Indonesia's Modalku: Banks find a fintech friend

To hear over-caffeinated techies tell it, fintech is all about disrupting the financial landscape, launching apps that empower the customer, breaking down the banking oligopolies and changing the world.

And then there’s Jakarta-based Modalku, a peer-to-peer lending platform that has positioned itself as the go-to fintech hot-shop in Indonesia and that sees itself very differently. Modalku doesn’t want to disrupt anything, much less Indonesia’s cosy banking industry. Far from it: Reynold Wijaya, Modalku’s 29-year-old co-founder, says he’s happy to send business the way of the big, traditional banks, where funds are cheaper than at Modalku.

On the surface, Modalku, which translates as ‘my capital’, seems to be made of the same stuff as emerging fintech lenders elsewhere; it operates from a funky neo-industrial open-plan office that is located several suburbs away from Jakarta’s downtown financial towers, underlining that it’s different to the norm.

There’s barely a suit among the 100-strong staff of energetic 20-somethings, who take their breaks lounging on bean bags or just on the floor by the inevitable office coffee bar, where the chatter is of the limitless blue sky of the app they have built on up-to-the-minute handheld devices.

Naturally all this millennial attitude is lubricated by speculative dollops of venture capital, foreign and local, funding Modalku and its three-year-old startup parent, the Singapore-based Funding Societies. Masayoshi Son’s ubiquitous Softbank has been among the early backers.

“I do not want to fight the banks,” Wijaya tells Asiamoney. “There has always been this misperception in the market, and it’s not helpful.” 

Modalku, Wijaya is at pains to point out, is “not really disruptive…. to me collaboration is more important. We never compete on the price. So, whenever they (the borrowers) can get a lower rate, just go to the bank, it will be cheaper.”

Wijaya’s sentiment stands in stark contrast to that at disruptive P2P startups elsewhere. Take Australia’s Society One, for example: the branchless lender launched by Westpac refugees has taken aim at the big banks by challenging traditional lending models and by rewarding reliable borrowers with cheaper interest rates because they are good credit risks.

But if you borrow from Modalku, you are likely to be charged a higher rate than if you borrowed from the established banks. 

Indeed, Wijaya says Modalku’s “value proposition is, if you can get a loan from a bank, go to that bank.”

What’s wrong with this picture? Part of it is cultural, Wijaya says, in a society that values consensus. Another factor is the overwhelming influence Indonesia’s big banks wield with regulators and the politicians who appoint them. 

Modalku has been registered as a financial entity by the Indonesian state’s Otoritas Jasa Keuangan – the OJK, or Financial Services Authority – which claims to be encouraging technological innovation in the financial sector.

But Modalku does not yet have key status as a deposit-taker in Indonesia, which limits its access to large-scale lendable funds that would enable it to genuinely challenge traditional lenders. 

“There’s no way to compete on the pool of capital,” Wijaya says. “They have unlimited source of capital.”

Still, P2P lending has been catching on in Indonesia over the last two years, albeit from a low base relative to more technically advanced economies. Data from the OJK show that loans disbursed through the 66 fintech lenders registered at the time amounted to Rp7.8 trillion ($520 million) in the year to July 2018.

The OJK has recognized about 70 fintechs, and the Fintech Association of Indonesia now boasts more than 200 members. That might seem healthy, but an association member cites familiar themes at play in Indonesia. 

“The biggest problem for us is the political power at play between the (government) departments,” he says. “The OJK wants to see them grow, but not everybody wants to see this.”

Wijaya says the real idea behind Modalku is to help Indonesia’s unbanked gain better access to the financial markets, particularly those small businesses that fall below the funding thresholds of traditional banks. 

“We are not destroying them [banks], to be honest, we’re actually increasing the pool,” he says.

“Most Indonesians can’t get funding from the banks,” he adds, “mostly because they have little or no collateral. So, they are willing to pay a higher rate in order to get access to funds. For these people, it’s never about the rate, it’s about the access. They cannot get in front of the bank, it takes months.”

Operating since 2016, Modalku is probably the best-known app in the sector and has handled roughly 10% of that P2P loan volume in its own right. Wijaya says total loan disbursements as of July are about Rp1 trillion.

Modalku’s funding model seems fairly standard P2P fintech. Wijaya and his team have gathered a growing array of private lender-backers to provide a pool of funds, from high net-worth Indonesians looking for alternative investments to middle-class millennials.

“You have funds and you put it in our account,” Wijaya explains. “You have your whole virtual account, so you send money there, you have your balance, and we will show you a list of companies that you can fund.”

The Modalku app lists borrowers, which have so far tended to be small businesses that fall outside the regular catchment pool of the big banks, but which aren’t quite microfinance candidates. Wijaya reckons up to 85% of Indonesian SMEs raise funds from friends and family, a niche where Modalku has its opportunity.

Modalku’s backers evaluate the list of potential borrowers and the details of the deal. A match is made and the prospective loan application is then assessed by Modalku’s 15-member evaluation desk. Once the deal is agreed, the funds are dispatched, the average loan length being about one year. The entire matching process takes a few days, says Wijaya.

In what is a revealing window into Indonesian lending, Modalku keeps borrower and lender separated at all times, their interaction only made via Modalku’s mediation. 

Wijaya says that’s “because it’s too dangerous,” hinting at standover debt-collection tactics common among loan sharks. Indeed, the OJK has identified up to 230 unlicensed P2P operators in the country, and there is some concern that the platform is being used as a new medium for loan-sharking. 

Wijaya says Modalku has had “minimal” bad knocks.

He was born in Jakarta and went to school there, before heading to the University of Michigan in Ann Arbor to study engineering. 

Like many young Indonesians educated abroad, he says it was assumed, if not expected, that he would return home to join the family business, in his case one of the country’s biggest confectionery companies, United Foods.

But Wijaya decided to continue post-graduate studies at Harvard Business School, where he met fellow student Kelvin Teo, a Malaysian who had been a consultant in McKinsey’s Singapore office. 

In an echo of the early days of Facebook, Wijaya and Teo started working on Funding Societies and Modalku in 2015 between their Harvard lectures.

They found early backing from Singapore’s DBS and Jakarta-based Alpha JWC Ventures, whose co-founder Will Ongkowidjaja had also been at McKinsey, in its Jakarta office. Another backer is Indonesia’s Bank Sinarmas, owned by one of the Widjaja business clan, of Asia Pulp and Paper. American venture capital firms Sequoia Capital and Golden Gate Ventures have also come onto the Funding Societies/Modalku register, along with the ubiquitous Softbank.

Today, Wijaya and Teo command about 200 staff between Modalku in Jakarta and similar startups in Singapore and Kuala Lumpur. Wijaya says the focus is on expanding in the region and developing closer ties with existing banks, like Indonesia’s BCA. 

“The banks are very supportive,” Wijaya says. A trade sale has not been ruled out.

“That’s why it has to be impactful,” Wijaya says. “At the end of the day, we are entrepreneurs, so we want to be able to trade it some time.”

For the moment, Wijaya says he’s happy to continue changing his immediate world, if not wreaking havoc on Indonesian banks. 

“This is super exciting,” he says. “You really have the opportunity to open a lot of access. It’s really powerful.”