The projected value of the total transactions in Fintech market of Indonesia was $ 22,338 million in 2018. As of 2018, total of 162 fintech companies are under operation in Indonesia.

• Definition / Scope
• Market Overview
• Top Market Opportunities
• Market Drivers
• Market Restraints
• Technology Trends
• Regulatory Trends
• Other Key Market Trends
• Market Size and Forecast
• Market Outlook
• Competitive Landscape
• Competitive Factors
• Strategic Conclusion
• References

Definition / Scope

Fintech can be defined as a phenomenon of fusion between technology and financial features that transform business models and a weak barrier to entry which lead to raises unregulated players to run the service as well as regulated financial institutions.

• Within APAC region, Fintech is a fast-growing industry and Indonesia is one of the major markets within the region. Indonesia has a massive population accounting 261 million with significant part of the population having weak financial accessibility that leaves the Fintech industries and entrepreneurs with unique financial technology tools could thrive.
• As Indonesia is addressing to the financial inclusion issues with the intervention of the regulators and the increased boom of the fintech startups for which Indonesia was also recognized as the only country in East Asia with most improvement in bringing the citizens into financial system in past three years.
• With US$500 billion of infrastructure investment planned for the next five years (2019-2023), the emergence of new markets of Fintech sector in Indonesia is set for a new path.
• With multiple fintech companies operating within the payment, lending and other products/services Indonesian fintech market has grown at a whopping 78% in (2015-2018) period.
• Fintech is the most desirable space in Indonesia at the present context. From investments, expansion of horizon to avenues and new products the sector seems beneficial from all viewpoints. The fintech startups are escalating be it in digital payments, lending or remote banking. The product/services offered by these fintech startups are also such that they solve the current needs of the population.

Market Overview

• According to the Tech in Asia Database, between (2013-2017), $56 million funding worth of establishments of fintech startups where 46 deals were made in a single year.
• Within the Fintech users, 70% use mobile phones to access their applications leaving mobile to be the number one channel for using fintech services.
• The market has also shown a considerable amount growth with the annual growth rate of 16.3% with the total investment into fintech companies standing at $ 176.75 Million in 2017 alone.
• Similarly, the projected value of the total transactions in Fintech market of Indonesia was $ 22,338 million in 2018.
• As of 2018, total of 162 fintech companies are under operation in Indonesia.
• Some of the promising FinTech startups in Indonesia include Jurnal, Cashlez, TunaiKita, Payfazz, and KoinWorks. In Indonesia alone, 44% of FinTech companies are payment service providers.
• The finance sector is lead by three state-owned banks—Bank Mandiri, Bank Rakyat Indonesia (BRI), and Bank Negara Indonesia (BNI); and one private bank—Bank Central Asia (BCA). Based on Indonesia Banking Statistics, this category takes up 41% of national lending. Thus, Fintech in Indonesia is comprised through collaboration with these banks.
• The fintech product/services and solutions can broadly be classified into 5 categories:
  • Lending: $29.4 million, 12 deals
  • Payments: $23 million,10 deals
  • Business Services:$3.5 million, 21 deals
  • Digital Currencies:$ 50000, 1 deal
  • Investing: Undisclosed, 2 deals

Top Market Opportunities

In the entire South-east Asia, Indonesia is the largest economy with an estimated population of over 260 million people, the majority of which are under the age of 35 with growing mobile phone, Internet penetration rates and are constantly engaged in social media, Indonesia has numerous untapped opportunities to in fintech space.

• Financial Inclusion/access

Indonesia is one of the highest unbanked populations in the world. Among the 58 million of small and medium enterprises in Indonesia, only 12% have access to credit because of the deficiency of credit history, statements or collateral. Additionally, these SMB’s contribute almost 60.3% of the total GDP in Indonesia.

To promote these businesses financial inclusion is imperative and the government of the country is positive for both financial inclusion and the role of Fintech in leading a robust financial ecosystem in the country.

With only 43% of lending market tapped and less attractiveness of banking and micro-finance institutions among the public, Fintech companies have huge opportunity to tap to the market.

It is at the emerging stage for crowdfunding, peer-to-peer (P2P) lending and other alternative up-and-coming FinTech lenders.

Most platforms are in testing phases and are set to reach a critical mass in the not too distant future. With significant investments from large foreign investors, e-wallets are now expanding with rapid increase of customers.

FinTech startups are being introduced all around the world to help banking institutions conquer the limitations of geography and reach out to the remote areas.

Moreover, being the major players in the Indonesian banking market, bank institutions did not bother much about a customer friendly approach.

Confusion and complications became a routine when issuing bank loans or searching information. Thus, FinTech in Indonesia is a sector with a great potential.As mentioned, FinTech sector especially lending will continue to grow.

Its expansion will support small and medium businesses in Indonesia, as the main reason for their low productivity is due to poor access to financing.

• Lending category

Lending is the most widespread category in the fintech development in Indonesia. 17% of the fintech startups in the country are introducing lending platforms and businesses like Modalku and Investree leading the charge.

Within lending, the P2P channel has become the most popular because of the boost that was provided by the Financial Services Authority (OJK) regulation regarding information technology-based money lending services. Further, the expansion of lending from fintech is most likely to support micro, small, and medium enterprises (MSME) within Indonesia.

At present, due to the lack of access to financing these institutions are performing poorly and are less productive. However, this gap can be filled by the fintech players who can either collaborate with the existing players or provide their own independent personalized channel to serve the MSME’s.

As current players tackle less than 20% of the financing, the scope of the market is very high.

• Support SMB’s

Indonesia is a country of SMBs. These enterprises account for 99% of the total amount of enterprises that are operating in Indonesia and they create total of 107.6 million jobs followed by 60.6% of contribution to the GDP of the country.

They also cushion country’s economy at times of market shocks. However, majority of these companies do not pay taxes, while most workers belong to the informal sector.

As these enterprises don’t receive much support from the traditional banking and financial institutions they can be supported by the fintech.

Market Drivers

• Regulatory support

Google and AT Kearney have identified fintech as one of the most attractive categories for investors within the Indonesia’s startup ecosystem.

The Indonesian government’s ecommerce roadmap also specifies fintech integration and better payment infrastructure as a key focus moving forward.

Some of the notable government effort include:

• The government, being receptive of developments in the fintech sector, launched the Fintech Association of Indonesia in 2015. As per an official statement, it has more than 55 registered startups and has identified 120 more.
  • The ‘1,000 Startups Movement’ launched by the Country’s President in 2016 aims to develop 1,000 startups by the end of 2020, the total valuation for which is expected to be around $10 billion . Additionally, it also plans to establish a dedicated section within its main stock exchange to host initial public offerings by startups. It wants to set up a new trading market that will be called the ‘technology board – at the Indonesia Stock Exchange with an aim to ease the process for founders and investors to take their companies public in an easier way.
  • Finally, in November 2016, the Indonesian government, through the Central Bank, had launched the Regulation on Payments Transaction Processing to provide legal assurance for new and existing payments business activities. It has also created a Fintech Office whose work also includes capacity building and regulatory sandbox implementation.

The Financial Services Authority (OJK) of Indonesia and other similar regulatory agencies have been conducting Fintech festivals that are aimed to increase consumer’s awareness and access to new applications.

FINSPIRE 2017, the yearly event held by Mandiri Capital Indonesia (MCI) is mainly to accelerate fintech development in Indonesia. It brings together financial technology organizations, startup communities, and fintech enthusiasts to discuss the future of financial technology in Indonesia.

The event aspires to help grow the Indonesian fintech startup ecosystem and accelerate the creation of products and services that will support the banking and financial industry.

• Private Lending

MCI, , the venture arm of Bank Mandiri, Indonesia’s largest financial institution has already invested a total of around $22.4 million in 7 startups since 2016.

MCI’s investment focuses on three broad areas: payment options, peer-to-peer lending, and small enterprise solutions.

Other lenders joining the digital wave include private lender BTPN, which spent $131 million to develop a digital platform called Jenius, over the past three years. DBS Indonesia also launched digibank, a completely paperless and signature-free banking experience.

Besides the agencies, investors, founders, students, entrepreneurs and startups were invited to participate in the event to accelerate Fintech development and discuss the future of Fintech in Indonesia.

Furthermore, OJK with the support of Central Bank of Indonesia has implemented a FinTech registration system for startups. This has proved that FinTech is formally recognized. As of June 2017, a total of eight startups have registered, and much more in the process.

The inauguration for FinTech Advisory Forum also happened around the same time to direct the FinTech industry’s development.

• Financial ecosystem

Firstly, Historically, Indonesia has hardly any financial or banking penetration to that degree that its contemporary countries have. It is estimated that only 40% of Indonesia’s 250 million population currently have access to services provided by banks and 49 million SME units are still not bankable because of low credit score.

Thus, this has led the market to move towards alternate banking solutions like fintech that could provide users with new and effective ways of banking. By breaking down the barriers of location, the emerging players provide an opportunity to this large population which doesn’t has access to banks to join the digital economy and drive its growth.

Secondly, due to Indonesia’s unusual geography, its traditional banking system continues to suffer. The number of bank branches, which is estimated at 10 bank branches per 1,000 square kilometers is far too low to serve Indonesia’s vast geography.

The fact that there are remote and inaccessible areas in the country poses an even greater challenge for banks’ penetration, which gives birth to the need of online and remotely accessible institutions that can facilitate these financial needs.

Market Restraints

• Acceptance of Cashless Payment

In Indonesia, FinTech payment options for both in-person and online transactions are limited to few merchants only. If they do offer option, consumers will have to pay an extra percentage for transaction which overall reduces its loyalty.

The merchants are also to be provided with some attractive incentive so that they incorporate such technologies into their infrastructure and services.

• Proper Business License in Indonesia

Most large startups in Indonesia are riding the wave and came up with more applications for a cashless Indonesian society.

However, to be totally cashless will still take some time, and lots of homework to do for all stakeholders. Because some companies still operate e-wallets without the right business license in Indonesia.

• Overseas Competitor

The FinTech lending startups will face some competition on all fronts due to the foreign companies in Indonesia such as Chinese FinTechs.

• Regulation and Process Clarity

Most of the Fintech companies are confident about the fact that the process of regulations in Indonesia is too slow and unclear. Although, government has been making number of initiatives to promote the fintech companies, the processing and the regulatory requirements remain unclear.

The obstacles continue to remain in issuing licenses and further down the processing and there are no regular consultants of institutions that could possibly guide and assist the fintech companies to start their businesses efficiently.

Technology Trends

As per the report by IDC, Indonesian enterprises to strengthen their digital strategies as the nation aims to become the largest digital economy in Southeast Asia with market valuation worth US$ 130 Billion in 2020.

According to the IDC Indonesia FutureScape 2018 predictions, the various technologies that are creating an impact and have a good scope in the industry include:

• Open API ecosystems: By 2021, more than half of the Indonesian enterprises will see an average of 20% of their digital services interactions come through their open API ecosystems, up from 5% in 2017 ― amplifying their digital reach far beyond their own customer interactions.
• Everyone a data provider: By 2020, 15% of Indonesian enterprises will generate revenue from data-as-a-service ― from the sale of raw data, derived metrics, insights, and recommendations ― up from nearly 2% in 2017.
• HD interfaces: By 2021, human-digital (HD) interfaces will diversify, as 10% of field-service techs and over 10% of infoworkers use 30% of new mobile apps use voice as a primary interface and 5% of consumer-facing Indonesian enterprises use biometric sensors to augmented reality, nearly personalize experiences.
• AI everywhere: By 2021, 10% of digital transformation initiatives will use artificial intelligence (AI) services; by 2021, 20% of commercial enterprise apps will use AI, over 30% of consumers will interact with customer support bots, and over 5% of new industrial robots will leverage AI.
• Digital economy tipping point: By 2021, it is expected that at least 40% of Indonesia GDP will be digitalized, with growth in every industry driven by digitally-enhanced offerings, operations and relationships. Investors will use platform/ecosystem, data value, and customer engagement metrics as valuation factors for all enterprises.

Regulatory Trends

There are basically three regulatory bodies responsible for creating guidelines and regulations for the Fintech market in Indonesia which are:

• Bank of Indonesia 
  • As of April 2016, Bank of Indonesia officially launched a fintech office dedicated to support growing number of fintech companies in the country. The four fold purpose of the office was to facilitate collaboration & professional advice, provide fintech related policies, economic data access and research.
  • In December 2017, BI launched National Payment Gateway (NPG), a system that is dedicated to provide shared payment infrastructure and creates a nationally integrated electronic payment channel, lowering cashless transaction cost for the public.
  • In March 2018, preparations to move to second phase of NPG was announced where transaction standards were prepared for including 20 main utilities including phone and electricity were to be included in payment facilities
  • Similarly, in December 2017 BI introduced Fintech regulation designed to support innovation while maintaining financial stability in the companies. The key component of the regulation is ‘regulatory sandbox’. To tap onto the opportunities provided by regulatory sandbox the companies are required to develop an innovative technology, service that provides benefit to customers and can be of widespread use.
  • In April 2018, BI approved 15 fintech service providers for the regulatory sandbox.
• OJK
  • Ojk on other hand is the Financial services Authority in Indonesia. It is particularly responsible for forseeing the P2P lending services in fintech.
  • For registration with OJK following criteria has to be met:
    • Established as a legal entity
    • Upto 85% of direct or foreign ownership
    • IDR 1-2.5 billion capital at time of licensing
    • Only P2P lending exclusion of securities and guarantees
  • As of April 2018, 40 fintech companies have already registered with Ojk
  • In addition, OJK in Indonesia has been actively setting measures to promote the growth of Fintech starting a business in Indonesia, while giving out the appropriate guideline to manage potential risks and challenges.
• KOMINFO

The Ministry of Communications and Informatics in Indonesia (KOMINFO) announced the 1000 Startup Digital National Movement Program which was initially launched in 2016 which has completed the incubation stage in the first batch of three cities, Jakarta, Surabaya and Yogyakarta.

The movement aims to create 1,000 high-quality digital startups by 2020 with a total valuation $10 billion. The startups will focus on providing concrete solutions for real problems by leveraging digital technology and the large base of Internet and smartphones (as Indonesia has around 100 million internet users and 80 million smartphone users).

Initiated by KIBAR, a tech-startup ecosystem builder supported by KOMINFO, the movement is part of the government’s vision to build Indonesia as ‘The Digital Energy of Asia’

Other Key Market Trends

Overall, in Indonesia, there are 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. The approach of Indonesia in Fintech is however is aggressive. Some of the major trend that is happening within the industry and is likely to follow through 2019 are:

• Fintech adoption rate

Fintech adoption is still very low in Indonesia. According to EY fintech adoption survey from 2017, fintech adoption here is still under 10%. Once Fintech adoption jumps up to at least 20% many things are likely to happen.

According to an Asian Development Bank survey, Indonesia has a $57 billion credit gap. If we can address this with the help of fintech, we will see a positive impact on the economy.

• Entry of International players

Now, most of the players in Indonesia are local players, like Go-Jek and Ovo. However, lately WeChat, and also Alipay, are exploring to collaborate with an Indonesian state bank, BNI.

Both Chinese Fintech giants are headed to make payment capacity and infrastructure better and collaboration with a local bank was an apt option as that would allow an easy access to license

• BNI emerges as the most finetch-friendly bank

BNI is the most digital bank in Indonesia. 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.

• Sharia Compliant Lending

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. The potential that lies in this particular area is high and as conventional fintech is likely to boom during 2019-2022 period. Sharia fintech maybe 1-2 years after that.

Market Size and Forecast

Digital payments have become so big in the archipelago that the total transaction value in the “Digital Payments” segment amounts to $18 million in 2017.

Additionally, the total transaction value is expected to show an annual growth rate (CAGR 2017-2021) of 18.4%, resulting in the total amount of $36 million in 2021.

Popular fintech categories in Indonesia are lending platforms, capturing 17% and marketplaces for financial products that have occupied 13%.

Market Outlook

• FinTech — is getting bigger in Indonesia. It is, in fact, one of the hottest trends in technology sector these days. It happens as the needs of society for a more practical and digital financial system on a daily basis is increasing.
• Until 2017, AFTECH (Association of Fintech) in Indonesia noted that there had been more than 210 Fintech based startup companies in the country, 39% of them are Fintech payment companies. The development of increasingly sophisticated financial technology is also predicted to have a positive effect on the number and type of companies of Fintech in 2018. Not only that, socialization and public education activities are also expected to increase.
• As of 2018, FinTech is growing rapidly within Indonesia because it has advantages and speeds that are not offered by banks such as P2P lending feature. P2P lending has the speed and certainty for consumers to obtain loans. The borrowers are usually the entrepreneurs of SME who want to develop their business faster.Also, based on data from Bank Indonesia, there is potential that domestic funding demand will reach up to $11 trillion, but Indonesian banks can provide only $ 4.24 trillion. Therefore, it is also expected that the banking business will experience a huge transformation if a good collaboration is done between banks and FinTech in Indonesia.
• Even though the interest rate is higher than the banking industry, with the speed that it can offer, Fintech has began attracting many consumers. Indonesia has the potential to become a digital economic power because internet users in Indonesia are predicted to reach 150 million people by 2020.Upon this development, the government will arrange everything related to Fintech so that society and business actors can well utilize it. Collaboration in various areas of finance is the government’s expectation of Fintech and the bank so that the economy of society will be improved better.

Competitive Landscape

Indonesia as a country has seen a major surge in the number of fintech ventures. The major areas that the fintech startups are capturing and disrupting are payments, insurance, stock markets, investments, PoS, comparison, and online lending. The clear winner is digital payments, prompted by the fact that the internet and consumption patterns are changing. Major startups in the payments sector include Mandiri, T-Cash, PayPro, IPayMu, Xenditi among others.

Within the various categories of Fintech, the digital payments sector has emerged as the clear winner since the IFA data shows that around 43% of startups of the fintech pie belong to that segment.

They are majorly spread across payments sector, from mobile payment to payment gateway companies etc. For the digital payments to suffice, e-commerce has been the biggest push factor.

Similarly, banks are taking in interest when it comes to establishing fintech businesses in the country. For instance, earlier this year, in January 2017, Bank Tabungan Pensiunan Nasional (BTPN) launched its own fintech service, called Jenius, which allows users to open accounts in banks via a mobile device and manage their own personal finances. Users can also give a nickname to their banks account, instead of the conservative lengthy account number.

This shows that banks have now become open and receptive to the idea of tech-efficient credit systems and are open to entering into strategic partnerships with various startups for lending and payments.

A successful fintech ecosystem of the future in Indonesia will be where all the market participants connect engage and share ideas across vibrant communities and networks as well as identify and convert opportunities into business. In this age of penetrative technology, no market participant can afford to operate individually.

Competitive Factors

Indonesia’s Fintech startup scene is a quite innovative, and it’s attracting the attention of corporates. Lately, more conventional institutions are recognizing the importance of going digital, and are enticed to collaborate with startups to fulfill the changing demands and needs of their consumers.

Although the Fintech landscape in Indonesia is quite proliferated, more recent Fintech startups showcasing a rather innovative approach in their business models include:.

• Jurnal: It is a company that provides cloud based accounting software provider that helps businesses save time, eliminate unnecessary entries and simplify the process for both enterprise owners and accountants. With 57 million SMEs spread out across the country, Jurnal has a huge market to tap, and it’s seeking expansion through partnering up with companies and government institutions.
• Cashlez: This startup is mostly targeted at local SMEs, mobile point-of-sale which solves key pain points that hinder these businesses from adopting cashless payment systems. Through Cashlez’s wireless card readers, local businesses have a chance at using cost-efficient digital payment solutions. A significant portion of the 57 million micro, small and medium businesses across the country have yet to adopt cashless payment systems which gives huge opportunity for the player. Despite of large penetration of debit and credit cards across the country, there are just about 1 million point-of-sales terminals for card transactions. Cashlez seeks to partner up with banks to distribute its solution.
• Tunaikita: It is a mobile app based loan service that provides overall convenience and time-saving loan processing features to its users. Snapping a shot of your face and ID card and uploading that along with some personal data is all that’s all that’s required

Formed through a joint venture between Wecash Southeast Asia, PT Kresna Usaha Kreatif, and PT JAS Kapital, TunaiKita combines finance, mobile technology, big data and machine learning to address the need for unsecured loans in Indonesia.

Further, striking up collaborations with financial institutions for online lending partnerships and launching additional loan products are the future strategies for TunaiKita

• Payfazz: As discussed previously, over half of Indonesia’s population (64%) is unbanked – yet 5o% of the unbanked adult population currently owns a smartphone. Payfazz allows these locals using a smartphone to have access to mobile banking services. In near future, Payfazz aims to build up an extensive network of agents who can help users to complete transactions – a critical solution in a country where bank branches operate beyond capacity to serve thousands of customers.
• KoinWorks: It is an online marketplace that connects borrowers and lenders. Similar to other P2P lending sites, KoinWorks targets micro and small enterprises – a group whose needs are underserved by traditional financial institutions.

The features that distinguishes KoinWorks from its comptetitors are: its Protection Fund, which an initiative compensates investors for losses from non-performing loans. Currently, KoinWorks seeks to boost its Protection Fund through partnering up with a credit insurance firm.

The potential demand for credit among women-owned enterprises is around $6 billion in Indonesia. With most SMEs unable to secure funding from banks due to a lack of collateral, there’s a sizable gap that can be filled by peer-to-peer lending platforms like KoinWorks.

Strategic Conclusion

The government of Indonesia should continue to come up in the front and issue some extensive rules and regulations, when it comes to operating fintech in Indonesia. Some regulatory concerns include business licensing, business operation, governance, supervision and inspection, reporting obligations, and equities which should be solved to let more startups to enter an penetrate the market easily.

At the same time, secondary factors like education, information, and internet penetration would also need a boost so as to push the bandwagon of Indonesian fintech startups further. The fintech ecosystem that has roped in banks and startups alike in its waves is likely go till which great extents.

References

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