Avina Sugiarto, Venture Partner of East Ventures

The role of fintech in closing the financial gap in Indonesia

9 March 2022

In recent years, Indonesia’s digital financial services have experienced a boom as COVID-19 became the unexpected catalyst that accelerates digital transformation and technology adoption. 

The immense adoption of digital financial services is driven by several key factors, including growth in mobile internet penetration, the rise of digital merchants, and accelerating consumers’ adoption. Based on Google, Temasek Bain & Co study in 2021, 95% of digital merchants are likely to increase or maintain usage in digital payments, and 51% have utilized digital lending solutions. Moreover, mobile internet penetration has increased from 53% to 71%, reaching over 195 million in 2019-2021. 

During the first half of 2020, the pandemic knocked the country’s economy and some businesses, particularly MSMEs. The situation had a detrimental effect on fintech lending. However, the industry has shown its resilience, taking peer-to-peer (P2P) lending, KoinWorks, for instance. When the pandemic hit, approximately 15% of its portfolio faced some challenges; yet the company worked through to let the borrowers recover their business first and restructure loans based on the regulator and agreed policy. By doing so, the platform was able to reduce the damage from 15% to 5%. 

The pandemic has also pushed the digital payment transaction to other vertical financial services, including investment. According to Indonesia Central Securities Depository (KSEI), the number of capital market investors increased by 92.99% to 7.5 million, while mutual fund investors increased by 115.41% in 2021. 

Aside from consumer-related services, the fintech that supports payment infrastructure has surprised performance. East Ventures-backed payment gateway, Xendit, founded by Moses Lo, Tessa Wijaya, Juan Gonzalez, and Bo Chen in 2015, has joined the one-billion-dollar company’s valuation club, among other Indonesian fintech unicorns including from the payment and investment. It clearly indicates the potential of financial services in the Indonesian market.

Digital financial services are poised to take off

Last year, the funding to Indonesia’s fintech sector represented the second-largest country out of the total fintech investment in the region. Indonesia received 26% or about USD 940 million from the total fintech funding to Southeast Asia, which is worth USD 3.5 billion in 2020-2021, according to Fintech in the ASEAN 2021 report by United Overseas Bank (UOB), PwC Singapore, and Singapore Fintech Association (SFA). Almost every fintech category in Indonesia received funding, an indicator of a dynamic and flourishing industry with a vibrant investment landscape. 

Given the impressive number and growth, some people might wonder, “will it be too late to enter or invest in the industry this year?” 

As an early believer in the startup ecosystem in Indonesia, East Ventures sees the proliferation of the fintech industry as just the beginning, which is soon to take off and seize a massive market. East Ventures, which has invested in fintech platforms since 2014, has continued to support the end-to-end fintech ecosystem. 

“Indonesia remains an underserved market for financial institutions. Almost 50 percent and 25 percent were unbanked and underbanked from the total of 186 adult population. We believe digital businesses can address the financial issues and open financial access and inclusion for more people,” said Avina Sugiarto, Venture Partner of East Ventures

Compared to the traditional financial institutions, fintech platforms are faster and able to reach higher penetration to customers, particularly as ecosystems are formed. However, the access and penetration are yet to be equal. Some challenges need to be solved, such as the gap of ICT infrastructure, financial literacy, particularly in the rural and remote areas, and the illegal lending existence that hurts consumers’ trust.

Most of the customers that access the financial services are still primarily concentrated in Java island, with penetration outside of Java steadily rising. Data from Indonesia’s Financial Services Authority (OJK) shows total loan disbursement to borrowers in Java island was IDR 127 trillion, or about 82% compared to IDR 156 trillion of total national loan disbursement. 

The SaaS business solutions provider, Mekari, experienced a high double-digit growth rate last year. Though the Company’s customer base is still more extensive in Java island, the growth rate outside Java was higher. 

Mekari was founded by Suwandi Soh, Rafeequl, Daniel Witono, and Anthony Kosasih in 2015. It began its service as an HR system, bookkeeping, and business solutions for corporates and SMEs. Last year, the platform observed an increased demand from the customers, particularly SMEs and employees, to access the financial services products. Therefore, Mekari launched a payment product, MekariPay, which allows SMEs to send and receive payment for invoices that are raised through its accounting platform. 

This year, Mekari will focus on integrating its platforms with financing products, including earned wage access, a salary advance scheme where employees can access their earned wages on a date prior to payday; and a revolving credit facility for MSMEs. Mekari will partner with third-parties for financing facilities. 

Transfez, a digital remittance platform, grew more than four-fold since it was launched in 2020. Due to the social restriction in the country, people started to look for digital remittance as an alternative without having to leave their homes. 

Bibit and Stockbit, a leading wealth tech and trading platform, which was founded by Wellson Lo and Sigit Kouwagam, have served three million users and one million users, respectively. The digital technology and government support that allowed e-KYC have helped the platforms reach more users in 500 districts out of 514 cities in Indonesia. 

Stockbit has a complete trading and investment ecosystem among its competitors. It facilitates a learning platform on stocks, a social forum to enable users to interact and discuss stock-related issues; comprehensive stock analytic tools; market news; and a trading platform that collaborates with two banks. Its wealth tech platform, Bibit developed Robo Advisor, to help first-time investors, and improve some features to provide a better user experience.

Meanwhile, fintech lending platforms Alami and KoinWorks are serving beyond lending and deepening their penetration across the archipelago through a digital bank or neobank. The sharia-lending platform, Alami has developed a sharia challenger bank, called Hijra Bank, to seize the untapped Muslim market in the world’s largest Muslim population. Alami, co-founded by former bankers Dima Djani and Harza Sandityo, aims to reach 15% penetration or 40 million people from a total 230 million Muslim population. 

Currently, sharia banking is merely around US$ 35 billion of assets, representing 6% of total banking assets in Indonesia. The low asset in sharia banking is due to the lack of sharia banks providing the best customer experience and competitive loan pricing, vis-à-vis the conventional banks. Alami’s Hijra Bank will focus on user experience, relevant use cases, and competitive loan pricing. Alami has 84,000 users (borrowers and lenders), primarily concentrated in Jakarta, West Java, and Banten.

Moreover, KoinWorks launched NEO, as a neobank platform last year. Through NEO, the startup aims to serve a larger market segment and strengthen the ecosystem, allowing the firm to utilize better data analytics. NEO will be an intelligent banking solution for MSMEs, combining technology and traditional banking products supplied by bank partners.

KoinWorks aims to expand and increase its active users by 3x by providing frictionless banking solutions and integrating information on clients’ cash flow and bookkeeping. It will provide more tools to empower SMEs to better procurements to expand their brand and sales. 

Building equal access for the economic sustainability 

It has been our nation’s ambition to actualize equal access to financial products and services. It is crucial to reduce poverty, social gap and bring a stable and more inclusive economy. It’s also aligned with Indonesia’s G20 Presidency, emphasizing on accessible and affordable sustainable finance. 

One of the ways to realize this ambition is to strengthen the MSMEs sector, as MSMEs have the highest contribution to GDPs. Over 65 million MSMEs generate 61% of Indonesia’s economic output in 2020 and absorb a whopping 97% of the workforce. 

However, the sector is also the most vulnerable, as it doesn’t have a strong bearing capacity when it faces a crisis. A 2020 survey by the Indonesian Institute of Sciences (LIPI) reported that 94.7% of MSMEs suffered from a drop in sales during the pandemic.

Financial access becomes the main problem for this segment. Traditional financial institutions find it challenging to provide financing due to the lack of knowledge on creditworthiness and data from potential users or borrowers. 

Yet, fintech brings the solutions to reduce the financial access gap and increase inclusion, both for MSMEs and consumers. Both P2P lending platforms like Alami and KoinWorks created transparency and credit scoring engines from businesses’ performance, financial and credit history. Both fintech firms apply these insights to provide invoice financing and supply chain financing for SMEs.

Meanwhile, Mekari helps reduce the barrier to financial inclusion by utilizing data in their product features, which enables them to facilitate low-interest lending by leveraging payroll disbursement as collateral. 

Transfez creates a fair financial solution accessible for everyone by building a solution around cross-border transfers. Transparency and flat fees become the key. Before it was launched in 2020, the remittance choice in Indonesia were either banks or incumbent players. They require customers to be physically present in the branch, pay high fees and wait 3-4 days to get their funds deposited into the recipient’s bank account.

Fintech also accelerated the financial inclusion of the investment. While investing in mutual funds or capital markets is considered complex and challenging for some people, Bibit and Stockbit make investing simple and easy. Bibit charges zero transaction fees, provides 24/7 live customer support and Robo Advisor feature to help address the customers’ investment needs. Stockbit also aims to democratize the capital market. 

“East Ventures believes financial inclusion can only be achieved when there’s a diversification of financial technology that caters to the different needs of the market. By doing so, we can deep dive into understanding the pain points for each focus area, and provide the right and localized solution in helping the nation to create a better, targeted, and sustainable financing for everyone across Indonesia,” closed Avina.