Start-up profiles: Digital banking, embedded finance, crypto banking

DIGITAL BANKING – TONIK (PHILIPPINES)

Greg Krasnov, founder and CEO of Philippines digital bank Tonik, knows that when a middle-class revolution starts happening – invariably at $3,000-5,000 GDP per capita – retail finance segments experience hockey stick-shaped growth, especially in consumer lending. He learned this in Eastern Europe, where he started his career as a private equity investor for Bank of America, and as founder of several fintech start-ups across Europe and Asia.

About 3-4 years ago, Krasnov saw these tell-tale signs in the Philippines, where 70% of a population of 110 million is unbanked. The incumbent banks would not – and still do not – provide any lending services based on non-traditional risk assessment options such as digital device footprints. Most people simply borrow from friends and family or loan sharks.

“There’s a lot of excitement around payments these days, and payment companies are getting all these investors, but frankly in a place like the Philippines, the revenue pool in consumer lending is an order of magnitude higher than in consumer payments,” Krasnov says.

“We’re going after the 80% of the population that has never had a bank loan and cannot get a bank loan. It’s about sifting through that and seeing who is more or less disciplined. For the ones that are more disciplined, you want to keep doing business with them.”

The first challenge was to establish the liabilities needed to build a consumer finance book capable of scaling into this opportunity. Offering interest rates of up to 6%, Tonik secured more than PHP1 billion ($20 million) in retail deposits within a month of launch, which is said to be a record for any new bank in the Philippines. It now has about PHP3.4 billion in deposits.

The plan is to open accounts for the upper part of the middle class and lend the money to the lower part of the middle class – and it’s clicking with investors. About $44 million has been raised since 2018 from the likes of Sequoia Capital India and Insignia Ventures Partners. Last month, Singapore’s iGlobe Partners led a $17 million pre-Series B round, with the Series B proper expected to close within the year.

Perhaps the most interesting aspect of the Tonik story is how the creation of Southeast Asia’s first independent, licensed, all-digital bank put the Philippines in an unlikely vanguard position. Singapore, the region’s presumed fintech leader, has approved at least four local applicants for a budding digital bank licensing program, but it has proven a long, bureaucratic journey.
“The Singapore way is extremely structured and diligent, which the way Singapore does everything, and it’s one of the great things about this country. But it’s also very slow and potentially fraught with errors of judgement along the way,” says Krasnov, who maintains Tonik headquarters in the city-state.

“The Philippines went more the Silicon Valley way and said, ‘Let’s just start throwing stuff at the wall, see what sticks and reiterate.’ That’s what they did with us. They said, ‘We’ll do a pilot with you. You’ll be our sandbox, and we’ll learn with you. Once we figure out what this digital bank license looks like, we’ll create the regulations and invite a few more people.’”

 

EMBEDDED FINANCE – YAP (INDIA)

YAP facilitates communication between regulated financial institutions and unregulated technology platforms. The start-up’s initial use case was creating the infrastructure backbone for India-based microfinance players that wanted to disburse small ticket, joint liability loans, but its ecosystem has broadened to include a heterogenous mix from start-ups to large consumer internet platforms to non-banking finance companies (NBFCs).

“We realized there was an opportunity to build a platform that could help businesses deploy payment products more efficiently because back in 2012-2013, the idea of working with a bank was really challenged,” says Madhusudanan R, co-founder and CEO of YAP. “Even though there might be intent from banks to participate, the capability set around technology, the back office, and the readiness of banks to let someone else manage the customer from a servicing standpoint were lacking.”

YAP works with approximately 20 banks. They bring the licenses and the banking infrastructure; it provides software that connects the infrastructure to the consumer-facing technology platforms, which are the primary paying customers. There are currently 300 customers, serving more than 20 million end users. About 50 new customers sign up every month, with around 20% going live on the platform. Others drop out or take longer to onboard.

“Problem solving remains the core, but the market has evolved from just payments into a broader banking infrastructure play,” says Madhusudanan. “There’s a host of things we could offer that you would normally rely on a bank to do.”

YAP’s product offering is based on 300-400 application programming interfaces (APIs) – excluding APIs that are not consumer-facing – that effectively bring an entire retail bank online. For example, opening a bank account involves 25 APIs, running card management and payments could be another 100-150 APIs. More sophisticated use cases involve credit card issuance and buy now, pay later (BNPL) services.

Banks have traditionally been technology buyers, but they are often wary of working with unproven start-ups. YAP found two ways to negotiate this obstacle. First, Madhusudanan previously worked for Visa and Citibank, while his co-founder Prabhu Rangarajan, has a similar background. They had networks within banking and could speak the industry language.

Second, the founders recognized that banks are expected to generate revenue from the technologies they incorporate. As such, they pitched YAP has an enabling function, a means of attracting customers that otherwise would be beyond the reach of banks.

The company was bootstrapped for more than four years, first raising institutional capital in 2019 when geographic expansion became an objective. It has raised $15 million in total across two rounds feature 8i Ventures, Beenext, Better Capital, DMI Sparkle Fund, Flourish Ventures, and Omidyar Network.

Funding translated into certainty that it could put people and infrastructure into new markets without slowing pace. YAP is now operational in Australia, New Zealand, the Philippines, Nepal, Bahrain, and the United Arab Emirates, as well as India. There are plans to enter another five or six territories by year-end, including Indonesia and Vietnam.

 

CRYPTO BANKING – MATRIXPORT (SINGAPORE)

Singapore-based Matrixport extended a growing list of crypto financial services unicorns this month by closing a $100 million Series C round at a valuation of $1 billion. It was led by DST Global, C Ventures, and K3 Ventures.

“We raised twice as much as our initial target size. The participation of these top investors adds weight in the minds of customers, as the financial industry deeply relies on brand reputation,” says John Ge, the company’s co-founder and CEO.

Matrixport aims to differentiate itself from crypto exchanges and wallets by providing a comprehensive suite of services with a focus on asset management. As of March, the company held more than $10 billion worth of client assets under management and custody and was tracking $5 billion in monthly transactions across all product lines. These include spot trading, lending, and structured products.

Most crypto trading and lending platforms do not disclose their investments to clients. Various assets are gathered into a single pool to generate uniform yield. Ge compares this approach to traditional fixed income, where underlying assets are disclosed, adding that with most crypto trading platforms, “you don’t know what they do with your money.”

Matrixport aims to provide significantly more transparency with decentralized finance products that only invest in disclosed projects. For example, its fixed income product only invests in morgaged loans, a low-risk product, while its funds invest in arbitrage trading which has relatively higher risk.

It also claims to publish real-time data such as the total supply, utilization, annual percentage yield, and current flow-balance. Clients can reference historical and real-time data to make appropriate investment decisions.

Customers can choose products according to risk appetite, yield expectations, and individual judgment of the market environment. "For example, Matrixport’s No 2 quantitative trading fund, has an annualized return rate of 40% in the past year, which is significantly higher than those fixed income products,” Ge says. “This is more suitable for customers who hope to obtain higher returns and are willing to take certain risks.”

High net worth individuals – defined as having at least $1 million worth of crypto – constitute more than 50% of Matrixport’s assets under management, while 20-30% is from institutions, and the remaining 10-20% is retail customers in the conventional sense.

“In the context of today's low interest rates and additional currency issuance, an asset such as crypto clearly has unique advantages to fight against inflation, although it fluctuates in the short term,” says Ge. “This is why the vast majority of European and American institutions are actively participating in investment.”

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• Topics
• Southeast Asia
• South Asia
• Financials
• Technology
• Philippines
• India
• Singapore
• Fintech
• Financial Services