The fourth most populous country in the world spread across more than 6000 islands, banks have struggled to reach out beyond Indonesia's big cities up to now. However, a digital transformation is gripping the country, bringing with it the promise of huge increase in financial inclusion. Stefania Palma reports.

Connecting Indonesia

Indonesia has a population of 250 million people spread across more than 6000 islands. However, to date, two-thirds of its population do not have a bank account. 

The Indonesian government is aiming to solve this financial exclusion problem by building a digital economy, given that the vast population is young and the adoption rate of mobile phones is in the double digits. As a result, start-ups including transport, travel and e-commerce applications are mushrooming in the country.

Digital movements

As the volume of daily transactions on apps balloons in Indonesia, these start-ups are rolling out digital wallets to facilitate payments on their platforms. Transport app giants Go-Jek and Grab have both launched digital wallets, named Go-Pay and GrabPay, respectively, which users can top up via bank account transfers, ATMs or mobile banking.

Banks are responding to the rise of financial technology (fintech) players by acquiring tech start-ups or by establishing their own digital banks. Bank Rakyat Indonesia (BRI) has gone as far as buying a private satellite – a first for a bank anywhere in the world – to secure national connection coverage and reach customers across the country's many islands. 

As fintechs move into traditional banking services, Indonesia’s regulators – the central bank and Otoritas Jasa Keuangan (OJK), the financial services authority – are rethinking its financial regulatory framework. But how will new guidelines for digital players affect incumbent banks?

Pushing all of these new economic trends – the start-up boom, regulators welcoming fintech players and banks’ digitisation drive – is a government that has put e-commerce at the heart of its policy goal to grow financial inclusion in Indonesia.

Going places

In a country where traffic congestion is paralysing cities, transport applications for mobile phones such as Go-Jek and Grab have boomed. Go Jek launched in 2010 with only 20 drivers. Today, the fleet has grown to 200,000 and the app offers 15 different services including scooter and car taxis, booking cinema or bus tickets or delivery of groceries, medicine or even massage services. Go-Jek’s latest $550m funding round, led by investment companies KKR and Warburg Pincus, was the largest for a local tech start-up.

Singaporean company Grab operates across south-east Asia, but Indonesia is one of its key markets, according to Ridzki Kamadibrata, managing director at Grab Indonesia. The tech firm’s main services include two- or four-wheel taxis.

Grab entered Indonesia in 2014 and is expanding aggressively. It announced an investment plan of at least $700m up to 2020 to set up a research and development centre in Jakarta, to invest in Indonesian start-ups via a $100m social impact fund and to increase collaborations with local banks. Grab raised $750m in its latest funding round, led by Japan’s SoftBank.

Apps such as Go-Jek and Grab are accelerating financial inclusion in a number of ways. As well as creating jobs in the formal economy for their drivers, they are offering them financing schemes to purchase the smartphones, cars and motorcycles necessary for the job.

In December 2016, Grab announced a partnership with Japanese financial services company Tokyo Century to offer leasing and rental car services to its drivers across south-east Asia. “It is very important for Indonesia because this market is accustomed to vehicles produced in Japan,” says Mr Kamadibrata.

Opening the wallets

In a country such as Indonesia where credit card adoption is a meagre 4%, 70% of the population is unbanked and where there are more mobile phones than people, the future of payments appears to be digital. Digital wallet services such as Go-Pay and GrabPay are tapping into this potential.

“We have become the largest digital wallet in Indonesia in just seven months,” says Nadiem Makarim, CEO and founder of Go-Jek. “[That is because] everything you want to do in your day-to-day life is available on our app: transport, food, groceries, concerts, DJ events, cinema tickets, you name it. The more daily and weekly use you have, the more relevant your wallet becomes.” Go Pay can also be used outside the platform, at any merchant that has a partnership with Go-Jek.

Go-Jek also has the competitive advantage of having an e-money licence – the closest thing to a full banking licence – which allows money transfers as well as payments. “We are one of the five non-bank, non-telecommunications companies in Indonesia to have this licence,” says Mr Makarim.

On the back of this licence, Go-Jek started rolling out a new Go Pay feature in March 2017, which enables users to send credit to any phone number linked to the app at no cost. Users will eventually be able to withdraw cash from their digital wallets via ATMs and their own bank accounts, says Mr Makarim. 

Grabbing an opportunity

Go-Pay's main rival, Grab, is taking a different approach to payments. The company does not have an e-money licence and is not planning to apply for one. Instead, it has set up partnerships with licence holders Bank Mandiri and electronic payment provider Doku. “Our immediate priority is building partnerships. Bank Mandiri is one of Indonesia’s largest banks and Doku is a prominent platform. They have so many partners and cash-in, cash-out outlets [where GrabPay can be used]. We can tap into each other’s customer bases,” says Mr Kamadibrata. 

Grab is also collaborating with Indonesian conglomerate Lippo Group to grow GrabPay. “Lippo Group owns [Indonesia’s] Nobu Bank and large malls, which our customers are attached to. We want to channel our payment system through Lippo Group outlets,” adds Mr Kamadibrata.

In the travel sector, Traveloka, Indonesia’s version of Expedia, would like to launch a digital wallet to overcome the bumpy payments services offered by banks. Traveloka chief financial officer Henry Hendrawan says: “Banks’ transfer ecosystem is fairly difficult. It is not built for large volumes of transactions needing instant confirmation [such as travel bookings]. Bank transfers are delayed during weekends and at some hours of the night.”

Using bank transfers also means customers need to finalise payments by going to an ATM or a bank branch. A digital wallet would keep the entire transaction online, on Traveloka’s platform.

BTPN strikes back

Banks are responding to tech start-ups entering the financial markets by boosting their own digital offerings. Like fintechs, these digitisation efforts are also linked to the government’s financial inclusion drive.

Local bank BTPN has taken on fintechs by setting up Jenius, Indonesia’s first digital bank. The mobile app offers services such as money transfers, high-yield savings accounts, mobile payments and the ability to request money from others by inserting a telephone number. Two million people have downloaded the app since its August 2016 launch.

Payments are the most popular feature in Jenius, especially as BTPN builds partnerships with retailers, and most recently transport app Uber. But Jenius’s Visa debit cards, which can be used worldwide, set it apart from other fintechs, whose wallets can mostly only be used within Indonesia. 

“This is a virtual version of a Visa card. Some people in Indonesia hesitate to use cards to pay online. But the Jenius Visa e-cards are top-up cards, have a limit that customers can set, and can be blocked or unblocked in seconds from the Jenius app. It makes people more comfortable,” says Peter van Nieuwenhuizen, head of digital banking at BTPN. 

Jenius could soon include new services such as insurance and wealth management products. But helping customers manage their personal finances is a high priority for Mr van Nieuwenhuizen, as poor financial management is often a significant problem in developing markets such as Indonesia.

“With Jenius, customers themselves can track, search and filter all payments and transfers quickly and easily. It is a wealth of insight that can be used to understand one’s financial behaviour and to help customers reach financial goals,” he says.

BRI reaches for the sky

Meanwhile, BRI stands out for its efforts to reach out to the most remote Indonesian islands. “BRI is often the only bank that exists in some parts of Indonesia,” says Liana Lim, a partner at KPMG Indonesia.

Poor connectivity in the country was limiting BRI’s reach so the bank bought a private satellite, BRIsat, which provides secure banking communication to link up all BRI outlets and more than 50 million BRI customers across the country. 

“Usually telcos and governments are the ones that invest in satellite technology. [But the purchase now means that] BRI does not rely on telecoms companies for connection,” says Ms Lim. The satellite purchase will also cut costs, as before it bought BRIsat the bank rented transponders from commercial satellite providers to have national coverage.

BRI’s connectivity drive also involves 'floating banks', or boats that visit the smallest islands in the country each week. As well as being fully fledged branches, they include libraries for children and medical consultation practices. In February 2017, BRI launched two new boats in the presence of Indonesian president Joko Widodo, taking its fleet to three.

BRI’s efforts to boost financial inclusion also involve digitisation, with up to 30% of the bank’s expenses dedicated to this goal. The bank is also partnering with fintechs. “If you can’t compete, you join them,” says Asmawi Syam, who stepped down as BRI chief executive in mid-March. “As a commercial bank, Indonesian regulation does not allow us to own stakes in fintech firms directly. Due to regulatory constraints, we need to create special relationships with fintechs.”

Making friends with fintech

State-owned Bank Negara Indonesia (BNI) is taking a similar approach to competition from fintech companies. “We know that support from fintechs will be the engine for growing our digital banking,” says Panji Irawan, managing director, treasury and international at BNI.

Both BRI and BNI have organised hackathons in cities with top universities to nurture and acquire talent from tech start-ups. BNI is also in talks with the telecoms industry to boost its digital offering. “We have the customers and [telecoms companies] could bring the technology,” says Mr Irawan.

Bank Mandiri, Indonesia’s largest bank by Tier 1 capital, has sidestepped the restriction on direct investment in fintechs by setting up a venture capital unit. The unit’s most recent investment in March 2017 targeted peer-to-peer (P2P) lender Amartha, which provides financing to groups of women in rural areas. “If [Amartha’s] model works, they can elevate it to Mandiri itself and go nationwide. This is a good example of how [fintech] experimentation can eventually be absorbed by banks,” says Ajisatria Suleiman, executive director at Indonesia Fintech Association.

Boosting partnerships

But while fintechs and banks are starting to co-operate, market participants say the number of partnerships is still low. “If you ask any bank or fintech, they say they want to collaborate. But actual collaboration is not there yet,” says Mr Suleiman.

According to Tek Yew Chia, partner at KPMG Singapore, banks are mostly interested in fintechs’ technology, rather than working together to run a business. “The technology allows banks to do what they want to do in a shorter timeframe than if they were to build capabilities from scratch,” he says.

Transport apps such as Go-Jek and Grab are keen to deepen their relationships with banks. “The value of having data [such as Go-Jek’s] is extremely powerful and can help banks sieve through for credit-worthy customers at a fraction of the cost. We have to get everyone on Go-Pay first, but we want to explore this [type of collaboration in the future],” says Mr Makarim.

Go-Jek is also talking to lenders about selling bank products via the app. “We would become a channel for banks to push their products. But we also want them to reshape these products for them to make more sense for today’s digital customer,” says Mr Makarim.

Asked if he would agree to this type of arrangement, BNI’s Mr Irawan says: “We’d be happy to sell products on fintech platforms as long as it’s lucrative for us. We have 16 million customers already. So there needs to be a good split of revenues to accept this proposition.”

Building regulation

Market participants point to fintech regulation playing catch-up as a reason for dwindling collaborations with banks. Until recently, fintechs were not regulated by the financial authorities. But in a significant display of support for fintech development, the central bank, Bank Indonesia, released debut e-wallet and payment gateway regulations in December 2016. A month later, financial regulator OJK launched IT-based lending regulation dedicated to P2P lenders.

Now, some market participants argue traditional lenders could be at a disadvantage versus fintechs as banking guidelines are comparatively stricter. “Banks are forbidden to do anything but classic banking. For instance, banks are not allowed to go into e-commerce, which was how [China’s] Alibaba built the network that Alipay started working on,” says Erik Koenen, director at Deloitte Indonesia.

As a further example, Indonesian banks are required to collect wet signatures (where the customer has to physically sign the document) as part of 'know your customer' procedures, meaning bank staff need to check their identity in person. But it is not forbidden for fintechs to use digital signatures, which are quicker and more cost-effective.

“Banks are going back to the regulator asking why they can’t do this as well,” says Mr Chia, while according to Mr Koenen, changing this regulation is quite simple and discussions are at advanced stages. 

Converging banking and fintech regulations could be crucial as these players start competing in similar fields. “Fintechs are focusing on the most profitable part of banks’ value chains and on the points of biggest friction between banks and their customers. Nobody likes to pay fees for [bank] payments, for example,” says Mr Koenen, in reference to the fact that fintechs tend to not charge for digital payments.

“Indonesian banks are in a harness being attacked by firms that are not in their industry, and they can’t really defend themselves,” he adds.

Competitive advantage

It is true that fintechs are nimbler and more tech-savvy than incumbent banks, that they possess valuable customer data and that regulation for them is relatively lax. But some pundits say traditional lenders are likely to remain Indonesia’s key source of financing, especially in more remote areas where financial exclusion is highest and manpower is still required to overcome financial illiteracy and connectivity issues. Indeed, fintechs still mostly operate in urban areas.

“Financial inclusion in terms of availability of funds for loans will still be dominated by those that have the balance sheet, and they are usually banks,” says Mr Chia. Mr Koenen adds: “Banks are doing much more for financial inclusion than fintechs.”

Mr Suleiman, however, argues strict bank loan requirements often mean small business owners with no assets to put up as collateral do not have access to credit. P2P lenders, which accept invoice financing – and not just collateral – as proof of eligibility can fill the gap left by banks.

Despite rising concerns on competition, tech giants Go Jek and Grab have no intention of becoming banks, for the time being at least. “We are a software company, so the more assets we own, the more it hurts our valuation, which depends on how assetless and efficient we are,” says Go Jek’s Mr Makarim. Grab’s Mr Kamadibrata adds: “We will be focusing on our main [transport] services and on payments, not on deposit or savings accounts.” 

Government push 

Today’s growing fintech ecosystem, regulatory reforms and banks’ push to digitise would not be possible without the Indonesian government’s unprecedented support. Mr Widodo has put digitisation at the centre of the government’s financial inclusion efforts, and the president’s office has established a task force comprising 10 ministries to develop e-commerce in Indonesia. 

The task force is key as growing e-commerce will mean creating a new type of government in Indonesia. “We will need, among others, different structures, systems and policies on taxation, commerce, trading and funding,” says Lis Sutjiati, special adviser to the minister of communication and IT.

“This government is far more open to digitisation versus the previous regime,” says Rudy Ramawy, managing partner at Venturra Capital, a Jakarta-based venture capital firm investing in south-east Asian tech start-ups. “Deliberately growing the digital economy is Indonesia’s best bet at equitable growth – far more than tax reform, which has social and political implications.”

Go Jek’s Mr Makarim finds the government supportive and open to conversations with the fintech community. “The government understands that regulation always lags behind innovation, and it has proven this, especially with transport,” he says. In a display of support for fintechs, Mr Widodo lifted a ban on online transport systems the day after Indonesia’s transport minister implemented it in December 2015.

The Ministry of Finance also supports the development of Indonesia’s digital economy. According to finance minister Sri Mulyani Indrawati, technology could support her efforts to increase government tax revenue. “If all transfers go through electronic payments, you have the ability to track transactions. Imposing VAT or income tax compliance becomes easier,” she says.

Building coverage

The Ministry of Communication and IT is one of the most active in shaping Indonesia’s e-commerce landscape. One of its priorities is building national 4G and fibre optic coverage by the end of 2019, with the support of telecommunications companies. “We are successfully getting everyone involved to sit at the same table,” says Rudiantara, the minister of communication and IT. 

His ministry also wants to use national post service Pos Indonesia’s 35,000 staff to help micro, small and medium-sized enterprises (MSMEs) – which account for 60% of the country’s gross domestic product – to go digital and have easier access to market. To that end, the ministry is working with local banks and regulators to give MSMEs more access to credit. “Collateral required by banks is too expensive. It does not fit with MSMEs’ target to go digital. We proposed dropping collateral requirements to make them more affordable,” says Ms Sutjiati.

For the first time in Indonesia, government, fintechs, banks and telecommunications companies are all converging towards the same goal: increasing financial inclusion through digitisation. Regulation and some incumbent players are still catching up. But if progress is sustained and more Indonesians are included in the formal economy, the potential is enormous for the fourth most populous country in the world.

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