The COVID-19 outbreak and widespread movement restrictions have accelerated the uptake of digital banking in Southeast Asia, with banks across the region reporting an unprecedented surge in digital services and new registrations for digital banking accounts.
The region’s largest economy, Indonesia, is a prime target for digital banking, with its large unbanked population and high mobile penetration. Indonesia hosts a fragmented fintech market where thousands of apps offer niche services to various verticals within the ecosystem. Aggressively stepping into the region’s competitive digital banking space is Akulaku, a fintech startup that was voted as the most interesting company in the region in a recent KrASIA readers poll.
Founded in 2016 by William Li who is also the current CEO, Akulaku is headquartered in Indonesia, with operations in the Philippines, Vietnam, and Malaysia. The startup offers three major services – online credit, wealth management, and digital banking. With 6 million users and counting, Akulaku’s current annual transaction value stands at over USD 1.5 billion.
Akulaku’s path to digital banking
In the second half of 2016, Akulaku began offering consumer finance products. Starting with an online instalment shopping platform for products from home appliances to travel and phone recharging services, Akulaku quickly expanded into unsecured personal loans in 2018, covering everything from daily salary loans to car loans.
“As our market experience deepened, we realized there was huge income disparity in Southeast Asia,” says Li. “While many young people make USD 283 a month, we also find a sizeable middle class segment that makes more than USD 1,415. There is strong demand for wealth management among these high income individuals,” he adds.
In 2019, Akulaku started its wealth management division, which is now the largest online wealth management platform in Indonesia with more than 100,000 monthly active users.
Akulaku’s next mission is to make financial services more accessible and affordable for the masses through digital banking. Retail banking is expensive in Indonesia due to the high cost of customer maintenance, so banks prefer to focus on wholesale and corporate banking.
“The internet is a good way to reduce costs so that everyone can afford banking services,” Li said. “We can achieve a breakthrough in mobile banking and card issuance, as these services can be easily automated.”
Akulaku’s digital products can plug a gap in Southeast Asia where the non-bank financial services that consumers currently enjoy are generally incomplete and not cost-effective.
“This makes us realize the importance of a bank license in the financial sector,” Li reflected. “We can be the financial technology platform in this region that provides cost-effective, comprehensive financial services to consumers.”
Around 66% of Indonesia’s population is unbanked. This market could chart a similar growth trajectory as that of Brazil’s, another major economy with a massive unbanked population. One in three Brazilians still does not have a bank account — a lucrative market for the 600 fintechs that currently operate in the country, including Nubank. Founded in 2013, the Brazilian startup is now the world’s most valuable digital bank with USD 10 billion in valuation and 20 million customers, that is divided between digital bank account users and credit card registers. The startup began its operation in Brazil through offering virtual credit card with low limits to encourage users to build credit history, and after 3 years, it acquired full banking license from the regulator, through which the savings product was offered and quickly gaining user base in the market.
Similar to Brazil, a huge population in Southeast Asia does not have credit history. Yet, the demand for credit here is strong.
“They mostly borrow from friends or family, which is why there is no credit history. This is a very interesting phenomenon—it presents a good challenge for us to devise a novel way of evaluating their credit worthiness,” Li said.
Akulaku’s investment in technology would set the stage for its digital banking ambitions. In 2019, it acquired BYB, an Indonesian commercial bank (soon to be renamed Bank Neo Commerce). Within a year, the number of BYB credit user accounts has surged from 30,000 to 300,000.
“We plan to transform BYB into a digital bank to serve more consumers. The first version of the app will be launched in the fourth quarter of this year with functions as easy account opening, online deposit and cash management” Li disclosed.
Turning a crisis into an opportunity
Li experienced first-hand the initial impact of COVID-19, which hit Akulaku at the end of March, when much of Southeast Asia went into lockdown. His team immediately set up a plan that enabled the company to continue operations with minimal disruption.
Akulaku decided to scale down considerably on loan services, which had been growing at a steady annual rate of more than 100% over the past three years. However, it was soon apparent that the startup’s risk outlook was more optimistic than expected.
“At present, user numbers and order volume have stabilized at 75% of pre-pandemic levels. But due to our risk control strategies and a natural decline in demand during the crisis, spending per capita has dropped slightly,” Li informed 36Kr.
He is confident that Akulaku’s tech-driven risk control system can help the company navigate this complex situation. Weekly data show that Akulaku is already on a rebound, with its user numbers expected to return to pre-outbreak levels in August.
“We will still achieve a certain growth rate this year,” Li says optimistically.
So far, the default rate on loans also seems healthy, he adds. Prior to the outbreak, the default rate for Akulaku’s consumer instalment product was kept below 3%. There has only been a 0.5% increase during the crisis. Li reports that thanks to the pandemic’s impact on the overall credit market, Akulaku’s market share in the instalment sector has risen from 40% to 70%-80% while risk control indicators remain healthy.
Despite pandemic-related uncertainties, Li is confident that the downturn is just part the economic cycle. Instead, he sees opportunity in the 600 million-strong Southeast Asian market.
“I think the pandemic will bring lasting changes, as new consumption habits form,” Li believed.
Riding the digital banking wave
“The potential for digital banking in Southeast Asia is enormous,” observed Li. “Just in personal banking alone, we are looking at 400 million workers. Only 5 to 10% are using digital banking services, so we have 300 million potential customers.”
Even credit card holders have many unmet needs, Li adds. If Akulaku could secure 5 to 10% of this market, that would already be a tremendous achievement.
Akulaku’s major goal is to serve 50 million customers by 2025 and expand its business to ten countries or regions. All business operations will rely on algorithms and AI to solve problems, which range from account transfers, Know-Your-Customer (KYC) and risk assessment to anti-fraud and anti-money laundering. Although the pandemic is likely to cause a delay of up to a year, Li is determined to achieve this major feat by rolling out a long-term investment in technology.
“Suppose you have 10 million customers. Each customer performs two transactions every month, totaling 20 million transactions per month. Every transaction involves risk control, KYC and anti-fraud—such calculations are simply beyond human capacity. We must rely on technology, which is why our investment in research and development exceeds USD 28million every year,” Li said.
Li senses a common interest in using artificial intelligence (AI) for risk control during his meeting with local banks and financial institutions to discuss collaborations.
“They asked if we could assist with technical and risk control solutions. Coincidentally, we have incubated our existing risk control systems and models into service outputs, which can be released as ready-made financial technology products,” Li said.
After all, the financial industry should be one where collaboration outweighs competition.
“We hope to contribute to the industry’s risk control and financial technology. When risk control standards improve, it will enhance the industry’s overall service standards, as well as user credit education,” Li believes.