In today’s episode we talk to our favorite serial fintech entrepreneur, Greg Krasnov, CEO and founder of tonik. He shares insights from his storied career setting up a leading digital bank in Europe and multiple fintech ventures in Asia, illustrates the opportunity and obstacles for digital banking in Southeast Asia, and explains the building blocks of a profitable and scalable digital-only banking proposition for the Philippines.
00:16 Yinglan introduction of Greg;
1:18 Greg’s journey from Europe to Southeast Asia;
3:20 Building blocks of a digital bank;
5:49 Building a digital bank in the Philippines vs other parts of the world;
8:33 Obstacles for digital banking in Southeast Asia;
12:54 Digital banking from regulators’ perspective;
15:23 Why tonik’s digital banking proposition is superior to other fintech models;
18:27 Launch of tonik;
19:17 Greg’s advice for founders;
20:24 Fast Talk corner;
Yinglan: Prior to Tonik you’ve had a storied career building fintech ventures in Southeast Asia, as I mentioned earlier — you developed a bank in Ukraine. Can you walk us through your personal journey, from Ukraine and Europe to eventually starting a digital bank in Southeast Asia?
Greg: Sure with pleasure. Thanks, Yinglan. I landed in Asia about five years ago. And one thing that I noticed when I first started exploring the business environment here is that in the consumer finance space, what’s happening in Southeast Asia is actually repeating what has happened in some other parts of the world before.
There seems to be a very strong correlation between middle-class evolution and consumer finance evolution. And, you know, before I came to Asia, as you mentioned, I worked in private equity in Europe, where a big chunk of my work was focused on emerging Europe and within that, consumer lending and retail finance was a very big theme that we invested in and made money on.
Then I became a founder of one of the first consumer finance banks in Ukraine, and we built that into a top-three player in consumer finance with retail deposits. So the movie of consumer finance is something that I’ve been watching and playing now for close to 20 years. And I think Southeast Asia is super attractive from the point of view of the scale of the opportunity, as well as the underlying demographics and the strength of the demand for retail, digital financial services.
We have a very young population. That is very digitally native. This population is demanding solutions for both deposits and loans that are digital to the core, that save them time. Nobody really wants to ever have to go to a bank branch again. And the size of the market is huge. In the Philippines alone, we’re talking a hundred million population, US$140 billion retail deposit market, and the potential of the consumer lending market to become a hundred billion dollar asset class. So very, very exciting opportunity. That’s what ultimately drove me to launch tonik.
Yinglan: Thanks for the introduction. Can you describe to us, especially the listeners who may not be familiar with the Philippines what are the key building blocks of a digital bank like tonik? I think you also have a disproportionate advantage given that you have a few, prior companies operating in the space.
Greg: There’s definitely a very clear value chain to the consumer finance business. And within that value chain, the four major elements and these elements are now possible to do through purely digital means. And it actually gives you a very different scale as well as a very different cost structure. So these building blocks because they give you such different cost structure.
If you execute on them, well, then you can ultimately build a very profitable proposition. Across the whole value chain and that’s really what I’m trying to do with tonik. So the elements of the value chain are origination, finding new clients and origination online is becoming a very, very important part of this equation.
In Southeast Asia and online, you can originate still at a fraction of the cost of offline origination. So to give you an example, typically in Ukraine, my origination costs would be about 10% for a new loan. Currently in Southeast Asia, you can originate clients for unsecured consumer loans at anywhere between two and five percent of the new loan, so a much lower cost.
The second one is risk, credit risk. By using digital footprint, analytics, and big data, you can actually make much better credit decisions now than in the past. And you can do that on people who don’t have any bank histories. The third one is servicing and collections. There’s a lot of automation tools that can go into really bringing down the cost structure on this.
And financing is something that if you can tap retail deposits, then that can be a very scalable and very cheap funding. And one of the first things we did Yinglan, as you know, is to go to the regulator in the Philippines and try to secure our own bank license. So those are the building blocks. Within those building blocks, I’ve worked before with underwriting and servicing, for example, I co-founded leading companies in these verticals in Southeast Asia, Credolab and Lowell respectively. A lot of lessons learned and a lot of do’s and don’ts of what we can do for tonik. And both of these companies we will also partner with, from the tonik side, to bring the best know-how to help us build tonik.
Yinglan: Thanks for sharing. And I mean, we’re seeing sort of the emergence of neobanks globally right? Because we know that neobanks are not all built equally. How does building this in the Philippines compare to the digital banking trajectory in more established markets, like Europe and China, where we see WeBank in China, we see n26 in Europe and also other emerging markets like India and South America, for example, Nubank. How is it different?
Greg: The largest number of neobanks in the world are actually in Europe for some reason that I haven’t yet quite figured out, but the absolute majority of these banks, they bring to the customer a current account proposition. So basically it’s a very streamlined, easy to use current account app with the debit card that, you know, enables you to make payments.
For European customers, foreign currency is important. So guys like Revolut, for example, they’ve made a big feature set around the FX and that business is very exciting because a lot of people are fed up with how the banks put together their apps. So you can definitely get customers. The problem is that it’s very hard to monetize these cases because current account business, the only way you can monetize is through the transaction fees and transaction fees are not that high. And in fact, most of these banks were founded on the premise of, “Hey, the banks are screwing you on the fees. We’re not going to charge you any fees. So switch over to us.” So when that’s part of your brand promise, it’s really hard to actually charge any fees.
So that’s how neobanks in Europe and neobanks in the US and other developed markets typically operate, but they have problematic profitability because of this. For me, the most interesting business model is actually an asset-liability model. True monetization for a bank is through loans. And I think the emerging markets opportunity is very, very compelling.
So the most interesting business model to me is what Nubank is doing in Brazil or what Tinkoff bank is doing in Russia. These guys are making consumers loans, both of them are actually doing it, so it’s a credit card business on the asset side, and they’re tapping into that middle-class massive demand for consumer loans and that’s a very profitable business if you can execute it right, using the proper digital tools alongside the value chain. An example of that would be Tinkoff Bank’s profitability. They are actually probably among the most profitable banks in the world today. They’re publicly listed on the London Stock Exchange, so the numbers are public. They have returned on equity last year that is an excess of 70%, seven zero. And that’s compared to the average banking sector return on equity globally in the low teens. That’s to me, a very, very inspirational example of what is achievable in the market if you’re monetizing through consumer loans in an emerging market environment.
Yinglan: Fantastic. I think we see the overall trend of millennial avoiding brick-and-mortar banks, and, you know, I think post-COVID I think we’ll see even more of that. But on the flip side, what are some of the obstacles that are more prevalent in Southeast Asia that is preventing digital banking from fully flourishing. And how have you thought to overcome these obstacles?
Greg: That’s a great question Yinglan. So the digital banking underlying market dynamics are very, very favourable in pretty much all of the emerging Southeast Asian countries, you know, Indonesia, Vietnam, Philippines, Myanmar, Cambodia, Laos. All of these countries present amazing opportunities. I would say Malaysia and Thailand, a little less, because they’re much more evolved and the banks there already present to the consumer are pretty decent proposition. So I’m less excited about digital banking there or in Singapore for that matter, which is a very, very highly penetrated banking market. But I think in order to launch a proper monetizable digital bank proposition in an emerging market, as I said, you need to go for an asset-liability strategy.
And that means taking in deposits and making consumer loans. Now, European neobanks and US neobanks have executed their business in partnership with existing regulated bank entities. And when you’re doing current account business, so purely transactional business, then that’s not that difficult to do. You can partner up with a bank, and especially if your bank is pretty sophisticated. They’re like a normal European or many US banks.
Now, in Southeast Asia, that is a problem. It goes, first of all, in places like the Philippines or Indonesia, the existing bank layers are very, very backwards technologically. They typically would not understand the benefit of partnering up with a third party to execute a digital channel proposition.
And even if they did then executing the asset-liability strategy on a partnership like that is really, really hard, because the bank would need to give you something that’s at the core of his license. It’s the guarantee, government guarantee on the deposits. And this is something that the banks are really, really scared to outsource to a third party. If they let you collect the deposits that is no problem, but then they probably wouldn’t let you lend out that money to consumers, because they’ll say, “I’m on the hook with a regulator for the deposits, for the safety of those deposits. So I need to really control the credit.” And they wouldn’t be incorrect in stating that, so essentially to execute that the business model, you really need to have your own bank license.
And in that, I think the regulators around the region differ hugely. So we were very lucky to find them a great partner in BSP — Bangko Central ng Pilipinas. The central bank in the Philippines is very active and forward-looking in how they think about digital and how to use digital to solve their massive financial inclusion problem of 70% of Filipinos outside of the banking system, so they’re willing to experiment and they basically told us a year and a half ago when we first came to them.
They said, “Guys we like what you are trying to do. We like your team’s credentials. Why don’t you apply for a rural bank license and we’ll enable you to operate a digital bank on the basis of that license. We will learn through that sandbox experience, what the digital bank license proper needs to look like and then we’ll be able to advise the parliament on how to draft up legislation. And then ultimately we’ll look to convert you to that proper digital bank license.” Now that’s a very different approach than the regulators would take in Indonesia or in Vietnam. So I think what’s holding back the real evolution of digital banking around the region is very much on the regulatory side, more than anything.
Paulo: Thank you very much, Greg, for painting this picture for us digital banking in the Philippines. Now to continue the conversation we have my colleague and principal at Insignia Ventures, Samir. So Samir has been working with Greg since they day one on tonik. So Samir take it away.
Samir: Yeah, thanks Yinglan for leading this discussion up to now, and hi Greg and thanks again for joining us on the call. We’ve been working together almost from day one on this tonik proposition. One question that I have, and just to piggyback on what you’ve been saying so far, is how do you think from your perspective was the initial thinking that the authorities in the Philippines had, how did they think about that digital banking proposition essentially before anybody in Southeast Asia?
What is really particular to the Philippines that the regulators actually thought about and said, “Okay, we need to pull the trigger before Singapore, before Indonesia, before Vietnam,” and how did you benefit from it as the first guy on the ground?
Greg: Thanks, Samir. Yeah, that’s a great question. And Philippines regulator is not obvious, you know, it’s sort of something endemic to the Philippines. I think it just happened to be that, you know, the Filipino regulator is very forward-looking in using digital for financial inclusion. Philippines is the country with one of the biggest financial inclusion issues in Asia with 70% of the Filipinos being outside of the bank system and their regulator takes a much more aggressive and active approach to experimenting and letting the market kind of help them figure out what the regulation needs to look like, which I think is very progressive and very helpful because if you look for example at how Singapore went about its digital bank place versus how BSP is doing it.
So Singapore went about it in a very rigid way. They hired 20 PhDs that spent two years drafting volumes and volumes of a book called Digital Bank Regulation. And then they put it out and said, “Okay, we’re putting it out for tender now, and here are all the requirements and good luck you people, hope some of you can fit into this very narrow box that we’ve defined with a very, very high capital requirement and other limitations and regulation.” That’s probably fine for the first stage. But I think the people that will be going into that will need to have an extremely high-risk appetite because it will be very hard to make money for them.
The Filipino regulator said, “You know what? We don’t have that 20 volume book, but we’re willing to run an experiment, create a sandbox, and then see what kind of books we need to create in order for it to [fly].” And that’s why you see, for example, in the Philippines, you have a couple of very big wallets GCash, Paymaya, Coins, which is now part of Go-Jek, Grab is now aggressively expanding its wallet there as well.
So these wallets are doing some extremely innovative stuff. That is not really that popular in other parts of the region, but it’s because they’re finding a very open and helpful regulator. It’s been a real pleasure working with the BSP for us. And we’re looking forward to continuing to work with them, to solve the financial inclusion problem in the Philippines.
Samir: Thanks, Greg. And I guess, just to add to what you just said, I think we’ve seen multiple attempts at solving for financial inclusion, closing the credit gap in the Philippines. Most of those attempts were mostly coming from single product platforms, either doing consumer lending, consumer payments, as you rightly said. So compared to these platforms, to what extent is a digital bank like yours a superior proposition to the consumers in the Philippines?
Greg: Well, let’s start with consumer lending. So to me, consumer lending is a middle-class opportunity and that middle-class, I broadly define it in the context of the Philippines as about 300 to 2000 USD per month of household income. Now the proposal to that segment right now in the Philippines on consumer lending is very limited. Because it’s mainly payday lenders offline and payday lenders online that are doing very short financing terms, you know, 30 to 60 days maximum. And at very high interest rates, the effect of annualized interest rates that are being offered by these players are in the triple-digit level.
So they are, you know, sometimes 200, 300% APR — annual percentage rate. So basically what that does is it makes it very unaffordable. To the average middle-class consumer to take a loan like that. And that payment amount doesn’t fit into most of his needs, because for a consumer like that, actually the biggest driver of the need that would push them to consider taking a loan would be, you know, buying a TV, buying a fridge, buying some furniture, things that are a $400, $500 ticket size and with income, like what I mentioned, that type of a consumer cannot finance that with a payday loan on a 30 day term, all he can do is hundred dollars, maybe $200.
So effectively the current proposition in that segment precludes the mass of the middle-class consumers from borrowing. And we think by introducing longer-term loans with double-digit APRs, which is more like the middle-class financing, a standard globally, we can help the consumers address that much better and that can help unlock this borrowing into the middle-class consumer in the Philippines.
Also, I think the issue of why, for example, the online payday lenders are not offering the product that we plan to offer — it’s because they have very limited liabilities. The liabilities that they’re borrowing to finance their loan book are in the tens of millions of dollars. And it’s hard to get those because not a lot of people will lend to the digital lenders. Banks typically don’t like to lend to them because they don’t understand the underlying product. They don’t understand how you can lend to somebody without a bank account. The insurance companies and pension funds are even more conservative. And the bond market for companies like that is not really very welcoming.
So retail deposits are the only source in my mind of scalable liabilities for consumer lending. And I think that’s where we will also be very differentiated. Because we will be able to attract retail in the Philippines, the retail deposit market today is already over 150 billion US dollars. So it’s a very, very large market and by tapping into that market for your liabilities, you really can build a very scalable balance sheet over time.
Samir: Got it. So I guess my question now is when would the Filipino consumers benefit from this product? So tell us a little bit about what’s next for tonik in the coming months, towards the full launch of your platform?
Greg: We’re very, very excited. We’re getting very close to going commercial. In September we plan to go pilot and end of September, beginning of October, we plan to go fully industrial. We’re currently on target to achieve that. Well, we were hoping to actually do it earlier. We were hoping to go to market in June, but obviously the log down in Manila created some logistical issues for us, which have now been resolved. We’re on track to launch in September, October, and very, very excited about it.
I think there’s a lot of consumers out there, we’re getting things at this point every day, of people asking us, when are you coming? When are you coming? So looking forward to servicing that demand.
Yinglan: Fantastic vision, Greg and I wanted to end with one or two more questions. Having built several fintech ventures in Southeast Asia, what is the one piece of advice that you believe fintech founders should keep in mind growing their companies?
Greg: This is the same as my advice would be to any entrepreneur. I’ve done this a bunch of times before at this point. And you know, one of my favourite phrases is, “Culture eats strategy for breakfast.” So whenever you’re doing a startup, it’s more about the people, the people that are with you, making sure you have the right people with the right mentality, because you are going to have to pivot a hundred times to find the right direction.
You’re going to have to change on the fly. But the bank that I built before, our favourite phrase was, “The concept has changed.” So we, and “the concept has changed”, you know, it would happen every few weeks. So you need to have a team that can handle that pace of change. And so we’re spending a huge amount of time trying to make sure that we’re bringing the right people in. We’re then measuring them on how well they fit into these values, how agile they are and how quickly they adapt to change. And that I think is the biggest advice I could probably impart — look for the right people. Then the rest will follow and make sure your people will follow you into various changes easily.
Yinglan: Fantastic. To wrap things up we have a lightning round, so we’ll ask you rapid questions. Favourite movie to recommend.
Greg: Oh man. Silicon Valley, hands down. It’s, it’s the absolute, like amazing and funniest piece about startups I’ve ever seen. It has some amazing life advice. There are some great, great characters, which are amazing stereotypes, which I’ve seen so many times, you know, all these startups. So lots of learning there. Yeah. Silicon Valley.
Yinglan: That’s great. Favourite app or tool that you use right now.
Greg: Favorite app would have to be Garmin Connect. I am trying to lose weight again. I’m being very, very conscious of the number of steps and my exercise and my sleeping patterns right now. So I really liked my Garmin, it’s one big step up from Fitbit, so yeah, that’s an app outside of the usual suspects that I’m probably spending the most time on.
Yinglan: That’s great. Favourite place in Southeast Asia.
Greg: Favorite place in Southeast Asia, I’ve really enjoyed Koh Samui. I lived there for about a year. It’s a place where my heart rests. So at some point would love to maybe own property there and just spend significant chunks of time there.