Join part 1 of our call with Greg Krasnov, CEO and Founder of Tonik, a Philippine digital bank that hit record user and deposit growth months after launch in early 2021, and over the past year has been focused on building up a balanced, scalable loan portfolio. Greg also shares his thoughts on generative AI and how this technology will change banking. 

Highlights and Timestamps

(00:00) Highlights;

(00:58) Building a diversified, balanced loan portfolio for scale and profitability;

“We have a range of loan products that we’ve worked on. The range that we’ve rolled out is actually, by far, the broadest range of any of the digital banks out there so far. And we believe we’re in the most advanced position in terms of proving the unit profitability and starting to scale…Now, we went quite quickly to introduce the products to the market, but then to operate at unit profitability on unsecured consumer loans, it takes time. Because basically, you need to train your credit system. And you need data; you need performance data in order to train that.”

(07:39) Scaling Tonik’s loan business in the Philippines’ 2023 market conditions;

“Having a diversified product portfolio on the asset side—on the lending side—is very important to making sure the bank is sustainable through different economic cycles. And, when times get tough, of course, you want to be more safe, more secure in the types of loans that you do. And it could mean security in terms of pledges over some assets. It could mean security in terms of the customer making a down payment against something that he’s bought with your loan, which is the case in our sales finance.”

(10:56) Repayment experience from the Tonik perspective;

“We also have a product, our Flex Loan, which makes it super easy for the customer. If they have a salary account, all they have to do is just activate their debit card with us and we’ll just charge the debit card monthly for them. And then they don’t even have to think; it’s just automatic. And of course for us, it’s great because it makes it a bit safer for us. So we can offer them a bit of a discount on the interest rate. So we offer a very broad range of payment options and try to make it as convenient for the customers.”

(12:52) Learnings from scaling a bank and the impact of generative AI on banking;

“Generative AI is going to be right in between them and completely change the way of interaction. Filling out forms on the app at some point is going to go away, because nobody really wants to do that. It’s much better than having to go to the branch and spend half a day there, but ultimately, it’s also not very efficient for the person. It’s not a natural way for humans to interact.”

The content of this podcast is for informational purposes only, should not be taken as legal, tax, or business advice or be used to evaluate any investment or security, and is not directed at any investors or potential investors in any ⁠⁠⁠⁠⁠⁠Insignia Ventures⁠⁠⁠⁠⁠⁠ fund.

Transcript

Paulo J: Today we are in for a treat because we have a returning guest who’s been on the show quite a few times, actually, and it’s been really a pleasure to see his journey as an entrepreneur. The journey of the company that he’s building right now has really evolved over the years, and we’re going to get to catch up with him again in this call. We have none other than Greg Krasnov, who is the CEO and the founder of Digital Bank Tonik in the Philippines. So, thank you once again for coming on, Greg. How’s it been?

Greg K: Hey Paulo, thanks very much for having me on. Great to see you again.

Revisit our past calls with Greg in 2020 pre-launch, then in 2022 post-achieving record deposit growth, and finally on a panel with other fintech founders. 

Building a diversified, balanced loan portfolio for scale and profitability

Paulo J: Yeah, great to see you again as well. You were last on the show in March of last year, so it’s been over a year now. And we were talking a lot back then about how Tonik had really amassed a lot of fuel to build on its digital banking business. Since then, you guys have launched a lot of different loan products. So maybe you can bring our listeners up to speed on what Tonik has been up to and what you guys have achieved so far.

Greg K: Sure. You might recall that, in the early days of 2021, we launched in March ’21. Our original launch was very focused on collecting deposits because we wanted to see how much of that raw material we could bring in and how quickly, because our main objective has always been to focus on solving the credit inclusion issue in the Philippines where, you know, over 95% of Filipinos have never borrowed from a bank.

So, basically, for us what we saw is that our deposits went above our expectations and very quickly. We got something like 50 million in the first few months. That’s when we started hitting the brakes, actually slowing down the advertising because we didn’t want to collect deposits until our loan portfolio was ready for scaling.

Without really even trying very much, we grew our deposit portfolio to about 130 million today. But again, it hasn’t been our objective to accelerate the growth of the deposit portfolio because that’s just amassing raw material. It sits in a warehouse, and you have money tied up that you’re losing on the inventory until you can actually put it into production.

So last year, our biggest objective was deploying a range of consumer loans so that we could productively put all those deposits to work. And we’ve been working on getting them to unit profitability.

We’re a bank, not a fintech company, which means the regulator puts a very different standard of diligence on us in terms of the profitability of what we do, right? It would be considered irresponsible by the regulator if we put out a loan portfolio that doesn’t actually make money at the unit level or if there’s too big of a burden.

I’d say that 2022 for us was very focused on launching these loan products and working on the unit profitability. This year we’re now seeing that a number of these are coming up to unit breakeven. So we’re starting to scale them up. More specifically, what we launched was a few different kinds of cash loans, unsecured cash loans.

We launched a shop installment loan, which is something that we are selling in stores. It’s basically consumer electronics, white goods, black goods, brown goods, and furniture. So we’re partnering with stores to put our product right there on the shelf with consumer lifestyle improvement goods.

We also launched a product called Big Loan, which is a home equity loan. This is a cash loan but secured against real estate. So we’ve started piloting that at the beginning of this year, and we’ve done some nice campaigns on it. We’re iterating the product now to further increase its appeal, and I expect that by the end of this year, we’ll start scaling that one up as well.

We’ve also created a cash loan product, which is an upsell to the good clients that we have, because once a client has proven to us that they can repay, we’ll want to offer them the next loan and the next loan. We want them to stay with us forever. We want to get married. That’s a product that’s done really well for us.

And another product that we didn’t launch organically, but we actually acquired a company called TendoPay. TendoPay is doing payroll deduction loans. They partner with employers to offer a benefit program to their employees, and a key part of the benefit program is a salary deduction loan, where it’s directly payroll deducted for the monthly payment.

So Tendo is another one that already had unit profitability when we bought them. From the beginning of this year, we’ve been scaling them out quite aggressively. It’s a very exciting place in the Philippines for that particular product. We have a range of loan products that we’ve worked on.

The range that we’ve rolled out is actually, by far, the broadest range of any of the digital banks out there so far. And we believe we’re in the most advanced position in terms of proving the unit profitability and starting to scale.

Paulo J: Is it correct to say that speed is really—because I think for Tonik, something that you guys have really built almost like a brand on—is the speed with which you guys grew from launch, right? First with the deposits, and then now I think even with the loans, you guys have been really aggressive on that. Is it really a matter of speed for this type of business? What are the other factors that you guys are looking at in terms of building out this loan portfolio?

Greg K: Deposits don’t have a credit risk involved, so they don’t have unit profitability as such. You don’t make money on deposits until you’ve turned them into loans. Think about a bank as you bring in raw material, which is the money from deposits, but then that raw material to make money needs to become loans. So, the deposits—yeah, we’ve gone very fast, and we actually slowed it down on purpose. 

And some of our competitors are out there PR-ing right now about how big their deposit book is, and some of them are bigger than us. When I hear that, I go, “Great, guys, good luck with that.” Because a big deposit book without a loan book just means that they’re burning way more money than we are, right?

It’s really all about getting those loan products in place. Now, we went quite quickly to introduce the products to the market, but then to operate at unit profitability on unsecured consumer loans, it takes time. Because basically, you need to train your credit system. And you need data; you need performance data in order to train that. 

So you need to see a customer once you’ve booked them; you need to see them over a few months. Our typical loans are 12 months plus, so you need to see them performing over a few months to really understand who is a good client and who is not a good client. And really, every month and every week, we’re refining our credit systems to make sure that we’re making good credit decisions and achieving profitability. 

So, that’s a pretty time-consuming process. I’m very happy to see our progress on that. At this point, a few of our products, we’ve already proven our unit profitability and are starting to scale up. And a couple of others, I think, are in a good place and should also be starting to scale up by the end of this year.

“We have a range of loan products that we’ve worked on. The range that we’ve rolled out is actually, by far, the broadest range of any of the digital banks out there so far. And we believe we’re in the most advanced position in terms of proving the unit profitability and starting to scale…Now, we went quite quickly to introduce the products to the market, but then to operate at unit profitability on unsecured consumer loans, it takes time. Because basically, you need to train your credit system. And you need data; you need performance data in order to train that.”

Scaling Tonik’s loan business in the Philippines’ 2023 market conditions;

Paulo J: I’d like to double down a little bit on the loan portfolio that you’ve built up. You talked about some of them: the cash loan, shop installment loan, big loan as well. Maybe you can run through quickly what the thought process was with regards to the order of launching these. You talked a little bit, I think, last year about focusing a lot more on secure loans given the current environment. So maybe you can talk about what this portfolio setup has meant for Tonik in particular, with regards to the current environment and how you’re really building this banking business.

Greg K: Having a diversified product portfolio on the asset side—on the lending side—is very important to making sure the bank is sustainable through different economic cycles. 

And, when times get tough, of course, you want to be more safe, more secure in the types of loans that you do. And it could mean security in terms of pledges over some assets. It could mean security in terms of the customer making a down payment against something that he’s bought with your loan, which is the case in our sales finance. 

We typically require about a 20% down payment from the customer himself. Let’s say they buy a TV. We provide 80% of the financing, but 20% has to be given by the customer himself. The big loan, of course, has security on the property. 

Even within the cash loan, we have different gradations. They’re not driven by security itself, but they’re driven by the demographic, because different demographics are exposed to different types of economic influences. And so what we’re seeing, for example, is that currently, as you guys might have heard, the second quarter for the Philippines was a very unhappy GDP story. 

There’s a lot of pressure on the consumer economy. We had actually a small contraction, quarter-on-quarter GDP, about 0.9%, quarter-on-quarter. The government is touting this as year-on-year growth, but the reality is, quarter-on-quarter, we’re actually down in the second quarter. 

And most of that issue is inflation. We’ve had rampant inflation for the last 12 months. The BSP has jacked up interest rates; that hasn’t yet brought down the inflation. And that inflation is disproportionately affecting the lower middle class and the lower-income parts of the population because they get squeezed.

For somebody making, let’s say, three, 400 a month, how much they spend on food is a very significant proportion of their total budget. So when food prices go up by 20%, that creates a big squeeze on disposable income and on their ability to service loans. 

There are different kinds of safety levers, and what we’re trying to do right now is to balance properly. Yes, as I mentioned to you, the reason I was so keen to launch the big loan was because I could see it coming; it was not rocket science, the macro was looking bad. 

When the macro is looking bad, you want to run to safety on the asset side. You want to make sure that you have products that can actually scale despite the negative macro. So payroll reduction for us, for example, is a great downside-protected mechanism because defaults would mean the employer would have to go under. And okay, we’ve had a couple of cases of employers going under; that’s not a major part of the loan. 

So it’s a very stable, safe kind of source of repayment where you can go directly on the payroll. So we’re looking for those types of risk mitigants that will get us through this down cycle safely and will still allow us to scale despite the macro turbulence.

“Having a diversified product portfolio on the asset side—on the lending side—is very important to making sure the bank is sustainable through different economic cycles. And, when times get tough, of course, you want to be more safe, more secure in the types of loans that you do. And it could mean security in terms of pledges over some assets. It could mean security in terms of the customer making a down payment against something that he’s bought with your loan, which is the case in our sales finance.”

Repayment experience from the Tonik perspective;

Paulo J: I also wanted to talk about the repayment side of things, right? And I’d like for you to talk about Tonik’s approach, maybe from two points of view. First, really, the user experience side, given that Tonik is a digital bank and all transactions, interactions are done through an app. 

How does that make repayment unique for Tonik? And then the second aspect of it is what you talked about earlier, really building this credit algorithm, this credit bureau, which in the previous podcast, you said that the Philippines doesn’t really have that. So you have players like yourself building this out from the ground up. So yeah, maybe you can start with that first.

Greg K: Yeah, the loan repayment for customers, they can take advantage of a variety of mechanisms that are provided in the TSA. What they can do is send money from their bank account. They can also, for the users of two of the banks, I think Unionbank and BPI, we’re providing a pool where we have an API to the banks, and we’ll pull the money. 

So because we’re from inside the total cap, we can pull the money. They can pull money from their GCash account. They can also top up their account from any of the over-the-counter options that we offer, including 7-Eleven, some of the big pawnshop chains, etc. So it’s a pretty broad range of mechanisms. 

We’re currently working on an additional way for the customers to top up their account and repay the loans specifically, which is Tonik as a biller. So we’re working on getting integrated as a biller in a number of the billing systems out there. So that they can just pay directly to their loan account without having to go through the TSA. 

We also have a product, our Flex Loan, which makes it super easy for the customer. If they have a salary account, all they have to do is just activate their debit card with us and we’ll just charge the debit card monthly for them. And then they don’t even have to think; it’s just automatic. 

And of course for us, it’s great because it makes it a bit safer for us. So we can offer them a bit of a discount on the interest rate. So we offer a very broad range of payment options and try to make it as convenient for the customers.

“We also have a product, our Flex Loan, which makes it super easy for the customer. If they have a salary account, all they have to do is just activate their debit card with us and we’ll just charge the debit card monthly for them. And then they don’t even have to think; it’s just automatic. And of course for us, it’s great because it makes it a bit safer for us. So we can offer them a bit of a discount on the interest rate. So we offer a very broad range of payment options and try to make it as convenient for the customers.”

Learnings from scaling a bank and the impact of generative AI on banking

Paulo J: And this isn’t your first rodeo building a bank. I was curious to know what, if anything, is new in terms of learning so far, trying to build this credit bureau for Tonik and trying to figure out what will really help scale the lending business here in the Philippines.  

Greg K: Yeah, I previously built a bank in Europe, a consumer finance bank in Ukraine. But that was mainly an offline bank; we didn’t really have this. We’re talking years 2005 to 2013, so this is before FinTech, right? 

So we had a very big network of points of sale. And we had over a hundred branches; the loans were selling through points of sale where we had our physical promoter, mainly in retail partnerships. So it was like what we’re building now in the Philippines. It’s our sales finance. Those were different days, and you didn’t have as much data back then. 

Now I think it’s more advantageous in a way that we’re swimming in this massive sea of data. So, how to make good use of the data and really create proper systems for the data lake itself, the data warehouses, the machine learning and AI stuff that sits on top of that, that cranks it for looking for predictiveness.

So all of that is a very exciting experience for me. Because you can really squeeze a lot of value out of this data. For example, we’re using device data quite actively. And I was a co-founder of another company before Tonik, called Credolab, which actually specializes in this space. 

All they do all day long is take the stuff that’s in your smartphone, pull it out, and create a scorecard from it. And I can guarantee you your smartphone actually knows way more stuff about you than your wife or anybody else. It’s actually an incredibly data-rich environment that is behaviorally extremely predictive if you know how to crunch it.

So Credolab is one of our partners at Tonik as well, and we’re using their data. We’re using telecom data. We’re using the data of customer behavior in our app: which channels he has come in through, how did he work with the app, what’s he doing with his account, etc.

So it’s a lot of information to process, but very exciting. We actually decided that this is such a strategic area for us, especially with the advance of AI, that we’re looking for a senior person to bring into the team as a head of AI and machine learning. 

We already launched AI in our contact center. We launched that project about a month ago, and we can see that at this point, about half of our customers avail of the AI chat instead of going to the agent, and they’re happy with that. And we’re going to continue to improve that. We’re working on a generative AI product that we can layer into what we’re doing today. 

I think in the future, instead of having branches for banking or internet banking or the app, you’re going to be telling your phone, “Hey Siri, or Hey Joe, or whatever, I want to take a loan for 5,000 bucks. Go get me a loan.” And Siri is going to go and get your loans.

I think it’s all going to go that way. So we need to be at the forefront of that. So we’re investing quite heavily into this. And also for credit applications, of course. Because there are predictions and trends that humans cannot make nearly as accurately as machines.

Paulo J: And actually, literally as of today, as of this morning, one of the things I woke up to was seeing Greg’s post about this new role that you just mentioned. So AI experts out there who are interested in this banking mission that Tonik has, check out Greg’s LinkedIn profile and Tonik’s LinkedIn to apply to that role.

And you did bring up the topic on generative AI. I was also curious to know how you’re looking at some of these, because AI obviously is not a new thing. 

And I think especially for lending, it’s that technology that’s being used already to really build out credit models and all of that. But specifically for LLMs, generative AI, this next stage of AI, you talked about customer support being one use case. 

Are there any other interesting use cases that are very specific to banking? Because I think for customer service, that’s pretty much, I think, almost every business’s low-hanging fruit kind of use case, right?

Greg K: In our business, we’re primarily going to be focused on generative AI for customer service, broadly defined. 

And when I say broadly defined, I don’t just mean the customer chat and the interaction with the contact center. I mean that ultimately, in the app, for the customer to be doing this on the screen and filling out like that— that stuff, I believe, is going to go away at some point. 

And what’s going to happen is you’re going to have a more natural kind of language dialogue. And the dialogue is not going to be by typing into ChatGPT. It’s going to be by pushing the microphone button and saying, “Hey, dude, I need a loan for 5,000 bucks. What should I do?” And then the app talks back to you, walking you through the filling out of the application fields and asking you all the necessary questions, then filling it out for you. 

In the meantime, you can also ask it any other questions about your financial situation, financial plans, or whatever it is, and it can also draw on that database for those answers. What we’re working on is trying to integrate this changing dynamic into the team. 

We’ve done an internal pilot, and I’m hoping that at some point in the next few months, we might be able to bring it into a market pilot. But I think the whole interaction of how the bank interacts with the customer is going to change. 

Generative AI is going to be right in between them and completely change the way of interaction. Filling out forms on the app at some point is going to go away, because nobody really wants to do that. It’s much better than having to go to the branch and spend half a day there, but ultimately, it’s also not very efficient for the person. It’s not a natural way for humans to interact.

Paulo J: Yeah. So definitely, like autonomous agents. I think it’s quite funny how we went from tellers to apps and then back to some kind of automated teller, almost like a financial advisor or teller role there.

“Generative AI is going to be right in between them and completely change the way of interaction. Filling out forms on the app at some point is going to go away, because nobody really wants to do that. It’s much better than having to go to the branch and spend half a day there, but ultimately, it’s also not very efficient for the person. It’s not a natural way for humans to interact.”

Watch Part 2: How to unlock the “holy grail” of Philippine digital banking | Call 140 | Tonik CEO Greg Krasnov