What’s the Philippines play for digital bank Tonik?

Greg Krasnov rolled out a few figures for DigFin. The first is $10 billion. That’s the size today of the unsecured lending business in the Philippines.

Second figure: $50-100 billion. That’s the projected size of this asset class in ten years.

Unsecured loans is the first part of a business model Krasnov is building. He is founder and CEO of Tonik, the first digital bank to receive a license in Southeast Asia. The company is headquartered in Singapore but its license is in the Philippines.

A bank runs a balance sheet: money it owes (liabilities) and money owed to it (assets). Consumer loans represent the asset side of Tonik’s business.

Here’s a third figure, moving to the liability side: $140 billion, the size of the Philippine retail deposit base.

Fourth figure: $70 billion, the estimated size of that market that could move to a digital offering, given widespread dissatisfaction with traditional banks’ services.

That might be optimistic, given human inertia, but on top of that is the vast and unknown size of the assets of the unbanked, who comprise 70% of Filipino adults. “It’s several tens of billions of dollars,” Krasnov says.

Let’s call it $100 billion in potential deposits up for grabs. That’s fuel to fund the unsecured lending side.

Why does this opportunity exist? Banks and consumer finance companies prefer to battle over the known, affluent top of the retail segment. They can’t and don’t want to handle the vast population of undocumented households. In that world swim plenty of sharks, including many digital payday-type lenders. But these lack access to deposits (as they’re not banks) or other sources of funding, and so they have to charge ruinous interest rates, annualized in the triple digits.

“There’s a really big hole,” Krasnov said. His vision for Tonik is to achieve the kind of size and profitability of a Tinkoff (Russia) or Nubank (Brazil), using digital banking to chase the emerging middle class. And if the business proves itself and scales profitability, Krasnov wants to enter Indonesia and Vietnam.

Retail is stable on both sides of the balance sheet

Greg Krasnov, Tonik

Tonik received a provisional rural-banking license from Bangko ng Sentral, the Philippines’ central bank, in December. It is working with BSP to prove a new model so it can obtain a full digital banking license, which would be the first in the country.

This goal informed its choices around how to build the business. Although Tonik wants to keep the customer-facing app development in-house, it has outsourced the rest. Krasnov says he’s interviewed about 100 vendors for 20 different functions on the Tonik tech stack.

Finastra, core banking, and cloud

The most important of these is the core banking system. Tonik has selected Finastra for this. Finastra is a traditional vendor whose roots go back to the 1980s as Misys, with a growing roster of digitally innovative clients.

For the past two years, it has been offering core banking for cloud-native customers, beginning with neobanks. Last year, it won its first mandates in the U.K. from neobanks Revver and Gravity. It is now actively selling outside of the U.K., and Tonik is its first win in Asia.

Anand Subbaraman, Finastra’s general manager for digital and retail banking products, based in Bangalore, says mandates with neobanks are a steppingstone to serving its traditional bank clients.

“If all goes well with neobanks, we will sell this service to traditional banks as they move their entire workload to the cloud,” he said. “The work today with virtual banks is a precursor to the next 10 years of work in traditional banking.”

Finastra’s cloud banking service is optimized for Microsoft Azure but can accommodate other vendors.

The work today with virtual banks is a precursor to work in traditional banking

Anand Subbaraman, Finastra

For Krasnov, the pedigree or culture of a tech vendor is not that important; it’s not about old world versus fintechs. What matters, he says, is whether a solution is cloud-based or designed for on-premise servers. Cloud means faster, cheaper, cleaner, and more secure, he says.

Being a startup bank makes it relatively easy to launch with a solution in the cloud.

Subbaraman says that it will be more of a challenge for traditional banks to migrate. “It’s a fundamental rewrite to make the stack containerized and modular,” he said. Operations teams also need to be able to monitor and manage a banking system that’s live 24/7.

But the benefits of scalability outweigh the requirement for traditional on-prem servers to be always at maximum capacity. Cloud-based banks can dial up or down their computing needs depending on demand. 

From tech to takeoff

Another reason Tonik selected Finastra was because the vendor is also old-school, with a track record and brand that lends comfort to regulators. Tonik is attempting something new in the Philippines, essentially working in a BSP sandbox towards a new license category. Krasnov didn’t want the core banking system raising eyebrows.

Tonik has also selected the vendors for other points in tech stack, from eKYC and AML to customer onboarding, card processing and credit scoring. For now Krasnov is not naming these partners, as he does not want to discuss the bank’s customer acquisition strategy. “That’s commercially sensitive,” he said.

One hint, though: he cited Filipinos’ intense usage of Facebook. The average Filipino spends six hours on the site per day, Krasnov says.

Beyond the tech, Krasnov is fixated on the business model, in particular the cost structure to make small loans a profitable business. He says the average unsecured consumer loan in the Philippines is under $100 per capita, far lower than in Indonesia or Vietnam. He needs a digital operation that finds the right level of risk and pricing for such small ticket sizes, and that will take time, trial and error, and data learning.

He says he will rely entirely on retail deposits to fund the business. Wholesale funding is rare in Southeast Asia, and he is wary of issuing high-yield bonds to a fickle capital market. By the same token he will keep the asset side of Tonik’s balance sheet also focused on retail borrowers. “Retail is stable on both sides of the balance sheet,” he said.

Tonik hopes to launch a beta version in June and enter full deployment in July.