Alexander Emeshev: "I have instructions on how NOT to open a neobank"
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Alexander Emeshev: "I have instructions on how NOT to open a neobank"

Alexander Emeshev, co-founder of Vivid Money, spoke to Digital Donut expert Ainur Temirkhankhazy about the experience of opening a neobank in Europe - the ambition required, the financial injections and the potential pitfalls.

Vivid Money is a Berlin-based neobank with 500,000 customers. It is a one-stop financial app that offers basic financial management services as well as the ability to invest in stocks and cryptocurrency. The company currently operates in four countries - Germany, France, Italy and Spain - and has raised a total of more than €200,000,000 from investors.

Your bank appeared in 2019. Are there any advantages and differences in operating in the European market compared to the Russian and Kazakh systems? If so, how and in what way?

It all depends on whether you have a licence or not. If you do not have a licence, you are not directly a supervised company. Indirectly, yes, because if you work with a (non-licensed) partner, in most cases your supervisor is your partner bank. Indirectly, you are also regulated, but it is a completely different type of supervision.

The European market is very convenient: once you are licensed in one country, you can provide services throughout the region. That is a huge advantage. But there are nuances - each European country has its own rules for getting a licence - there are its own financial regulators, general rules. All of this affects the processes - from onboarding new clients to marketing and servicing the products.

The important thing is to have a license. If a neobank does not have its own licence, it is not directly supervised. In most cases the regulator is the partner bank. For example, we are based in Germany but we got into France, Spain and Italy quite quickly because we already had credibility. In each individual country, we studied the tax legislation, the legal peculiarities and the regulators' requirements.

The first step was to study and analyse the market. This may seem like an obvious step, but it is one that is often overlooked in practice. A simple example. In Western Europe, banks do not play a significant role in people's lives. The attitude towards them is the same as in Kazakhstan with regard to telecommunications. Why is that? Basic consumer needs are met by a bank without a customer - automatically. In Kazakhstan, we use the bank app all the time: to pay for utilities, mobile communications, education, to pay off loans, to make transfers, to use a QR code in a shop, and so on. In Europe, the customer opens a bank account when he wants to pay something (taxes, utility bills, insurance, etc.), gives the account number, and the companies or government agencies debit the necessary amounts themselves.

In the West, banks are perceived as Russia's and Kazakhstan's telecoms. Few people go to the helpdesk with questions, let alone call.

Another difference is the careful and even strict handling of personal data. But there are two sides to this coin: on the one hand, the rights of citizens are protected as much as possible, and on the other hand, statistics from the last five years show losses in digital positions. After all, all advanced products are based on personal data. More labour-intensive methods must be used to process information. That is why China and the CIS countries are leading the way, they have a different approach.

You mentioned the issue of licences, can you tell us more about the difference between running a licensed bank and an unlicensed bank, and how much of a budget to expect?

The availability of a licence has a direct impact on the budget that is set when you open a bank. There are small banks that start with a minimum of one million dollars and a maximum of ten million dollars and still do well. Yes, most of them are not very profitable. But they have such a small gap between income and expenses that they can close it and become profitable on a small scale.

If we're talking about a big business, it's a licence and tens of millions of dollars for a team, marketing and customer acquisition. Capital is needed both to meet standards and to build a team (from CEO to COO). These figures include building from scratch. Having existing software to start with would be a big plus. A less obvious but important part of the cost of setting up a new bank is marketing. The existence of a neobank requires customers, and that automatically means a budget to attract and retain them.

It is not necessary to cover everything from the outset. It is complicated and financially unprofitable. It is possible to obtain a licence for one of the activities and then gradually expand it.

In the past, many banking licences have been issued in Lithuania. For example, Revolut Bank got its licence there. It allowed to issue and open accounts and cards, make transfers, payments and loans, but did not give the right to carry out brokerage activities, which required a separate licence.

Big money at launch was no guarantee of success. Vivid raised more than €200,000,000 in total and invested a significant proportion of the money in working with a partner, obtaining its own licence and launching a large number of products.

Artem Yamanov and Alexander Emeshev co-found universal financial app Vivid Money

Tell us more about Vivid Money's path.

We decided to follow two paths in parallel - working with partners and waiting for licences for different types of business: brokerage services, cryptocurrency and so on. Currently, we have licences in Italy for crypto services and in the Netherlands for stock exchange and investment services.

Licences in Holland, Germany, France or Austria also have a psychological aspect because of their excellent reputation. Working with German partners has given us a certain credibility among Europeans. Many people think that a German company is reliable.

We had to write the software from scratch. Although Artem and I had worked at Tinkoff before, and in theory we could agree to use certain developments, it seemed pointless to us. Tinkoff's software is not packaged, it is written for itself and it is simply impossible to get anything out of it. Besides, we should not forget that in Europe the regulatory environment and the law on storing personal data are completely different. So everything was written from scratch. And that is not a bad thing - there is a motivated technical team, there is no legacy code, you can take the best and create your own unique software.

Now, three years and hundreds of rakes later, I would give myself and others one piece of advice - wait six months to a year, get your own licence and launch the product with a small team.

Why don't you believe in long-term partnerships?

On the one hand, the market is mature and there are a large number of financiers willing to provide immediate product launch opportunities. On the other hand, the product is hampered by the limitations of the partner. And this affects the speed of development and response, the flexibility of the products being launched and the realities of the market. And, of course, the partnership is an additional cost.

In any case, we have managed to do the most important thing: we have built our processes and stuck to our own business logic. Processing, trading platform, quality control and product flexibility are all in our hands.

What else do we need to guard against?

Last year was difficult and we made a lot of avoidable mistakes. One of them was that we were overconfident. That confidence was instilled in us by the market itself. Remember, in 2019, 2020 and 2021, it was much easier to raise money from investors, and we invested in development and showed fantastic speed in getting products to market. We were releasing two new features a week. But was it really necessary? Surprisingly, we launched too early. The product was good, just not at the right time - without the right audience. We were doing things that companies 5-6-7 years old should be doing. When they have a large customer base and the products are paying off. Some of our products were not paying off. Of course, we expected that we would reach a million and everything would be fine. But the market changed, so it didn't work, we had to readjust.

Tell us about your growth and attracting investment. What stages have you been through, and what is important to consider at each stage?

I am not an expert, but I will share my own experience. The standard progression is seed, pre-seed rounds, Series A, B and so on.

We came at a time when even at the seed round stage, investments were not in the hundreds of thousands of euros, but in the millions. And often in companies that did not yet exist on the market, sometimes even without a finished product. Now the market has changed, it has become more reasonable. The rounds amount to hundreds of thousands, millions and, very rarely, tens of millions of euros. There are also contributions to existing products. The company may not be on the market, but the most important factors are taken into account. These are the finished product, the established team and the readiness to launch.

In the first stage, investors look at the team and the founders - how good they are. People are the only understandable component at this stage. It is important for investors to understand whether the team can be relied upon, whether they will solve problems when they arise and how reliable the people are.

The next stage is Series A. There is already a product-market fit, traction is visible and there are customers who are really interested in the experience of using the product. At this stage, the track record, the product itself and early numbers are important to investors.

The Series B round is for growth. There is both a product and a working business model. And investors see how scalable the model is and how fast it can grow. Measurable scalability is the company's ability to increase the number of customers. It's easy to get 5,000 customers, but two million takes some serious work.

Series C rounds continue to raise money for growth. This is when some investors shift their focus from revenue growth to profit growth. The company may not be fully profitable yet, but there is a trend towards profitability in the not too distant future. And investors are funding customer acquisition so that the company can generate more profits in the long term.

At the beginning of 2022, when you announced the funding round, you announced a target of one million users. Now you have half a million customers. What is your target for customer acquisition in 2023?

We did not set such a target. We used to have one, but now we don't. It has to do with the global cycle. When the central bank started to raise interest rates, investors' money became more expensive. So investors are more cautious. We have changed our plans from customer growth to profitability growth. And the first step for us last year, as a not-for-profit company, was to spend as little as possible.

We have reduced the amount of cashback we give out, and we have deliberately closed a large number of accounts, cards and contracts with customers who were either inactive or not earning money. This process has now slowed down somewhat. But our goal today is not the number of customers, but the profitability of the customer portfolio.

How would you describe your customers? Why do they choose you?

In order to attract users, we have created a large number of different products. We have not just created a bank, we have created a lot of options for our customers: multi-currency, different accounts, issuing cards and so on. People come to us because they want to manage their money easily, but they cannot do that with their current bank. Some come for the cashback. Some, and this is the audience that is growing up now, are interested in cryptocurrency.

The core of our audience is people between 25 and 45 years old, tech-savvy, mostly urban, often salaried. As our product is a mobile app, our audience is "up to speed" with mobile apps.

You said last year that you were cutting back. What exactly did you optimise?

Marketing is always the first thing you cut. It's certainly not an instant process, it's a multi-step process. When it comes to acquiring customers, we count all the costs - both marketing and operational. Operational includes issuing the card, delivering it, maintaining it and so on.

We have also discontinued products that have not taken off. Some of them did not work because they were designed for a much larger audience than we had, and some of them because we were wrong in our bets.

Of course, we also had to say goodbye to people. There were a lot of losses in the move, we had to downsize the team, sometimes unnecessarily. For example, there were excellent developers from the closed project who did not want to move to the new project. At the moment, the process has more or less settled down. We have four main locations: Berlin, Amsterdam, Cyprus and Almaty (where the tech hub is located).

In terms of optimisation, how much does it cost per customer now?

How can I answer that, so as not to help those who will be reading (laughs, ed.)... When we focused on profitability, we cut costs as much as possible, so we have a low cost per customer - well below €50. It is important to us that new customers are as active as the ones we already have. That is why we have put a lot of effort into cross-selling. I think this is one of our strengths.

It is both marketing and product work. The more products you sell, the more money you make. It's a simple formula.

What other products would you like to offer? How do you want to make money?

Credit cards and other credit products. Also an investment business. We also launched Freelance Banking last August, which is a bank for freelancers. There are plans to expand that. The first pancake was a bit of a bump in the road, now we are working on our mistakes - there will be a lot of new things.

We plan to achieve operational profitability this year. A transactional business can work if there is an alternative strong business that draws in the others. For example, it could be an investment business. We started later than others and didn't choose the right setup, so we missed the big global hype. The same applies to cryptocurrency. We partly caught the wave, but then crypto fell and has not yet had time to rise. We believe it will come back in the long run, but you can't bet on it. That is why we are actively developing our commissions - both from banking and from subscriptions. When the market goes up, we will start to make money. But again, we're not just hoping for that. We have a lending business where we also want to make money. But it takes a long time to build up and there is a risk of burning through all the money if you are not careful.

What is special about Freelance Banking?

In our concept, it is a bank for people who have third-party projects or who have chosen freelancing as their main source of income. Freelance Banking is ideal for individuals. The customer has a need to separate business income and expenses from personal ones, and our app helps with that.

How do you see 2023 for traditional and neobanks?

More and more people will use mobile apps because it is convenient.

Investment in new technologies will become more cautious, both in traditional banks and in fintech. The latter have been divided into two camps since last year, with different paths and strategies. Those that had a profitable business model are investing more in growth. Those that have attracted a lot of investment but have not yet shown sustainable profitability, such as us and Revolut, are optimising costs and actively working on profitability.

I think we will see a lot of start-ups dying, which will lead to a lot of mergers and acquisitions. All this started last year. Penta was bought by the French, Kontist (the neobank for freelancers) was sold to the Danes. We have also done some partner deals. Unsuccessful companies will become part of more successful ones or die. All in all, this will free up the market and reduce the cost of attracting customers.

Big banks and their subsidiaries such as ING (Germany), BBVA, Orange Bank (France), Imagin Bank and Open Bank (Spain) are doing well, but independents and neobanks such as Revolut and N26 need to rebuild. We have been doing this carefully over the past year. It has taken a colossal effort, but now, from a cash position and generally - looking ahead - we feel great.

After interviewing Alexander about his experience with Vivid Money, we decided to make a short guide on how to create a neobank. Take advantage!

1. Choose a country in which to open a neobank and analyse the market - study all the regulations, market characteristics and development opportunities.

2. Decide whether you want to work in partnership or not. Choose your path - open a company in partnership with someone who already has a licence, or get a licence yourself. The second route is longer but better.

3. Clearly define your strategy, product and customer profile. Calculate the budget correctly and allocate it to the team, product and marketing. Set your own TOC and stick to it.

4. Use it if it is up to date, if not - write it from scratch. This way you don't limit your team and you can use best practices without any "buts".

5. Calculate and control your client's costs. Try not to go over budget.

6. Make the product profitable. Credit products, investments - you should have something in your arsenal that makes you profitable.

Ну а сейчас самое время пройти тест и понять, насколько вы финансово грамотные. Поехали!
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