With JPM organ Chase & Co recently advising traditional global bankers that “Silicon Valley is coming”, and Goldman Sachs estimating that the disruptive newcomers of the financial technology segment (FinTech) attracted $12bn in investment worldwide in 2014 – up from $4bn in 2013 – a new era in finance is beginning. This global trend has not passed Indonesia, either. Indeed, a string of innovative financial products from the country’s finance start-ups is now circumventing the traditional payment and investment system, helping to broaden financial inclusion and challenge the established banks.
Indonesia’s tech-savvy youth have created pioneering start-ups with social and religious missions, but now, the FinTech industry is set to disrupt local banks by offering everything from Bitcoin remittances to mobile pawn shops and retail lending.
With a large portion 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. IT uptake has been expanding rapidly, with some 80m internet users in the country. Around 60% of Indonesian internet users (45m) access the web through a smartphone. A recent report by the digital media research firm, Emarketer, forecast the number of smartphone users would double to 100m by 2018. The population is youthful – around 50% of all Indonesians are under the age of 30 – with this age group the most open to innovation, creating a market for FinTech.
Banks and regulators in Asia do not fully understand the sector, Mohit Mehrotra, an executive director at Deloitte Consulting, told local media in May. “Asia has huge potential for FinTechs. Countries like India and Indonesia, with their low financial services penetration and large unbanked and under-served populations, are perfect breeding grounds with several white spaces for FinTechs to play an important role,” he said. The newcomers have also displayed a high degree of innovation in targeting the real financial needs of ordinary Indonesians. For example, Pinjam, Indonesia’s first online pawn shop, attracted 2000 registrations in its first month and may tap a Rp100trn ($8bn) market.
Another example of this new thinking is Wedlite, a start-up offering loans to couples to finance their wedding – an increasingly costly business for many. Wedlite offers lower interest loans than ordinary bank loans with a two-to-three year pay back period using monthly instalments. Wedlite, like many start-ups, works together with non-banking financial institutions known as multi-financers to provide the loan. These institutions have often been used by Indonesians in the past to finance purchases such as cars and motorcycles, but Wedlite effectively repackages the multi-financer’s facility.
Other successful FinTechs include Doku and Veritrans, both payment gateway providers. FinTech outfits in this field typically offer payment methods through their gateways that do not rely on credit or debit cards, making them accessible to the large numbers of non-banked customers that exist in countries such as Indonesia. Meanwhile, Ruma offers a transaction system aimed at micro-finance operations, such as those conducted using cell phone credit. It also offers training to villagers to help them utilise these services. This is particularly useful in areas of the country where banks have no physical presence. NgaturDuit, meanwhile, provides financial management advice to its customers.
The sector is also becoming more organised within itself, establishing FinTech Indonesia in early 2015. This describes itself as a “community group and monthly meet up”, bringing together executives from financial service firms. At its first gathering in Jakarta in February 2015, Markus Gnirk, from London-based Startupbootcamp FinTech, forecast that this innovative sector would “change the traditional financial processes forever during the next few years”.
Indeed, many in FinTech see their services as upending the investor-broker model of finance, in which small numbers of in-the-know gurus are entrusted with investors’ money. The IT age gives investors the opportunity, through well curated and massive data networks, to trawl the internet for information on companies, financial products and individuals, using tested algorithms that enable users to make better decisions about risk.
The meet also saw the founder of another popular start up, Cekaja.com, point to government programmes to encourage e-commerce and IT take-up as laying some of the foundations for FinTech’s local growth. “The new government even pushes an ‘eservice’ for all their social security programmes,” JP Ellis told the gathering. This has helped familiarise Indonesians with the use of technology for finance. The government has helped in other ways, too, from the increased openness of the Ministry of Communication and Informatics, to a variety of other innovative ideas like the “Supercard” programme, under which some $20m in aid to low income families is now being distributed via mobile SIM top-up cards.
Cekaja.com is one of the country’s more successful FinTech outfits, running a financial product comparison site. It also offers free consultation on these and insurance via a call centre and livechat. Also, several IT incubators launched in recent years have helped FinTech boom. One, the Global Entrepreneurship Programme Indonesia (GEPI), is a non-profit bringing together funding from ANGIN Indonesia and the entrepreneur programme, Ciputra GEPI Incubator (CGI). Wedlite was one of its start-ups.
With Us not Against Us
While FinTech is in competition with traditional banking in many areas, collaboration is also an option for traditional banks, and represents a potential source of growth, particularly for larger lenders. “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, CEO of JPM organ 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. Some start ups already have close links with established banks, too. Veritrans, for example, has partnerships for its payment gateway service with Bank Mandiri, CIMBA, BNI and Permata Bank.
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. In June 2015, Japan-based venture capital firm CyberAgent Ventures announced a $50m fund for Southeast 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, vice president of CyberAgent Ventures, told regional media. “It does not only have to be in consumer business or e-commerce... We are keeping our eyes on other sectors too.” Other major regional banking players have begun the search for promising FinTech start-ups too. Malaysia’s Maybank, for example, recently partnered with Kuala Lumpur-based tech incubator and investor 1337 Ventures to find FinTech start-ups around Southeast Asia. Jakarta was one of their principle destinations for the search. Such moves will likely draw interest to firms like Blossom, a product targeting the global Muslim community. Based out of south Jakarta, the firm uses Bitcoin, microfinance and Islamic finance. The latter is increasingly popular in Indonesia.
The company’s model involves collecting money from investors for entrepreneurs who want to start a small business. Blossom does not distribute 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 joined forces with Artabit to provide a remittance service for Indonesian workers in Hong Kong who want to send money back home.
FinTech also has a natural affinity with e-commerce, easing payment challenges in non-banked areas and populations. Raj Dharmodaran, MasterCard Asia Pacific’s group head for emerging payments, highlighted the importance of having a regulatory framework that supports the growth of digital payments, explaining that a country should have globally standardised regulations conducive to the growth of digital payments.
For now, the government is maintaining a strong stand against Bitcoin. The central bank does not recognise crypto-currencies as legal forms of currency and has even gone so far as to officially warn Indonesians to use them at their own risk. Despite the ban on Bitcoin and other crypto-currencies, the public are embracing the technology and its services, which has enabled a few firms based on cryptocurrencies to survive.
Oscar Darmawan, CEO of Bitcoin Indonesia, told TechInAsia.com that each day there are $30, 000-50,000 of bitcoin transactions in the country. Artabit, in addition to pursuing the market for remittances, is offering crypto-currency payment services for ecommerce vendors in Indonesia, with a simple interface that eases integration. Two other companies, Bitcoin Indonesia and BitDoku, are competing as intermediaries between buyers and sellers.
Despite the potential for digital payments, some industry participants say that telecoms and transport infrastructure are 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 Dharmodaran.
Indeed, the poor state of transport infrastructure is also an issue for e-retail development, with logistics costs standing at 27% of GDP in Indonesia, according to the World Bank – higher than in regional peers such as Thailand (20%) and Malaysia (13%), while in the US, they run at 9.9%. However, e-commerce is clearly a major growth sector – the logistics firm JNE, for example, receives more than 60% of its total revenue from e-commerce transactions.
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