Taking market from the big boys

Photo: Liis Treimann

CEO of Coop Bank Margus Rink says that banking is an exciting sector again as competition is picking up. It also turns out Estonians still love cash.

Rink says that the bank has decided to accommodate clients and will soon make it possible for cash to be deposited in addition to being withdrawn in Coop stores. Coop Bank has given up its former owners’ non-resident clients business. “There is no logic in it for Coop,” the CEO says.

What has surprised you the most in the past year?

Two things. The first is factual. We have grown by 30-40 percent in the past year and taken our market share from 1.3 percent to 2 percent. Major banks have grown by 5-7 percent in the same time. That makes me feel proud, even though we are still very small.

But a very small bank can also grow. Secondly, we have managed to surprise the market despite our small stature. Banking has been static, frozen for the past 10-15 years. Things have changed now.

We have gained 10,000 clients in the past year, while LHV has gained 25,000 clients. This means that at least 35,000 people have changed their service provider and opted for smaller banks. We feel something has started moving.

You probably had an idea of who your clients would be a year ago. Who are they today and how different are they from what you imagined?

We thought we would mostly get people living in rural areas. In truth, the majority of new clients are city dwellers. I believe one reason is that we only started offering cash withdrawals in Coop stores this summer.

We are more attractive for people in rural areas now. At first, people came to us because they heard we are an Estonian bank. We had people from Tallinn despite the fact Coop doesn’t have a single shop in the capital. However, looking forward, we will be concentrating on people outside major centers.

Who typically uses the possibility of withdrawing cash in a grocery store?

A person who lives in the country. The average sum is 40-50 euros. Quite a lot. I usually only withdraw 20 euros in Tallinn. The only time you need cash in Tallinn is when you want to tip your waiter. If you live in the country, you need cash to buy smoked fish or milk or pay your neighbor to mow the lawn for you.

The other thing we are developing is cash deposits. At first, we did not believe anyone would want to deposit cash. But clients have been asking us for the service. We will make it possible to deposit cash at Coop checkouts soon.

What are the biggest obstacles for banks today?

Regulation. The previous crisis has made banking a highly regulated field. Yes, banks take smaller and bigger risks every day and the field needs tighter regulation. Endless queries, demands, control actions complying with which costs us a great deal. The only way to cope with all that is to grow. Then we will be able to pay for it.

Then there’s income tax. The government singled out banking and decided to saddle it with advance income tax. While that is not a problem for major banks that pay dividends (advance income tax will be cleared when making dividend payments), this new income tax constitutes a direct expense for smaller banks, holding back their development. We need all of our profit to grow and do not plan to pay dividends in the near future.

There is no alternative on the horizon?

We have talked to various parties about it. Everyone says they understand but that every single million counts today. They ask us where they should take those five million euros instead.

Next year’s budget will grow by more than 600 million. Five million does not seem that much.

But several five-million documents add up.

It seems that small banks with Estonian roots are sticking together. For example, LHV pension funds are buying Coop Bank’s bonds.

It makes perfect sense. Who understands you best? LHV has been down this road. When they first started out, I wondered whether they would succeed in taking market share from major banks that are very diligent in the way they do business. We are pleased that a developing company looked into us and believes in us. Perhaps our bonds would not have been picked from somewhere further away, like Stockholm for example.

What is your target in terms of market share and clients?

We want to have 100,000 clients, 5 percent market share and a steady profit, with equity capital productivity of 15 percent.

Where will that growth come from?

Big banks. Major banks have a brilliant business model. They go down the highway at great speed and pick up 200 million along the way. Another bank then matches that speed and collects another 100 million. Very effective. You do not take a single turn.

We are on the byroads. We take turns, stop, negotiate, yield and make four-five million a year that way. There is room for both on the market, both are needed.

For example, we issue a million euros worth of home loans every week. Our client needs a more personal approach. People who work in Finland for example. Talking about a skilled worker whose family lives in Estonia, so what their money is not made in Estonia. Where’s the risk? Dealing with such a client takes time.

They would not pass an automatic check. We also provide loans in rural areas which is something major banks are not doing. That way, everyone has their place on the market.

Could the ambition of Luminor’s new owner change the market?

If so far, they had an owner that didn’t want them, the new one really does. That is very good. The new owner is also wise and experienced. On the other hand, foreign capital comes and goes. Nordea came and went. Danske came and went. DnB came and went.

We have an Estonian owner. They are not going anywhere. The owner has told us their investment is for life. But something will definitely happen on the market in the short perspective. Luminor needs more clients. Where will they come from? Not from us probably. So, they will likely go where we are going – after the big boys.

What is the owner’s (consumer association Coop) goal in banking?

Coop has said their goal is to build on existing retail client relationships. Owners noticed that financial services were moving away from their clients five or six years ago. Branches were closed, ATMs removed, and banking services were no longer offered in post offices.

Last fall, around 150 community centers were closed in Estonia. Coop realized we could offer banking services. And a bank client would be closer to Coop retail. That was the logic behind it.

The Danske money laundering scandal is the talk of the town. When Luminor was sold to Blackstone, CEO Erkki Raasuke said that half the work had to do with the know your client principle, money laundering and sanctions. It was also relevant at Coop’s predecessor Krediidipank. To what extent did you discuss these topics during the takeover? How serious were you about it?

It was among more important things we discussed. Non-resident clients were an important part of our predecessor’s business model. Coop said from the first that we will back out from that business.

We have largely finished that process by now. We still have a few clients, but I believe we will have exited that business by next spring. We will still offer services to non-resident clients whose backgrounds we understand and who have ties to Estonia. We will not do business with non-residents we don’t know. There would be no logic in it for Coop.

Will you look outside Estonia?

No. We will be purely domestic. We do not have plans for expansion abroad.

About a year ago, you said you were considering going into pension funds. You have changed your mind?

Our initial business plan included the idea of dabbling in pension funds. But the market is so competitive today, also with the addition of Tuleva as a new service provider, that we cannot find our niche there. We have shelved that idea for now.

Rather we are thinking along the lines of small and medium business services. We want to develop commercial services, like factoring, foreign trade financing or leasing. We cannot manage major syndicate loans or complicated transactions.

We will definitely enter the card terminals market at one point.

Because 60 percent of Coop’s 550-million-euro annual turnover is card payments, it is clearly something we will get into in the coming years.