Investopedia define Fintech as the integration of technology into offerings by financial services companies in order to improve their use and delivery to consumers. Examples of Fintech applications include blockchain technology, crypto apps, roboadvisors, payments apps, peer-to-peer (P2P) lending apps and investment apps, among others.
AC Insights, in a story originally published in Forbes Indonesia (March 2022), write that Indonesia has seen rapid growth in all aspects of Fintech, including payments, lending, and investments. On its current trajectory, they say, digital payments are forecast to grow to USD 351-billion, digital loans look to reach USD 35-billion, and Fintech investment AUM will hit USD 28-billion by 2025; according to research from Google, Bain, and Temasek.
This has driven stronger investor interest into the sector; three of Indonesia’s four Unicorns in the past 12-months, for example, are in the Fintech space.
Even though these figures are impressive, AC Insights suggest the opportunities in Indonesia’s Fintech sector are enormous, particularly because adoption numbers still constitute just a fraction of the total addressable market, which has a total of 47-million underbanked and 92-million unbanked adults.
As of 2021, P2P loan book accumulation only reached USD 20.4-billion from 103-Fintech companies officially listed by the Financial Services Authority (OJK).
This, however, only covers around 26-million borrowers in a country with a population of more than 276-million (Source: World Bank). In addition AC Insights suggests there are 63-million Micro, Small and Medium Enterprises (MSMEs) contributing over 60-percent to the country’s GDP, but less than 20-percent of them have access to financial products resulting in an estimated USD 80-billion lending gap.
The number of retail investors has increased by 362-percent in the last 3-years but estimates suggest this only translates to a total of 7.5-million retail stock investors, which is only 4-percent of the total adult population.
Crypto investment, an alternative investment asset class to stock, also saw astronomical growth touching over 10-million investors, which is less than 10-percent of the total adult population in Indonesia.
To help us understand why this has happened, Fauzan Jamaludin, writing for Merdeka.Com says that the Indonesia Fintech Society (IFSOC) is encouraged by this positive performance suggesting there are seven things that need to be looked at in the Fintech landscape and the development of the digital economy in 2022, which will help support the sector and further increase growth in the future.
1. Progress in personal data protection in Indonesia
IFSOC appreciates the government and DPR for passing the Personal Data Protection Act (PDP). It is hoped that the issuance of the PDP Law will provide legal certainty and protection in the processing of personal data, as well as build public trust in digital services, writes Jamaludin.
The Chair of the IFSOC Steering Committee, Rudiantara, said that the implementing arrangements for the PDP Law that will be drafted later must prioritize aspects of the level of compliance for those who process personal data. Rudiantara also highlighted that the Personal Data Administration Agency, as mandated by the PDP Law, must be able to oversee the implementation of the PDP Law with a monitoring scheme that encourages data controller compliance.
“The PDP Law brought Indonesia into a new era of personal data management. The drafting of derivative regulations for the PDP Law in the future should be directed at increasing mitigation and compliance with personal data protection, compared to only focusing on imposing sanctions,” said Rudiantara.
2. QRIS between countries connects MSMEs with foreign tourists
QRIS is the Quick Response Code Indonesia Standard, developed by Bank Indonesia and the Indonesian Payment System Association for cashless payments in Indonesia. Bank Indonesia continues to expand QRIS innovations, which are part of the 2025 Indonesian Payment System Blueprint (BSPI), one of which is through the implementation of QRIS between countries.
This initiative is already in place with Thailand, and will be expanded to several other ASEAN countries, using the Local Currency Settlement (LCS) scheme where transactions between countries are no longer dependent on the US dollar exchange rate, writes Jamaludin.
Dyah NK Makhijani, from the IFSOC Steering Committee, stated that the Interstate QRIS initiative has the potential to boost the tourism sector from the aspect of the payment system, by connecting MSMEs and the creative economy with around 6.2-million (BPS) ASEAN foreign tourists coming to Indonesia, but this must be supported by massive education and socialization for both foreign tourists and QRIS merchants in Indonesia.
3. Wider collaboration opportunities between banks and Fintech
Collaborative channelling of banking funds through Fintech lending continues to increase and dominate in 2022. This is evidenced by the proportion of outstanding loans in the domestic banking lender category, which reached the highest contribution of 46-percent in October 2022.
“IFSOC appreciates the efforts of the government and OJK in terms of making regulations that facilitate easy synergy between banks and fintech which is expected to open up opportunities for wider collaboration and increase the penetration of financial services to all segments of society,” added Dyah.
4. Increased trust in P2P lending
Distribution of P2P lending continued to grow until it reached IDR 18.7-trillion in October 2022. On the other hand, the significant decrease in illegal loans closed indicates stronger efforts to prevent illegal loan activities in Indonesia.
Senior Economist with the IFSOC Steering Committee, Hendri Saparini, appreciated the collaborative efforts of relevant stakeholders in increasing the credibility of P2P lending. Highlighting the increase in non-current and bad loans, Hendri Saparini stressed the need to strengthen risk management to maintain loan quality.
“Deeper collaboration in the area of improving credit risk quality and increasing public literacy needs to be massively encouraged, for example with other financial services sectors such as BPRs and BPDs,” he said.
5. Indonesia’s startup industry is moving in to a new phase
Even though the value of funding for Fintech startups in Indonesia will increase by 8.4-percent in 2022, the number of deals will decrease by 28-percent (Source: UOB, 2022).
Inflation and global economic conditions have influenced investors to be more selective in funding startups, focusing on profitability rather than growth. “This year, the Fintech startup ecosystem underwent a transformation that encouraged adjustments to a commercially viable business model. This change has pushed the competitive climate for startup Fintech companies to be healthier and more innovative,” said Hendri.
6. Education and strict enforcement are key in eradicating illegal investments
Illegal investment practices are still a serious challenge in the development of the digital financial sector in Indonesia. Based on data released by the Investment Alert Task Force (SWI) throughout 2022, total losses due to illegal investment practices reached IDR 109-trillion, or an increase of 44 times from the previous year’s total, writes Jamaludin.
7. The PPSK Law exists as a legal umbrella for fintech development
IFSOC is of the view that the issuance of the Law on Development and Strengthening of the Financial Sector (UU PPSK) has answered the problem of regulatory relevance in the financial sector as a result of technological developments.
IFSOC appreciates the issuance of the PPSK Law which has provided a legal umbrella that puts forward a principle-based, adaptive and integrative approach, as well as guarantees the independence of the authorities in the financial sector. Particularly with regard to crypto assets, the PPSK Law has provided fundamental arrangements by strengthening the supervisory framework and consumer protection.
Sources: Merdeka.Com, AC Insights, World Bank, Statista