This interview originally appeared in the leading Czech daily, Mlada Fronta Dnes, on 4 March 2017.
Author: Zuzana Kubátová
Which of the territories where Home Credit operates is the most profitable today?
China made our biggest profits last year; it’s our biggest market and a very promising one. But we are not as dependent on China as we once were on Russia. For example, our business in India is growing so fast that it may be as big as China for us in five years. Vietnam, the Philippines and Indonesia, where we are already present, have big potential for us too.
60 percent of your Group’s profit comes from China now. Has the profit outweighed the money you had to invest in China?
Not yet. We have the quickest return on investment in Vietnam where our profitability is now covering the expansion and something is even left as dividends as well. We have earned more than we invested, whereas in China we are still putting money in. We are still growing there. However, this year we should cross the line in China where growth can be financed from profits, so there is no need to put money in anymore. And I think we can expect a dividend there within two years.
You started in one province in China; have you covered the whole country now?
We have more than 300 cities covered there – the entire territory; we are now increasing the density of our network. From 125,000 points of sale at the end of last year, we will have more than 200,000 this year.
What is the target status?
Nobody knows. We are testing selling loans through sales assistants in shops so we can do without our own employees. In addition, we are now capable of providing loans without any paper documents in China and some other Asian countries. Clients don’t have to complete or sign any forms – everything is sorted out using a tablet. The client has the contract and all the information in electronic form. Simplifying our products and selling them via retail partners will allow us to grow quickly in China and have 300,000 to 500,000 points of sale. We have yet to see how successful this is.
You lend people money to buy mainly mobiles in China. Do customers in various countries have different preferences?
We are focused more on electronics in China, whereas in Russia we sold more fur coat loans during the season – we cover more commodities there. As a result, we can also grow in Asia through expanding the range of goods.
You entered the US market last year, cooperating with Sprint, the fourth local mobile operator. Do you stand a chance of visibly penetrating the local market?
We were convinced we had one of the world’s best risk management systems for consumer financing, if not the best, and this was confirmed in the US. Sprint was evaluating customer risks using systems provided by the biggest players in risk management such as FAIR, ISAAC and EXPERIAN. When they migrated to our system it enabled them to improve the credit product without increasing the risk. As a result, their potential customer pool – the group to whom they can provide mobiles using loans – grew by as much as 15 percent. In effect, we enabled Sprint to add hundreds of thousands of clients a year while maintaining the same risk level. I consider that a success.
How will the collaboration with Sprint continue?
We are discussing the next phase now; we want to partner with them to issue a credit card that will bear both of our logos – Home Credit and Sprint. If we manage to do this credit card, we can make it among the top ten card issuers on the US market within several years.
Are you considering any additional markets?
Not at the moment. We want to focus on getting the most out of those territories where we are present. If we go for another country, it will be in Asia more likely than in the Americas. We are present in markets with 3.5 billion people today. The world is brimming with many attractive opportunities, but many companies went bankrupt because they were thinking too big and then were unable to manage their business. We don’t want to repeat that.
What is left of your activities in Russia, which used to be your key market, in the wake of the economic crisis?
The crisis forced us to find a much more efficient business model. Our monthly costs there were 2.3 billion roubles in 2012 whereas today it’s 1.3 billion. This is likely the target status. We may continue reducing the number of bank branches, but in turn we will invest in online services. The great news for me is that we started growing again in the second half of last year and we will accelerate the growth still further this year.
You and Petr Kellner have been generally retreating from Russia recently: you cut the credit business and got rid of the interests in the Eldorado retail chain and the Polymetal mining business. Do you not trust the Russian market anymore?
I think the Russian economy will not grow for some time; it will be stable with no major fluctuations. We see no reason to exit the Russian market. Sometimes, though, we get offers we cannot resist. Polymetal was primarily a financial investment for both of us. And Eldorado was a business that was personally fulfilling – we were happy to see where we were able to take it. In the past we had tried to buy the Russian market’s number one, M-Video, so we could merge it with Eldorado, but we didn’t succeed. Now it seems that Safmar will succeed, and that allowed them to offer us an attractive price for Eldorado.
Are you considering any new investments in Russia at all?
Petr Kellner and I have certainly not lost our love for the market. We are considering further acquisitions. We are still interested in the local retail sector.
The economic growth in China is slowing down. Are you concerned about it?
A few years ago, journalists often asked me if I was expecting the Chinese economy to plummet. I always said I was expecting a soft landing rather than plummeting. This is now being confirmed. Even though China is slowing down, it is still growing at a rate that Europe can only dream of, which is obviously the result of the demographic development in part. In addition, the Chinese have demonstrated that they can be very efficient in managing the economy.
President Zeman announced a big Chinese investment expansion in the Czech Republic, but only a few of the announced transactions have actually taken place to date. Do you think the importance of Chinese investments in the Czech Republic is overrated?
If you look at the size of the Chinese economy, it’s obvious that the Chinese investments abroad will become increasingly frequent. Chinese investors behave and will behave in a standard manner on international markets.
Some of the top Czech politicians are rather welcoming in relation to China – more than in relation to other countries that are commercially more important for the Czech Republic. Does Czech-Chinese business need greater political support than developing collaboration with other countries?
I think it is right to have cordial relations with China, as with any other country. The better the relationships, the better the business. In China, this is even more true than elsewhere.
You are talking like a diplomat, but be more specific: when the Czech Minister of Culture meets the Dalai Lama, who is an undesirable person for the Chinese government, can this impair your business in China?
If the relationships between our two countries deteriorated markedly, it would certainly not be good for business. But this applies to China in the same way as it does to any other country. Do you know why we love retail? It’s because what matters most in retail is whether you have a good product that people actually buy. If you have a bad product, political support can’t do much about it.
Home Credit includes Zonky, a P2P credit provider where “people lend to people” on an online platform that Zonky provides. What future do you see in such shared economy products? Can they start competing with the standard credit business one day?
We test innovations, as any market leader should. We believe P2P loans are a viable model so we encourage them. However, the world has yet to see a P2P loan facilitator that is profitable – assuming they stick strictly to the “by the people, for the people” lending model. Zonky can work well but it must get much bigger than it is today. So far, it has facilitated loans worth CZK 500 million and we want to triple that this year.
When do you think P2P loans will start making money for Home Credit?
How successful Zonky is will be apparent in about two years. We think we can realistically expect it to start making a profit sometime around 2019–2020.
Will you expand it to other international markets too?
We use the Czech Republic as a test lab, but we are looking at Asian countries. For Zonky to make sense in the Czech Republic, it needs a market share of about 10 percent in all cash loans, which is a lot. But I think that is possible over time. The advantage of large Asian countries is that a much lower market share is sufficient; that said, the expansion into Asia is also a matter of legislation. Our lawyers spent a relatively long time developing the system in the Czech Republic in order to protect the anonymity of the borrowers and offer comfort to investors. It is even more difficult in Asian economies, as they still don’t have some of the prerequisites in place.
Home Credit recently announced the founding of a venture capital fund that intends to invest in technologies. You have announced your first acquisition, Nymbus in the US, for the time being. How active will your fund be, and how strong is it in terms of capital?
It is a Home Credit fund so we will not invest in anything that would not create synergies with our own business. It won’t be the typical venture capital fund that would just look for suitable investments. We want to maximise the yield for the entire Home Credit Group. We want to support innovation to stay on the cutting edge of technology development. We choose our investments accordingly. To be specific, Nymbus is developing a new generation of software for US banks. We have an arrangement with them so they will incorporate our credit product solution in it. As a result, we can get closer to those smaller banks in the future.