A string of innovative financial products from Indonesian start-ups are circumventing the traditional payment and investment system, helping to broaden financial inclusion and challenging the established banks.
Indonesia’s tech-savvy youth have already given rise to pioneering start-ups with social and religious missions and the so-called FinTech industry is set to disrupt traditional banks by offering everything from Bitcoin remittances to mobile pawn shops and retail lending platforms.
With a large swath of the population still unbanked – in part due to the country’s challenging geography – new technologies in banking, transactions and payments offer significant growth potential, with banks under increasing pressure to respond to the trend.
Banks and regulators in Asia are at difficult levels of understanding of the sector, explained Mohit Mehrotra, an executive director at Deloitte Consulting. “Asia has a huge potential for FinTechs. Countries like India and Indonesia, with their low financial services penetration and large unbanked and underserved populations, are perfect breeding grounds with several white spaces for FinTechs to play an important role,” he told local media in May.
But collaboration with the FinTech sector is also an option and represents a potential source of growth, particularly for larger banks. “Big banks, by nature of their legacy set-ups, find it increasingly difficult for forging new digital-enabled business models that FinTechs specialise in,” said Mehrota.
This is starting to be acknowledged by the big banks. Jamie Dimon, chairman of JPMorgan Chase & Co, in a letter to shareholders in May warned there were “hundreds of start-ups with a lot of brains and money” working on various alternatives to traditional banking services.
With Indonesia’s demographic trends favouring smaller and more flexible solutions, start-ups are set to gain a competitive advantage over established banks in areas such as mobile payments and crowd funding, which are increasingly popular in the new web-based financial services field.
Regional investors have been quick to spot the trend. On June 1, Japan-based venture capital firm CyberAgent Ventures announced a new $50m fund for South-east Asian start-ups, with more than half of the new fund’s activity directed towards the Indonesian market. The firm has predominantly focused on series A Indonesian start-ups until now, but the new fund will open the doors to tech start-ups in the seed, series A and series B stages.
“We are very bullish, especially on Indonesia,” Steven Vanada told regional media. “It doesn’t only have to be in consumer business or e-commerce... We’re keeping our eyes on other sectors too,” he added.
Such moves will likely draw interest towards firms like Blossom, a product targeting the global Muslim community. Based out of south Jakarta, the firm brings together Bitcoin, microfinance and Islamic finance, the latter of which is increasingly popular in Indonesia.
The company’s model involves collecting money from global investors for entrepreneurs who want to start a small business. Blossom does not give the funds to business owners directly, but works through an intermediary or a local microfinance institution. After a 12-month investment cycle, Blossom collects profits from the microfinance institutions and distributes them to the investors.
Due to Indonesia’s large underbanked population, Bitcoin is expected to gain significant traction as consumers bypass banks and other financial institutions. World Bank inclusion data from 2014 put the percentage of people above 15 years of age in Indonesia with a financial account at 36%, up from 20% in 2011 and the percentage with a loan from a financial institution at 13%. This compares poorly with regional peers with more than two-thirds of the population in East Asia and the Pacific having an account.
Artabit, a US and Indonesian start-up, is tapping into the market by combining payment solutions using the Bitcoin network. One use of its products is for remittance services. Hong Kong-based Bitspark recently joined forces with Artabit to provide a remittance service for Indonesian workers in Hong Kong who want to send money back home.
But despite the huge potential for digital payments in countries such as Indonesia, some industry participants say that infrastructure is still lacking. “Given the size of Indonesia, it may take some time before digital payments are widely used for retail e-commerce because the required infrastructure will have to be in place first,” said Raj Dharmodaran, MasterCard Asia Pacific’s group head for emerging payments.
He also highlighted the importance of having a regulatory framework that supports the growth of digital payments, saying that a country should have globally standardised regulations conducive to the growth of digital payments.
For now, the Indonesia government is maintaining a strict stand against the digital currency. The central bank does not recognise Bitcoin as a legal form of currency and has warned people to use it at their own risk. However, the Indonesian public are beginning to embrace the technology and related services as new FinTech start-ups help to make them more accessible and easier to use.