* To spend 10 pct of capex on new services, mostly fintech
* Seeks more fintech deals in retail, transport, utilities
* MTS Bank contributes about 500 mln roubles to profit (Adds analysts' comments)
LONDON, Oct 12 (Reuters) - Russia's largest telecoms operator MTS is betting on financial services as one way to stop its customers from hanging up in a highly-competitive market.
Although most of its investment will be in communications, 10 percent has been earmarked for "fintech" and other digital services, MTS' chief finance officer Alexei Kornya told Reuters.
"Investing in core connectivity services remains a primary need, but we also need fancy new products to charm customers."
MTS, which provides mobile, fixed, broadband and pay-TV services to more than 100 million customers in Russia and former Soviet states, is now planning to spend a tenth of its 75 billion rouble ($1.3 billion) 2017 investment program to expand its fintech and digital services, said the CFO.
"Financial services are a natural area to expand into and there are lots of synergies with the telecom business, such as in the way we service customers and around new online products such as payments, wallet to wallet transactions etc," he added.
MTS recently bought a 30 percent stake in asset manager Sistema Capital to address a growing appetite for equity investments, as low interest rates make savings unattractive, Kornya said, adding MTS is now on the lookout for other deals.
Big telecom operators are seeking to reinvent themselves as internet or media players in the face of falling prices and regulation, but few have so far opted to take on the large established banks which dominate finance.
But Russia's MTS, MegaFon and Veon are all betting that the Russian market, with a relatively less developed banking sector, offers more favorable conditions.
"We believe recent acquisitions should increase the stickiness of MTS's existing user base and fit with the firm's strategic initiative of enhancing customer value, while moving away from pure price competition in Russia," said Morningstar analyst Alex Zhao.
"We have seen such successful combination of mobile services with financial services in other countries, particularly in emerging markets."
MTS recently launched a Money Wallet app. This allows users to make payments and contactless payments, use a bank card issued by any Russian bank or issue a prepaid card.
Although the company first ventured into financial services five years ago when it took a stake in MTS Bank, it has only started to see the benefits this year because the bank first had to refocus on retail, gain more branches and then overcome the economic challenges from the Ukraine crisis, Kornya said.
The bank now contributes about 500 million roubles ($9 million) to MTS' net profits, he added.
MTS, which has more than 3 million debit and credit cards issued, declined to disclose how exactly many Money Wallet users it has because the service is relatively new, but said they are in the single digit millions.
When it first launched its MTS Money project in 2013 with MTS Bank it started providing financing for handsets. Including those customers, the total number of financial services clients now stands at 8 million, it said.
Kornya said Russian telcos could take advantage of a relatively less stable banking system to push new products, pointing to the high number of online banks already operating in the country alongside the large state-owned institutions.
The CFO also pointed to the appeal of peer-to-peer transactions in Russia and Central Europe where many citizens work in a neighboring country and transfer money back home.
"There is still room to develop financial services in order to further reduce intermediation," he said.
MTS is also aiming to help small and medium businesses in Russia and former Soviet states become more efficient by using adapted cloud and Internet-of-things (IoT) services.
It recently bought a start-up that helps small retailers register their stocks and store the data in the cloud, instead of tracking them manually and is looking at similar deals in retail, transportation and Utilities, Kornya said.
MTS is outsourcing most of its cloud services but is planning to build more data centers in the near future to meet new requirements by the government to store mobile data for six months from 2018 under a new anti-terrorism law.
But for some, MTS still needs to do more to truly differentiate its services from rivals.
"MTS should focus on developing services features, innovation and expanding partnerships with financial institutions to compete with existing money mobile services," said IHS Markit analyst Ruomeng Wang. ($1 = 57.6940 roubles) (Reporting by Sophie Sassard; editing by Alexander Smith and David Evans)