before adding something to the platform it’s crucial for me to understand whether the product meets ethical requirements. I don't see anything fundamentally wrong with structural products. Moreover, for some clients this can be a very interesting strategy. The question is what sum and what strategy we offer. Of course, we offer structural products, but they should not occupy the client's entire portfolio, it all depends on their risk profile.

- You define the client’s risk profile, thus limit their freedom?

- We do, and we do it profoundly. For instance, the adviser will not even suggest any shares to a conservative investor.

- However, at the beginning of the year, VTB announced a structural bonds program for 1 trillion rubles. How much was placed? For which strategies?

- It’s an open-ended framework program aimed at facilitating the implementation of individual releases for specific purposes. In total, since the beginning of the year, VTB has placed about 20.2 billion rubles of investment and structural bonds, 1.5 billion of which accounted for the last month. The range of ideas is pretty wide. It includes Russian and foreign stocks, currencies, commodities and instruments with credit risk of third-party issuers. Choice is predominantly determined by the market situation.

- Do you have a VTB Capital Pre-IPO in your range of funds? What are its assets? What are the issuers?

- It's an interesting story. The Pre-IPO Fund invests in successful quickly developing technology companies which intend to prepare an IPO or attract a strategic investor in the next 2-4 years. The Fund was established in April 2019. We have held two rounds of fundraising, and we are preparing to launch the third one in November. The size of the Fund can reach 10 billion rubles.

We have already made several deals, and the Fund has acquired stakes in some companies. These are small startups, but their revenue is from 1.5 to 3-4 billion rubles. In spite of the profit, but they are not ready for an IPO yet. It turned out that there are quite a lot of such companies in Russia, more than 500, by our estimates. Most of them are five or ten years old, so they have already reached the point where they need another massive cash injection to take the next step. On the other hand, we have clients willing to diversify their savings portfolio and invest in such projects unknown to general public. The average check in this Fund is around 7-10 million dollars. The Fund has got shares of 3 companies so far, but another additional issue is to be held before the end of the year.

- VTB Capital Investment is interested in real property (including warehousing) to pack into a CEIF for retail investors. Sberbank decided to create a separate management company for this domain. Will you do the same?

- I see no point in a separate management company. We have our team, the rental fund was launched, several transactions are in the pipeline. We will close them and make an extra emission.

- Is it the only fund?

- Rental fund is only one. There are also several commercial and residential real estate funds. One of them has seen a repayment recently.

- What’s the average net asset value of these funds? Are they all made only for qualified investors? What are the results of the fund that was terminated?

- Real estate funds are available to unqualified investors as well. For today the value of net assets in the rental fund is over 3 billion rubles, in the residential real estate fund - 2 billion rubles. To develop our range of commercial real estate funds, we plan to launch a product for qualified investors in the near future. The yield on current funds meets the level of clients’ expectations and substantially exceeds the deposit rate.

-The regulator suggests postponing the admission of foreign ETFs to the Russian market, allowing Russian counterparts to develop. The idea is clear, but it infringes the rights of investors. How to deal with this situation? What do brokers and managers say about the rules for ETFs?

- The exchange-traded mutual fund, which is being developed by Russian companies, is generally the same to ETF. The client won't see much of a difference. Security is the main issue. When you buy a Russian mutual fund, you understand from which management company you bought it and to whom to file complaints in case a problem occurs. I am for giving to ETFs the access to the Russian market, but they must fully comply with the requirements imposed on Russian mutual funds.

- I see it as another competition within the group, but this time not with the Bank, but with your management company. The same is going to happen later with the non-state pension fund when the third type of individual investment account is launched, isn't it?

- What's wrong with competition? I have never been afraid of it. Moreover, it is competition that helps us provide the customer with the best solution and product.
A new business format is being formed now. We are experiencing tremendous changes in terms of attractiveness of the investment product for the client, just the way it was in the evolution of retail or mobile communications sectors. Here you can try to save the old format, or you just think, what meets customers’ needs most. We see a transition from selling “from a truck” to civilized trade. People want to go to beautiful, convenient stores that offer fresh products at a reasonable price. Then these stores will compete with their own layout. Some companies will create a private label, as well as networks that previously competed with their own brands.

- Can the marketplace that is currently being implemented by Moscow exchange earn adequate money, especially considering that each financial group creates its own marketplace?

- Originally, any platform that has client data can be called a marketplace. Without customers marketplace just can’t operate. Everyone has been collecting data for a long time. But data means nothing without the product and the ability to work with it. Without this there’s no way you can make money from a database. We’ll continue to monitor the developments.

- Despite the wishes of various market participants and requests from retail clients, the Russian Forex market is underdeveloped, and soon there will be only three licensed companies left in the sector. What is necessary for its development? And is it easy to explain their losses to customers?

- We are developing VTB Capital Forex as one of the business branches, because we see demand for these services as well. However, growth rate of demand in this domain is well behind the one on securities market. Maybe the access to CFD instruments (Contract For Difference, a contract for the difference in asset prices at the time of conclusion and at its end - Kommersant) will give help it advance.

- You have a savings management service, joint with Yandex. Can you tell us about the results of this project?

- We’ve just launched it. We gave Yandex clients API access to our investment platform. We have created an additional channel for attracting customers through Yandex.Plus. So far it has provided us with 4 thousand customers with accounts of more than 200 million rubles, but it’s only the beginning. About 200 new customers arrive a day, and we expect these numbers to grow in the future. We are also exploring other opportunities.

- Today selling soft to professional participants of the market, so called WhiteLabel is advancing. For example, you can sell a trading mobile app to a small bank, but without the owner's logo. Are you interested?

- Brokerage is going through the digital transformation, and not all participants are able to pass it. Only a few will become a proper modern broker, as it requires a great amount of investment. We are open for cooperation and ready to provide access to our platform based on the WhiteLabel concept. We have even implemented a pilot project with Pochta-Bank: the client does not see that the brokerage services are provided by VTB, as they remain within the infrastructure of another bank.

- Are you planning to promote your platform abroad?

-We will develop an analogue of VTB My Investments platform in Germany, the country we have a licensed bank in. Last year we launched a robo-adviser VTB Invest within that platform. The client can get an increased deposit rate if a part of the money is invested. Next, we will be devloping a complete trading application. I hope by the middle of the next year we will release the product.

- Is its work, including attracting customer funds, affected by sanctions?

- No.

- Do you expect a big number of clients in Germany?

-The uniform European passport will help us attract clients from all over Europe. The bank already has 165 thousand customers with deposits of €3 billion.

- Do you think your mobile application is going to be better than the European counterparts?

- I don’t know why, but everybody tend to consider European applications to be better. But in fact, our country is one of the leaders in fintech. Various projects prove that.

Vladimir Potapov. Profile.

Vladimir Potapov was born in Moscow in October 1982. Graduated with honors from State University - Higher School of Economics and People's University of China in Beijing. Received an MBA from the Chicago Booth School of Business with honors.
Since 2003 Vladimir worked for Troika Dialog group of companies as a partner and the leading portfolio manager. In 2010 he joined the VTB Capital investment Management team as the global head of the portfolio investment business. In 2013 he started to rule the business, becoming the Chairman of the Board of Directors, the company’s CEO. Since 2018 Vladimir has been the head of VTB Bank's joint investment product platform, VTB Capital Investments.

VTB Capital Investment. Company profile.

VTB Capital Investment is a joint investment and product platform of VTB Bank. It includes several domains: management companies for Russian and international investors, brokerage services for retail and institutional investors and services for individuals in the Forex market. VTB My Investments represents 57 investment funds, including 9 exchange-traded ones.

The total volume of the clients’ assets exceeds 2.9 trillion rubles (37.4 billion dollars). The client base in all business areas exceeds 1.1 million of individuals and legal entities. The number of active users of the mobile app is about 500 thousand.
Interview by Polina Smorodskaya.