Financial technology is developing well in Indonesian market. The fintech sector has been expanding in the past three to five years due to, among others, the COVID-19 pandemic, a colossal market, the penetration of internet and the increasing number of smartphone users as well as government support.
“The whole Corona [COVID-19 pandemic] situation has accelerated this development,” global banking expert Aljosja van Dorssen told Indonesia Business Post in an interview on April 11, 2022.
A bless in disguise
He explained that government’s policy to impose lockdown to curb the spread of the virus prompted people to self quarantine. With the closing down of malls and markets, people switched their shopping behavior to online shopping. Courier service companies and e-commerce platforms make an advantage of this phenomenon to facilitate and encourage online shopping. Market places such as Tokopedia, Bukalapak and Shopee have developed in-house capabilities, joint ventures and partnerships with delivery companies.
Data from the Indonesia Fintech Association (AFTECH) show that Indonesia is the second most developed fintech industry in Southeast Asia after Singapore. The association had 352 members in 2021, including 56 digital payment companies, 104 peer-to-peer lending firms, eight supply chain finance companies, six neo banks, 77 innovations in digital finance, 14 wealth management companies, seven technology partners and 11 financial institutions, as well as 69 other categories.
Indonesia’s central bank, Bank Indonesia (BI), has encouraged the development of fintech as it was deemed to benefit the underserved. The underserved cannot access credit as they do not have bank accounts.
“At present, there are sufficient number of Indonesians who have bank accounts,” said van Dorssen. He added that the use of social media through smartphone in Indonesia was among the highest globally.
Attractiveness of fintech environment
Indonesia’s fintech sector has attracted more investment due to this favorable environment. Global venture capital firms are interested in investing in Indonesia’s fintech companies, including firms from Singapore, the Netherlands and the United States, said van Dorssen. “We have already closed several deals,” he added.
Many banks show their interest in this sector, including the country’s biggest private lender Bank Central Asia (BCA). Banks are interested in learning about the development of fintech sector to strengthen their lending capabilities to compete against fintech companies.
Following data from AFTECH, Indonesia’s fintech industry has secured US$904 million in total investments up until the third quarter of 2021. Venture capital came primarily from the US, Singapore, Japan and South Korea.
Despite the enormous investment, it can take a few years for investors to evaluate whether the investment has been profitable. It is still too early to predict what the actual returns will be.
“E-commerce companies, such as Shopee, keep investing and investing, hoping to reap returns in the future. However, it is too early to predict,” van Dorssen said.
Fintech provides several advantages to investors and venture capitalists. These investors hope to cross-sell or promote related products or services to existing customers since they possess information about the customers and their purchasing habits.
According to van Dorssen, fintech companies need to demonstrate to venture capital companies that their propositions are distinct and different from those of other venture capitalists to attract investment.
“That’s point number one. Of course, you need to have a track record of having existed for two or three years with a different rate from the competition.,” he said.
Fintech companies must show their management capability because venture capital firms look at who is responsible for investing, the management track record and the management team’s experience.
Challenges in the future
Despite the progress, van Dorssen explained there were still some challenges in the domestic fintech industry. A significant concern is the lack of penetration in rural areas, particularly among the elderly. In most cases, the elderly cannot use smartphone for financial transactions. The older generation is also less comfortable with social media and online payment compared to the the younger generation.
Based on his experience working with microfinance companies, van Dorssen said when he distributed funds to older women in rural areas, some were still using old-fashioned methods. They could only complete paper-based applications to receive disbursements. Nevertheless, by explaining and looking at what their children are doing, the older generation can quickly become familiar with social media and online payment.
“There is still a long way to reach out to the elderly in rural areas since sometimes they do not have a phone or need assistance in using it,” he said.
Illegal peer-to-peer lending poses another challenge in the form of misuse and fraud. Many P2P lending are working just like loan sharks. In addition to extortion, they employ thugs to threaten the safety of the people. Lenders have the right to seek repayment from borrowers, but they should do so through a legal process rather than a heavy-handed approach.
“The police weigh in on this issue, not the OJK (Financial Services Authority). The OJK can draft regulations for fintech companies, but if they threaten people’s lives or extort them, then the policy should handle the case, not the OJK,” van Dorssen said.
Fintech companies should also protect themselves by limiting the amount of money they lend to individuals. A few fintech firms even lend their funds only to a group of people who can cross-guarantee the payments.
“For example, they lend the money to a group of 10 women. If one woman does not have the funds to pay back on time, the other nine will guarantee to pay the debts,” van Dorssen explained. “The woman has an agreement with the other nine that she will pay back the money later.”
By using this method, fintech companies can reduce their exposure and their risk of not receiving their money back.
Limited access to internet infrastructure and the slow speed of internet access are another challenges.
“Improving telecommunications and internet infrastructures remain a significant concern, particularly in rural areas,” van Dorssen said.
Additionally, microfinance companies’ penetration in rural areas and remote island will increase despite the fact that the applications are still centered in Java and Sumatra.
“The rest of the archipelago will follow. It is simply a matter of time,” he added.
