In the first part of this article, we took a look at the craze of Chinese mobile payday loan companies entering the Indonesian market. In the second installment, we are going to review the key challenges and risks they are facing, and how to manage/mitigate these.
Challenges for mobile payday loans
Customer, risk control, capital and collection are the four points of focus for mobile payday loan platforms.
Access to the Indonesian market does not seem difficult – the Chinese mobile payday loan platforms can rely on online advertising, especially Google AdWords, and social media to easily attract the first batch of customers. However, if they want to scale, they will need to find an effective long-term access to high-quality low-cost user traffic. Also bear in mind that this is not a business where customers build loyalty, so in a competitive environment customer retention is likely to be quite costly as well.
In terms of risk control, the current Indonesian personal credit system is very limited. Many Indonesians prefer cash transactions, which do not leave a record. As a result of these factors, the mobile payday loan platforms have to start from scratch with their risk control process, currently solely through the collection of phone and social media information. Data points are limited for building a good credit rating system, which in turn limits the speed of expansion.
In their investor PR, a few companies published a default rate of 0% – we really doubt that.
Capital is a big problem, as Indonesian capital providers are relatively conservative compared to their Chinese counterparts. At the same time, it remains to be seen whether the development of mobile payday loan platforms will not cause an increase in capital costs.
During the collection process, the collectors will encounter a lot of different scenarios, and there is no systematic guide on how to deal with these circumstances. The collectors can only analyze these different circumstances one by one, which requires a lot of manpower. Indonesian manpower cost is low so payday loan platforms can hire many people to do the collection for them. However, over the long run this practice is unlikely to be sustainable.
In that regard, we place our confidence in the companies which can emerge to a significant size very soon, as they will be able to leverage the data they have collected to build a better model, for both risk control and collection.
Policy risk cannot be ignored
When many Chinese companies are operating the industry, some of which are operating very aggressively, the Financial Services Authority (OJK) may issue a number of adjustment measures, such as limiting the issuance of licenses and system access and so on.
After all, for the Chinese gold rushers, this is someone else’s homeland. If there is any political strain, these foreign companies will suffer.
In addition, if the Indonesian government emulates a policy announced by Thailand at the beginning of the year, the actual gains (interest rates and other gains) of all payday lenders are capped at a figure that does not correspond to risk. Then most of the companies may be better off out of business.
After all, for a country’s government, financial stability is a, if not the top priority. For the governments of Southeast Asia who have suffered the financial crisis in 1997, the prevention of systemic financial risks is not taken lightly. Indonesia’s 1997 crisis has not only led to the collapse of the Suharto government, which had been in power for decades, but also resulted in the country being forced to allow East Timor to become independent. President Jokowi surely will not see a repeat of these episodes
How to avoid risks
So, how can Chinese mobile payday loan companies deal with these risks?
First, they can cooperate with a big, local player. This will not only solve the policy risks, but also funding and collection and other issues.
Second, they can scale quickly and transform, and be a good corporate citizen. Early entrant Akulaku is an example. Akulaku has accumulated a large number of customers and maintained a good momentum of growth. With this user base and traffic, and the customer transactions and repayment records accumulated for such a long time of doing business, the company can consider horizontal expansion to other business, such as credit, installment and so on.
It is also important to pay close attention to the surroundings to detect any signs of trouble and inform other Chinese mobile payday loan companies which are new to (or yet to be in) the market. Though it’s a competitive relationship, cooperation is necessary for the development of the entire industry.
As Chinese mobile payday loan platforms are flocking to Indonesia, they should have a long-term strategy and note the difference in policy from their home country and Indonesia that could bring risks to the operation.
They should also note that the potential for mobile payday loans does not only lie in Indonesia, but other countries in Southeast Asia (and even other parts of Asia) too.
Article originally written in Chinese by Jialei Zhao; translation into English and content update by Kate Tran