Navigating the fintech landscape - Indonesia's journey and potential, by Yoshiharu Okubo and Gavin Adrian
East Ventures


6 October 2023


Navigating the fintech landscape: Indonesia’s journey and potential

In the past few years, funding to the fintech sector has increased significantly. Between 2021 and 2022 it has increased by 83%, showing investors’ optimism about the opportunities in the sector.

Fintech funding in Indonesia

Indonesia’s fintech sector has undergone dynamic evolution, beginning with innovations in online payments and diversifying into different vertical industries, reaching the untapped markets in tier 2 and tier 3 cities, and addressing the unique financial needs of other startups in the ecosystem. This evolution highlights the adaptability and diverse innovations within Indonesia’s fintech landscape.

The fintech journey in Indonesia began with a focus on facilitating online payments responding to the rise of online transactions and tech companies. Pioneers like Xendit, one of East Ventures’ portfolio companies in fintech, significantly helped refine payment flows and provided payment infrastructure for tech companies locally and regionally. 

As part of the evolution to digitize cash transactions, several players started offering e-money in e-wallets, including GoTo’s GoPay, OVO, and other players. Some have tried aggregating payment terminals in offline stores into one single terminal or providing mobile POS products like Moka, backed by East Ventures and acquired by Gojek in 2020, as a cheaper alternative to traditional POS systems.

The presence of fintech platforms also accelerates financial inclusion into tier 2 and 3 cities, previously untouched by non-cash payment infrastructure. For instance, Kudo targeted this space, offering innovative solutions to these untapped markets. Kudo was acquired by Grab in 2017. 

Following the journey from the beginning, we see Indonesia’s fintech development embarked into several milestones, as we described below.

Rise of fintech lending platforms for consumers

With over 50% of the adult population in Indonesia being unbanked or underbanked, fintech lending platforms emerged as a solution, fulfilling the gap. These platforms, such as Julo, evolved to offer revolving credit lines to consumers and then Buy Now Pay Later (BNPL) schemes, catering to the unique needs of the Southeast Asian market. ShopBack offers BNPLs for consumers on top of their core cashback coupon products, and Traveloka’s PayLater enables consumers to buy tickets and other products in Traveloka’s app and offline merchants.

Transition to digital banking solutions for SMEs and Startups

The proportion of unbanked and underbanked small and medium-sized enterprises (SMEs) are similarly large. Lending startups have evolved their business models from simple peer-to-peer models to digital banking plays, often achieved by acquiring banks, or securing Payment Service Provider (PJP) licenses in Indonesia. A notable example is KoinWorks, part of East Ventures’ portfolio. This strategic shift is primarily motivated by the desire to lower funding costs and develop alternative funding sources as these companies expand their Assets Under Management (AUM) and aim for higher net interest margins.

Startups in this sector are also diversifying by specializing in different niches. For instance, Komunal focuses on serving rural banks  (BPR) across Indonesia, currently working with more than 15% of BPRs in the country. Hijra Bank (previously known as ALAMI) caters to the Islamic finance sector. A number of players offer early-wage-access lending schemes to employees. Some are also offering embedded finance solutions to enable non-fintech companies to provide some form of lending product.

Moreover, companies outside the fintech sector, having established substantial customer bases, are exploring opportunities in lending. For instance, tech players in automobile space typically offer asset-backed lending schemes. These diversification and specialization illustrate the dynamic evolution of startups in response to market needs and opportunities.

Concurrently, some fintech startups recognize the need to cater to other startups’ needs, including remittance services, cash flow management, and other financial processes in the company. Seeing the potential, East Ventures invested in Jack (formerly Transfez for Business), a platform addressing a crucial need for startups: acquiring corporate credit cards for essential expenses. Given startups’ limited financial history and uncertain profitability, securing corporate credit cards is often a struggle, making Jack’s solutions invaluable in easing and refining their financial processes.

Wealth management and online stock trading

The sector also saw a surge in platforms centered on wealth management and online stock trading, tailored for the Millennial and Gen Z demographics. Companies like Stockbit, which offers the Stockbit app for e-trading and the Bibit app for robo-advisory products, gained significant traction, especially during the pandemic.

Developments in insurtech

The insurtech sector has seen extensive developments, with companies diversifying distribution models and delving deeper into the value chain. Following the global trends where markets typically initiate offline educational approaches to insurance products, Fuse has been the leader in the space by enabling insurance agents to scale. We are now observing ventures into underwriting and micro-insurance for e-commerce products in the market.

Untapped potential in Indonesia’s fintech landscape

Indonesia’s fintech landscape presents vast opportunities waiting to be explored. A prime example is the credit card sector, where penetration remains low, lingering in the single digits. Yet, history suggests that as economies flourish, credit card adoption tends to rise in tandem.

The rapid ascent of BNPL solutions has somewhat overshadowed traditional credit avenues, offering a glimpse of the potential in the market. Moreover, fostering an understanding of changing consumer behaviors while also navigating the evolving regulatory landscape is crucial. 

As the infrastructure advances, it creates a conducive environment for expanding credit card usage. However, we do note that credit scoring capabilities, economics, and risk tolerance levels of the banks are necessary conditions for this market to grow.

Overarching challenges in the fintech sector

The horizon looks promising for the Indonesian fintech sector but has challenges. A significant short-to-medium-term concern is the rising cost of funds due to the prevailing high-interest rate environment and rising NPLs (non-performing loans) as credit is tightened in the market.

The rising cost of funds is putting pressure on fintech companies’ margins, with the average net margin decreasing from 10% in 2021 to 8% in 2022, as reported by McKinsey & Company

To remain viable, fintech companies must innovate and adopt sustainable business models that ensure longevity while minimizing potential losses. One way is by reducing the cost of funds through access to customer deposits, although challenges remain in acquiring customers with the right economics and approach.

Other challenges include merchant discount rates that have been traditionally low relative to other adjacent markets, putting pressures on margins for payment companies serving in the space. As such, we observe the companies serving in the space to enter adjacent spaces, such as lending.

Diverse fintech ecosystems across Southeast Asia countries

Southeast Asia’s fintech ecosystem is diverse, with each sector carved by its unique market maturity, regulatory landscape, and consumer demands. It shows the advancements in insurance penetration, wealth management dynamics, and payment solutions. The diversity reflects the different opportunities and challenges, with innovations in payments and credit services altering the financial landscapes and creating unique competitive environments in each country.

Diverse fintech ecosystems across SEA

Key takeaways for new founders in the fintech sector

1. Deep dive into industry intricacies

  • The fintech sector is dynamic and multifaceted. New founders must invest time in understanding its nuances to make informed decisions.

2. Regulatory awareness is essential

  • The fintech industry is heavily regulated, and each country has distinct regulations to adhere to.
  • Familiarizing oneself with licensing roadmaps and the perspectives of regulators is essential.

3. Regulatory knowledge of multiple markets and response speed is crucial

  • Beyond ensuring compliance, understanding regulatory developments in multiple markets can help founders anticipate challenges ahead.
  • We have seen response time to regulatory changes determine the future paths of companies in the same space. Plan and execute ahead of your competitors where possible. 

4. Closely monitor take rates in your business and plan well into the future

  • Take rates in payments and acquiring businesses have decreased over time globally.
  • The market is no longer convinced with high transaction volume or value with negligible take rates. The economics will need to be there. 

5. Strategic long-term planning

  • Given the evolving nature of take rates, founders should incorporate this potential risk in their mid to long-term strategies.
  • Being proactive and adaptable is key to staying ahead in the game.

6. Geographical business model variations

  • Successful fintech models in the U.S. and Europe may sometimes find different outcomes in Southeast Asia, often with timing (too early) and market size issues (too small).

7. SEA’s evolving landscape

  • The Southeast Asian market is in a state of constant flux.
  • Business models that may not be viable today could turn into lucrative opportunities in the future.

By Yoshiharu Okubo, Principal at East Ventures, and Gavin Adrian, Investment Professional at East Ventures