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We are pleased to present the highlights of our webinar The Future of Fintech Lending in Indonesia. The webinar brought together a distinguished panel of experts in the field, including:
These experts shared their perspectives and insights on the current state and future of fintech lending in Indonesia. Through engaging discussions and thought-provoking presentations, the speakers provided a comprehensive overview of the challenges and opportunities facing the fintech lending industry in the region. This blog post serves to share the key takeaways from the webinar and offer a glimpse into the exciting future of fintech lending in the country. We hope this post will be informative and valuable to all those interested in the industry.
Peer-to-peer (P2P) lending is a particularly successful and profitable area as there is a lack of access to bankable products in Indonesia, which creates opportunities for fintech companies to fill the gap and provide financial services to consumers. The fintech industry in Indonesia has grown significantly in recent years, with over 100 licensed P2P lending companies operating in the country. The industry has evolved to include various forms of lending, such as buy now pay later (BNPL) and salary-based lending, as well as money management apps and digital banks. There has been a focus on providing credit to productive sectors, such as small businesses, to help increase income and sustain operations. It is also mentioned that there may be potential for further evolution in the P2P lending sector.
The increase in interest rates can directly impact lending products and customers may ask for higher interest rates on deposits. The need to carefully consider which customers to target and to introduce new risk acceptance criteria in response to changes in the market. There has not been a significant increase in mass layoffs or unemployment in Indonesia, but there may be an impact on consumer behaviour and purchasing power in response to rising prices for necessities such as food, gas, and electricity. The importance of understanding and responding to changes in the market and the potential for partnerships and collaborations to mitigate the impact on their businesses, such as working with other companies to share resources and expertise.
The Indonesian peer-to-peer (P2P) industry has grown significantly over the past few years, with total disbursements reaching between $15 billion and $18 billion and assets under management (AUM) at roughly $3-3.5 billion. The success of the industry has been attributed to the regulatory foundation set by the OJK (Otoritas Jasa Keuangan), which has helped to establish trust and credibility within the industry. Additionally, the industry's success has been driven by the availability of alternative data sources and the ability to use technology to efficiently underwrite loans. Despite its success, the industry still has room for growth, with an unmet credit gap of $80-100 billion in Indonesia.
The P2P lending model in Indonesia has been successful due to a strong regulatory foundation and a huge unmet credit gap in the market. Despite the emergence of digital banks and big tech companies entering the credit market, the standalone P2P model is expected to continue to evolve and grow, potentially through consolidation and collaboration with traditional banks. P2P lending companies do not have the same risk assessment difficulties and regulatory restrictions as traditional banks and therefore can serve the underserved segment of the consumer lending market.
The OJK (Otoritas Jasa Keuangan), or the Financial Services Authority in Indonesia, has played a crucial role in regulating the peer-to-peer (P2P) lending industry in the country. In the early days, the OJK took a "sandbox approach," allowing for a more unregulated environment, but over the years they have gradually implemented more rules and regulations to crack down on unregulated platforms. This has been a positive move for the industry as it has helped to clean up the space and protect consumers.
Recently, the OJK has implemented new regulations such as higher minimum capital requirements for peer-to-peer platforms and introduced a cap on "super lenders," or institutional lenders financing the industry. The impact of these regulations has been positive for the industry, but it is important to note that regulations can also be a hindrance to business growth.
In this webinar discussion, the industry experts agree that regulations are necessary to protect consumers but it is also pertinent for the OJK to be open to adjusting regulations based on feedback from businesses and associations. The speakers generally view the OJK's regulatory efforts as positive, as they aim to protect consumers and crack down on predatory lending practices. It was also noted that the moratorium on new licenses for P2P lending companies may not be as much of an issue as it was in the past, as there are not many new companies entering the market at this time. Overall, the speakers believe that the regulatory environment in Indonesia is still attractive to investors.
Digital banking has been making headlines as a potential disruptor to traditional banking and peer-to-peer lending companies. However, the reality is a bit more nuanced. While digital banks may have an unfair advantage in terms of access to information and customer segments, they are not likely to completely disrupt the traditional banking industry. Additionally, partnerships and collaborations between these different players will continue to play a role in the industry.
For example there is a digital bank that is utilising partnerships to its advantage by leveraging the retail network of a franchised Indonesian convenience store chain. This gives them access to a large customer base and valuable information about the market.
Overall, it is important to remember that credit and banking penetration is still relatively low in many markets, leaving plenty of room for growth and cooperation among different players in the industry.
Financial inclusion is an important issue that has been addressed by fintech companies in recent years. The credit gap is a significant problem, and fintech solutions have helped to reach out to underserved clients. Many of these solutions have targeted different segments, such as agriculture and students. However, the question remains, what has been the key driver of using fintech solutions to break barriers and achieve financial inclusion?
One of the speakers explained that in Indonesia, agriculture is a significant industry, and many farmers and fishermen live in poverty. They have to buy input materials, such as seeds and fertilisers, and wait for months to get their money back. Government subsidies in the form of loans have also been provided in the past to help these farmers
In 2013, there were a number of Fintech start-ups that aimed to promote financial inclusion and help this group of people earn more by addressing their financial needs. However, many of these companies failed because credit scoring was difficult to accomplish due to a lack of information. This highlights the challenges in this industry and the difficulties in trying to serve this market segment.
Since 2019, it has become easier to provide credit to those in the agriculture industry, specifically those at the bottom of the pyramid, due to advancements in supply chain technology. This allows for a better assessment of credit worthiness, which was previously difficult to accomplish. The opportunity for entrepreneurs to drive growth in this industry is significant, but at the same time, there is also a desire to include those at the bottom of the pyramid and provide them with financial access to thrive. This is possible today because of the advancements made by other tech companies in supply chain technology, which allows for a better assessment of opportunities. This example specifically pertains to lending to micro-entrepreneurs, but the overall movement towards financial inclusion is driven by the recognition of a gap in the market that has not been addressed properly. The industry has matured. There is now an increased focus on giving back and driving sustainability and financial inclusion for those in the lower segments of the economic pyramid.
The Indonesian financial industry is a dynamic space, with a wide range of options for individuals seeking to grow their wealth. On the one hand, traditional banks offer lower-risk investment options, such as deposit accounts, with yields that are not as high as those offered by peer-to-peer (P2P) lending firms. However, banks have regulations in place to guarantee deposits of less than 2 billion rupiah, which provides a sense of security to customers.
On the other hand, P2P lending firms have emerged as an alternative option for those seeking higher yields. These firms function as matchmaking platforms, connecting lenders with borrowers and assessing the risk of loans or lines of credit. While there is still a risk of not getting the full amount back, these firms are providing access to financing for individuals in less urban areas who may not have had many options before.
Despite the growth of P2P lending, the industry still faces challenges. Out of the 102 platforms available, very few offer lending investment opportunities to retail investors, with most working primarily with institutional lenders. The speaker's company is one such firm that works with banks and debt funds, but focuses on savings rather than investments for retail customers.
It is important to note that P2P lending may not be the best option for individuals looking to invest small amounts of capital to earn more. In the speaker's opinion, it is not the responsibility of P2P lending platforms to cater to this segment, as there are other solutions such as fund management or direct investing available.
Since Indonesia is home to a large Muslim population the question of the potential for Islamic banking in the country is a topic of much discussion. Historically, the penetration of Sharia financial services in Indonesia has been relatively low compared to other Muslim-majority countries such as Malaysia. However, the speakers did discussed the potential for Islamic banking to grow in Indonesia.
One speaker spoke on the early success of companies offering early wage access and the potential for these companies to expand their offerings to include more general credit products. Another speaker argued that the low penetration of Islamic banking in Indonesia is likely due to a lack of access to competitive products and services, rather than a lack of demand. it was also highlighted the prevalence of Sharia compliance across various industries in Indonesia, including food and beverage, cosmetics, and even life-saving medicines, as evidence of the potential for Islamic banking to grow in the country.
The speakers also discussed the benefits of early wage access and the potential for traditional players to add this offering to their portfolio. The question of the potential for Islamic banking in Indonesia is a complex one, and there are a variety of factors to consider when trying to understand the future of this industry in the country.
Peer-to-peer lending has been on the rise in recent years, thanks in part to advancements in technology and the use of alternative data and predictive analytics. This approach allows for a more accurate assessment of a borrower's creditworthiness, and enables lenders to offer tailored products and pricing to their customers.
One of the key drivers of the success of the peer-to-peer lending industry is the use of alternative data, which is data that is unrelated to what is being predicted. This allows for a more comprehensive and accurate assessment of a borrower's creditworthiness, as it takes into account a wide range of factors that are not typically considered in traditional credit scoring models.
To achieve this, P2P lending companies rely on big data and predictive analytics, which allow them to extract patterns from large amounts of data and make more accurate predictions about a borrower's behaviour. These models are able to choose from thousands of features or parameters, and determine which are truly indicative of a good borrower.
Additionally, P2P lending companies use risk-based pricing and verification, which enables them to offer different products and pricing to customers depending on their creditworthiness. This approach allows for a more efficient and fair lending process, and helps to reduce the risk of defaults and loan losses.
Overall, the use of alternative data and predictive analytics is a key driver of the success of the peer-to-peer lending industry, and is helping to make lending more accessible and affordable for borrowers.
With the rise of peer-to-peer lending, data privacy and security have become increasingly critical issues. P2P lending companies collect and store a lot of sensitive information about their customers, including financial and personal data. In light of this, it's crucial that these companies protect their data.
Using a cloud-based platform is one way P2P lenders ensure data security. By doing so, data can be stored and accessed remotely, protecting it from physical damage and theft. The data is also protected from unauthorised access by cloud-based security measures, including encryption and multi-factor authentication.
Compliance with regulations and industry standards is also imperative for data security. To ensure their customers' data is secure, P2P lending companies must follow strict regulations, such as those set by the OJK. Furthermore, they must follow best practices for data security by complying with industry standards like the Payment Card Industry Data Security Standard (PCI DSS).
A P2P lending platform must protect the personal information of its users by using a cloud-based platform and adhering to industry regulations and standards.
The speakers also discussed the potential use of cryptocurrency in the fintech lending industry. One of the speakers stated that they are open to using cryptocurrency as a source of funds for their lending activities as long as it is a legal and not too cumbersome process and the rate is reasonable. Another speaker also suggested that while they personally like the topic of cryptocurrency, regulation in their country is not yet ready for it. They believe that the most likely use of cryptocurrency in the near term would be as collateral in investment products or as a way to leverage crypto trading, but think that payments will be less likely to be enabled by regulators.
The conversation centers on the potential for fintech lending in the agriculture segment in Indonesia. One of the speakers noted that while there are a few fintech lending platforms focused on agriculture, they haven't yet seen any that have truly disrupted the traditional lending market in the country. Another speaker shared that the evolution in this area has been the collaboration between fintech lending players and those in the agricultural sector.
One example she cites is the collaboration between a P2P lending platform, and a company that helps bridge fishermen with buyers for their catch. The lending platform relies on the company’s knowledge of the lower-risk customers in the fishing industry to provide funding, rather than trying to assess creditworthiness on their own. The speaker points out that these collaborations are becoming more common in the agriculture industry, and that they are necessary in order to build the data sets needed to effectively assess the creditworthiness of farmers and other agricultural workers.
Overall, it was suggested that while true disruptions in farmer lending may not yet be happening in Indonesia, the trend towards collaboration between fintech players and those in the agricultural industry is a positive step towards making lending to this segment more accessible and efficient.
Dyota M. Marsudi
President Director of Bank Aladin
Dyota Marsudi is President Director at PT Bank Aladin Syariah Tbk. His previous roles include management consultant at the Boston Consulting Group, Co-Founder and Chief Operating Officer at PT Indonesia Untuk Dunia (Happy5) and Senior Executive Director-Investments at Vertex Venture Management Pte Ltd. He received an MBA from INSEAD and an undergraduate degree from the University of Indonesia.
Partner, East Ventures
Melisa Irene is a Partner of the firm with the responsibility of providing support coordination for deals and portfolio companies. She graduated from Binus International University in 2015 with a Bachelor of Accounting degree with a track record in debate championships and business competitions. She sits on several boards for portfolio companies in Indonesia, serves as AMVESINDO Head for International Relation (Ketua Bidang Luar Negeri) and ranked #1 for Indonesia Young Women Future Business Leader in 2020 by SWA Magazine.
CEO & Co-founder of Julo
Adrianus Hitijahubessy is the CEO & Co-founder of PT JULO Teknologi Finansial (JULO), established in 2016. Adrianus has been inspired to support financial inclusion in Indonesia further through credit access - owing to his career journey back in the USA. Excelling at Micro Credit, Risk Management, Account Servicing and Consumer Analytics fields, he developed his expertise further at Capital One Financial (2006), eBay Inc. (2012) and Cignifi (2013) before returning back to Indonesia. Adrianus also obtained his Master of Science (2006), Bachelor of Science (2004) and Mechanical Engineering degrees from the University of Texas, Austin.
Quentin Vanoekel (Moderator)
Chief Investment Officer and Co-founder of Helicap
Quentin is a seasoned PE/VC and alternative investment professional who possesses over a decade of experience in Southeast Asian markets. He was a Venture Partner at venture capital firm 33 Capital and Via iD, and Deputy CFO of MC Payment, a regional FinTech company providing omni-channel payment solutions. Prior to that, Quentin was an Executive Director at Bongo Capital, a family office investing across industries in Indonesia and Europe. He was also part of the founding team that set up and ran the Asset Management arm for the group, during which he obtained the Investment Manager License certified by Indonesia’s OJK in 2012 (fka Bapepam-LK). He holds a Bachelor’s and Master’s degree in Business Management, majoring in Finance, from the Solvay Brussels School of Economics and Management in Belgium.