This article first appeared in The Edge Malaysia Weekly on February 24, 2020 - March 1, 2020

TONIK Digital Bank Inc, the first licensed digital-only bank in Asean, expects to launch in the Philippines in the middle of the year, tapping a market in which over 70% of the adult population is either unbanked or underserved.

“We plan to go live around July,” Greg Krasnov, its founder and CEO, tells The Edge in an interview.

Tonik is 60% owned by Singapore-based fintech firm Tonik Financial Pte Ltd, with the remainder 40% owned by local partners comprising two family offices.

It received a banking licence from the Philippine central bank last month, becoming the first fintech company in the region to clinch one. “We’re launching a digital-only banking service on the [back] of a rural bank licence,” says Krasnov.

Tonik expects to deliver retail banking services via a mobile app, focusing on consumer loans and retail deposits.

According to Krasnov, the banking sector in the Philippines is ripe for digital disruption. “The country has high internet usage, the majority of Filipinos are unbanked and research shows [that] half of the people who do have bank accounts would be interested in switching to a neobank.”

The Philippines, with a population of some 100 million, represents a US$140 billion retail deposit market and a US$100 billion unsecured retail lending opportunity, he says. “We’re looking at a market that is massively underpenetrated on both the loans and deposits side, where we think quite a substantial market share can be had by a well-scaled digital entrant. In terms of unsecured consumer lending right now, the Philippines, on a per capita basis, is about a US$10 billion market, and if you compare just to Indonesia or Vietnam, then it should be more like a US$30 billion to US$50 billion market.

“And, on the retail deposit side, there’s US$140 billion of retail deposits in the Philippines ... and most [of the depositors] are very keen to have a digital proposition and an interest rate that is better than 2%. The banks are offering on average, 1% to 2%. So, we think the achievement of market share even in single-digits in those types of market-sizing conditions will lead us to have a multibillion-dollar balance sheet in the next four to five years.”

Tonik is targeting to be profitable in the second full year of operation, hence, in 2022.

According to its website, products will include deposits, loans, current accounts, payments and cards — all on a highly secure digital banking platform. Just last month, Tonik picked technology firm Finastra to power its core banking capabilities.

“We’ll have a transactional savings account with a debit card attached to it, with a lot of advanced security and safety features [as] too many people feel uncomfortable about keeping their money in a cloud. We will have savings and term deposits capability to make it attractive for people to keep deposits with us. And we’ll also offer consumer loans. Immediately after the launch, we will be offering pre-approved credit limit to our customers and we’ll also be working with the ecosystem partners to bring these services to consumers through multiple channels,” says Krasnov.

Tonik is currently in discussions with a variety of ecosystem partners — basically, fintech companies that have developed significant customer bases in the Philippines — to accelerate its market expansion.

Is Tonik taking on too much risk by focusing on the underbanked, given that it is tough to gauge the credit worthiness of this group?

“That’s actually the reason none of the banks in the Philippines are going after this group ... because they don’t know how to assess them. But the techniques for assessing customers like that in today’s environment actually stretch out well beyond historical credit or historical bank statements,” says Krasnov.

“Each of us leaves a multi-terabyte digital footprint on a weekly basis out in the digital universe, and there are companies out there which are quite skilled at using that digital footprint to predict the credit performance of the customer. So, we will be actively leveraging the digital footprint data to assess the customer’s credit worthiness.”

Tonik Financial’s plan is to focus solely on the Philippine market over the next three years or so, before considering expansion into other markets. It does not plan to apply for a digital bank licence in Malaysia.

“Malaysia is not one of our core markets of interest. The Philippines is definitely a massive market opportunity, and similar market dynamics exist in Indonesia and Vietnam as well, so these would be the markets that we’ll potentially look at in the long term before considering places like Malaysia or Singapore,” says Krasnov.

There are already a few other banks in the Philippines that position themselves as digital banks, including CIMB Bank Philippines and ING Philippines. Krasnov, however, does not consider them his competitors.

“You have subsidiaries of big banks that do banking through a digital channel. In banking speak, these are called pseudo challengers. And then, you have true challengers like us, which are banks that are built from scratch to deliver their entire solution purely digitally. The basic difference between the two is that, with the [former], there is practically no product innovation going on. But we are a technology company, not a bank, so we start with the user experience, consumer needs. And that’s why we think, okay, we’re positioning in potentially the same customer space, but we’re positioning with a fundamentally different product proposition,” he says.

Tonik is set to launch at a time many digital banks in the UK and Europe continue to make losses. Many struggle because they focus on a business model based on payments, says Krasnov.

“This model is actually very difficult to monetise because the banks don’t charge the customers fees, it’s part of their customer acquisition ... so they are only earning inter-change  from their transactions. I’m not interested in this model. I think the proper monetisation for a bank is to take deposits and to extend loans. And in an emerging market environment, it is possible to make very good money on that if you know what you are doing on the cost of servicing, cost of risk, cost of acquisition ... and if you’re hyper-automating your middle and back office, and delivering your services digitally,” he says.

A good example of that is Russia-based digital bank Tinkoff, which achieved a return on equity of over 70% last year, outperforming the larger Russian banking sector’s average of below 10%.

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