On March 2, Ukrainian fintech product Koto was launched in the UK in beta mode. It is a banking application by Fintech Band, the team of PrivatBank ex-managers Oleh Horokhovskyi and Mykhailo Rohalskyi. In Ukraine, they are most famous for creating one of the fastest-growing investment banks, monobank.
Koto is Fintech Band’s first step beyond the Ukrainian border, driven by their global ambitions. In the interview with AIN.UA, Mykhailo Rohalskyi speaks about what it is like for Ukrainians to work in the British fintech market, what it is like for British people to work for Ukrainian money and under the management of Ukrainians, and what sort of thing is an English-style monobank.
On the creation of Koto
We have always been interested in trying our hands outside Ukraine. We view Fintech Band as a global company. I hope that Koto will be just the beginning of our journey to other markets out there.
We decided to begin with England for several reasons.
Firstly, language and culture. None of us speaks French, German, or Spanish well enough to try working in these countries. We understood that we must be able to speak the same language as the team.
The second reason: in our thinking, out of all European markets, the United Kingdom is the most “foregrounded.” Success in this market means much more further opportunities than success in the Spanish market, for instance. Without diminishing the significance of the Spanish market, we have to consider that most of the world press is English-language, most investment funds are situated in America and also speak English. All this creates some media buzz around the UK market. On succeeding there, it is much easier to find partners in other markets.
The third reason is regulation. On the one hand, in the UK everything is very strict with this, and they tend to regulate such aspects of the business which we couldn’t have thought of in Ukraine. At the same time, there is an opportunity for such companies as ours to obtain a license in a simplified way.
Whereas in Ukraine, for starting monobank we, by all means, needed a partnering bank whose license we would work under, in the UK we just got our own license for crediting activities. It does not allow us to collect deposits, but at the same time allows to work with credits without the involvement of a partnering bank.
So, what is Koto?
Our license does not allow us to call ourselves a bank; it is not a banking license. We cannot call our product an overdraft, because overdraft is a quality of a current account, and it is just banks that can open current accounts. However, we can call ourselves a banking app.
The positioning of our product in the United Kingdom differs from that in Ukraine. Whereas in Ukraine monobank is a full-fledged bank that can cover almost all your financial needs, in the UK, we focus on lending.
Koto is a banking application that allows access to simple and straightforward credit products for those British people who are often unable to get them from traditional banks.
The so-called thin credit profile clients (who did not use credit products ever before, or have just recently moved to the country, or have no credit history, due to their age) are typically refused a loan in the traditional banks. That is why they have to resort to the services of non-banking creditors; this is quite a large market in Britain. This is just what we aim for.
On the UK lending market
All the UK lending market can be broadly divided into three sections.
The first is prime loans. They are provided by large banks. These are credit cards with an interest rate of about 18% per annum. This segment accounts for nearly one-third of all the market.
Just 30% of the British can get a credit card from a bank.
The opposite segment is the sub-prime market. These are loans at the interest rate of 1000% per annum, the very “money till payday” they give you back home at markets and around metro stations. This segment accounts for another third of Britain’s credit market.
And in the middle, there is the near-prime segment. This is where clients with no credit history fall into, as well as those who have had problems with paying back loans, or other reasons for large banks to consider them not reliable enough and grant them no credit.
There are two big players in this market. These are the banks NewDay and Vanquis. There are also different companies providing loans, but everything is not very concentrated there, meaning there are no big players yet.
Koto’s unique selling points
We will compete on technological efficiency.
NewDay and Vanquis have no local branches and provide services remotely as well, however, they were created about 15 years ago, and since then their processes have remained almost unchanged. To their credit, they have built up large businesses. For example, Vanquis Bank has recently cost $5 billion; although they are experiencing problems now, and their capitalization has shrunk fivefold. Still, they have almost 2 million clients.
They are still soliciting customers in traditional ways – via email, aggregator websites, etc. As for their technological efficiency, they already have a sizable legacy, and it is difficult for them to keep up with new players.
We will reduce this process down to just a smartphone, like in Ukraine. Thus, we will grant our clients easier access to credit, making it more stress-free by tossing in our cat, and by providing simpler and more straightforward terms without any hidden commissions. Our commissions will be fixed and easy to remember.
What sort of product is this?
This is an application; on installing, you register on the same principle as with monobank – fill in the form, add documents. But after that, owing to the difference in regulations, you don’t have to meet our representative in person or wait until he or she comes to your place; you get a virtual credit card right away, which you can add to Google Pay and go shopping with it.
We have two credit products linked to the card. One of the credit products is called Extra and is somewhat similar to overdraft, or if we talk in the Ukrainian context, credit limit. Meaning, you can go into the red on your credit card. Our limit is moderate – we offer up to £400 maximum.
This product is useful for cases where you have run a little short before payday, or where you have stepped out leaving cash behind. Such credit is ultra-short-term, and the interest is charged on a daily basis. In fact, your balance doesn’t matter – if you used more than 10 pounds, you pay 25 pence a day.
The second product is the installment plan. In Koto, it is very similar to how it works in monobank. You can choose the number of payments that you want your purchase to split into, and pay with your card. Alternatively, you can later pull out a transaction from your statement and transfer it to installments.
For using this product, we charge a fixed commission – you pay 10 pounds for every month of using the installment plan, regardless of the number of purchases. The limit is higher: up to £2000; the minimum purchase cost is £200.
On the difficulties with the launch
The main obstacle for us was obtaining the license. Initially, when we gathered the documents and the team, we presumed that we would get the license in between 3 and 6 months, but ultimately it took almost a year.
We were greatly hampered by Brexit. No one knows what’s coming next, so all companies that had been using a European license for working in the UK decided to get a local British license just in case. That is why the regulator was overloaded with huge numbers of applications, and our application was just lying there for three months, waiting to be appointed a case officer. Consequently, everything was progressing much slower than the legal advisors who run our registration had promised us.
On over-regulation in the United Kingdom
For instance, to get a license in the UK, we had to write so many internal policies! And that was mandatory. Social media policy, vacation policy: all that one would expect from large corporations only, the regulator demanded of us too.
The way our company is governed is very formalized as well. There are some obligatory functions which should be covered in a company; they can be performed by one and the same person.
When a person holds a position, he or she takes the relevant responsibility. For example, the preventing of money laundering. And if a money-laundering crime happens during their “duty call” and they do nothing about it, they will be criminally liable on equal terms with those who commit the crime, and they can go to jail.
It is possible that for the British as a society this could bear some disadvantages, but who am I to judge them? I live in a country having 14 times smaller GDP than theirs.
On the lender-borrower relationships
In Britain, the social convention is that regulations are more supportive of the borrower. The lender has fairly few tools to recover debt. As soon as the borrower runs into some difficulties in his or her life, the state takes their side – and the lender should “forgive them everything.”
In Britain, there are dedicated organizations a person can appeal to in case he or she owes money to a bank but cannot pay it back due to financial struggles. And if the person makes such an appeal, the bank no longer has a right to communicate with them concerning the debt; from then on, it should communicate with the organization’s mediator.
The mediator starts with examining the situation, and then says something like: “The debtor should have been paying you £200 a month; but they cannot pay that much, that is why they will be paying you £20 a month.” And you can do nothing about it.
On the one hand, this sounds good: a citizen, facing difficulties, is being protected from greedy rich corporations. But in effect, this leads to the situation where just a third of all Britons can obtain credit at a low-interest rate – the others have to take loans on oppressive terms. Because banks grant loans just to those they are sure about.
On the risks of money-lending business
Any lending is risky because it can always happen that you do not get the money back. But this is what business is about – whether or not you can identify clients whom you can provide with a loan.
Unlike in Ukraine, in Britain there are credit bureaus which aggregate customer data from a bunch of different sources: where they have lived, how often they have moved, etc. In order to get the information about a client from such a bureau, you need to obtain consent from the client themselves first. But after that, based on the received data, you can build credit models for the particular customer.
In the UK, we contracted a credit bureau called Experian. We received a large data package from them, which we can use for practicing our algorithms developed back in Ukraine. That is how we came up with models that are about 20% better than those Experian offers by default.
In the course of time, the longer we work in Britain, the more information about the clients and their behavior we can gather, to enhance our models accordingly.
Investments
At this point, we have not brought in outside investors, and have financed Koto at our own expense. It is not so capital-intensive yet, as to bring in investors.
As of today, we have invested nearly $3.5 million.
In the future, to grow and develop faster than organic growth allows, we understand that we will have to attract investment. First of all, as resources for lending – because it is a lending business. But also in equity – to invest more in the advertising and the team.
About the team
We have hired several people from Vanquis Bank. Owing to their work experience in this segment, they have helped us a lot with understanding the market and the regulation.
The London team is not very big. As we are approaching the launch, we begin to expand it. Now there are some 9 people working full-time, plus we hire part-time workers for certain positions.
The UK office is responsible for relations with regulators, product development, for all legal and operational issues. And in Ukraine our company Fintech Band makes the product itself and does the marketing.
Me and Dmytro [Dubilet – Ed.] were spending approximately 50% of the time in London, and 50%, in Ukraine, acting to build bridges between the Ukrainian and the British colleagues, helping them to communicate with each other. Now I am spending most of the time in London.
Dmytro Dubilet was the co-founder of Fintech Band and the projects monobank and Koto together with Horokhovskyi and Rohalsky. But in 2019, he has left the business and went into politics, becoming Minister of the Cabinet of Ministers. Currently, Dubilet implements IT solutions into the government’s practices modernizing outdated processes. He quit the projects monobank and Koto and, as of today, is in no way connected to them.
On Dubilet’s move into politics
It did not influence the launch plans in any way: everything is ready for the full-scale start by March 17. As for me personally, of course, I miss having such a partner and friend at meetings; we had worked together for quite a long time. But I understand his patriotic aspirations and know it was a difficult decision for him. My hat is off for him.
Dmytro decided to quit all the business projects, so as not to have any conflicts of interests and to be able to focus on performing his new role. He has sold his shares in mono and Koto to existing shareholders.
On the particular features of corporate culture in the UK
I must say that, unlike in Ukraine, all the candidates coming to the interview in Britain, were quite well-prepared. They knew about monobank, had seen it, and knew that we were a Ukrainian company. Maybe, some had been put off by the fact (those who did not show up to the interview).
I can speak not about corporate culture in general, but rather about what is happening here in Koto. And here, perhaps, the influence of the Ukrainian colleagues matters a lot, because I cannot see any visible differences. But as regards that which I see through our office windows, overlooking a pub – I can say that in any day, starting from as early as noon, there gathers a crowd of people outside. And on a Friday, starting from 5:00 pm, one gets the impression that all our building pours out towards this pub, and then stands on the street and drinks beer.
Visiting London’s business district on a Friday will help you realize that Ukrainians are actually a non-drinking nation.
On the promotion of Koto
Our story with monobank worked in a viral mode: at first, we did not buy any advertising whatsoever, everything just rushed along by itself. Then gradually we began to bring online advertising into play, and we had some experiments with offline advertising.
We really hope that in Britain we will manage to achieve a similar effect. But we are preparing for a situation where we would need to follow in the footsteps of traditional companies and would not be able to get the first clients without an advertising campaign.
On the regulation of advertising in the UK
In the UK, advertising is highly regulated, like anything, indeed. For example, we cannot advertise loans in such a way to produce the impression that we foster consumption through lending.
So you can’t say in an advertisement, for example, “Afford more!” or “Vacation on credit.” This can prompt a negative reaction from several regulators at once – the advertising regulator, the regulator responsible for financial institutes, etc.
Due to the latest innovations over the GDPR, we must ask for a client’s permission to communicate with them through any channel, even through an application. So, the identification in the app is not enough – aside from that, we must secure their permission, for example, to send marketing information in push notifications.
Differences between mono and Koto
In the UK, we work with Fedoriv Agency. For us, they conducted some research with different focus groups and came to the conclusion that the colors we use in Ukraine, in monobank, we cannot use here – because they are associated with credit companies disbursing onerous loans “till payday.” It is better to use more restrained colors.
Their second recommendation, that we have partially applied, is to make our cat a little bit friendlier. In Ukraine, when we were developing the cat’s personality, it called people “bipedal slaves.” In the UK, they would not get the humor, so the cat is rather a friend than a master.
And, of course, we have adapted the product. It differs quite significantly from monobank.
