Our call with Greg Krasnov, CEO and Founder of Philippine digital bank Tonik, continues in this episode. He shares more on his views on global fintech in today’s bear market, Tonik’s thesis on digital banking in the Philippines, and the impact of automation on their organization. He also gives a quick masterclass on credit monetization. 

Check out last week’s episode going behind the scenes of Tonik’s approach to scaling a balanced loan portfolio

Highlights and Timestamps

(00:00) Highlights;

(01:29) Introduction;

(01:50) Trends in fintech in Southeast Asia in today’s bear markets;

“Back then, the market was valuing neobanks as a price to user. And I’m a bit of an old-school guy, right? So I believe that a bank should be profitable and the bank should be selling profitable products as a starting point, and you don’t scale it out until you’ve achieved that. So it has a sequence, right? And that whole kind of, “Hey, let’s go and just capture this huge market share” mentality is not a safe place to grow a bank. For me, it’s returned to normal in a way…a business is there for profit, not for massive market share capture as the main assumption. That’ll come, but it’ll come as a result of diligent focus on profitability.”

(04:28) Reflecting on Greg’s 2020 thesis for Tonik;

“The lessons learned are, yes, there’s definitely that massive gold to be had. It’s taken us longer than we expected to figure it out, but we’re getting there. And I think we’re still in a great position. So our competition hasn’t really figured it out…None of these guys have figured out the Holy Grail, which is the kind of unsecured and semi-secured digital channel-only lending. None of them have done that. We’ve been trying to figure it out for much longer than them, so we’re probably in a better place than they are.”

(07:29) Growing and maturing Tonik’s organization and where is Tonik hiring?;

“When you launch, you iterate the processes very quickly, and it makes no sense to automate the first iteration because then you just have to re-automate, and that’s just wasted investment. So, for a couple of years, we operated with a relatively low level of automation. But at the end of last year, we started investing in getting that automation in place and really trying to improve the efficiency of the humans that we have…As I mentioned, in the contact center, for example, we just doubled the efficiency of our contact center agents last month just with a generative AI implementation.”

(12:34) Greg’s masterclass on credit monetization;

“It’s pretty hard to monetize on the basis of payments, but at the same time, there’s usually in these emerging lower-income markets, a much higher credit under-penetration and credit inclusion issue…And it’s hard work, building all those credit models, optimizing your CAC, optimizing your cost of risk, optimizing your cost of operations, building a real McDonald’s-type of operation…So we’re monetizing it for the credit. And we think it’s very exciting and very emotionally fulfilling because, at the end of the day, we’re helping Filipinos truly improve their lifestyle, right? Bringing credit to the masses.”

(15:04) A memorable customer story;

“Every once in a while, you get something like that. Yeah, actually, two or three months ago, I got this thing from one of our customers…She literally just contacted me on Facebook out of the blue and said, “Thank you so much for letting me take the loan,” and walked me through the life story situation that had helped her turn things around. And man, that just made my day…And this kind of stuff you get every once in a while really makes it all worth it.”

(16:04) Rapid Fire Round;

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

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. 

Trends in fintech in Southeast Asia in today’s bear markets

Paulo J: I wanted to get your sense of how Fintech, more broadly, even beyond digital banking, has evolved in the Philippines and Southeast Asia. Are there any specific trends that you’re particularly interested in this year or moving forward?

Greg K: I think it’s been very interesting to see how the change in the macro environment and change in the funding environment is changing the playing field. We’ve had a lot of people doing a lot of pretty silly things when the money was flowing easily. And if I did what the market was back then telling me to do, then I probably would be bankrupt by now. 

Back then, the market was valuing neobanks as a price to user. And I’m a bit of an old-school guy, right? So I believe that a bank should be profitable and the bank should be selling profitable products as a starting point, and you don’t scale it out until you’ve achieved that. 

So it has a sequence, right? And that whole kind of, “Hey, let’s go and just capture this huge market share” mentality is not a safe place to grow a bank. For me, it’s returned to normal in a way, and okay, I feel bad for some of the founders that kind of got caught in this. 

We were very fortunate that we raised a very large Series B right at the end of that peak wave. So we raised 130 million and closed that in about February last year. And with our burn, we’re very comfortable that we’ll have plenty of money for the next year, two years, to support our burn. We’re not under pressure to raise, basically. 

A lot of people have burned through the money that they raised at the peak and that’s now creating some shaking up. Yeah, there are some guys in the ecosystem that I can see have been focused on the right things, focused on that fundamental profitability, and are doing well. 

There are some others who are under huge stress because they can’t raise and they are very reliant on raising. And they didn’t have that pathway to profitability. So that’s interesting to watch. It’s not the first time I’ve seen it; I’m old enough to have actually been there during the Internet bubble. 

I was an associate at Bank of America Private Equity in London back in the late ’90s, right? I was actually allocated to look for internet deals, right? And back then it was like price per eyeball, right? Or whatever, some very interesting metrics. 

So to me, that was actually a huge lesson even back then. But okay, this stuff moves in waves and this irrational exuberance sometimes gets the better of people. You just have to keep a level head through it. And remember that a business is there for profit, not for massive market share capture as the main assumption. That’ll come, but it’ll come as a result of diligent focus on profitability.

“Back then, the market was valuing neobanks as a price to user. And I’m a bit of an old-school guy, right? So I believe that a bank should be profitable and the bank should be selling profitable products as a starting point, and you don’t scale it out until you’ve achieved that. So it has a sequence, right? And that whole kind of, “Hey, let’s go and just capture this huge market share” mentality is not a safe place to grow a bank. For me, it’s returned to normal in a way…a business is there for profit, not for massive market share capture as the main assumption. That’ll come, but it’ll come as a result of diligent focus on profitability.”

Reflecting on Greg’s 2020 thesis for Tonik

Paulo J: Really great pointing that out, a way to balance out. And I guess “old school is new school,” quote-unquote, nowadays. I wanted to tie in what you just talked about to what you mentioned in our very first podcast back in 2020. 

When you talked about your thesis on digital banking, how you wanted to do things differently from what a lot of other fintechs have been trying to do in terms of the way they approach lending, and even how you approached lending yourself prior to doing Tonik, right? 

So, how does, from your view now, the Stone Experience Trajectory come full circle to that thesis that you shared with us in 2020?

Greg K: I’m happy to see that in that space, that blue ocean space in the Philippines, the Holy Grail is really the untapped middle-class client. And in that space, nobody’s really made much progress in the last few years. Because it’s tough. 

It’s tough to create your own credit evaluation system, to train your credit model to the point of unit profitability. You know, our team has a lot of experience doing this stuff in many different parts of the world. 

We have a bunch of quite senior guys who are not 25, 30-year old fintechers, right? They’re experienced bankers, data science people, et cetera. And still, for us, it’s been taking longer than we expected. I think that’s a non-trivial challenge. 

But there’s definitely gold at the end of the rainbow. It’s an enormous market, and whoever gets there first will have the benefit of onboarding these clients faster and therefore being able to upsell them into subsequent products becomes much easier. And the stickiness of that process is actually quite good. 

So, the bank that I built previously, Platinum Bank in Ukraine, we had, by the time we were done with our build and we’re exiting, more than half of our loan book provided by repeat clients or a revolving product. And those guys were super profitable, as the credit risk is already low on them because you know them well, and they’re good guys. 

The acquisition costs you’ve already amortized into the first product, so you don’t have a gap. So basically, the unit profitability is great. And that’s what made that bank really profitable. We were the most profitable bank in the country at the time that we were exiting. So, I think that’s okay. 

The lessons learned are, yes, there’s definitely that massive gold to be had. It’s taken us longer than we expected to figure it out, but we’re getting there. And I think we’re still in a great position. So our competition hasn’t really figured it out. There’s a few digital banks out there that have been announcing and yelling on every street corner right now that “we’re the biggest, we’re the best,” et cetera, et cetera. 

None of these guys have figured out the Holy Grail, which is the kind of unsecured and semi-secured digital channel-only lending. None of them have done that. We’ve been trying to figure it out for much longer than them, so we’re probably in a better place than they are.

“The lessons learned are, yes, there’s definitely that massive gold to be had. It’s taken us longer than we expected to figure it out, but we’re getting there. And I think we’re still in a great position. So our competition hasn’t really figured it out…None of these guys have figured out the Holy Grail, which is the kind of unsecured and semi-secured digital channel-only lending. None of them have done that. We’ve been trying to figure it out for much longer than them, so we’re probably in a better place than they are.”

Growing and maturing Tonik’s organization and where is Tonik hiring?

Paulo J: What really excites me is how what you guys are doing will really set the standard for other banks in terms of how they approach building out their own credit bureau and really assessing who to lend to and what makes a good borrower. So, it’s super exciting to see this develop in the next few years.

I wanted to shift gears a little bit and talk about how Tonik is very much an international organization, although it’s focused on that “rainbow in the Philippines,” sticking to its guns in the Philippines. But you guys employ people from India and Singapore. 

I wanted to know what your approach has been to managing this kind of international organization and aligning everybody in terms of the priorities, like for example, with the loan business that you guys are scaling right now.

Greg K: Our main two hubs are Chennai and Manila. Obviously, in Manila, we have our regulated bank entity, and here we have the biggest headcount, close to, I think, about 350 people. So, our bank staff handles bank functions, regulatory-related functions, and then a lot of ops stuff. 

We just launched what we call our ops engine. It’s basically a big open-space type of environment where we have our underwriters, our collectors, our call center agents, and all the other Ops functions that work directly on client volume.

And then in Chennai, we have our main R&D hub, where we have about a hundred people headcount. It’s very difficult to find in the Philippines sufficient quality and depth of the pool of people who’ve done digital banking. A lot of that has been done out of India, so that’s why we decided to go there.

We have a great team there that is really focused on not just IT development but also all of our day-to-day business-as-usual stuff, just running our infrastructure, running all of the testing, and all the data science stuff, et cetera.

So, those are the two main hubs. We also have a small hub in Singapore, which is where we’re headquartered. Mainly in that hub, we have about 20 people who are focused on technology and some of the more advanced technology and product stuff we’re doing out of Singapore. 

Frankly, I haven’t been to our Singapore office in over six months. I’m mainly going between Singapore, Chennai, and Manila. Most of my time, I try to spend in Manila because that’s where we have our team. Those are the three main hubs. We do have some people outside of these, but as COVID ended, we’ve actually tried to pull everybody into these three main hubs.

You can’t do innovation in the same way without face-to-face interaction. That’s why we’ve been very focused on bringing people together. Some of our senior guys, for example, that are spread all over, a few of them have already moved to Manila. A few of them are in the process of moving.

Paulo J: Yeah, definitely night and day from when we last talked, where you, I think, had just visited Manila for the first time back then, and now you’re literally spending most of your time in Manila. That’s great to hear. How do you see Tonik’s organization, maybe from a functional perspective, given everything that we’ve talked about thus far with loans, AI, and all of that, developing over the next year?

Greg K: What we’re doing right now is investing quite heavily in operational efficiency. That ops engine that I mentioned—we started out with a pretty high headcount there because most of our processes were not automated. And that was by design. 

We didn’t want to invest in automation of the processes until they were more stable. When you launch, you iterate the processes very quickly, and it makes no sense to automate the first iteration because then you just have to re-automate, and that’s just wasted investment.

So, for a couple of years, we operated with a relatively low level of automation. But at the end of last year, we started investing in getting that automation in place and really trying to improve the efficiency of the humans that we have. So that as we scale out, we can basically maintain our headcount pretty flat.

Our plan is that we won’t grow the central functions very much as we scale. We see opportunities to keep investing and keep bringing those efficiencies in. As I mentioned, in the contact center, for example, we just doubled the efficiency of our contact center agents last month just with a generative AI implementation. So that’s a perfect example of some of the other stuff we’re doing in this area. 

We will grow our headcount in the field, though, because we have the promoter network for our sales finance product and the retailer partnerships, where we put our promoter in the retail store. They can hold the customer’s hand, explain to them how to onboard, help them with the product, et cetera. 

So that network will grow. It’s not within our Tonik Digital Bank. We have a separate company in the Philippines that does that. But on a consolidated basis, that’s where we’ll probably see most of the headcount growth.

The retailer partner still wants to see us doing that kind of interaction with the customer to enable smoother onboarding and higher penetration. At the end of the day, they want to sell a TV, or a fridge, or whatever it is. What they want to see is that we have high conversion. And high conversion is still a high-touch business at the point of sale.

“When you launch, you iterate the processes very quickly, and it makes no sense to automate the first iteration because then you just have to re-automate, and that’s just wasted investment. So, for a couple of years, we operated with a relatively low level of automation. But at the end of last year, we started investing in getting that automation in place and really trying to improve the efficiency of the humans that we have…As I mentioned, in the contact center, for example, we just doubled the efficiency of our contact center agents last month just with a generative AI implementation.”

Greg’s masterclass on credit monetization

Paulo J: You’re really balancing out that automation versus the trust that comes with building this kind of business. I wanted to tie a bow on this conversation so far with a quick question. If you were to give a class on monetization for digital banks, what would be a key one-line takeaway that you would have for the students of this class?

Greg K: There are two types of environments in which digital banks operate. It’s a higher-income environment and a low rate. And there are two different models for monetization. So guys like those that operate in the developed markets, Chime, Revolut, et cetera, are more focused on transactional monetization. 

The reason being that, okay, you get a customer to onboard, maybe making $5,000 a month. You give him a debit card, and he will use that debit card. And if you can get him to transfer the salary to you, he’ll use that debit card, and every time he uses that debit card, you make 2% back of interchange income.

So that’s a great income stream, but it doesn’t work in a market like the Philippines. In a market like the Philippines, A, people don’t make $5,000 a month. They make a lot less. B, they’re not used to using their debit cards to pay for everything. Usually, the people in the middle class get their salary card income dumped into the account; they go to the ATM, withdraw the cash.

It’s pretty hard to monetize on the basis of payments, but at the same time, there’s usually in these emerging lower-income markets, a much higher credit under-penetration and credit inclusion issue. Because the Philippines is not unique; big banks in the Philippines don’t really care about middle-class consumer lending to the middle class.

They’re making enough money off of their corporate business and off of the premium retail business. And so going into that market is not a priority for them. And it’s hard work, building all those credit models, optimizing your CAC, optimizing your cost of risk, optimizing your cost of operations, building a real McDonald’s-type of operation. That’s hard.

And that requires a lot of the know-how that the big banks don’t have. So that’s really the model we’re deploying, and I’d say, depending on which market you want to operate in, that’s a very different way to monetize a business. So we’re monetizing it for the credit.

And we think it’s very exciting and very emotionally fulfilling because, at the end of the day, we’re helping Filipinos truly improve their lifestyle, right? Bringing credit to the masses. 

I’m a big believer in that; in the early stages of my life when I was a refugee in the US, that really helped me when I got my first credit loan from the credit union. So it’s been with me throughout my career.

“It’s pretty hard to monetize on the basis of payments, but at the same time, there’s usually in these emerging lower-income markets, a much higher credit under-penetration and credit inclusion issue…And it’s hard work, building all those credit models, optimizing your CAC, optimizing your cost of risk, optimizing your cost of operations, building a real McDonald’s-type of operation…So we’re monetizing it for the credit. And we think it’s very exciting and very emotionally fulfilling because, at the end of the day, we’re helping Filipinos truly improve their lifestyle, right? Bringing credit to the masses.”

A memorable customer story

Paulo J: You really talked about how this whole work, all this work that you’re doing, is really emotionally impactful as well, emotionally meaningful as well for you guys. Like any particular story or something that you’ve heard from people on the ground in terms of what Tonik has been able to do in terms of changing lives or impacting lives of its customers?

Greg K: Every once in a while, you get something like that. Actually, two or three months ago, I got this thing from one of our customers. 

She literally just contacted me on Facebook out of the blue and said, “Thank you so much for letting me take the loan,” and walked me through the life story situation that had helped her turn things around. And man, that just made my day. 

And then I shared that with the rest of the team, actually with the whole company, and the number of hearts that I got on that, on our company chat, was a record.

So I could see that story really resonated. And this kind of stuff you get every once in a while really makes it all worth it.

“Every once in a while, you get something like that. Yeah, actually, two or three months ago, I got this thing from one of our customers…She literally just contacted me on Facebook out of the blue and said, “Thank you so much for letting me take the loan,” and walked me through the life story situation that had helped her turn things around. And man, that just made my day…And this kind of stuff you get every once in a while really makes it all worth it.”

Rapid Fire Round

Paulo J: Yeah, it definitely puts everything that you guys do into perspective. And on that note, I wanted to go into a rapid-fire round. Greg is no stranger to this. So I changed the questions up, doing things a little bit differently this time around. So, short, sweet answers we’ll do. What superpower of any one of your fellow C-level colleagues would you want to have?  

Greg K: Todd Esposito — our CFO. Great guy with focus on execution, just getting things done. And we’ve been together for 20 years now, and we’ve done a few things together, and we’re very complimentary because I’m usually the guy with a lot of vision there, and I can drill down into numbers and analysis really well, etc. 

But when it comes to just getting it done, that’s a superpower that I don’t have the staying power for, and I need it. Therefore, I try to bring people around me that are really good at that. So I find that’s quite good and complimentary.  

Paulo J: Great CEO-CFO dynamic there. If you were to be invited to produce a Netflix series, what would be the title and maybe like a one-liner for the show? Title and one-liner.  

Greg K: I, there is this I saw on Netflix, there’s actually a motorcycling series by one of the famous actors. I forget the guy’s name. So he’s cycled through…  

Paulo J: Ewan McGregor  

Greg K:…So I probably want to replicate that, have a little battle with the camera, and I’d just go out and do that.  

Paulo J: I mean, if you do that in the Philippines, that would definitely be interesting to watch. Looking back now, what is a skill? It could be a soft skill or hard skill that you believe you should have learned back in your time as a student.  

Greg K: Not just as a student, but I think the first 10 years of my career were in private equity, and my studies were quite analytically focused—finance, accounting, and some political science—but very technical. 

And then in private equity, it was also very technical, a lot like strategic analysis, financial modeling, etc. Now, when I got out and became an entrepreneur, I was an entrepreneur in my college days, but that was just like a sole proprietorship. 

But then when I started building my first business, I was in my early thirties. I was like, “Man, all that stuff, Excel and PowerPoint, don’t matter. What matters is can you get stuff done by working with people, getting teams together, getting people motivated, getting people focused.” 

And it’s those people skills, the soft skills, that have been a real watch-out for me throughout my career, a big blind spot in my early days, because when you’re in private equity, nobody cares; they just care about working 24 hours a day, right?  

Paulo J: That’s really one of the most elusive questions of life. What is leadership, really? And how do you get things done at that level? And in contrast to soft skills, if there’s something that you could automate in your job just by wishing for it, what aspect of your role would that be?  

Greg K: Oh man, travel. Because I end up wasting a lot of time at airports and on planes, and I wish I had that Star Trek transporter, “beam me up, Scotty” thing, that could just get me from my house in Singapore to my office in Manila like this. That would be just awesome. I hate wasting time.  

Paulo J: And definitely something that we’ve got a lot of answers to that I guess already exist with LLMs and GenAI, but that one does not. I don’t know how that’s going to be possible yet with current technology. Definitely a good answer. If you could pick anyone alive or dead to be your 24/7 executive coach, who would it be, and what would you want to learn in particular?  

Greg K: I do have an executive coach right now. He’s an amazing guy. He’s been working with founders, kind of series A, series B, series C founders.  

Paulo J: Anything in particular that you picked up from your relationship with him?  

Greg K: Yeah, I think some of what I’ve been struggling with on my own is that you develop habits through consistency of behavior. And that’s so much of our behavior, including things we want to aspire to be or do, whether it be exercise or diet or whatever, right? 

It’s all down to habits. But you can build those habits, working on mindfulness and consistency. That’s really where he’s helped me a lot. I’m very grateful for working with him.  

Paulo J: And speaking of habits, to wrap up the rapid-fire round, any habits that you’d like to recommend to our audience that have really helped you?  

Greg K: For me, as I get older, wellness becomes a lot more important. Because my business runs on my energy at the end of the day. So if my chi is not flowing properly, the business is not going to flow because I’m not going to radiate the right kind of energy field that I then try to instill in everybody. 

So, taking care of my energy and how I flow has been one of my big lessons learned over the last few years. It’s a continuous struggle because I’m really not good at taking care of myself. 

Paulo J: Any particular action that you’ve started doing more recently, or anything that you’ve changed about your lifestyle?  

Greg K: I have my 16-point checklist that I try to go over daily. I’ve got an app called Habitify, where I’m pretty religious about checking it off. It has to do with diet, toxins, drinking, smoking, and that kind of stuff. Things I eat, exercise, being in contact with my close ones, and a couple of other things.  

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