Indonesia's fintech growth supported by tailwinds

INDONESIA'S fintech sector is looking up, as government support and strong consumer interest in innovative financial products are set to boost the sector in the coming years, Fitch Solutions Macro Research said in a report.

"The expansion of fintech services in Indonesia is supported by several tailwinds, including the massive underbanked population which is receptive to innovation in financial services, and the rapid adoption of smartphones and mobile data services," Fitch Solutions analysts wrote.

The report added that the regulatory regime is forward-looking, with both the financial regulator and the central bank actively introducing new regulation and licensing regimes to ensure financial soundness.

Fitch Solutions noted that the central bank and other regulators are actively developing the fintech sector. Indonesia's fintech sector is regulated by its central bank Bank Indonesia (BI), which looks after the digital payments segment, and the Financial Services Authority (OJK), which supervises peer-to-peer (P2P) lending. Cryptocurrencies are regulated by the Commodity Futures Trading Regulatory Agency (BAPPEBTI), which is under the Ministry of Trade.

Meanwhile, Fitch Solutions said the payments and peer-to-peer (P2P) lending segments are gaining traction, with independent players Go-Pay and OVO and operator-led service TCash leading the payments market.

In a bid to gain market share and to foster adoption of e-money services, the three platforms have offered high cashbacks and launched giveaways and this has led to many users using more than one e-money service simultaneously, the report said.

Quoting BI data, it said the 40 e-money providers had as many as 292.3 million e-money instruments in circulation by December 2019, representing a penetration rate of 108 per cent. However, it believes that unique subscriptions likely hover below half of the total population.

In response to the growing popularity of e-money, Fitch Solutions noted that banks have also responded accordingly, with the Association of State-Owned Banks (Himbara) launching an e-money service called LinkAja last March.

LinkAja is a collaboration among Bank Mandiri, Bank BNI, Bank BRI and Telkom, and while this alliance could reduce cannibalisation and achieve greater scale overall, Fitch Solutions said it believes the service may struggle to build the traction that independent players have developed if it does not increase its functionality.

As for P2P lending, Fitch Solutions said it is now a multi-billion dollar market, with the surge in P2P financing largely attributed to relatively attractive financing rates and less stringent requirements.

By November 2019, total loans disbursed through P2P lending platforms amounted to 74.5 trillion ruppiah (US$5.4 billion), while outstanding loans stood at 12.2 trillion (US$893.3 million), indicating an increase of 141.4 per cent year-to-date, according to the report.

"The OJK has been actively seeking to regulate the sector, although overall, the regulatory environment still remains relatively lax," the report said, adding that the OJK has shut down 1,087 illegal P2P lending companies by July 2019.

Cryptocurrencies at the moment show "little potential", the report said, as they are increasingly being acknowledged by the Indonesian government as digital assets that can be used for investing, even though they are not recognised as legal payment instruments.