Efficiency 2015 Annual Report

The Global Potential of Financial Service Export

To continue the economic development of Latvia, a new driving force is needed. The financial service sector can become such a force, especially its international segment. Being a part of the economy with high productivity and added value, financial services also promote related sectors and less productive segments of the national economy. Oļegs Fiļs, the Chairman of ABLV Bank Council, shares his thoughts on the subject.

When we talk about the export of Latvian goods and services, the first things that usually come to mind are the traditional sprats, timber, and tourism — not banking operations.

There is a myth that anything produced manually gives the economy tangible returns, whereas everything related to services is intangible. Unfortunately, this myth still endures. Although overseas, there are lots of examples of how the brain, not hands help in producing a lot more substantial results, efficiency, economic profitability, and so-called added value, which leads to the development of the national economy and an increase in GDP.

This attitude is typical for an economy, which is in the middle income trap. Agriculture, woodworking, tourism, catering business, hairdressing salons and other similar services fall into the low-yielding part of economy, where it is difficult to achieve growth and increase the added value. This ineffective part directly depends on the productive sectors of the economy.

A great example is Swiss chocolates made by chocolatiers in small workshops and sold for EUR 10 per piece. How can you ask that much? And why are people willing to pay? The answer is that Switzerland is one of the richest countries in the world and, in particular, because of the productive part of its economy. The banks and the largest raw material sellers are operating there. The employees of such companies are receiving great salaries and can easily afford to pay EUR 10 for a piece of chocolate.

So, by developing the banking sector and international financial services, it is also possible to boost that part of economy related to manufacturing: primarily for local consumption, but only afterwards – for export?

Exactly. This example demonstrates that the productive part of the economy can share with the less productive part and stimulate it. Furthermore, the productive part — in other words, intellectual labour — has unlimited development potential.

What are Latvia’s prospects and possibilities in this respect?

The range of services in our country could be very wide; I am not only talking about banks, but also about IT, pharmacy, various marketing services, as well as local and international research. In my opinion, Latvia has all the possibilities for using intellectual potential more productively, because our educational system, despite the criticisms, has one substantial advantage: our school graduates have a command of three languages. That is 90% of success; you can learn the rest.

As for the educational system, I would like if it prevented young people from working in low-yielding parts of the economy. Of course, when you have economic or other problems, it is tempting to take a job as a bartender or a cashier, but in that case, we are losing a potential specialist, who could work in the productive part of the economy. I think we need to make our young people pursue higher education and learn foreign languages, because this guarantees high income and contribution to the economy in the future.

What is the role of banks in the Latvian economy?

Compared to our closest neighbours, Riga is the largest financial centre. Latvia accumulates 70% of all international clients of the Baltic countries. That is not only due to the knowledge of the Russian language, which is spoken by a majority of CIS countries, but also the numerous banks, wide range of services, advanced operations on deposits and brokerage services, and other financial instruments. According to the figures from 2014, the banking sector directly and indirectly accounts for about 4.5% of GDP, and its direct impact on the economy is 2.44%, of which 1.27% comes from the locals and 1.17% from foreign clients. These are specific figures; however, it is important to account not only for the banking operations, but also for their impact on the related sectors. In regards to goods and services, banking contributions amount to 2%, while the value added for export is 7.28%.

Oļegs Fiļs receives the State Revenue Service’s “Largest Banking Sector Taxpayer” award

Most likely, these figures should be looked at in the context of the number of specialists, working in the banking sector.

Even with all the contribution to the economy, the number of bank employees is shrinking. During the last five years, their number has fallen by approximately 2,000, due to the optimization, introduction of e-services and expansion of online bank services. In 2014, Latvia’s banking sector employed 9,362 workers, each of whom contributed almost EUR 63,000 to GDP, which is almost 2.6 times more than the other sectors. Moreover, in 2014, the international client segment’s value added or, in other words, its contribution to the economy per employee was twice the amount, i.e. EUR 113,000. In the same period, the banking sector paid EUR 141 million in taxes. This means that we are the driving force, and that we precede other sectors, which is good for economic development as a whole. After all, the banking sector operates in collaboration with other sectors like insurance, stock exchange, infrastructure, real estate, IT, auditing and consulting companies. We are the major customers of many related sectors. In addition, all the other economic sectors are bank clients.

Banks are the driving force, and we precede other sectors, which is good for economic development as a whole.

ABLV Bank received the Red Jackets Award as one of the largest service exporters. What is the importance of this on an international scale?

In the table of largest taxpayers ABLV Bank ranks 17th — right after all the large sellers of fuel and other excise goods. Conclusion: you can make a quite major contribution to the economy without manufacturing or selling anything tangible.

I believe we need to take advantage opportunities to create value added through the exclusive use of brainpower as much as possible. Compared to other countries, we are beginners in this regard.

The outsourcing services are a very big sector. I will explain by using an example of one large company. For example, the research and development centre of Apple is located in Silicon Valley, USA, where the company’s largest added value is created; whereas its manufacturing, as we know, is based in China; its IT service and customer support is in Ireland; its logistics, trade, warehouses, cargo handling, and order processing are mostly based in the Netherlands; and last, but not least, its financial accounting centre is located in Luxembourg. This demonstrates that by specialising within a specific realm and focusing on improving economic indicators, any country can find its own niche and its own development potential.

The research field is underdeveloped here, and the invention of new products is problematic. The production potential of Latvia is quite limited — entrepreneurs, who are planning to develop businesses in Latvia, encounter the following problem daily: you can do it cheaper and more effectively somewhere in Asia. There is development potential in IT, despite the limited availability of workers. Customer services also have decent potential. The logistics, marketing, transport and transportation of goods and freight also have potential.

Our financial sector is stable, progressive and ready to service new clients.

But what about the financial sector?

I am not sure that we can offer Apple and similar companies the services of Riga as a financial centre, but we can aspire to it, and maybe, in some ten years we will succeed. Look at Estonia, which has overtaken the external services of Sweden and Switzerland, and maintained those with Russia (e.g. goods transportation, railroad communications, and ports). We can also look at Poland, which took the manufacturing path of development, which was only logical, because it is located near rich European markets and large companies could rapidly increase their competitiveness by relocating the factories there. However, in the last 10 years Poland has begun transforming into a provider of external services. By creating so-called clusters in every large city and offering various advantages, the country has already lured away multiple corporations, which are working in research, client support, IT, marketing and other fields. Unfortunately, we cannot boast about attracting such big-name corporations yet.

Is it enough to adopt the successful practices of other countries?

In other words, you want to ask if we can achieve great results by copying the functions of customer support or IT from Ireland? Most likely, the answer is no. This is because Ireland has a big advantage — its population speaks perfect English. Can we get similar results of those of Holland if we copy its logistics, transportation of goods, marketing or warehouses? Once again, in all probability, the answer is no. We are not in the centre of the Europe, where the distance to delivery locations is minimal. We are on the outskirts and will not succeed so by copying the experiences of others.

So you need to think about something of your own?

It is important to consider these three significant factors. First, we need to offer a bit lower prices than our competitors. Second, we need to be faster than they are.

Third, and most important, we need to aspire to service some small international companies, although, of course, they will be considered large in Latvia. It is easier to work with such companies, and there are a lot more of them, compared with companies like Google, Apple, IBM, Microsoft, which are already established in various countries. After several years, when we are internationally recognised as a provider of financial services, we can also talk about the aforementioned giants.

Most likely, the country’s reputation is the key part in the banking business. Especially when providing banking services to foreigners. Is there a reliable system for building trust with customers, which would make it possible to avoid unpleasant situations?

I think that the bank supervision in Latvia is sufficient. Of course, it is always possible to find problems, but the most important thing is that all the necessary laws are enacted, and the regulatory institutions are operating. The three largest banks, including ours, are also controlled by the European Central Bank.

Banks are continuously working to improve internal control. A great deal of work is being done, the knowledge is being accumulated, and the staff are being trained. Since Latvia is a bigger financial centre than its neighbouring countries, we need to know how to control the safety of banking operations self-sufficiently.

Our financial sector is stable, progressive and ready to service new clients. By using the geographical location of our country and other advantages, we can keep developing the international segment by offering clients something more than just payment services, which, on the one hand, are simpler, but on the other, involve large risks related to the auditing and control of the money flow. In contrast, providing investment and brokerage services is a lot safer, but the potential for development is higher.

Lately the quick loan companies have become increasingly active. Are they competitors to banks?

Sure, it is interesting to listen to the discussions, in which banks are called stagnant organizations, and to hear the projections about how the limited liability companies, which call themselves payment companies, are about to take over a large part of the banking business. However, has anyone thought about the control of these companies? What kind of money are they operating with? Are the finances of their clients guaranteed? And what about the strange talk about the so-called interim stages that form the financing platform, in which they attempt to bring together investors and borrowers, use unproven risk models, and issue loans with a 30% annual rate? In Latvia, 24 banks offer loans, which are estimated in billions, at a 3% rate, and even then there are not a lot of takers, let alone with 30% per year. What kinds of people take these loans, why are they ready to do it on such conditions, and why they do not go to a bank? What are the advantages of choosing such a loan provider over a bank?

Maybe the biggest advantage is the lack of control?

Yes, maybe it is all about high-risk business, which should be perceived quite sceptically.

Our country’s success story depends on the contribution of each citizen, and on the competitiveness of every entrepreneur.

If we take a broader look at the business environment and the need to attract investments — what kind of support do you expect from the government?

I can talk about the things that our politicians do not understand when stating that Latvia needs to improve its competitiveness in the global market. They are forgetting about the most important issue, i.e. productivity. Our country’s success story depends on the contribution of each citizen, and on the competitiveness of every entrepreneur who is trying to do something here. In other words, if the entrepreneurs are not competitive, the competitiveness of Latvia will also be out of the question, because it begins and, in my opinion, ends with the competitiveness of every company and every able-bodied citizen.

Latvia needs to send a clear signal that it is oriented not towards taxing new companies, but on the development of their business within the country. That will provide more rapid, larger returns from the salaries paid. Therefore, if an entrepreneur is ready to develop his business in Latvia, we need to give him the opportunity to “take off”. If the investor plans to get his company on the ground in three years, it is natural that the first two years will be unprofitable. During the next two years, he will either break even  or maybe make just a small profit, compensating for the losses of previous years. After that, the company might become profitable. With that in mind, many countries are offering tax incentives and are informing the investors (including through marketing) that they will not have to pay tax on profits for the first four years.

The legislation does not need serious changes — only a couple of corrections. For example, it should be permissible to compile documents in English for submission to the State Revenue Service and the Register of Enterprises. This is very important to all investors. It is also important to allow the entrepreneurs to act as the members of the board. A foreign investor cannot always run the company himself. When establishing a company in Latvia, he has to appoint someone else to the position of a member of the board, and be confident, that the appointee is a responsible professional.

It is great if the investor already has some connections and contacts here, but that is rarely the case. In Latvia, the company can only be represented by a natural person, while in many developed countries company management can be done by special law firms.  In other words, they sign a contract with the investor and fulfil the responsibilities of the member of the board and report not only to the investor, but also to the government and governmental entities.

Let us return to ABLV Bank. What are your advantages on the global competitive landscape? What are your points of difference, where your power lies, since you are amongst the leaders?

ABLV Bank is interested in building long-term relations with our clients. For example, the client can either use the brokerage service, and decide what to invest on his own, or invest in professionally managed mutual funds, which we have been offering for ten years. We offer 12 funds, with asset value worth of EUR 129.7 million in 2015. All the funds are structured by different return levels and regions. There are investors who focus on the funds of developed nations and there are those who prefer the markets of the developing countries, where the levels of return on investment might be higher, but so are the risks. We operate with three currencies: euros, US dollars and Russian roubles.

Our bank is the second largest in Latvia, but on a global scale, we are not a large company. That is why we strive to service clients faster and more efficiently. We focus on fields in which we see the prospects for further development, and try to avoid those in which we cannot compete.

Table of Contents

Creative team: Arnis Artemovičs, Ernests Bernis, Jānis Bunte, Anna Celma, Ilmārs Jargans, Jekaterina Koļesina, Sergejs Mazurs, Samanta Priedīte, Jūlija Surikova, Romans Surnačovs
Project managers: Anna Celma, Jūlija Surikova
Interviews: Jānis Bunte, Ingrīda Drazdovska, Konstantīns Gaivoronskis, Katrina Gordejeva, Ilmārs Jargans, Jekaterina Koļesina, Sergejs Mazurs, Romāns Meļņiks, Sergejs Pavlovs, Romans Surnačovs, Jānis Šķupelis
Text authors: Leonīds Aļšanskis, Jānis Bunte, Anna Celma, Vladislavs Hveckovičs, Jānis Grīnbergs, Māris Kannenieks, Ļubova Kazačenoka, Jekaterina Koļesina, Zane Kurzemniece, Aleksandrs Pāže, Gints Pumpurs, Dmitrijs Semjonovs, Jūlija Surikova, Kaspars Vanags, Benoit Wtterwulghe
Photography: Arnis Artemovičs, Uldis Bertāns, Mārtiņš Cīrulis, Ieva Čīka, Krišjānis Eihmanis, Andrejs Hroneloks, Alise Jastremska, Valdis Kauliņš, Valts Kleins, Marks Litvjakovs, Sergejs Mazurs, Reinis Oliņš, Samanta Priedīte, Gatis Rozenfelds, Polina Viljun, LETA foto, Marka.photo, Studija F64
Proofreader: Jānis Frišvalds
Translators: Jekaterina Koļesina, Nataļja Malašonoka, Lidija Marsova, Jūlija Surikova
Design: Aivis Lizums, Valters Horsts

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