In an increasingly digitalised global market, the transition from brick-and-mortar institutions to electronic applications is occurring in various industries, and electronic transactions are replacing traditional commerce in both the personal and professional arenas. Banking is pivotal to the expansion of financial technology ( fin-tech) as services increasingly move online.
While many early innovations in fintech developed in technology hubs such as Silicon Valley, the proliferation of mobile devices and specific localised demand has enabled growth of fintech start-ups around the world. Indonesia – with 250m inhabitants, a significant portion of whom are young and tech savvy – is a particularly attractive market for these products.
Fintech has become an attractive means to reach Indonesia’s underserved markets, as a population spread over 17,000 islands and nearly 2m sq km has previously hindered the expansion of traditional banking products and services. The high costs to build, staff and maintain bank branches in some of the country’s hinterlands has proven economically unviable for the majority of firms, and lenders that service these areas are often state-owned institutions operating to advance national economic policy rather than to profit.
DIGITAL ADVANTAGE: In addition to these geographical constraints – which have created a large unbanked population in remote areas – the majority of businesses in the country are micro-, small and medium-sized enterprises, which tend to rely on flexible, inexpensive and simple financial products more than large firms do. The rise of fintech contributes to ongoing efforts to increase domestic financial inclusion.
The Indonesian banking sector projects the growth of electronic channels to outpace that of traditional bank branches in coming years. The “Indonesia Banking Survey 2017”, a survey of sector professionals carried out by PwC, 89% of respondents said they expected mobile applications to experience the largest growth in usage between 2017 and 2022. Internet-based channels occupied the top four spots in the survey: websites and web-based platforms ranked second, with 78% expecting it to be the fastest-growing channel, followed by social media at 51% and email at 22%.
Most products in development fall within the micro-credit segment, characterised by lower value and shorter processing times for transactions. Domestic fintech has been weighted in favour of online payment systems, accounting for 43% of new fintech products as of 2017, according to the Indonesia Fintech Association (IFA). Digital payments are projected to total $18.6m in 2017 and are expected to grow at a compound annual growth rate of 18.4% between 2017 and 2021 to reach $36.6m by the end of that period, according to the IFA.
LENDING PLATFORMS: Online lending platforms were the second-most-prevalent new fintech products in 2017, accounting for 17% of the market, followed by aggregated financial products at 13%, and both crowd-funding and personal finance and planning accounted for 8% each. These online lending platforms often serve to fill a niche left largely vacant by traditional banking systems: sometimes they target non-traditional market segments, such as people with low credit scores – a sizeable population in Indonesia – or those living in remote areas. They also offer loans for non-traditional purposes, such as social projects or marriage.
Some of the most significant players in online lending have entered the market since 2015. The three largest players are currently Investree, a peer-to-peer (P2P) platform connecting lenders and borrowers launched in 2015; Modalku – also operating in Singapore under the name Fund Societies – focused on providing loans of up to Rp1.2bn ($90,500) to small and medium-sized enterprises, launched in 2016; and Taralite, which also commenced operations in 2016 and provides low-interest, no-collateral loans for a variety of purposes, including education, marriage, childbirth, home renovation, and vehicle and property purchases. All three lenders have grown quickly and garnered financing from major investors: Taralite received $6.3m from Japan’s SBI Group in May 2017; Modalku drew $7.5m from Sequoia India in August 2017; and Investree secured an undisclosed commitment from Indonesian venture capital fund Kejora Ventures in June 2017.
EMERGING TRENDS: In spite of this success, traditional banks have had very mixed reactions towards fintech. In PwC’s “Indonesia Banking Survey 2017” only 37% of respondents anticipated that there was a significant level of risk that new fintech competition in 2017 would disrupt or threaten their businesses. Another 43% viewed the risk as moderate, with the remaining 15% projecting only some risk.
Three-quarters of respondents indicated they thought it would be very important in the medium term to increase digital solutions to improve operations, with the remaining quarter classifying the segment’s growth as important. Anticipating growth in coming years, many institutions are moving to bolster their fintech offerings through acquisition or development of sophisticated in-house capabilities.
Although the number of fintech businesses continues to rise, many struggle to expand and fundraise once they pass the initial start-up phase. As a result, many of these new operations are looking to attract larger, well-financed institutions to buy them out. “For big banks it makes sense to have a fintech division. Demand for fintech is coming largely from younger people, but it is not yet massive” Dhawin Yuwono, director of Asian equities for Credit Suisse in Indonesia, told OBG.
In order to diversify and remain competitive, one of the country’s larger banks – Bank BTPN – has developed its own digital division named Jenius, which allows users to open accounts in banks and manage their own personal finances via a mobile device.
NEW FRONTIERS: While established tech companies and start-ups continue to churn out fintech products for corporate and individual clients, regulators face the challenge of establishing rules for a constantly evolving market. The fintech industry still operates largely in a regulatory grey area, with the Financial Services Authority (OJK) working on an overarching framework to govern the sector. Because they operate online, fintech services could fall under the purview of numerous distinct bodies. The Ministry of Communications and Information Technology, for instance, monitors communications channels including the internet, while Bank Indonesia (BI), the central bank, oversees payment systems and the OJK is directly responsible for the banking industry as a whole.
Regulators must ensure that offline and online systems are equivalent and that no discrepancies arise between the platforms. “Fintech is developing faster now, but we are still in an early stage, because regulations are not fully supported,” Yuwono told OBG.
Some early initiatives introduced for the fintech segment include the BI’s Fintech Office, launched in November 2016, which is tasked with capacity building and regulatory concerns. In December 2016 the OJK also issued new regulations governing online P2P lending.
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