Essential Ingredients in Building a Comprehensive Fintech Ecosystem for Indonesia

This article is written by Kameswara Natakusumah, Doctoral Student, Fintech Enthusiast and former Chief Commercial Officer of AXA General Insurance Indonesia. It was originally published on LinkedIn. Reproduced with the author’s permission here.

For a long time, when people thought about fintech in Indonesia, P2P lending is almost always the first word that came to mind. Mobile wallet and payments came second.

We also often look at China, where the adoption of mobile payment was already prevalent. The recent coronavirus (Covid-19) which was originated in Wuhan City probably pushes it to new heights as people avoid contact with each other. We are seeing similar situation in Indonesia and rest of the world in the past few months where on-line shopping for foodstock and food delivery are likely to increase as consumers are either self-isolating themselves at home or working from home (WFH).

In more developed markets like China, in addition to lending and mobile payment, there are a lot more areas of fintech. Since I left AXA in early 2019, I have met so many budding entrepreneurs in various areas of fintech, especially insurance related. And I am proud to have a co-founder of Kitabisa from the family.

But I am often wondering – is all this a bubble? How do we make sure these often young, but also more often experienced founders achieve their dreams, and thus benefiting the Indonesian society as a whole? When will we see neo-banks flourish?

In my opinion, the key success factors are: supportive regulatory environment, availability of key infrastructure such as KYC and payment, as well as a good functioning capital market.

Other than that, Indonesia already has all the natural ingredients: large consumer/SME base, budding entrepreneurial talent and the market demand.

Encouraging initiatives from the Regulators 

A key ingredient is obviously the Regulators. In that regard, OJK (Financial Services Authority / FSA)has done a good job registering, regulating and codifying fintech. Although, some improvements in respect of its monitoring functions may still be required.

The Regulators have been busy monitoring and registering new fintech business models. Fintech companies with new business models will have to go through a three-stage registration process: recording, regulatory sandbox, and registration. Those who are registered to OJK must pass the regulatory sandbox process and are recommended by OJK.

More than 60 fintech companies (called IKDs) have registered with OJK, with business models in more than 15 areas covering from aggregation to credit scoring, from online gold repository to claims service handling.

In 2018, OJK has also launched OJK Infinity, an innovation hub, business incubator and education center for fintech.

This, I have to say, is actually more advanced than what I have seen in many other countries.

Key infrastructure 

Another factor is the infrastructure, including KYC, payment, and settlement. Many of the fintech business models rely on knowing who the customers are, the ability to facilitate transactions, and control the risk. Obviously, it is not feasible that they build everything themselves.

Last year, a good friend, who is a tech investor in India, visited me. When comparing the fintech ecosystems in India versus Indonesia. He mentioned that since the Unified Payment Interface (UPI), a government sponsored settlement system for digital payment, was rolled out, “new and exciting business models are coming out every week”.

It seems that in China, Alipay and WeChat played a key enabling functions of fintech business models, but facilitating KYC, payment and user registration.

In Indonesia, Similar infrastructure is emerging. The ecosystem replicated by Grab and OVO, with KYC, payment and user registration, would likely be a driving force to create Alipay-like infrastructure in Indonesia.

It is also interesting with the recently announced US$706 million funding of Japanese financial group MUFG into Grab. As people in the sector would know, MUFG has been studying the market for a long time. Its subsidiaries Bank Danamon and Adira Finance will probably complement the ecosystem very well, in theory at least.

Worth noting that Alipay and WeChat do not profit from payment itself, but through the myriad of business models enabled by having that widely-used mobile payment infrastructure.

Last September, a leaked BI (the Central Bank) slide put the user base of OVO, the leading digital wallet player, at about 36 million. That is enough to build some good business models on – and at the same time a lot of room to grow (our population is reaching 270 million).

In January this year BI imposed standard QR (QRIS) for all mobile payments, with a standard fee of 0.7%, discounted for educational and some other organisations. This is a good progress towards a unified system that fintech (and other) startups can tap on.

We are not there yet, but investors, especially international investors, are confident. Just look at the latest round of funding Kredivo raised, and the rumoured US$727 million MUFG funding into Grab.

Capital Market

Indonesia has a booming capital market – Jakarta Stock Exchange is set to overtake the bourse in Thailand to become the biggest in the region this year.

However, recently domestic funding seems to be taking a dent, trickled down from the Jiwasraya and Asabri Insurance saga and what ensued.

Confidence needs to be restored – however, looking at the professionals being put in place by the second Jokowi government, we have reasons to be confident.

Although we hope that some of the actions would be quicker, with no reversals.

Indonesian Fintech Entrepreneurs Building Businesses in Indonesia

Combining the above – we can be reasonably optimistic about the fintech ecosystem in Indonesia. The infrastructure will take time – but we will get there. Improving regulatory environment and restored confidence in the capital market will push it to be faster.

I recently met up with a friend from the Middle East, who is building a fintech start-up for the Middle East in … London.

“Isn’t your market Middle East,” I asked.

“Yes, but it is so hard to change anything here from ground up,” he replied. “It is much easier if we use the infrastructure, regulations and also the whole sector’s receptiveness to change to build a fintech company, and then expand back to my home markets.”

I am glad that Indonesian fintech founders do not have to do the same.

Stay healthy everyone and please stay at home!

Jakarta, 30th March 2020