Tonik Digital Bank in the Philippines welcomes new clients with a love letter: “Your traditional banking ends here. Your neobanking romance starts now.” The bank calls accountholders “luv” and offers higher interest rates on deposits to help customers “move on and get over your Ex (bank).”
Tonik has won over 100,000 hearts since launching in March. In its first month, the company pulled in more than PHP one billion (USD 20 million) in retail deposits, which to date total over PHP 4.4 billion.
The Sequoia India-backed startup is one of six digital banks courting the 70% of Filipino adults who do not have bank accounts—one of the highest rates in Southeast Asia.
Digital banks are allowed to offer traditional banking products and services. The central bank introduced the new banking designation a year ago but limited the number of digital bank licenses to six for three years. These branchless banks are expected to be up and running next year in an increasingly lucrative market amid the pandemic-related push into fintech.
Philippine regulators expect the asset-light business model to spur better and flexible offerings for millions of Filipinos who lack access to financial services. Digital banks have the potential to outpace traditional players in the long term, according to analysts, who also point to the challenges they face: big and well-entrenched lenders in a market that still prefers in-person transactions.
But Tonik founder and CEO Greg Krasnov is upbeat.
“With the Philippines, we are talking about a market with potential values of up to USD 140 billion in retail deposits and USD 100 billion in lending,” Krasnov told Nikkei Asia. “Traditional banks simply do not offer compelling propositions, especially for loans.”
One of the fastest-growing economies in the region before the pandemic, the Philippine archipelago is home to 109 million people. Micro, small and midsize companies comprise 99% of businesses and the economy receives USD 30 billion in remittances annually from 10 million overseas workers.
But the cost of setting up brick-and-mortar branches in rural areas has hindered financial inclusion, while strict know-your-customer protocol or simply lack of funds discourages many from opening accounts. Entering banks with their all-too-often long lines can also be intimidating, which explains why Tonik tried a light-hearted approach in its app.
“These disadvantages can be exploited by digital banks who can issue loan approvals quickly, operate without the complexities associated with branches, and can be nimble in building new offerings,” said Patrick Stokvis, vice-president at research company Third Bridge.
The difficulties big banks face are not lost on KKR-backed fintech Paymaya, which will launch its digital Maya Bank early next year targeting small transactions. “Our approach is about the relatively shorter tenor of loans,” Paymaya president Shailesh Baidwan said. “Our whole system and processes are designed to be able to do transactions of [as small as] 1 centavo.”
Paymaya’s mobile wallet has 40 million registered users, covering over half the adult population. Its 60,000 remittance agents spread across the islands could help in cash disbursements, Baidwan said.
Officials say data will allow Maya Bank to tailor offerings and keep costs low amid rising loan defaults endured by traditional lenders. “We know when [customers] need money. We know when they have extra money. We know their capacity to pay,” said PayMaya CEO Orlando Vea.
Other digital bank license holders in the country include Overseas Filipino Bank, a unit of state lender Land Bank of the Philippines; GOtyme, a joint venture between Singapore-headquartered fintech Tyme and local conglomerate JG Summit Holdings; and UNObank, which is owned by a Singapore-based company that chose the Philippines as a launchpad for regional expansion.
“In the longer term … digital banks will outrun traditional players, eventually becoming the primary bank of choice for customers,” said Swarup Gupta, analyst at the Economist Intelligence Unit.
Gupta, however, pointed out that the five largest domestic banks share 60% of the total loans and assets, “providing them with a strong incumbent position that digital challengers will find difficult to erode immediately.”
“Besides, they are making their own forays into the digital space,” Gupta said.
Union Bank of the Philippines, which is among the nation’s 10 largest lenders, is an example. Jose Emmanuel Hilado, the bank’s chief financial officer, said their new digital bank will be a vehicle to “reinvent” banking. “[It will] allow us to let go of the old ways of thinking about banking … and compete with the fintechs,” Hilado said.
Rizal Commercial Banking Corporation is also building a digital bank but missed the first round of licensing. RCBC secured a USD 93.9 million investment in June from Sumitomo Mitsui Banking Corp. to fund its tech initiatives.
Eugene Acevedo, CEO of RCBC, said in June that the low-interest rate environment has squeezed margins, and to cut costs, app-based banking is the way forward. RCBC shut dozens of branches last year.
The country’s largest lender BDO Unibank, which has PHP 3.3 trillion pesos in assets and over 1,400 branches, launched a mobile wallet this year for a service already dominated by players like Paymaya and Ant Group-backed GCash, which is also moving into financial services. GCash recently closed a USD 300 million funding round, raising its valuation to USD 2 billion.
Krasnov said Tonik, which has so far raised USD 44 million, is set to conclude another fundraising by yearend, strengthening the digital bank’s financial muscle to compete with established lenders.
But analysts said there’s another crucial asset that digital banks should build for the “neobanking romance” to last: trust.
“Digital banks will need to make efforts to gain the trust of customers in a country with a predisposition for face-to-face transactions,” Gupta said.