Banking Sector : A New Business Model

1. Banking Sector: A New Business Model 23rd International Banking Congress

2. Current Challenges to Banking Industry ROEin Banking Sector, by region, % • Low rates translate into lower business profitability • ROE still remains appreciably below pre-crisis levels • Since 2010, the US lost 14% of their banks, the EU lost 11%, Russia – 16% • Investors’ trust in the banking sector is falling • Tighter regulation will multiply negative trends • Competition has been growing from non-financials: • Electronic startups industry had a turnover of $2.2bnin 2013 • Crowdfunding market was $5.1bn in 2013

3. Tighter Regulation for Banking “These new regulations will fundamentally change the way we get around them”.

4. A Requiem for Investment Banking? • Investment banks’ income has been falling for the 4th consecutive year at an accelerating pace (-9%yoyin 1Q2014). • UBS, Credit Suisse, RBS, Barclays make a quarter of their IB staff redundant. • Central Banks essentially assume the functions of commercial banks in this new environment • DeutscheBank – is the last non-American global investment bank. • The ‘globalization’ strategy has led to increased risks, as opposed to diversified risks, hence banks have been re-localizing. * Bulge Bracket – global investment banks

5. Banking Sector in Russia • Despite the rouble volatility and “clean-up” of the banking system, so far it has remained stable • However, as of end-2013 only state-owned banks managed to shrink their NPLs (from 4.4% to 3.6%) • Private banks and part foreign-owned banks have been less successful The Number of Credit Organizations by Specific NPLs, number of entities “The impression so far has been that the banking sector overall passes the stress tests, including the extreme case scenarios” Mr Alexei Simanovskiy 1st Deputy Governor of the Bank of Russia, April 2014 0% 0-2% 2-4% 4-6% 6-8% over 8%

6. Non-Banking Competition Bringing Pressure • PAYMENTS Numbers of mobile payments has been growing: • by 55% a year in banks, • by 92% a year in non-banks • FINANCING Retailers have been aggressively introducing their own plastic cards: • 1/3 of Starbucks revenue gets paid in via own loyalty cards • Google and Walmarthave introduced their plastic cards • ADVISORY Mobile Payments in the World, tn transactions Source: J'son& Partners

7. Non-Banking Competition in Russia Turnover of electronic payment systems (EPS) in 2013 stood at RUR2.4tn (27%yoy): • Bank terminals: RUR180bn. • Non-bank terminals: RUR910bn. Remote banking services– 35% of the turnover* • Electronic money– 18% • Payments by mobile operators – 1.5% EPS core business is still payment terminals…. …but growth is achieved through electronic money (43%yoy) Turnover of Electronic Payments in Russia, RUR tn Source: J'son& Partners *Mostly online banking

8. Sometimes Different Generations Speak Different Languages Generation X Generation Y Generation Z The newspaper says that starting from next week the post will stop delivering letters … What’s ‘post’? What’s a ‘newspaper’?

9. The World Becoming Digital • New Trend: less need to physically visit the bank • Banks launching new brands focusing on online services • By 2017 the number of online banking users will exceed 1 billion • The developed countries lead in online banking penetration • Russia has been catching up fast – 15 mln people have been banking via the Internet Online Bank Customers as a Share of Population Share of Online Bank Customers, by transaction in a month Sources: banki.ru; Markswebb Rank & Report Sources: banki.ru; statista.com

10. Tailoring of Banking Services – the needed next step or ‘a skimming strategy’? • While conventional banks are targeting an ‘average’ customer… • …the new banking outfits have been targeting select segments. • Example: mobile-only intermediary systems The American Simple.com, EuropeanHello Bank– over 100,000 customers The new generation is growing, and 75% of Generation Y(with only 34% of Generation X)choose mobile banking. What will Generation Z prefer?

11. Crowdsourcing in Banking: “We Are Smarter Than I Am” • New levels of feedback from clients and employees • Fulfilling the potential of social media as the driver of innovations • The format required for communication with Generation Y • “Idea Fairs” have been evolving as the standard tool in banking • UK: Barclays(YourBank), RBS (Ideas Bank) • Europe:Deutsche Bank (DriveDB), BancoSabadel(BS Idea) • US: Capital One (Development Center),Chase (Community Giving) • Russia: Sberbank (Sberbank-21),Alfa-Bank (Alfa-Idea) “Crowdsourcing is the new way of thinking. It’s about recognizing the complexity of the world exceeding the ability of any company to generate ideas ‘as a thing-in-itself’, in a self-contained mode”. François Pétavy, CEO eYeka