Indonesia: Clever collaboration lifts fintech

Everyone in Jakarta seems to be building, investing in, or using an app these days. 

While Silicon Valley is famously secretive, a place where financially innovative firms zealously protect their ideas and identity, Indonesia’s capital, for now at least, is the polar opposite: buzzing young fintechs work on projects with banks, who team up with other banks, and so on. 

Even the central bank is involved, rolling out a new QR payment system that everyone can use.

At one level, Indonesia’s embrace of fintech is no surprise. This is a poor country burdened by bad infrastructure, but filled with aspirational consumers crying out for clever solutions to life’s many iniquities.

The best ideas solve real problems, and often emerge from the same company. Thus, Gojek finds a motorbike to shuttle you to work, which you pay for using its Gopay e-wallet.

Gojek, located a half-mile south of Jakarta’s main financial district, is one of four readily acknowledged billion-dollar unicorns, along with booking firm Traveloka, digital marketplace Bukalapak and online retailer Tokopedia. All are based in Jakarta, and expanding across the region.

Gojek is already in Thailand, Vietnam, the Philippines and Singapore. Traveloka’s payment platform has launched in six Asean markets, as well as Australia.

Modalku, a crowd-funding platform for small and medium-sized enterprise financing, is in Singapore and Malaysia.

The pace of financial innovation is so great, and the proliferation of service providers so rapid (unlike China or Western markets, no single firm yet dominates specific forms of digital payments or communication), that it’s no great surprise that mainstream banks choose to strike online alliances with everyone and everything.

State-controlled Bank Mandiri is working with Gojek, Tokopedia, Traveloka and Shopee, an e-commerce platform owned by Singapore’s Sea Group.“We are about to launch a virtual credit card with Tokopedia, which people can apply for and install virtually without having to come and visit us,” Mandiri’s chief executive, Kartika Wirjoatmodjo, tells Asiamoney in Jakarta. “Indonesia is one of the fastest-moving countries, [in terms of] moving from traditional to online ecosystems.”

Wirjoatmodjo described fintechs as a “threat” in a prior interview with Euromoney, and saw the emergence of e-wallets as a source of competitive concern.

But one of his rivals, Jahja Setiaatmadja – president-director of Bank Central Asia – prefers to treat financial technology as his friend.

“Four or five years ago, I was quite afraid of fintech firms,” he admits, fearing being disrupted out of existence.

Setiaatmadja came to realize fintechs need him as much as he needs them.

“Most fintechs put their money to work with us,” he says. “Gojek and Tokopedia have their e-wallets. But they still need a payments bank, and for that they come to BCA. That’s one of the reasons why I see us maintaining our position as a leading digital payments bank. Financial businesses are not challenging our role, but we are able to grow more and more into the fintech space.”

This is an interesting development: the big, traditional lender, watching with a somewhat detached air as insurgent fintechs duke it out for market share, while it sits back and decides which ideas work and which do not.

Of course, that only matters if the bank in question is also highly digitally innovative, with good online services that customers want, and a sensible, flexible strategy.

Many of Indonesia’s big banks have been strong in digital for some time, partly because most of their account holders are wealthier urbanites.

In its latest Findex survey, released in 2018, the World Bank said 49% of Indonesian adults had access to a bank account: that puts Indonesia ahead of the Philippines (32%) and Vietnam (31%), but behind Thailand (82%) and Malaysia (85%).

Desperate not to lose touch with this core group of customers, “banks were forced to persistently improve their online services” or lose business, says Laksono Widodo, director of trading at the Indonesia Stock Exchange. “The best ones did just that.”

Asked to identify the most financially innovative lenders, most analysts point to Bank Danamon, with its multi-service D-Bank platform, and BCA, with its internet banking platform KlikBCA, Sakuku e-wallet, and stored-value card Flazz.

Ari Lumbantobing, head of digital development at leading brokerage Mandiri Sekuritas, applauds the success of Bank BTPN, whose digital banking application Jenius offers “good online on-boarding with products that fit the needs of millennials.”

This financial evolution has gone through distinct stages in Indonesia. First came the banks, testing the waters with their online services. Those same lenders then launched their own e-wallets, BCA’s Sakuku being a prime example.

But “the new products were slow to take off,” notes a local technology investor, “and that’s when the likes of Gojek enter the story”.

Many of the unbanked or underbanked jumped at the simple-to-use e-wallet services rolled out by Gopay and its main rival Ovo.

In February 2019, transactions worth $6.3 billion were completed via Gopay, according to data from Malaysian online aggregator iPrice Group and San Francisco analytics firm App Annie, followed by Ovo, Dana, LinkAja, and Jenius.

Those five also own the five most-downloaded e-wallet apps, as measured in the first half of 2019. Bengaluru-based management consultancy Redseer tips Indonesia’s e-wallet market to grow from $1.5 billion in 2018 to $25 billion by 2024.

The fiercely competitive nature of Indonesian fintech, and the sheer proliferation of services and apps, can be explained in large part by the identity of its investor base. Gojek, when you stare into its guts, looks pretty much like any Western technology giant. Its founder-chairman Nadiem Makarim owned 4.81% of the company at the end of 2018, according to Emerhub, a Jakarta-headquartered professional services firm with offices in Manila and Ho Chi Minh City.

A small army of big-name investors each holds a sub-5% stake, ranging from KKR and Sequoia Capital, to Anderson Investments, a subsidiary of Singapore sovereign wealth fund Temasek.

Ovo is known by many for its financial backing from Singapore’s ride-hailing firm Grab, its partnership with Tokopedia, and its sheer ubiquity.

Chief executive Jason Thompson, who joined from GrabPay, where he was southeast Asia managing director, said in March 2018 the firm served 110 million people in 300 Indonesian cities.

But the main name in Ovo’s development is John Riady, son of James and grandson of Mochtar, the billionaire founder-chairman of local conglomerate Lippo Group. The Riadys founded Ovo, and John has been handed responsibility for transforming Lippo into a digital financial powerhouse.

Nor is Ovo the only prominent example of old money turning to financial technology in search of new profit – and possibly a new, enhanced identity.

Dana is a joint venture between China’s Ant Financial and Emtek, a media group controlled by the Sariaatmadja family.

Another prominent Indonesian family, the Salims, own the popular iSaku e-wallet via their holding in Indomaret, a supermarket chain.

“Old money likes new ideas, especially when there’s new money to be made,” notes a venture capital investor. “None of the big families wants to be the one that didn’t create a super-app, or back a unicorn and make a ton of money from it.”

Aware of the looming danger of being disrupted, if not out of existence then out of a valuable and fast-growing corner of the financial space, Indonesia’s banks hit back. In June 2019, the big state lenders, including Bank Mandiri, Bank Rakyat Indonesia, and Bank Negara Indonesia, unveiled LinkAja, a single platform that integrates each institution’s e-payment services. Telkomsel’s e-payment system Tcash was also a founder of LinkAja.

Anyone who believed Indonesia’s state banks would bicker and moan and build a hodgepodge of a system that accentuated the benefits of private-sector innovation, was mistaken. LinkAja is already a roaring success: in the first month alone, 22 million Indonesians subscribed to its platform.

Its chief executive Danu Wicaksana – brought in from Tcash, where he was CEO until February 2019 – has built a centralized QR code payment platform that works to boost digital financial inclusion or, to use the government’s phraseology, to further the “national non-cash movement”. Its backers also include oil and gas firm Pertamina and Jasa Marga, a state-controlled group that runs toll roads used by millions of Indonesians every day.

“We are embedding it in public services and installing it in car parks and gas stations and train stations,” says Mandiri’s Wirjoatmodjo. “If we can lock in this usage, hopefully we can have a chance of competing with the [big private] fintech players like Ovo and Gopay. But then we have to ask ourselves, do we want to compete with them head to head, or create our own markets?”

Some see LinkAja as a state-sponsored disruptor, and for sure it is one of the more eye-catching regional innovations. But its ambitions are complex. At its launch, Wicaksana said LinkAja could become the country’s largest mobile payment platform, but stressed that it was open to collaboration with other digital providers.

He wasn’t kidding. Within a month of its launch, Gojek said it would integrate LinkAja in its Gopay e-wallet by the end of 2019. The aim, said Gopay managing director Budi Gandasoebrata, was to boost digital financial inclusion in a country where many are still “untouched by formal financial services”.

A local technology investor says: “This is the state fighting back, making this about financial inclusion and ensuring the private sector doesn’t have it all its own way”.

Another key moment for financial innovation and collaboration, Indonesia-style, took place in May 2019, when central bank Bank Indonesia (BI) announced its long-awaited Quick Response Indonesia Standard system. The aim of QRIS, central bank chief Perry Warjiyo said at the unveiling, was to allow all “QR-code-facilitated payments to be interconnected and interoperable through a single standardized code”.

Asiamoney saw the platform in operation in July at a national expo taking place at the Jakarta Convention Center. Most stallholders, their shelves piled high with fruits and clothing, used LinkAja, but all accepted payment using a QR-generated code from any one of 13 e-wallets, including Gopay, Dana, BCA and Maybank. The payment process was fast and seamless, as one would expect given that the central bank based its QRIS pattern on a template created by Mastercard and Visa.

QRIS is still very much in its infancy. Bank Indonesia plans to roll it out around the country in stages, starting in January 2020.

BI’s aim of making cashless payments universal, by allowing users from one payment service to transfer funds to any rival service within BI’s ecosystem, is simple enough. A customer using, say, Gopay, will be able to transfer funds to a shopkeeper who uses a LinkAja e-wallet, so long as at least one party has a QRIS code.

An August research note by CGS-CIMB Securities, a broking joint venture between Malaysia’s CIMB and Beijing-based China Galaxy Securities, tipped the scheme to accelerate the creation of a cashless society, boost funding and liquidity in the banking sector and declutter domestic QR.

It would also, the report said, give a shot in the arm to the tourism sector, by making it easier to process inbound payments.

The thinking behind the scheme is solid. Indonesia remains an overwhelmingly cash-based society, home to an estimated 130 million unbanked citizens and 65 million micro and small enterprises, few of which have a physical card reader.

“It’s a game-changer,” says an executive at a leading financial technology firm.

For all of its palpable benefits, there are difficulties. The technology is not bullet-proof and security is vital: in the past, QR codes have infected smartphones with viruses, causing personal financial damage.

Mandiri’s Wirjoatmodjo says the aim “is to make it easier for the merchant and the customer to do business. There has to be a commercial structure, as the system is expensive, and we’re working with other state-owned banks and fintechs to figure out the charging process. We are still ironing out the kinks. In rural areas we are not yet comfortable in putting a QRIS sticker on something that is so potentially riddled with fraud.”

Perhaps this national desire to collaborate on financial technology will fade, and Indonesia will become more like markets such as the US or China, where secrecy predominates and entire markets are the preserve of just one powerhouse firm.

But instinct says this won’t happen, not yet anyway, if only because the really big step-change in Indonesian banking and financial technology has yet to happen.

The fact remains that much of Indonesia, and a good share of the surrounding region, is a stranger to formal banking services.

Batara Sianturi, chief executive officer of Citi Indonesia, makes that exact point: “Around 60% of Indonesia’s population is completely unbanked, and approximately 94% of people in Indonesia have no credit card. There is still a huge opportunity for banks here given size of population. This is why the Indonesia story is so compelling and interesting.”

Jonathan Zax, founder of Jakarta-based investor relations consultancy IR Advantage, and former head of investor relations at Bank Mandiri, sees scope for Indonesia to follow the example of other emerging markets on this front.

“The Holy Grail in Indonesia is to come up with a way to profitably bank the unbankable and provide them with other relevant financial services,” says Zax. “Given the size of the unbanked population here, I expect to see a proliferation of approaches, perhaps borrowing ideas from places like India and South Africa, each with large poor rural populations. I’m not sure we’ll become a leader, but we’ll certainly be a fast follower.”