Indonesia is the largest economy in South-east Asia, the world’s fourth-most-populous nation, the 10th-largest economy in terms of purchasing power parity and a member of the G20. PwC’s “World in 2050” report predicted that, by 2050, Indonesia will be the fourth-largest economy in the world. However, President Joko Widodo, commonly known as President Jokowi, believes that Indonesia could reach this position even earlier, by 2045.
In the first five years of President Jokowi’s administration, from 2014 to 2019, one area that particularly prospered – aside from the long-overdue focus on infrastructure development – was the digital economy. The digital economy is transforming the lives of millions of Indonesians by creating a sharing economy and boosting consumption.
Key figures that highlight the strength of Indonesia’s digital economy include an excess of 2000 technology start-ups in the country, including over 150 financial technology (fintech) lending start-ups and around 75 fintech payment start-ups. The strength of Indonesia’s digital economy has already attracted attention both within the region and beyond, assisted by the recognition of the country’s four tech unicorns – start-ups valued at $1bn or more – and the promotion of one tech company to decacorn status after it was valued at $10bn.
There were around 175.4m Indonesians connected to the internet as of early 2020, which is forecast to help drive the country’s internet economy to be worth more than $100bn by 2025. This signals a bright future for the sector, and the government’s tax reforms are set to play a pivotal role in allowing the country to capitalise on its demographics – with a growing young middle class that is generally techsavvy and may look favourably towards disruptive technology and entrepreneurship.
As part of the government’s plan for further reforms, President Jokowi unveiled the following five focus areas for the second term of his administration from 2019 to 2024:
• Developing human capital;
• Increasing the transparency and efficiency of social protection programmes;
• Accelerating infrastructure development;
• Reforming bureaucracy; and
• Opening up the economy to investment. Although the digital economy was not explicitly mentioned as a target segment, it forms an important part of the government’s plan to use technology to drive development within these key areas.
There are a number of enablers that need immediate attention in order for the Indonesian digital economy to prosper. These include a continuously evolving regulatory framework, effective digital infrastructure to support the growth of start-ups and the availability of high-quality talent to drive the digital economy forward.
Across the world, regulation has often lagged behind innovation, and Indonesia is no exception to this trend. However, Indonesian regulators are making strides to support digital start-ups by creating clear licensing requirements and establishing a code of conduct through the fintech associations Asosiasi Fintech Pendanaan Indonesia and Asosiasi FinTech Indonesia.
This collaborative approach has helped the government to support the development of the fintech segment by learning from previous setbacks in the Key figures that highlight the strength of Indonesia’s digital economy include an excess of 2000 technology start-ups in the country, including over 150 financial technology (fintech) lending start-ups and around 75 fintech payment start-ups market, and setting policies that encourage growth and provide customer protection. The fintech sandbox established by the Financial Services Authority (OJK) in 2018 has also been very successful, and a number of companies have registered with the regulatory body through this process.
The regulatory approach to fintech lending is somewhat unique for Indonesia, given that the government has been proactive in nurturing the industry through the OJK since its inception. Traditionally, its approach to introducing regulations has been more conservative. In terms of fintech, however, the government used a principle-based approach to promote financial inclusion and innovation.
Another area that has undergone changes in recent years is data privacy and customer protection. Government Regulation (GR) No. 71 of 2019, regarding the implementation of electronic systems and transactions, replaced GR No. 82 of 2012. GR No. 71 regulates the implementation of electronic systems, electronic agents, electronic transactions, electronic certification and reliability certification institutions, as well as domain name management.
This regulation makes a distinction between private and public domain electronic system operators and allows private domain operators to move the management, processing and/or storage of electronic systems and data offshore from Indonesia. This is a positive step and should support the development of the cloud industry by helping small and medium-sized enterprises adopt cost-efficient technologies in their day-to-day operations.
Meanwhile, a draft Data Protection Law was submitted to the House of Representatives in January 2020, which will bring Indonesia in line with the EU General Data Protection Regulation. There are still consultations and discussions under way surrounding this legislation but, from a customer perspective, this will greatly improve trust in the digital economy.
Within the region, India faces similar challenges to Indonesia in terms of population and geography. One of India’s most significant digital infrastructure developments in recent years is the creation of IndiaStack, a set of application programme interfaces (APIs) that allow governments, businesses, start-ups and developers to utilise a unique platform to solve the country’s challenges in delivering remote, paperless and cashless services. IndiaStack is built on multiple digital platforms – including the Aadhaar (unique identity) electronic know-your-customer (KYC) platform, the National Payments Corporation of India’s platform for managing and clearing all retail payments, and the DigiLocker platform for the digital issuance and verification of documents and certificates.
IndiaStack took 10 years to be developed and was completed in 2019. In 2009 the Unique Identification Authority of India first started to issue unique identification numbers to increase the efficiency of social protection programmes. The country’s well-established tech ecosystem has enabled start-ups to focus on customer innovation and value creation by utilising the existing digital infrastructure.
Looking to this example, the country would benefit from the development of an “IndonesiaStack” in the coming years. This digital infrastructure would immediately benefit the recipients of social protection programmes. According to the World Bank, Indonesia spends around 1% of its GDP on social protection programmes, which include contributory programmes such as health insurance, social insurance for employment and pension insurance, as well as non-contributory programmes such as food assistance and conditional cash transfers.
The Indonesian government has started to migrate from a cash disbursement to a direct transfer to bank account model, in order to reduce leakages and corruption in the disbursement.
Such a digital platform would also help to drive financial inclusion and retail payments, and thereby boost the consumption economy. According to PwC’s 2019 fintech lending study “Driving Economic Growth Through Financial Inclusion”, fintech lending in Indonesia was forecast to reach Rp223trn ($15.7bn) in accumulative loan disbursements in 2020. However, it remains to be seen how far the economic fallout of the Covid-19 pandemic will impact the segment.
There was a record growth in fintech loans disbursed between 2016 and 2018, and lending is expected to grow by 214% between 2018 and 2020. The creation of an IndonesiaStack platform would accelerate growth further by making it easier for fintech players to reach out to potential customers and carry out e-KYC functions at a much lower cost. The potential multiplier effects of this digital infrastructure are manifold and would, in turn, help Indonesia to achieve its wider national goals.
OBG would like to thank PwC Indonesia for its contribution to THE REPORT Indonesia 2020.