Ben Aris in Moscow -

Russia's express consumer lending business was launched by the "Vodka Bank" in 2001, and now the country's credit card business is being championed by what could be called the "Beer Bank."

Consumer lending in Russia exploded after the small start-up bank Russky Standart - better known for its premium vodka of the same name - introduced the concept of lending cash with no security at the point of sale. At the time the bank was thought to be a flash in the pan, but a decade later most of the incumbent banks in Russia are still struggling to catch up with Russky Standart.

Oleg Tinkoff hopes to pull off the same trick with credit cards. Best known for opening a now legendary bar-cum-microbrewery in his hometown of St Petersburg in 1998, Tinkoff is a serial entrepreneur and a string of pubs quickly grew into the fourth largest independent brewery in Russia with 1% of the market.

The company's flagship brand Tinkoff Zolotoe (a light beer in the style of Mexico's Corona) made Tinkoff a household name and he sold the business InBev for €167m in July 2005. Now he is hoping to do the same with finance, establishing Russia's first "virtual" bank that has no branches and specializes in credit cards.

Steady on its feet

Linking a bank to booze would be anathema in the West, but a study commissioned from consultants McKinsey by Russky Standart in its early days found that a bank tied to an alcoholic drink has a more stable image in Russia than those linked to oil or gas: energy prices are cyclical, but Russians believe people will always drink regardless of the state of the economy and so an "Alcobank" will never go bust.

Rising incomes and a return to economic growth, albeit it at a slower rate (pre-crisis, Russia's economy grew at 6-8%, but has slowed to an expected 3.5-4.0% for this year), have enabled consumers to start spending again - and borrowing. Consumer loan growth was white hot over the first half of this year, up 43% on year, according to the Central Bank of Russia (CBR) - but credit card growth is running even faster. Oliver Hughes, chairman of the management board of Tinkoff Credit Systems (TCS), tells bne in an interview that the company's credit card portfolio has doubled in size every year for the last three years. "And the overall Russian credit card market has grown by between 25% and 40% a year for the last two years - with no sign of slowing down," Hughes says.

TCS is not alone in the credit card space and faces competition from not only Russky Standart, but also other up-and-comers like Renaissance Credit (the retail arm of the eponymous investment bank), Trust Bank, Alfa Bank, Citibank and mobile phone retailer turned bank Svyaznoy Bank. But surprisingly, Hughes doesn't regard Sberbank, which recently started issuing cards and already accounts for one in five credit cards, as part of the competition yet. "Sberbank decided to launch credit cards about three years ago and now probably accounts for a fifth of credit cards in circulation. However, they have just built on their existing customer base. When it starts having to market to new customers, then its growth will slow down and we will be able to compete on the basis of better service and product," says Hughes. "Sberbank will become a major competitor - but not now as they are fishing in a different part of the pool."

Russia's credit card market remains underpenetrated. Hughes estimates there are a total of 15m-16m credit cards in circulation out of a total economically active population of about 90m to 100m, and TCS already is the biggest issuer after Sberbank with 2.3m cards.

From a similar start, Hungary's credit card penetration after five years was 20%, in Poland 30%, in Brazil 70% - all of which are still well off the mature market levels of penetration of 400% to 600% in Germany and the US respectively, says Hughes.

Small town business

TCS' strategy is unusual for two reasons: first, its offers and services are entirely online; second, it has adopted a "Moscow last" policy when it comes to finding customers.

Russia's capital is the largest city in Europe and its population is more than that of most Central European countries, but this means a lot of competition. After that, most companies focus on the "millionki", the 13 Russian regional capitals with populations of more than 1m people. However, TCS has explicitly ignored these markets and thanks to the internet has gone straight to the untilled markets of the smaller cities. "Some 61% of our customers are in towns of 200,000 people or less, and another 38% are in towns of less than 50,000 people," says Hughes. "We have only moved into Moscow and St Petersburg relatively recently, which now account for 8-9% of customers."

Russia's internet (known locally as RuNet) has exploded in recent years and at the start of September VTB Bank released a report saying that the broadband penetration rate has now reached 65% of the population. As a consequence, the volume of Russia's e-commerce transactions is at least doubling every year, but "banks have only started to tumble to the power of the internet now," says Hughes.

After five years of operation, TCS is now branching out and offering its customers more services. Following the 2008 crisis, the bank started taking deposits amongst other services. The next stage is to double equity to $400m-450m and then exit, possibly via an IPO, says Hughes. Tinkoff owns some 62% of the bank, with minority investors that include Goldman Sachs and Russia's biggest private equity investor Barings Vostok Capital Management holding the rest.