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OCTOBER 30, 2024
ANDY WU
MALIHA MALEK QUADIR
ATICUS PETERSON
Tonik
In early January 2024, Gregory Krasnov, the founder and CEO of Tonik, the first digital bank in the
Philippines, concluded a meeting with his board of directors. He presented his preliminary budget for
2024, projecting a fourfold growth for the company in the next 12 months, requiring significant capital.
The board directed Krasnov to revise his budget and focus on accelerating the path to breakeven. “It’s
a fintech funding deep winter out there,” emphasized his investors and board members. Tonik still
retained over $50 million of equity cash from the Series B round raised two years earlier, the largest
Series B in the history of the Philippines. The investors insisted that Tonik reach breakeven with this
existing capital and avoid the need for any new third-party capital infusions.
Launched in 2021, Tonik received the first “sandbox” digital bank license from the Banko Sentral
ng Pilipinas (“BSP”), the bank sector regulator. Krasnov, a global fintech entrepreneur, established
Tonik to address what he believed was a $50 billion opportunity in consumer credit inclusion in the
Philippines, where consumer credit underservice was among the highest in Asia. (See Exhibit 1 for a
detailed breakdown.) Tonik attracted deposits, the key ingredient for its lending book, accumulating a
$150M deposit portfolio just over a year after its launch.
However, scaling its primary revenue generator, the lending book, progressed more slowly than
anticipated. Tonik encountered challenges in fine-tuning its proprietary credit risk model to lend
profitably to the unbanked, identifying the right loan segments, and navigating these issues amidst a
Philippine economy grappling with COVID-19 and significant macroeconomic headwinds. By the end
of 2023, Tonik reported unit profitability in two of its lending business lines and prepared to accelerate
growth. With a loan portfolio of approximately $23 million, it was just beginning to scale lending.
The investors’ message in 2024 starkly contrasted the exuberant investor mood only two years
earlier. At that time, zero interest rates drove a massive uptick in startup valuations. Digital banks
around the world were among the hottest deals, and the venture capital investors valued them at
Price/User ratios. The prevailing mentality was “grow, grow, grow, at all costs.” However, by 2024 the
sentiment had made a 180-degree turnaround to “slower, slower, slower, but make money.” To
maximize profitable growth, Krasnov and his team needed to decide what mix of products to offer.
Professor Andy Wu, Executive Fellow Maliha Malek Quadir, and Doctoral Student Aticus Peterson prepared this case. It was reviewed and
approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and
not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of
primary data, or illustrations of effective or ineffective management.
Copyright © 2024 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied,
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Global Ascent of Digital Banking
The last decade witnessed a global ascent of digital banking, which is still revolutionizing the
financial industry by rapidly advancing technology and changing consumer behavior. In recent years,
digital banking experienced exponential growth; one estimate forecast 3.6 billion digital banking users
by 2024, up from 2.5 billion in 2020. 1 The company viewed this expected surge as the result of the
increased convenience, efficiency, and accessibility offered by digital banks, allowing users to conduct
transactions, apply for loans, and manage their finances anytime and anywhere. Furthermore, the
COVID-19 pandemic accelerated this shift as traditional bank users moved online. As the digital
banking sector continues to expand, it is set to redefine the future of banking, making financial services
more inclusive, particularly in underserved regions around the globe.
Within the digital banking universe, digital bank “pure-plays,” also known as “neobanks,” gained
the largest market share. Without the legacy costs of branch network and manual operational
processes, neobanks can scale quickly and enjoy unique profitability advantages. For example, WeBank
in China reached 360 million users within less than a decade of launch, accounting for over 20% of the
national population. 2 Similarly, the top Brazilian neobank, Nubank, boasted 90 million users as of the
end of 2023, accounting for more than half of the working population of the country. 3 In South Korea,
Kakaobank onboarded 20 million users (or half the country’s relevant addressable market) within five
years of launch. (See Exhibit 2 for growth statistics for this set of banks over time.) 4
In addition to rapid growth, the leading neobanks achieved high Return on Equity (ROE), e.g.,
Nubank’s 2023 ROE stood at ca. 20% while typical ROEs of their legacy competitors remained in the
low single digits. 5 The capital markets rewarded these growth and profitability results with hefty
valuations, e.g., Nubank and Kakaobank market caps stood at $53 billion and $10 billion, respectively,
as of March 2024. (See Exhibit 3 for comparative stock performance over time.) 6
In established markets, neobanks primarily catered to a tech-savvy customer base looking for
convenience, speed, and lower fees for daily transactions and financial management. Companies such
as Monzo and Revolut in the UK, N26 in Germany, and Chime in the US gained meaningful market
share and significant valuations. Given the high level of banking services penetration in the established
markets, these digital challengers often switched customers away from legacy banks for their daily
banking services and became the primary bank for these customers. These neobanks had paymentrelated revenue streams, such as interchange revenue from Visa and Mastercard on the client payments
with cards, foreign-exchange fees, and international transfers.
In contrast, the emerging market model for digital banks mostly emphasized monetization through
lending. This model aligned with the needs of underbanked populations in these regions, where
traditional banking services were either inaccessible or inadequate for the emergent middle class and
below. A typical emerging market client had less digital payment volume as compared to an
established market client, making monetization through payments unfeasible. On the other hand, the
growing disposable income of the emerging middle class made it possible to lend to them if the lender
could reliably assess the credit risk of these new-to-credit customers. Consequently, digital banks
utilized alternative data and credit scoring models to offer microloans, personal loans, and SME
financing. In Brazil, Nubank became one of the largest digital banks globally by market value; it started
by offering credit cards and expanded into other lending products. In China, MyBank and WeBank
lent to individuals and small businesses.
One of the key advantages of the pure-play digital bank business model was its scalability. Without
the need to build a physical presence, neobanks could accelerate development and rapidly grab market
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share. A neobank could partner with a well-entrenched digital ecosystem player. Some examples
include Kakaobank (partner: Kakaotalk, #1 chat app in Korea), Jago Bank (partner: GoTo, #1 ride
hailing and food delivery app in Indonesia), Mybank (partner: Alibaba, #1 e-commerce in China), and
Webank (partner: WeChat, #1 chat app in China).
The divergent strategies between established and emerging markets underscored the adaptability
and diversity of digital banking models. In established markets, the emphasis on payment
monetization reflected a competitive response to an already banked population looking for improved
service and lower costs. Conversely, in emerging markets, the focus on lending monetization served a
more pressing need: financial inclusion and access to credit. Both models capitalized on technological
advancements, changing consumer expectations, and regulatory evolutions.
Financial Inclusion in the Philippines
Despite notable GDP growth in the Philippines from 2010 to 2019, during which the country
experienced an average annual GDP growth rate of approximately 6%, the nation’s financial inclusion
rates have remained low compared to regional benchmarks. 7 The World Bank reported that 35% of
adults in the Philippines had a bank account in 2019, lower than the 47% with one across Southeast
Asian countries. Neighboring countries such as Malaysia and Thailand had financial inclusion rates
exceeding 85% and 82%, respectively. 8 Despite robust economic growth over a decade, the formal
financial system excluded a large segment of the Philippine population.
From 2019 to 2023, financial inclusion in the Philippines significantly increased, attributed largely
to the effects of the COVID-19 pandemic and the rapid adoption of e-wallets such as GCash and Maya.
GCash, launched in 2004, and Paymaya, launched in 2000 (originally as SmartMoney), have been
central to this growth, supported by their respective telecom parents, Globe Telecom and Smart
Communications. These platforms addressed the needs of the unbanked and facilitated a surge in
digital transactions. By 2022, financial account ownership rose notably to 66%, illustrating a substantial
leap towards closing the financial inclusion gap within the country. 9
While the big e-wallets succeeded at creating more financial account and transactional inclusion,
Tonik management believed the Philippines’ situation with broad-based credit inclusion remained
very problematic. As of 2023, all retail loans accounted for $47 billion or only 11% of the total banking
assets and 19% of total bank loan portfolios. 10 Most of these retail loans were mortgages, car loans, and
credit cards targeting the top 20 percent of the population. The percentage of adults with a credit card
stood at only 8.1% in 2021. 11 Based on the World Bank data, while 58% of Filipinos have been reported
to borrow money, only 17% borrowed from a formal financial institution, and only one-fourth of
those—from a bank. 12 Borrowing from friends and family and informal lenders have been the
dominant modes of providing for the population’s credit needs.
Thus, credit inclusion, and especially in the unsecured lending segment, presented by far the largest
revenue pool opportunity in the banking sector in the Philippines. Unsecured consumer loans as a
percentage of GDP stood at only 2.5%, compared to the 12.5% Southeast Asia average, creating a $50Bn
lending asset-class opportunity. 13 More tellingly, the Philippines ranked even lower on this metric than
more financially underdeveloped economies in Asia like Myanmar, Nepal and Pakistan.
In response to the unmet credit demand and to foster financial inclusion, the Bangko Sentral ng
Pilipinas (BSP) enacted a series of additional reforms aimed at transforming the financial landscape,
the most important of which took place in 2020 with the Bangko Sentral ng Pilipinas (BSP) approving
a digital banking framework. This initiative was officially announced on November 26, 2020, paving
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the way for the establishment and licensing of purely digital banks. The framework aimed at extending
financial services and promoting market efficiencies by allowing consumers to shift towards digital
platforms for their banking needs.
Gregory Krasnov
In April 1991, a 16-year-old Soviet Jewish refugee Krasnov landed at Phoenix Sky Harbor Airport,
USA, after a three-day trip that originated in Mykolaiv, Ukraine (at the time, still part of the Soviet
Union). Krasnov and his parents were met by a welcoming group from a local synagogue that
sponsored them as refugees to the US, providing four months of financial support for food and rent.
Fortunately for Krasnov, he brought with him some computer skills, which were in very hot
demand in the early 1990s as the PC industry was starting to grow dramatically. This enabled Krasnov
to quickly start earning some money by helping SMEs with custom coding as well as PC repair and
customization. To launch a proper business, Krasnov needed a car, but he did not have any credit
history. Luckily for him, a friend recommended a “credit builder” loan from a local credit union. This
loan enabled Krasnov’s PC-related consulting business revenue that covered his college studies at
Arizona State University and, subsequently, at Cambridge University, UK. This personal lesson in how
credit inclusion can drive upward mobility was not lost on Krasnov, and increasing credit inclusion
ultimately became his lifelong mission.
Entering the world of private equity after college, Krasnov observed up close from an investor
vantage point how consumer finance rocketed throughout post-communist Central Europe—Poland,
Hungary, Czech Republic, Romania, Bulgaria—and how it created billions in shareholder value while
empowering the consumer population. When the same trend started emerging in Krasnov’s native
Ukraine, now a sovereign country, he grabbed the opportunity and founded one of the first consumer
lending banks in Ukraine, Platinum Bank. He gained the backing of international private equity funds
and the World Bank/IFC and, over the following years, built Platinum into a top three consumer lender
and the most profitable bank in Ukraine.
After exiting Platinum for $150 million, Krasnov decided to move to Asia. His original intent was
just to take a sabbatical with his family, cruising the region on a sailboat. As he got to know the region
better, Krasnov observed that the same “rocket” trend of consumer finance that happened in Central
and Eastern Europe was about to repeat itself in Southeast Asia. Parking his sailboat in Singapore,
Krasnov decided to take this on as his next business challenge. He began by starting a fintech venture
builder, Forum, in Singapore, through which he co-founded four fintech companies: Credolab, Flow,
Asiakredit, and Solarhome. In one way or another, all four companies were focused on credit inclusion,
at this point Krasnov’s main “wheelhouse” area.
Through his Forum activities, Krasnov realized that the Philippines presented by far the most
interesting opportunity in consumer credit inclusion compared to anywhere in Southeast Asia, and
possibly among the most sizeable in the world. One of his Forum venture-builds was AsiaKredit, one
of the first digital lenders in the Philippines, operating under brand Pera247. Despite quickly achieving
unit profitability, AsiaKredit remained sub-scale because it could not gain any meaningful wholesale
funding for its loan portfolio. This led Krasnov to understand that in order to tackle the consumer
inclusion opportunity in the Philippines at scale, one would need a bank license—so that one could
access the $300+ billion bank deposit market for funding. He also understood that the young and highly
digitally native Filipino population, with an average age of 25 and the highest digital engagement in
the world, would likely be very keen to move their deposits to a digital contender. (See Exhibit 4.)
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The idea of marrying the $50B consumer credit inclusion opportunity in the Philippines with the
digital deposits opportunity to create one of the top banks in one of the most populous countries in the
world inspired Krasnov to draft the first business plan for Tonik Bank in the summer of 2018 and
incorporate Tonik Financial Pte Ltd in Singapore on September 12, 2018. The groundwork was laid,
but he was still needed a bank license, funding, and a team. Krasnov saw himself as a man on a mission
to turn retail banking in the Philippines upside down. To realize his vision, he needed to get through
the first step—the bank license.
Philippine Regulation
At 2:30 p.m. on October 3, 2018, Krasnov entered an imposing grey edifice in Manila’s Malate
district, featuring a big blue logo of the Bangko Sentral ng Pilipinas (Central Bank of the Philippines).
Feeling a bit stressed and constrained by the suit and tie, which he hadn’t worn since exiting his bank
in Ukraine five years earlier, Krasnov sat down for a meeting with Pia Roman, the Head of Financial
Inclusion at the BSP. Krasnov shared with Roman his personal history working on credit inclusion
across multiple emerging markets, and then presented the business plan deck for Tonik Bank that he
had created over the summer.
“We both know that the Philippines has a credit inclusion problem,” he told the regulator. “We also
both know that the way it is going to be solved is not by the legacy banks, but by new innovative
digital-only entrants. I want to be one of the guys solving it and bringing all my experience, resources
and contacts into it. But I need a bank license to do that. How do we do this?”
His expectations from the meeting were low. Having dealt with many bank regulators around the
world, Krasnov understood that innovation is usually the last thing on central bankers’ minds. What
he did not take into account is that his counterpart was not a run-of-the-mill career government
bureaucrat, but a holder of advanced degrees from Columbia and Tufts University, with a deep
intrinsic motivation for solving financial inclusion in her native Philippines. She reported directly to a
BSP Governor who swore to improve the lives of Filipinos during his tenure by making financial
inclusion a top priority—and that he was brought to this meeting by a top Filipino financial inclusion
banker Long Pineda—retired already, but with significant credibility at the regulator herself.
As a confluence of these factors, and to Krasnov’s surprise, the regulator’s response was, “Let’s do
this!” Tonik was instructed to apply for a brand new rural bank license under assurances that it would
be put into a special regulatory sandbox and allowed to launch as the first purely digital bank in the
country. Subsequently, BSP would write special regulations for digital banking taking into account its
experience launching Tonik and would then convert Tonik into this new digital bank license category.
Without giving it much thought, Krasnov and Long looked at each other and said, echoing the
regulator, “Let’s do this!”
Launching During Lockdown
In the year that followed the fateful BSP meeting, Tonik obtained its experimental digital bank
license approval, selected the technology vendors, built the team, and raised initial VC equity funding.
However, when the time came to run towards the build and launch, the COVID-19 epidemic struck.
This created a major logistical issue for Tonik: How do you build a full-stack retail digital bank
while the CEO and CTO are in Singapore, the tech team is in India, the operational team is in the
Philippines, and none of them can travel to meet each other or interview any new people in-person for
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expanding the team? Because of the inevitable delays caused by this remote-only mode, it took Tonik
twice as long to integrate the entire solution and launch than it originally planned. Nevertheless, the
company successfully overcame these challenges and launched on March 18, 2021, as the first Filipino
bank “born in the cloud.” The company’s online launch event attracted massive attention and included
appearances from some of the leading Filipino financial services players, as well as by the deputy
governor of BSP in charge of bank supervision.
Tonik’s initial minimum viable product (MVP) at launch was focused on the transactional and
savings accounts. The Tonik app brought many highly innovative features to the market, including an
instantly opened interest-bearing transactional account with a variety of payment integrations and a
free virtual debit card, as well as the first deployment of a Stash savings account concept and the first
deployment of an online term deposit in the Philippines. Tonik’s savings proposition included a highly
unique and viral product called Group Stash, which reproduced in a digital environment a uniquely
Filipino communal savings concept called paluwagan.
Coupled with attractive deposit rates, friendly and humorous branding, and a simple interface,
Tonik’s MVP achieved traction significantly exceeding its initial targets. Within three months of launch
Tonik was already able to achieve its full-year goal of $50 million in deposit balances. Within just over
a year it reached $150 million in deposits, setting a new record for speed of balance sheet growth for
any bank ever launched in the Philippines.
Tonik used its market leadership and early traction to become the best-funded fintech startup in the
Philippines. It raised $170 million of equity capital across Pre-Seed, Seed, Series A, and Series B rounds
from major international venture capital investors, including Sequoia Capital, Point72 Ventures,
Insignia Ventures, and one of the top 10 global banks, Mizuho Bank of Japan.
With the portfolio and equity funding problem solved, it was time for Tonik to turn its attention to
building out its main money-maker: consumer loan products. And while doing so, Tonik needed to
tread a careful balance in terms of how its asset-side monetization would impact both its investor
relationships as well as its relationship with the BSP, its main regulator.
Digital Bank Valuations and Profitability
Traditionally, financial market analysts have been using return on equity (“ROE”) and price/book
value (P/B) metrics as the primary determinants of bank valuations. ROE is a measure of a bank’s
profitability, expressed as a percentage. It calculates how effectively a bank is using its equity to
generate profit. It is calculated by dividing a bank’s net income by its shareholder’s equity (total assets
minus total liabilities). P/B value ratio is a financial metric comparing a company’s market price per
share to its book value per share. The book value is defined as the shareholder’s value or net asset value
of a company, calculated as total assets minus total liabilities.
The two metrics are typically in a direct mathematical correlation to each other, with ROE used as
an independent variable and P/B as the dependent one. In essence, when it comes to bank valuations,
the financial markets are primarily interested in what is the level of profitability of a given bank in
relation to its shareholders equity, i.e., how efficiently is it using its equity to generate profit. And the
more efficient the bank is at using its equity, the higher the multiple that will accrue to its equity to
determine ultimate company valuation. When one takes legacy bank valuations worldwide and puts
them on a plot graph, with ROE on the x-axis and P/B on the y-axis, one observes a very close
dependency, with the regression trend forming a tight straight line trending from bottom left to top
right, and a high R-squared, indicating a high degree of statistical correlation.
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In a big deviation from historical precedent, at the peak of the fintech hype in 2019–21, digital bank
valuation started to be based on price/user, a metric deriving from the digital economy. In essence,
due to the early-stage nature of most of the digital bank startups, venture capital investors appeared to
be rewarding digital banks for grabbing market share as defined by the number of users. It seemed
that little attention, if any, was paid by the investors to the current profitability of the company’s
products and its overall path to profitability. Price/revenue seemed to be a secondary metric, i.e.,
investors were using a sanity check of “can the company generate revenue.” This valuation
environment created a dislocation, rewarding fintech company CEOs for growth at any cost.
This valuation approach and the resultant growth focus were in conflict with how bank regulators
tend to approach the matter of bank profitability. A bank license can be viewed as a partnership
between the investors and the regulator, in which the regulator insures the bank’s deposits, thus
enabling stable access to low-cost deposit resources for lending. However, the regulator is also keenly
interested in making sure that these deposits are safe. Therefore, the regulator generally frowns at
banks expanding their loan book with unprofitable products, and especially if such unprofitability is
primarily a result of the bank’s lack of control over its credit risks.
For most neobank startups around the world, this expansion did not present much of an issue. Most
operated without their own bank license and, consequently, were not under direct pressure from
regulators. The majority of them, especially in established markets, mainly focused on monetization
through payments or investments and not on collecting deposits or making loans. This situation
created a dilemma for Tonik. On the one hand, Tonik raised large amounts of capital for growth,
making it accountable to its investors. The investors demanded rapid growth of Tonik’s user base and
its lending portfolio because, in the current valuation environment, that is what would create the
highest growth in the value of their shares. On the other hand, Tonik needed to balance this against
pressure from the regulator, who provided Tonik with considerable feedback after its first regulatory
audit, especially in relation to Tonik’s credit risk and product profitability issues. Tonik needed to make
sure it grew its user base, but it was not in a position to do so until it achieved strong traction towards
unit profitability on its core monetization strategy—its lending products.
Monetization Through Lending
In Q3 2021, Tonik piloted its first lending product, a digital cash loan. QuickLoan quickly found
public acceptance. However, managing credit risk on the product proved a challenge—the risk results
improved throughout 2022–23 but slower than original forecasts. 14
At the same time, the global economy started experiencing signs of distress. First, the COVID
epidemic created massive shocks to global supply chains, fueling inflation. Then the inflation was
exacerbated by the post-COVID stimulation. In Tonik’s view, this did not bode well for the economic
outlook, with high risks of a turn of the macroeconomic cycle being just around the corner. Tonik
needed to think about diversifying into lending product lines that were less risky than the digital cash
loan—both to find a faster path to unit profitability on its lending and to have some products that could
be profitable even in a difficult macroeconomic environment, i.e., structurally risk-mitigated.
So, in 2022, Tonik shifted its attention to building out a broader asset-side product range. First, it
entered sales financing by launching a pilot of the Shop Installment product. Second, it sourced and
locked in an acquisition of the payroll deduction loan company TendoPay. Third, in order to address
the upper-income quartile competing with banks, it introduced a variation of its Digital Cash Loan
called Flex Loan, which featured larger ticket sizes and a more manual approval process. Fourth, Tonik
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piloted an E-Commerce (BNPL) loan. Finally, it prepared and piloted a home equity product branded
as Big Loan. The characteristics of the market for each of these products are further described below.
Cash Loans
The general-purpose unsecured cash loan is typically the holy grail of consumer finance in an
emerging market context, i.e., the most versatile consumer finance product from the customer
perspective. As such, it usually constitutes the lion’s share of unsecured consumer loan production and
portfolio on bank balance sheets in the emerging markets. However, in the Philippines this product
evolution has been historically restricted to two subsegments:
Personal Loan The company estimated the total size of the personal loan business at $6 billion.
The lending of general-purpose personal loans by banks has been historically limited to larger tickets
(typically well over $1K), stemming from the legacy bank focus only on the upper-income part of the
population. Over 80% of this segment is dominated by just five banks: BDO, BPI, Metrobank, EastWest
Bank, and Security Bank. The bank personal loans business in the Philippines remains entrenched in
outdated practices reminiscent of the 1980s, including (a) a requirement for prior credit history and
bank account, (b) a paper-based physical application process at the branch, and (c) a manual credit
approval process leading to long approval times of 3–7 days.
Payday Loan The company estimated the total size of the payday loan business at $0.5 billion.
Payday loans are characterized by a very short duration of 15–60 days and very high APRs reaching
over 150% p.a. Loan sharks are the largest providers of this product, known in the Philippines as the
“Five-Sixes.” The name stems from the characteristics of the product as perceived by the consumer,
whereby if you borrow five dollars from a payday lender today, you have to return six dollars
tomorrow. In the recent years, the Philippines witnessed entry into this segment of digital/fintech
payday lenders, such as Tala, Pera247, UnaCash and JuanHand. Without access to deposits, both offline
and fintech payday lenders remain subscale and quite fragmented, with individual loan books of even
the largest players not exceeding $50 million.
Tonik was aware of only a handful of players offering small-ticket cash loans targeted at enabling
true mass market adoption, i.e., loan terms of over six months and APRs in the mid-double digits (i.e.,
40%–80%). With the largest market share in this subsegment, e-wallet GCash partnered with CIMB
bank for its financing. As of mid-2023, the company believed that GCash/CIMB had around $250
million in its cash loan portfolio. New entrants into this segment in 2023 included Maya Bank and Uno
Bank, but both their loan books remained quite small, well below $100 million each.
Tonik launched a cash loan product through its app in 2021 and, in the course of 2022–23, worked
toward achieving unit profitability. This included attempting to penetrate a “safer” personal loan space
with a larger-ticket flex loan. However, bringing down the cost of risk on cash loans proved a bigger
challenge than Tonik anticipated, especially against the backdrop of a global inflation spike that started
in late 2022 on the back of the commodity price shocks caused by the Russian invasion of Ukraine.
As of the end of 2023, Tonik has not achieved unit profitability on the cash loan product. Tonik
started exploring structural risk mitigation strategies, including: (a) tying its cash loan production to
partnerships, whereby it could leverage a B2C partner’s customer loyalty data for improved credit
analytics and performance, and (b) linkage of cash loans to the customer’s transactional history on the
Tonik app, thus gaining further insight and data on customer behavior for further risk mitigation.
However, neither of these strategies was ready for industrial scaling as of the end of 2023.
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At the same time, Tonik worked on improving its scorecards and product parameters to improve
its main digital cash loan economics. The early vintage indicators, such as first payment default, had
declined by ca. 40% in the course of H2 2023. Tonik has also been achieving positive unit economics on
the upsell cash loan to the customers originally acquired on a digital cash loan. Therefore, Tonik is
getting close to hitting unit profitability on its digital cash loans on a lifetime basis (i.e., with the first
upsell), and it has a couple of hypotheses of how it can continue improving the economics through
partnerships and payments linkages.
Sales Finance Loan (Shop Installment)
In most emerging markets at an early stage of consumer credit penetration, sales finance (a.k.a. POS
Lending) becomes a major channel for consumer credit. Consumer lenders partner with retailers of
home appliances and mobile phones to deliver credit at the point of sale, i.e., in stores. This is typically
achieved by the lender placing a promoter inside the partner store. The promoter guides the consumer
through the credit application process and conducts basic KYC (Know Your Customer) procedures.
Sales finance is a less-risky way to deliver unsecured consumer loans to new-to-credit customers
than a cash loan, for the following reasons: (a) the disbursement is made by the lender directly to the
merchant, (b) physical KYC is conducted by the promoter, and (c) down payment of at least 10% is
made by the consumer, creating more “skin in the game.” The disadvantages for the lender include (a)
a significant cost of maintaining a physical promoter network and (b) constrained speed of scaling of
production due to the requirement for securing merchant partnerships and recruiting and onboarding
promoters. Similar to the cash loans, consumer lenders typically consider the sales finance loan unit’s
profitability on a lifetime customer value basis, i.e., the “good” (creditworthy) sales finance loan
customers are typically upsold into successive tranches of cash loans on advantageous terms, thus
amortizing the initially high unit customer acquisition cost over multiple successive loans.
The potential addressable market for sales finance loans in the Philippines in 2024 can be estimated
at about $16 billion, of which $11 billion 15 is constituted by household appliances and $5 billion by
smartphones. 16 According to Tonik’s analysis, the dominant player in this segment is Home Credit, a
non-bank consumer lender, which Tonik estimates has reached approximately $1 billion in annual
production as of 2023, accounting for what Tonik believes to be over 90% of the market share of instore financing provided at merchants. Thus, overall penetration of in-store credit into the relevant
addressable market remains at a level below 10%. Based on the benchmarks of other emerging markets,
in-store credit typically grows to 40–50% of the entire gross merchandise value, implying a $6–7 billion
gap in annual supply of credit through this channel. Home Credit’s dominant position creates
discomfort among its retail partners, stemming from overreliance on a single supplier of consumer
finance to support their sales volumes. This creates a favorable position for new entrants.
In 2023, a series of changes took place in the market. First, the Japanese banking group MUFG, the
world’s seventh-largest financial institution with over $3 trillion in assets, acquired Home Credit and
provided it with access to scalable liabilities for the growth of its loan book through access to the global
MUFG treasury. And second, two new entrants appeared on the market, Salmon Finance and Skyro,
both management team spin-offs from Tinkoff Bank, the largest player in credit cards in Russia. In late
2023, Salmon Finance acquired a rural bank, which gave it access to scalable liabilities through access
to the retail deposit market. At the same time, both Salmon Finance and Skyro raised significant
amounts of venture capital funding, preparing to challenge Home Credit’s near-monopoly in the sales
finance loan segment.
Tonik launched its sales finance loan product, branded as Shop Installment Loan, in pilot mode in
2022, and throughout 2022–23 iterated on the product to try to achieve a stronger competitive fit against
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the dominant competitor Home Credit, as well as to try to achieve unit profitability. By the second half
of 2023, Tonik achieved unit profitability on this product on a lifetime basis (i.e., including the first
Upsell). From Q3 2023, Tonik started actively scaling its merchant partner network, increasing new
loan production in this segment by 10x in the course of H2 2023.
Payroll Deduction Loan (Tendo)
Given the historical difficulties in assessing and managing mass-market credit risk, some banks and
fintechs in the Philippines started providing loans with direct payroll deduction. These lenders partner
with employers and sign framework agreements under which they can make cash loans to their
employees, typically for a term up to 24 months. The employer deducts the monthly loan payment
directly from the employee’s salary and passes it on to the lender.
Some of the banks, such as Security Bank and BPI Bank, which had a significant clearing of employer
payroll processing business, entered this segment. There were also two fintech companies that entered
this market in the last decade—Savii and Tendopay—with Savii becoming the market leader.
The payroll deduction loan solution is characterized by attractive unit profitability. Customer
acquisition cost is low: the lender just needs either a pre-existing payroll relationship with the
employers that it would target, and/or a B2B sales force focused on such employers. Credit risk also is
quite low, as the only time a credit risk arises is when the employee leaves the employer before paying
off the loan or the employer goes bankrupt.
Tonik entered payroll deduction lending in 2022 by acquiring Tendopay. Even though Tendopay
was not the market leader, it already had positive unit economics. Furthermore, Tonik hoped to grow
the Tendopay loan book with capital from Tonik’s deposits. Closing the Tendopay acquisition in
February 2023, Tonik accelerated Tendo’s growth, growing its new loan production and loan portfolio
by close to 4x by the end of 2023.
Even though the segment was attractive from a unit economics perspective, Tonik management felt
saw limited potential because they believed a relatively small proportion of employers would go
through the hassle of setting up a payroll deduction. There was a long lead time in the B2B sales process
to employers. Tonik viewed this market as a short-term loan book accelerator, rather than a major longterm production pillars. An additional risk was presented by the fact that the market leader Savii was
rumored to be for sale and might be acquired by one of the recipients of a digital bank license, all of
whom were quite successful following in Tonik’s footsteps to generate sizeable deposit books but were
struggling to find ways of profitably deploying these deposits into loans.
Home Equity Loan (Big Loan)
The Filipino residential real estate market is characterized by a very low level of mortgage
penetration. According to Tonik’s analysis, bank mortgage loans comprise under 10% of the total
residential real estate value in the country. The company estimates that another approximately 10% is
comprised of loans given by developers directly to buyers, and a further 10% is provided by various
types of government-backed affordable housing programs. This leaves the majority of the residential
real estate stock unpledged and therefore available for collateralization through home equity loans.
The reason this situation exists is because banks in the Philippines have historically provided very low
deposit interest rates of 1–2%, while real estate appreciation can easily reach 5–10% p.a. Therefore,
many Filipinos choose to purchase property with cash rather than using loans.
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Tonik recognized that this scenario represented an opportunity for providing much more affordable
loans to the population than on a purely unsecured basis. Home equity loans, i.e., cash loans
collateralized by real estate, have remained a tiny proportion of banks’ loan books because banks
would require a very cumbersome process and set of documentation from the clients on loans of this
type, including long and manual decision-making processes for credit assessment. Tonik also
recognized that this situation had some parallels to what happened in Central and Eastern Europe,
where most families ended up owning their apartments outright as a result of post-communist
privatization. Tonik management was also aware of the fact that in Central and Eastern Europe this
had led to the emergence of a large and very profitable home equity loan industry. Also, given the
difficult macro outlook, Tonik believed that entering secured lending could be a useful way of reducing
the credit risks associated with building up its loan book in an uncertain macro environment.
Therefore, in 2022 Tonik approached the BSP with a request to approve a pilot of its home equity
loan, branded as Big Loan. Tonik required this approval because the mortgage loan would have to
have a physical completion requirement with notarized signatures, which potentially was not
permitted under its digital bank license. The approval was granted after a five-month period, and Tonik
was able to launch its pilot at the end of 2022.
The pilot showed that further product changes were required to give the product a broader appeal
(i.e., taking different types of collateral and enabling lending to SME owners). After another five
months of consideration, Tonik received approval and by the end of 2023 relaunched its pilot with an
improved set of product-market fit parameters. However, as of the end of 2023, Tonik still has not
validated that its unit customer acquisition cost on the Big Loan is sufficiently low to demonstrate
positive unit-level economics. The product required significant marketing and fixed costs, including
dedicated sales and underwriting personnel and marketing for lead generation.
Other Potential Consumer Loan Products
Tonik management considered a potential entry into a few other lending segments.
Home Acquisition Loan The company estimated the total size of the home acquisition loan
business at $40 billion. This loan is mostly provided by legacy banks and developers. The developers
get funding by accessing credit lines from legacy banks, which are usually owned by the same
conglomerate as the developer itself. Banks and developers lend this product at high single-digit
interest rates. Since legacy banks and developers have a sustainable competitive advantage over Tonik
on the cost of funding, Tonik management made the decision not to enter this segment.
Motor Vehicle Loan The company estimated the total size of the motor vehicle loan business
at $9 billion. This segment is dominated by legacy banks, who partner with car and motorcycle
dealerships to originate loans at the time of vehicle purchase. Because the banks also provide inventory
financing to the dealers, they are able to lock this consumer loan channel into exclusive arrangements.
For this reason, Tonik management made the decision not to enter this segment.
Credit Card The company estimated the total size of the credit card business at $13 billion. As
of 2023, only ca. 15% of the adult population holds a credit card. 17 Credit cards were the only consumer
lending product on which BSP limited interest rates to 30%. Due to high credit losses in the mass
market segment, it would not be profitable to provide credit cards to the mass market at this interest
rate level, causing Tonik to deprioritize the rollout of this product. At the same time, there is additional
income potential on credit cards in the form of digital payment interchange fees. It might be too early
in the Philippines for this revenue stream to be meaningful due to low penetration of card payments,
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it does have potential for the future. There was also good precedent: Nubank became a $50B market
cap company with a credit card as its primary product.
E-Commerce Loan (BNPL)
The company estimated the total size of the e-commerce loan
business at $0.2 billion. The e-commerce market in the Philippines is highly concentrated, with the
company estimating 80% of the volume being driven by two main players: Shopee and Lazada. The ecommerce market is also at a relatively low level of development, with over 70% of the consumer
durables categories estimated as being sold offline. Shopee introduced its own BNPL product in the
Philippines, and it is financed by its own Seabank, a rural bank with a digital channel add-on, that has
access to the consumer deposit market. Lazada set up a strategic partnership with BNPL company
Akulaku, which also set up a rural bank with a digital channel add-on, Own Bank. Thus, for a new
entrant into BNPL, only a relatively small portion of the market is available, and one would have to
integrate with many fragmented merchants to achieve meaningful flow. However, success in this space
is possible. Billease, a fintech company started in 2015, achieved a loan portfolio of over $50M as of
2023 year-end and achieved profitability on this segment (albeit mostly on a repeat cash loan upsell
basis, not on the first product). Tonik piloted its e-commerce Shop Installment product in 2022 but
discontinued it due to high credit losses and, at the time, lack of visibility on upsell economics.
Looking Forward
In the course of 2022, regulators around the world started raising interest rates to actively combat
inflation. This caused valuations of high-growth companies to adjust downwards, sometimes quite
dramatically. By mid-2023, this created a complete “winter” in fintech investment by the venture
capital sector. The only companies able to raise money were the ones that were not only delivering
growth but also profitability (or a clear near-term path to profitability).
In January 2024, Krasnov met with his board of directors to discuss budgeting for 2024. The board
felt it absolutely critical that Tonik start showing not only acceleration of its revenue growth but also
an accelerated reduction in its cash burn. Tonik still held over $50M of equity capital from its latest
Series B round, giving it 18–24 months’ runway if its cash burn did not decrease. But the board advised
Krasnov to plan to reach breakeven on the existing capital, without expecting any additional capital in
the near term. Because it was impossible to predict whether or when investor sentiment might turn
positive again, Krasnov needed to set Tonik up for self-sustaining growth and profitability.
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Exhibit 1 Digital Banking & Consumer Finance Market Opportunity in the Philippines: Unsecured
Consumer Loans (% of GDP)
Unsecured Consumer Loans as % of GDP
25.0%
20.9%
20.0%
~$50B Lending Opportunity
15.0%
12.0% 12.3%
10.4%
10.0%
8.8%
6.8% 6.8% 7.3%
6.2% 6.5% 6.5%
5.0%
2.5%
3.5%
0.0%
Source:
Proprietary company research.
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Exhibit 2
Leading Digital Bank Growth Statistics
2016
Total
Customers
(MM)
Profit
($M)
Assets
($M)
Kakaobank
Nubank
Webank
Kakaobank
Nubank
Webank
Kakaobank
Nubank
Webank
2017
2018
2019
2020
2021
2022
2023
1.0
10.0
12.4
15.4
18.0
20.4
22.8
0.5
2.4
5.2
15.6
29.7
48.1
65.3
93.0
19.8
>60.0
>100.0
(11.4)
(78.0)
(15.6)
10.3
84.9
152.5
196.5
265.1
(37.6)
(35.3)
(25.8)
(77.8)
(26.8)
6.6
204.1 1,196.5
56.6
204.3
349.0
557.2
699.3
971.1 1,260.7
209.1 4,362.2 9,060.6 16,970.8 19,906.3 26,920.2 29,519.6 40,701.5
660.7
1,422.4 2,699.6 6,453.9 10,154.3 19,858.7 29,916.6 43,345.2
7,335.4 11,525.1 31,034.4 41,078.3 48,865.1 61,885.5 66,851.0
-
Source:
Created by casewriter based on Nubank, Webank, and Kakaobank financial reports provided by the company, as well
as those accessed on Statista in July 2024 at the following pages:
Statista, “Number of Kakao Bank customers in South Korea from 2019 to 2023,” May 17, 2024, https://
www.statista.com/statistics/1127770/south-korea-number-of-kakao-bank-users/, accessed July 2024.
Statista, “Net income of Nubank from 2015 to 2023,” July 18, 2024, https://www.statista.com/statistics/882241/
brazil-nubank-net-profit/, accessed July 2024.
Statista, “Net profit of WeBank from 2016 to 2022,” January 8, 2024, https://www.statista.com/statistics/1221243/netprofit-of-webank-china/, accessed July 2024.
Statista, “Net income of Kakao Bank from 2016 to 2023,” June 4, 2024, https://www.statista.com/statistics/1227676/
kakao-bank-net-profit/, accessed July 2024.
Statista, “Total assets of Nubank from 2015 to 2023,” July 18, 2024, https://www.statista.com/statistics/882209/
brazil-nubank-total-assets/, accessed July 2024.
Statista, “Total assets of WeBank from 2016 to 2022,” January 8, 2024, https://www.statista.com/statistics/1221237/
total-assets-of-webank-china/, accessed July 2024.
Statista, “Total assets of Kakao Bank from 2016 to 2023,” June 4, 2024, https://www.statista.com/statistics/1227624/
kakao-bank-total-assets/, accessed July 2024.
Note:
RMB converted to USD using the exchange rate of 7.0889 RMB to 1 USD from Google Finance on September 7, 2024.
KRW converted to USD using the exchange rate of 1338.77 KRW to 1 USD from Google Finance on September 7, 2024.
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Exhibit 3
Source:
Digital Banks: Share Price Performance
Public stock exchange historical data.
Exhibit 4 Digital Banking & Consumer Finance Market Opportunity in the Philippines: Internet
and Social Media Usage
Source:
Proprietary company research.
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Endnotes
1 Statista, “Number of online banking users worldwide,” https://www.statista.com/statistics/1228757/online-banking-users-
worldwide/, accessed July 2024.
2 PR Newswire, “WeBank recognized as best global digital-only bank by the Asian Banker,” February 27, 2024,
https://www.prnewswire.com/apac/news-releases/webank-recognized-as-best-global-digital-only-bank-by-the-asianbanker-301791395.html, accessed July 2024.
3 Statista, “Number of Nubank active customers quarterly,” https://www.statista.com/statistics/1415559/nubank-active-
customers-quarterly/, accessed July 2024.
4 Statista, “Number of Kakao Bank users in South Korea,” https://www.statista.com/statistics/1127770/south-korea-number-
of-kakao-bank-users/, accessed July 2024.
5 MBN Staff, “Nubank records US$8 billion revenue in 2023,” Mexico Business News, February 27, 2024,
https://mexicobusiness.news/finance/news/nubank-records-us8-billion-revenue-2023, accessed July 2024.
6 Yahoo Finance market cap lookup for each company, March 2024.
7 Republic of the Philippines Department of Finance, “PH’s full-year 2023 GDP growth strongest among major Asian
Economies,” January 31, 2024, https://www.dof.gov.ph/phs-full-year-2023-gdp-growth-strongest-among-major-asianeconomies/, accessed July 2024.
8 World Bank, “Financial Inclusion in the Philippines,”
https://datatopics.worldbank.org/financialinclusion/country/philippines, accessed July 2024.
9 Bangko Sentral ng Pilipinas, “Financial Inclusion Dashboard—Q4 2022,”
https://www.bsp.gov.ph/Media_And_Research/Financial%20Inclusion%20Dashboard/2022/FIDashboard_4Q2022.pdf,
accessed July 2024.
10 Bangko Sentral ng Pilipinas, “BS Financial Statements,”
https://www.bsp.gov.ph/SitePages/Statistics/BSFinancialStatements.aspx?TabId=, accessed July 2024.
11 Jay Hilotin, “Philippines Credit Card Spending Soars by 39%, Here’s Why,” Gulf News, October 31, 2023,
https://gulfnews.com/business/retail/philippines-credit-card-spending-soars-by-39-heres-why-1.1698739295845, accessed
July 2024.
12 Bangko Sentral ng Pilipinas, “Financial Inclusion Report 2021,”
https://www.bsp.gov.ph/Inclusive%20Finance/Financial%20Inclusion%20Reports%20and%20Publications/2021/2021FISTo
plineReport.pdf, accessed July 2024.
13 Proprietary research based on company documents.
14 Market sizing estimates in this section are based on proprietary analysis by Tonik Bank.
15 6Wresearch, “Philippines Home Appliances Market (2020–2026),” https://www.6wresearch.com/industry-
report/philippines-home-appliances-market-2020-2026, accessed July 2024.
16 Statista, “Smartphones—Philippines,” https://www.statista.com/outlook/cmo/consumer-
electronics/telephony/smartphones/philippines, accessed July 2024.
17 TransUnion, “Philippines’ Robust Credit Card Market Poised for Further Growth Driven by Greater Financial Inclusion,”
July 10, 2024, https://newsroom.transunion.ph/philippines-robust-credit-card-market-poised-for-further-growth-driven-bygreater-financial-inclusion/, September 2024.
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