Pandemic an Opportunity for Fintech Growth
The Covid-19 pandemic has created an opportunity the fintech industry to grow. Fintech companies have developed significantly since the pandemic emerged.
Visitors flock to the Indonesia Fintech Summit and Expo 2019 on Monday (23/9/2019) at the Jakarta Convention Center in Central Jakarta. The expo hosted conferences, educational activities and fintech exhibitions to promote financial literacy and inclusion.
The Covid-19 pandemic has created an opportunity the fintech industry to grow. Fintech companies have developed significantly since the pandemic emerged.
Fintech companies have expanded noticeably in electronic payments and digital loans in the first half of 2020. Data at Bank Indonesia (https://www.bi.go.id/id/statistik/sistem-pembayaran/uangelektronik/ contents/jumlah%20uang%20elektronik.aspx) shows that electronic payments totaling Rp 93.63 trillion in transaction value were made from January to June 2020.
The number of electronic payment accounts, or e-wallets, grew 68.5 percent year-on-year (yoy) to 353.6 million. Data at the Financial Services Authority (OJK) puts the number of borrower accounts at 25.7 million in June 2020. Fintechs have disbursed a total of Rp 113.46 trillion in loans, up 153.2 percent yoy.
The figures reveal the role that the digital financial services industry is fulfilling during the current economic difficulties. Demand for digital financial products and services has been on the rise during the health crisis, particularly for payment systems, financial planning and financing access among the public, as well as micro, small and medium enterprises (MSMEs) and ultramicro (UMi) businesses.
The limited movement of people in society as a result of the restrictions imposed to prevent the spread of Covid-19 has created an opportunity for this industry. Fintech has made transactions and payment systems more efficient and economical.
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Since the financial services adopted technology, the industry’s business model has changed from conventional to moderate. The demand for financial services is fulfilled easily without any constraints due to distance and time for in-person meetings. The emergence of fintech companies has replaced the role of formal financial institutions, like banks.
Today, the industry offers 23 fintech services and products, and the offerings are only expected to expand in the future.
Prior to the health emergency, awareness of fintech businesses was already widely known among the Indonesian public. Over the last four years, fintech companies have made positive achievements in business development and product innovation. In 2016, only digital payments and financing solutions were available to the market. Today, the industry offers 23 fintech services and products, and the offerings are only expected to expand in the future.
The performance of the fintech industry could impact monetary stability, financial system stability and the reliability of payment systems. The industry is becoming increasingly relevant as a means of deepening Indonesia’s financial markets, especially in provided coverage for communities as yet unserved by formal financial institutions.
Over the last few years, the fintech industry has made significant contributions to the Indonesian economy. A study by the Institute for Development of Economics (Indef) (https://indef.or.id/update/detail/studi-dampak-fintech-peer-topeer-lending-terhadap-perekonomiannasional#:~:text=Studi%20Dampak%20Fintech%20Peer%2DTo%2DPeer%20Lending%20Terhadap%20Perekonomian%20Nasional
Tim%20Peneliti%20Indef&text=Berdasarkan%20data%20Otoritas%20Jasa%20Keuangan,menembus%209%2C7%20juta%20akun.) and the Indonesian P2P Fintech Lending Association (AFPI) has indicated that peer to peer (P2P) fintech lending increased Indonesia’s gross domestic product (GDP) by 131 percent yoy in June 2019, or Rp 60 trillion.
In addition, the fintech industry has absorbed 362,300 workers. Its labor absorption has contributed to a 0.7 percent reduction of the poverty rate.
Beyond employment, fintech companies have also helped increase income and spending, increasing the income of rural farmers by 1.23 percent and urban traders by 2.59 percent. Meanwhile, household spending of the urban lower-class increased 1.34 percent and upper-class spending by 1.77 percent.
This is because the industry can adapt to the “new normal” condition and promote digital transformation towards restoring the economy.
The Indef-AFPI study underlines the fintech industry’s role in economic growth. Fintech companies present a means of accelerating economic recovery from the impacts of the Covid-19 health emergency. This is because the industry can adapt to the “new normal” condition and promote digital transformation towards restoring the economy.
Fintech development
Broadly speaking, there are four types of fintech categories. First is peer-to-peer (P2P) lending and crowdfunding. P2P is a personal loan service. Some examples of fintech companies in this category are KoinWorks, Kredit Pintar and Tunai Kita. Crowdfunding offers individuals and groups the use of a digital platform, such as Likuid, to raise funds for financing a certain activity.
Second is investment risk management, covering electronic trading and electronic insurance for financial planning and investment. Examples of these fintechs are.
Third is online payment, clearing and settlement portals for making electronic ransactions, like digital wallets (OVO, GoPay and ShopeePay) and payment gateways (Faspay and Doku).
Also read: Ultramicro Businesses Help Drive Economic Growth
Last is market provisioning and aggregator platforms that offer data on different to financial products to help consumers in decision-making. Examples of this type of fintech are Cermati, Cek Aja and Pinjamania.
According to June 2020 data from the OJK and the the Indonesian Fintech Association (Aftech) (https://kompas.id/baca/ekonomi/2020/08/25/peta-jalanseimbangkan-ruang-inovasi-dan-perlindungan-konsumen/)ftech), 43 percent of fintech companies were P2P lending platforms, 18 percent were online payment platforms and 5 percent were market provisioning and aggregators. Total lending in June 2020 grew 153.2 percent yoy in terms of value.
According to Aftech, two main factors contributed to lending growth amid the health crisis: the increased number of fintech companies registered with the OJK and the increase in consumers familiar with and benefiting from fintech lending.
A total of 113 companies were registered or licensed for fintech lending in the first semester of 2019. Cumulative lender accounts comprised 99.40 percent of the domestic market. In the first semester of 2020, the number of registered or licensed fintech companies rose to 158, while cumulative lender accounts showed a shift to 32.16 percent domestic lenders and 30.69 percent foreign lenders.
Employees of peer-to-peer lending startup Investree attend to visitors at their booth on Monday (23/9/2019) at the Indonesia Fintech Summit and Expo 2019 at the Jakarta Convention Center in Central Jakarta.
Despite the positive trend, fintech lending performance should take note of the sharply increasing trend of bad debts as a negative effect of the pandemic. The 90-day delinquency rate of outstanding loans was 6.1 percent in June 2020. As a result, fintech companies changed their strategy by being more selective in providing financing, especially to new borrowers.
Nonetheless, lenders remain confident about investing. Some fintech lending firms have raised funds that have increased investor confidence. Investree and Modalku secured serial C funding commitments of respectively US$23.5 million and $40 million. A portion of the funds is for restructurings to relieve the burden for borrowers affected by Covid-19.
In the meantime, Bi data (https://www.bi.go.id/id/statistik/sistempembayaran/uang-elektronik/contents/transaksi.aspx) showed growth of fintech payments from January to June 2020. The nominal value of electronic cash accounts and electronic transactions grew respectively 68.5 percent yoy and 66.87 percent yoy. Similarly, a Snapchart survey revealed that electronic transactions through digital wallets have been on an increasing trend over the last two years.
The Snapchart online survey was conducted in June, July and August 2020 and involved 1,000 respondents in all regions of Indonesia. The survey results showed that digital wallets were the preferred choice for shopping at both online and offline outlets. The digital payments ecosystem promotes for business sustainability.
The company’s rapid growth is attributable in part to the completeness of its features and that its merchant partners hail from all over Indonesia.
ShopeePay has recorded the fastest growth in the digital wallet market against OVO, GoPay, Dana and LinkAja. ShopeePay also recorded the highest monthly transaction value, volume and frequency as well as user numbers compared to other digital wallets. The company’s rapid growth is attributable in part to the completeness of its features and that its merchant partners hail from all over Indonesia.
Digitalization era
Complete and easy-to-use fintech features have led to the burgeoning use of digital financial services. Continuous innovation is the challenge for fintech companies’ survival. Fintech development plays a role in maintaining economic growth during the Covid-19 health crisis.
Looking ahead, the momentum of fintech development must be maintained and strengthened further. The OJK views fintech platforms as very promising for the future.
The OJK has seized the moment by launching the 2020-2024 Digital Finance Innovation Road Map and Action Plan (https://www.ojk.go.id/id/berita-dan-kegiatan/siaranpers/Pages/Siaran-Pers-Peran-Industri-Fintech-dalam-Pemulihan-Ekonomi-Nasional-.aspx). This road map is intended to support digital financing innovations to meet future needs.
The road map contains an action plan containing rules, guidance and supervision on intensifying research into technological improvements and related risks. It also covers consumer protection, financial inclusion and digital literacy. Enhancing consumer protection will widen financial inclusion.
Modal Toko, a digital lending service established as a collaboration between e-commerce giant Tokopedia and SME crowdfunding platform Modalku, is launched on Monday (22/7/2019) in Jakarta. Attending the product launch are (from left) Tokopedia fintech assistant vice president Samuel Sentana, Financial Services Authority (OJK) fintech licensing and supervision director Hendrikus Passagi, and Modalku cofounder and CEO Reynold Wijaya.
The fintech industry has a role in digitally transforming the finance industry by strengthening the digital ecosystem. Setting up a fintech ecosystem has even more support because of the higher awareness in digital financing due to the imposition of social restrictions.
Financial access and government social assistance are distributed through the use of technology. This condition enables fintech companies to help people and businesses complete their transactions conveniently and safely.
The Covid-19 health crisis poses both a challenge and an opportunity for continued growth of the digital financial services industry, which offers added value and financial independence to society.
This industry has the resilience and capacity to adapt to the “new normal” transition phase. The support of policymakers is being awaited to encourage digital transformation towards economic recovery. (LITBANG KOMPAS)
