Is Indonesia experiencing a fintech boom?
The numbers suggest healthy growth for the sector, at least. A report by Fintech News Singapore from October 2021 counted as many as 322 fintech companies, in addition to 125 registered but unlicensed lenders.
According to the report, online lenders account for around half of all fintech startups, closely followed by payments providers, blockchain and cryptocurrency services. The likes of Jurnal, Cashlez, TunaiKita, Payfazz, and KoinWorks are regarded as among the most promising fintechs.
In many respects this growth has been a long time in the works. Indonesia doesn’t win as much attention as some other emerging nations, but it already boasts the seventeenth-largest economy (nominal, IMF) in the world, and is projected by PwC to be the fourth biggest by 2050.
With an enormous population of 275 million, 84% of which is under the age of 54, Indonesia is surely primed to embrace fintech.
Opportunities in the underbanked
There are obvious opportunities for innovative, agile lenders and payments providers. For a start, Indonesia has a large unbanked population – around 92 million according to a 2019 report by Google, Temasek, and Bain & Company – but possibly as many as 200 million smartphone users.
This means that, among the 58 million small and medium enterprises in Indonesia – contributing about 60% of national GDP – only 12% have access to credit simply because such a large portion of the population lack credit history, statements, or collateral.
But high smartphone penetration opens a clear route for financial inclusion, one that the Indonesian government clearly understands.
Over the last few years, the Financial Services Authority (OJK) of Indonesia has been holding fintech festivals to increase consumer awareness and promote the burgeoning fintech sector
As a vehicle for encouraging investment, these festivals evidently produce results. For instance, at a 2017 conference, Mandiri Capital Indonesia (MCI) invested around IDR 300 billion (USD 22.4 million) in seven fintech startups.
Risks and challenges
Like much of the planet, the COVID-19 pandemic drove the adoption of digital platforms in Indonesia, including digital payments.
However, according to Fitch Ratings, the pandemic also highlighted “the presence of elevated credit risk across the sector as fintech lenders target under-banked segments of the population”. It noted in particular the sharp rise in delinquent loans in 2020.
As a consequence, the OJK has made efforts to better regulate the fintech sector.
Peer-to-peer lending, which is fairly common in Indonesia, has historically been under-regulated, but in January 2022 the financial authorities completed the mammoth task of licensing all P2P lending platforms to ensure all of them are covered by the OJK’s rules.
This is at the very least a statement of intent, designed to increase confidence in a lending market that has traditionally lacked a proper licensing regime.
Data – no longer a roadblock?
In 2012, Indonesia issued a rule demanding a wide range of customer data collected by websites and applications be stored in data centres based in Indonesia. This “digital sovereignty” rule made life difficult for international organisations looking to enter the Indonesian market.
However, in 2019, Indonesia relaxed these rules to allow private companies to keep and process data abroad, opening more opportunities for foreign investors and improving the ease of doing business in the country.
A concern for consumers and businesses may be the relative lack of data privacy laws in Indonesia. However, as cloud computing takes off – a 2021 PwC survey suggested over 80% of businesses in Indonesia use the cloud in some form – the regulators may feel the need to step in and improve protections for consumers.
Indonesia’s fintech ecosystem is healthy, having weathered the uncertainties of the COVID-19 pandemic. Mergers and acquisitions, and consolidation have continued apace over the last several years.
In addition, a clearer regulatory environment and a better licensing regime have increased confidence in the sector, attracting more investment. With Indonesia projected to become one of the world’s largest economies, the smart investor will try and get in on the ground floor.