David Rafalovsky is CTO/CIO and Global Head of Operations and Technology at Sberbank Group and Executive Vice President at Sberbank, Russia’s largest bank, which has over 100 million active retail customers and some 14,000 branches in Russia. In 2020 Sberbank underwent a rebranding, changing its name to Sber, and expanded its mandate to include not just financial services but an ecosystem of diverse services to help its clients with their everyday lives. Rafalovsky leads Sber’s tech strategy and technology business, including the introduction of a modern digital platform, innovative cloud infrastructure architecture, an advanced enterprise analytics platform and smart consumer electronics built on natural language processing (NLP) algorithms and image/video recognition technologies.
Prior to joining Sber Rafalovsky served as CTO of Citi Global Functions – Compliance, AML, Risk & Finance, and HR platforms at Citibank, where he started his career as a Lead Corporate Payments Architect and worked his way up to executive positions. Ravalovsky recently spoke to The Innovator about the bank’s ecosystem tech strategy.
Q: Sber is more than a bank today – the company has significantly transformed technologically in recent years and developed its own ecosystem. Why did the bank decide to move in this direction?
DR: I need to give a little bit of history. Here you have this thoroughly successful Russian bank called Sberbank with a large client base of more than 100 million clients. If you do something successful in one country, it’s logical to expand internationally. So Sberbank launched banking services in other countries; then geopolitics changed dramatically a few years ago. So, a strategic question was asked: What do we do next? If you cannot expand globally, it’s logical to look at the domestic market, where Sberbank was already a dominant player. Depending on the product line, we have between 30% to 60% to 80% of the market. Growth in pure financial markets in Russia, although still interesting, will probably decelerate over time just as they have in Europe. Since there’s really no way to grow dramatically in the Russian market with pure financial services, we needed to do something else. So we adopted an ecosystem model. What does that mean? We want to give our customers services to satisfy their ultimate objectives, such as getting them into a new house. You are happy when you move into a new house. The fact that you needed some sort of financing, as a steppingstone towards that goal is irrelevant. Maybe you did, maybe you didn’t. But even if you did, do you know anybody who wakes up in the morning who says ‘woop dee doo, I have a mortgage?’ We want to give our customers ultimate happiness. Financing by itself rarely gives you that. Take my example of getting customers into a new house. Let’s say a customer needs to sell a house. We can help them with that. They need financing. We will be happy to give them a mortgage or a loan of any kind. They need help with moving, we can provide them with that. They need help with finding a new home, we have a service which will accomplish that. We are a commercial entity, so of course we want to earn a profit. But just as importantly, we have a client base who wants to be helped, from soup to nuts. That’s why we like the ecosystem model.
Q: What, for you, differentiates an ecosystem from a holding company?
DR: With a holding if you have enough capital, you can purchase random assets such as a newspaper, an airline and food delivery services but in between them, other than the fact that we are a common legal entity, there’s really nothing in common. We’re not interested in the holding business model. Why? Because we want to have a lot of commonality between assets, which we assembled to satisfy our customer needs. Probably the most prominent and the most significant common element is our technology platform. We operate in quite a few sectors, which some people would describe as random. I would postulate there’s nothing random about it, we do it because we have a customer in the middle of it. In my example of moving into a new house, we assemble enough services to satisfy their every need. Some of them are run by our partners, but we have the complete solution from beginning to end. We have selected important high growth areas of customer interactions and we assembled enough assets, either by building them ourselves or by investing in or partnering with existing services, to give this kind of end-to-end service to our customers.
Q: Would you describe Sber’s offering as a kind of super app?
DR: No, it’s a lot more than a super app. There are examples of super apps, primarily in Asia, where one application gives you access to many services. Instead, we prefer to offer multimodal interfaces to our customers. Imagine you are in your kitchen. When you are cooking, and your hands are dirty, you don’t want to use your phone or anything else with a touch interface, so in this case a voice interface makes sense. But a motion sensitive interface is more convenient when you host a party. Let’s say music is playing on your smart speaker and you want to lower the volume. What do we do today? We scream across the room but the smart speaker doesn’t hear because it’s too noisy. You know what would be convenient? Gesturing with your arms and miraculously the technology understands that you want to lower the sound. Our multimodal interface is sometimes a touch on your phone, sometimes it’s voice, sometimes gestures. We want to be next to you as our customer, not only in the circumstances where you’re holding a phone.
How do we package it for you as a consumer? We invested heavily in our own family of virtual assistants called Salute. We have three virtual assistants. Their voices have different cadences and genders. We did this because we have over 100 million clients and they have many different preferences. We want to surround our customers with our help and our services, regardless of where they are.
We even make smart consumer electronics. When you’re putting your small child to bed, it’s unlikely that you have a phone with you but there is probably a smart speaker in the room. And in your family room you probably have our smart display next to one of our smart TV sets. We want to always be able to offer our clients a convenient means of interacting.
Q: Once you come into your ecosystem through one of these virtual assistants, how do you keep the person there and let them know that you have all these other alternatives if you’re not going through just one app?
DR: Why do hundreds of millions of people use Amazon and subscribe to Amazon Prime? It’s convenient and because they trust the brand. Amazon may not always offer the cheapest price, but the customer knows they are not going to be ripped off, their order will be delivered on time and the customer service will be great. And people trust them. We looked at it from the same perspective. If I convince my customer to try the virtual assistant and trust Salute, everything else becomes very natural. ‘Salute, deliver food.’ ‘Salute, order me a taxi.’ ‘Salute I need financial advice. How should we invest?’ ‘Salute order my prescription to be delivered.’ ‘Salute play a video for me.’ We dropped the name bank from our name because now we are not just Sberbank we are SberHealth, SberCloud, SberDevices, and many other names. It just made sense to broaden our brand to be an umbrella brand for everything we do. We are lucky to have a very loyal, digitally trained client base. We have over 100 million customers and 72 million use our digital channel every single month. It’s a very significant percentage of Russia’s population. We have a huge branch network, but our customers are trained to use our digital channels.
Q: How has this impacted your branches?
DR: We don’t think of ourselves as a bank anymore but more as a technology company. People can still come to our branches to do financial transactions, but most come for other reasons. They come to look at new home electronics devices, either ours or our partners. They can come in to either send or receive packages because we offer logistics services, including for our own set of e-commerce offerings. They’ll come in to do many other things, including having a cup of very good coffee. Our whole notion of a branch changed. We’re very happy to see how accessible and popular the new branch format has become.
Q: Why did you decide to build your own technology platform?
DR: We are not only using technology and creating sophisticated products using the technology platforms, Sber is the platform creator. So the vast majority of things we build is, in fact, underpinned by our technology platform. It’s called Platform V. V stands for speed because that’s really what the modern world of technology is all about, speed. Speed is needed to invent new products, try them out, bring it to the client base, decide what is successful or not, scaling up or – if the idea was not successful – killing it and trying something else. So, we’re very proud of platform V. We also have an independent business, SberCloud, which is like Amazon AWS or Microsoft Azure for Russian market. We’re unusual in that we are a significant user of technology and a provider of technology services and we’re also a creator of the platform we use.
Q: What are the pros and cons of building your own digital platform?
The investment needed to build your own platform is very significant. That’s why a vast majority of businesses don’t build their own platform, they use somebody else’s. And there’s no shame in that. That’s a very sound business decision because there are some great platforms out there, such as Amazon’s and Microsoft’s. We decided to build our own platform precisely because the circumstances of our business are so unusual. We’re building very different businesses on top of the same consistent platform and a unique set of engineering is required to do that successfully. I wouldn’t recommend it for the faint of heart or for anyone who doesn’t need to do this, but that’s the path we decided to take.
Q: Are you able to put any kind of figures on this?
DR: The creation of the platform requires a multi-year effort and tens of billions of dollars of investment, but the result is a good return. Let’s take the example of AI. We use it in every single product Sber offers. Sber was working on AI long before it was sexy and a mandatory part of every conversation. In 2021 we are projecting about 200 billion rubles of operating income from AI; this equals about $2.7 billion. We have become a recognized leader in AI and organize what has become one of the largest AI conferences in the world – AI Journey. This year more than 52,000 people from over 120 countries registered for the conference.
Q: Are all of the ecosystem’s new services profitable?
DR: It depends on the service. Every product, every service has its own life cycle. Some of them are more mature and profitable, others are in the early stages of their maturity, and we are investing heavily in customer acquisition and growth. So it depends on the product itself. I remind everyone how many years Amazon was not profitable. It’s an important message to every executive who asks the question ‘Are you going to be profitable tomorrow?’
Q: Sber has undergone a radical transformation. What have you found to be the most challenging?
DR: We’re still changing. It’s still a work in progress, but we managed, within the span off about five, maybe six years, to dramatically change from pure banking to the ecosystem business model. The key was that we decided who we wanted to be. We are not the Amazon of Russia. You cannot be the Amazon or the Apple of something else. We had to find for ourselves what it means to be Sber. We decided being a holding company was not for us. For others joining somebody else’s ecosystem is the way to go, some people will be very successful doing that, or as successful as that can be. We decided against that. So you have to find your way. I can tell you the common denominator across all of these decisions is you need to have a level of talent to evaluate your options and build whatever it is you’re building. It’s probably the most difficult challenge. That’s really what will determine if your company will be successful or not. Whether you have money or not to invest won’t matter. Most companies figure out an investment strategy one way or another, with different different degrees of difficulty, but if you don’t have the talent to deliver this for you that’s a problem. That’s where we’re all in the same boat. We’re all fighting for the talent that can make us more successful and make our customers happy, but if you have a clearer vision of who you are and where you’re going, it is easier to attract good people.
Q: What advice would give to companies who are thinking about moving towards a platform business model?
DR: It’s always difficult to be self critical, especially in the banking industry, which historically was not only successful but highly lucrative. What’s happening in Europe right now is a painful sign that the degree of profitability expected from this business will continue to diminish. People in financial services need to take a deep breath, and ask themselves ‘What are we going to do about it?’ Not doing anything, of course, is an option. Some banks continue to make money and they will continue to do this for a little while longer. But the question is what will happen to the core of banking? Will it become a core ingredient of somebody else’s ecosystem? It’s already started happening. Banks are becoming money movers, underneath somebody else’s customer relationship. This for Sber is completely unacceptable; we will never give up the relationship with our clients. I think the biggest challenge and threat to banking is really the potential disintermediation between banking brands and their customers. The banking industry and the financial sector need to think long and hard what their response will be to that threat.
The other topic I believe needs to be discussed and understood is that measuring success means measuring speed. Measuring speed is not how many transactions are processed per second, it’s about how long it takes for your organization to move from an idea to a product that your customers can touch and see and try out. If your bank is still taking many weeks or months to do this, you will not be very successful. Your competitors, the pure technology companies, they can do it in days. Your company needs to match that.
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