Indonesia’s fintech association is just about two years old now. In this short time, fintech services like the mobile wallets Go-Pay and Ovo have started a new era of cashless payments in the country. And online lending is about to make access to capital much easier for small businesses and individuals.
The association is an important mediator between fintech industry players and regulators such as the Indonesian Central Bank (BI) and the Financial Services Authority (OJK). Indonesia has 167 registered fintech companies, and the vast majority are members of the association, which also serves as a self-regulating body and defines industry guidelines.
KrAsia sat down with Kuseransyah, the association’s managing director. Here’s a roundup of his observations and predictions for Indonesia’s fintech landscape, edited for clarity and brevity.
After Indonesia hits a 20% fintech adoption rate, we’ll see a tipping point
Fintech adoption is still very low in Indonesia. Based on the EY fintech adoption survey from 2017, fintech adoption here is still under 10%. In India, it’s above 50%, in China 69 %.
Fintech adoption, in this case, means someone who has a smartphone and uses the phone for transactions. Most of the time, it means mobile payments. Borrow and lending transactions are still low everywhere.
I believe once fintech adoption goes from 10% to 20% in Indonesia, many things will happen. According to an Asian Development Bank survey, our country has a US$57 billion credit gap. If we can address this with the help of fintech, we will see a positive impact on the economy.
Alipay and WeChat Pay will get more active
Now, most of the players in Indonesia are local players, like Go-Jek and Ovo. We have heard in previous months that WeChat, and also Alipay, are exploring to collaborate with an Indonesian state bank, BNI. (Editor’s note: The bank has only confirmed Alipay and WeChat Pay are exploring opportunities to make their mobile wallets available in Indonesia for Chinese tourists.)
We don’t know what the scheme is for WeChat and BNI. We just listen and read the media. We don’t really understand the progress and state of the collaboration. What I want to note is, that Indonesia is very welcoming. We need the technology and money from other countries, to stimulate the domestic business. I think that’s an important point.
I think WeChat and Alipay will make our payment capacity and infrastructure better once we collaborate with tech companies from China.
The challenge from WeChat’s perspective, to enter Indonesia, will be the license. How can they directly and instantly operate in the market? They must build a local entity here to do business. Banks have the licenses and infrastructure. The best way for them is to collaborate with a local bank.
We have 261 million people, a big market. We need to think about who has the most advanced technology and we need technology to be brought here, not just from China. From Europe, anywhere.
BNI emerges as the most finetch-friendly bank
I think BNI is the most digital bank in Indonesia.
The way Bank Mandiri (Indonesia’s largest bank) digitalised its business is different. Madiri Capital acquires or invests in startups. The way it goes digital is through acquisition.
At BNI, they prefer to build up their in-house capacity to do digital business. BNI is not too strong in the retail business. their competency is in corporate business. They set up a team to prepare for the digital era, and now most P2P lending companies will use their product. BNI opened its API for fintech. That makes it easy for fintech startups to do many things related to transactions and payments.
From these transactions, BNI will have the chance to see which fintech startup is good, from its transaction history. That increases the opportunity for BNI to acquire or invests in or partner with the best startups.
At the fintech association, we see which bank has the best product and is most open to collaborate with fintech startups, and right now BNI has that position.
Banks and fintech startups will co-exist because they complement each other
I think every financial institution has a chance, and should, go digital.
Banks are by nature already licensed to operate in payments, there’s no need to apply for new licenses the way fintech startups must go through BI (Indonesian Central Bank) to get a license to conduct payments.
And now every bank and also the big multifinance companies have a program, they are exploring how they want to digitalise.
The challenge for them is, they have asset legacy, big buildings, many branches, employees, operational costs. How can they utilise all their office space, all the bank branches, in the digital era? Fewer customers come to the bank branches.
There’s another problem: the regulation for banks and multifinance companies is different. It makes them less agile. For example, any business entity that applies for a bank loan has to be at least two years old. If you are 1 year 8 months old, the bank cannot give you a loan.
Fintech startups can assess a business not just from information the business provides, but also through its partners. All merchants on Tokopedia, if they are less than two years they will be rejected by banks. But fintech can look at the turnover, the payment discipline. If Tokopedia says this is a good merchant, fintech firms can go there and give them a loan.
This difference will continue to play a role long into the future. Fintech has more room to serve what we call the unbanked or underbanked. Every business that’s less than two years old is underbanked. But that doesn’t mean it’s a bad customer. Many bankers will say, we cannot service this good customer, because one major requirement is the minimum age limit. Well, fintech is waiting in front of your bank.
On the other hand, banks can offer a better price to borrowers, because banks have huge deposits.
In fintech lending, lenders expect to get returns that are better than savings at a bank. But, they also only need one HQ, and maybe some kind of kiosk in other provinces, as a place to connect with the local market.
Also, in fintech lending, the ticket size has to be below IDR 2 billion (around US$137,403). Any loan above that must be done by a bank, or financial institution. That’s the regulation.
Indonesia defines a middle way between China and India to control online lending
In P2P lending, the regulation (POJK 77) allows 85% foreign direct investment. Indonesia is very open to foreigners when it comes to the lending business.
The POJK 77 regulates off-balance sheet, on balance sheet lending is not allowed. But who the lender is, that’s flexible. They can be individuals, or institutions. Borrowers can also be individual or institutional.
I think what Indonesia does, is we want to find a middle way when it comes to online lending. China is very aggressive in incentivising fintech. There’s little regulation, innovations are quick to enter the market, but in the end, they can experience some harmful impact on society.
That’s different to India. If I’m not wrong, India only allows five P2P lenders for now. Indonesia is in the middle. We have 73 registered P2P lenders. Another 100 are in the registration process. I think at the end of 2019 we will have around 200 registered P2P lenders. That’s quite aggressive, compared to India, but compared to China, not so aggressive.
Overall, in Indonesia, we have 167 fintech startups, from several categories. 73 are P2P lenders, 60 are registered as payment system providers, the rest are in price comparison, insurtech, crowdfunding, wealth management, and so on.
All categories are still growing. If we have 200 P2P lenders in the market by end-2019, then maybe 100 new ones will be in the process of registering,
President Jokowi said Indonesia needs 1,000 fintech startups. I don’t know what that is based on, but it could make sense. Maybe not 1,000, but maybe 700, or 800.
Digital ID is the bottleneck, but a breakthrough is near
For P2P lending, the bottleneck is identification. Once P2P lending can access the official digital ID database from DUKCAPIL (the civil registration office), that will be a breakthrough.
Meanwhile, the DUKCAPIL data and its citizen IDs still need to integrate with face recognition data. Indonesia has this data now, but it’s separate. Once we can integrate this data and it is open and can be used by fintech, that will be a quantum leap for P2P lending. This means they can easily do digital KYC for borrowers.
Actually, digital ID data will be better for many kinds of industries. Lending and payment will both make a giant jump if the digital ID becomes accessible.
I think DUKCAPIL has made progress, its data is available to some businesses now, but not all. We are now discussing with DUKCAPIL how fintech can also use this data.
Indonesia is lagging behind. In Malaysia, there’s Mycard, a single ID. Singapore, of course, has this system. In Indonesia, with its vast size, the challenge is much greater.
Credit scoring is another bottleneck in the industry.
Now, credit scoring is still entirely separated from the bank credit scoring system. Some platforms look at big data, at social data, or even do psychological analysis. I think this is good, but this is hard to access for smaller startups. Maybe big fintech companies have that, but for smaller ones, it’s hard to get these tools.
The association is more optimistic about lending than the regulators
For P2P lending, this has been around for only two years. In the first year, the loans disbursed to borrower were only IDR 4 trillion (US$274 million) in total. This year, we already have already seen more than IDR 15 trillion (US$1 billion) in loans.
The OJK projects the total loan figure will grow to 30 trillion (US$2 billion), accumulative, by the end of 2019. I think accumulative IDR 50 trillion (US$3.4 billion) is possible. It grew four-fold from the first year, and it can grow 2-3-fold from 2018-2019.
What I observe is that out of the 73 P2P lenders now, maybe only 30-40 are already operating at full speed. The rest are only at the early stage. preparing their platform, recruiting. In 2019 all 73 will be at full capacity, hence I am more optimistic than OJK.
Multifinance was established 25 years ago, and now it has IDR 500 trillion (US$34 billion) in net service assets. P2P is really evolving quite fast.
Regulators will force fintech startups into sharing real-time data
OJK, right now, gets data from the company’s own reports. The question is, how can OJK get access to data real time? I think it’s a very important question for OJK.
The style of oversight we have now is market conduct. The providers have a commitment to adhere to certain rules set out by the fintech association, and we will punish members who go against those rules. The association will do the sanctioning. But to do better oversight, OJK needs to get data real time, so that it can self-assess.
It’s very sensitive. Borrowers and lenders have many worries; does this company adhere to rules?
Of course, the businesses will be quite resistant to opening up real-time data. But the nature of fintech is to be open, transparent. If we want to collaborate, we must be open. We must create trust. There is no reason for fintech to be resistant about opening data, and the regulators BI (Central Bank) and OJK have the authority to push for this. E-commerce has a looser regulatory framework, that’s maybe why the real-time data sharing initiative for e-commerce has not yet been successful.
Indonesia is on track to become a pioneer in equity crowdfunding
OJK will soon announce a regulation on equity crowdfunding. Maybe at the end of this year or early next year.
Once the industry has clarity, many players will come. Now equity crowdfunding still has issues, OJK hasn’t yet announced its plans. Indonesia could be a pioneer here.
in Europe, the sequence fintech developed was first payments, then P2P, then wealth management, insuretech. Equity crowdfunding is still rare to see.
If our staging goes from payment, to P2P, then to equity crowdfunding, this means Indonesia has a different way to groom fintech. But this stems from our needs. We need many companies, thus we need to allow ways for startups to get capital from the market and from the public.
Many lending opportunities in niche markets remain unexplored
Most payers in lending are based in Jakarta, or Greater Jakarta. From the borrower side, 70-something percent come from Java, 30% from outside Java.
On the lender side, 80% are from Java. We have a challenge about how to educate the market in other provinces. Few companies tackle this.
One example is Esta Capital. It’s based in Jakarta but its business is mostly in eastern Indonesia, in Ambon and Papua. I think this is very good. It’s hard to get a company to start its business outside of Java. Here, in Java, we have a big population, a good economy, most companies start Java-centric or even Jakarta-centric.
But this company, because of their good understanding of the market, of the people of that area, they started from eastern Indonesia.
Ideally, to make the business sustain, your understanding of the local market has to be so good that you can get lenders from Jakarta to send their money through the platform to help people in the eastern provinces.
Another example of a highly specialised P2P lender is Iternak. They give loans for animal husbandry businesses in West Sumatra. That’s where their expertise is, and the founder has a good understanding of this business. They started there, now they can expand that knowledge to other areas.
With creativity and a deep understanding of the market, a lending business can run. But to make this sustain we need more advanced technology, especially in digital ID and credit scoring.
Sharia-compliant lending won’t go mainstream yet
In Indonesia, sharia finance, or financial services that are in line with Islamic teachings, is not yet big. Although 85% of Indonesians are Muslim, most don’t understand what makes a sharia business.
It’s an opportunity, there is a growing spirit to follow sharia. But finance is challenging. Maybe halal tourism grows first. To educate about sharia finance isn’t easy, not as easy as to explain about what makes a product or service sharia-compliant. The potential I think is very good but still needs time. Conventional fintech will boom 2019-2022. Sharia fintech maybe 1-2 years after that.
Even the portion of sharia banking to normal banking is only at 5-something percent now. But sharia fintech can do better than banks, because they can grow faster. With one fintech platform, you can reach all the people. You just need a way to communicate that.
Editor: Ben Jiang