Ask ten thousand people when they think the Indonesian fintech industry was born, and you’re going to get as many birth date guesses as there are islands in Indonesia. Some would say it began with the release of OJK Regulation №.77/POJK.01/2016 by Otoritas Jasa Keuangan in January 2017, where Indonesia’s regulator unveiled its initial framework to regulate and facilitate the development of the fintech industry. Others would claim it began earlier, with the founding of the earliest fintech startups in the various fintech verticals of payment, remittances, crowdfunding, lending, asset management and marketplaces. And then there are others — banking and finance veterans — who try to remind us that fintech is merely the latest buzzword coming off the backs of earlier waves of digitization in banking and finance that gave us online banking over WAP before the age of smartphones.
Over the past few decades, the definition of fintech has expanded rapidly to match the relentless pace of technological progress; from the initial application of technology to the back-end of banking and finance, to its present-day portmanteau that applies innovation to the frontiers of information and communication technology, transforming financial activities for individuals and companies. With the likes of networking, computer science, computer vision, artificial intelligence, machine learning and even distributed ledger technology, we’re seeing the complete overhaul of the finance experience for individuals and companies across the realms of trade, banking, financial advisory, and in the origination, underwriting, pricing, promotion and operations of financial products.
History Repeats Itself, I-Win-You-Lose, but There Is Hope.
As the Luddites of the early 18th century (1811–1816) have shown us, technology-induced disruptions in any industry tend to incite significant feelings of helplessness and despair among the disenfranchised, while exacerbating gaps in efficiency and competitiveness between those who become adept in harnessing its innovation and those who can’t. I started my career in 2006 as a policy maker specializing in the ICT industry in Singapore, became an early-stage technology venture capitalist in 2010 investing in tech startups in Southeast Asia and North America and have been a tech entrepreneur in Southeast Asia since 2013. Across all three sides of the table — initially as policy maker, industry developer and regulator, later on as investor and fund manager and most recently as entrepreneur and business leader — I have developed keen appreciation for the levels of close cooperation and ‘constructive agility’ needed between regulators, innovators and consumers to ensure that there is a sufficiently robust regulatory sandbox to give innovation room to thrive, while minimizing those that are left behind by the growing digital divide.
It is with the above in mind that I laud OJK’s invoking of Indonesia’s gotong royong kampung spirit as encouragement for greater collaboration between alternative fintech and mainstream banking and consumer finance. It is a breath of fresh air amidst antagonistic media portrayal that positions fintech companies as upstarts competing with financial institutions for customers and eroding the income of those who are slow to embrace new technologies. Ironically, some banks have even been quoted to expect regulators to level the playing field by ensuring that there is equal regulation between traditional banks and the fintech industry to ensure that banks will have no difficulty in competing with new-kid-on-the-block fintech. Among fintech players, Aidil of UangTeman has not helped matters by suggesting that the Indonesian online lending is a tragedy waiting to unfold for regulators and investors alike, thanks to the easy availability of cheap and dumb foreign capital flooding into Indonesia seeking fast and aggressive growth.
As banking, finance and fintech industries experience rising entropy, we see those among us who have chosen the easier “I-win-you-lose” narrative and focus on negatives and how our differences divide us and potentially hurt one another. I stand opposed to this regressive view and adopt the other side of the same coin, arguing instead that it is much more sensible for upstart fintech and mainstream banking and finance to seek out common ground and mutually beneficial opportunities. I am heartened to note that I am not alone in holding this view, and am at least joined by banking veterans such as Jerry Ng, President Director of Bank BTPN, who discussed the differences in operating cadence between traditional banks and fintech companies, urging both parties to leverage on their core strengths in credit scoring using unconventional data by relying on the balance sheet of banks and the data science capabilities of fintech players.
TunaiKita as Part of Indonesia’s Fintech “Gotong Royong”
As one of Indonesian regulator OJK’s forty-odd registered peer-to-peer lending platforms, TunaiKita has actively promoted our unique institution-to-peer (i2p) lending platform — the first of its kind in Indonesia — to our banking and multifinance lending partners in Indonesia. Unlike traditional crowdsourcing peer-to-peer players in Indonesia, we do not accept consumer lenders on our platform and instead work exclusively with institutional lenders such as local banks and multi-finance companies.
Our mobile app is accessible across the 27 largest cities in Indonesia, across the islands of Java; Jabodetabek as 5 cities, Bandung, Surabaya, Semarang, Kudus, Yogyakarta, Surakarta, Magelang, Malang, Kediri, Jember, Gresik, Banyuwangi), Bali (Denpasar), Sumatra (Medan, Palembang, Padang, Pekanbaru, Batam), Kalimantan (Banjarmasin) and Sulawesi (Makassar, Manado, Pontianak).
Our fraud-resistant platform acquires new and repeat individual borrowers entirely via online channels through their smartphones and our mobile app, performs e-KYC to ensure their identity and provides borrowers with an accurate credit score powered by our proprietary ‘lending robot’. Individuals can then apply for loans that match their needs, backed by institutional lenders.
As a peer-to-peer loan arranger, we recommend and facilitate a loan between our institutional lenders and consumer borrowers, giving Indonesians anywhere-anytime access to unsecured consumer loans from the convenience of their smartphones, with loan amounts ranging from as low as Rp.500rb up to Rp.20mio with flexible tenures of between 10 days to 12 months. We approve and disburse loans to borrowers’ bank accounts 7 days a week within 24 to 36 hours via multiple redundant integrations with local Indonesian payment providers. We remind borrowers to repay on time and conduct respectful loan collection from overdue borrowers on behalf of our institutional lenders.
Despite being a startup in Indonesia with barely a year of operations under our belt, TunaiKita is actually a subsidiary of Wecash, a big data tech company founded in Beijing in 2013 that has since raised more than US$260 million over 4 rounds and more than 800 people across our offices in China, North America, Brazil, Singapore, India and Vietnam. TunaiKita also counts publicly-listed multi-finance company Danasupra Erapacific (IDX:DEFI) as its local minority shareholder. We have successfully commenced a lending collaboration with our first BUKU III bank earlier this year; all this while growing our Asia Pacific team to over 100 people across Singapore, Indonesia, Beijing, India and Vietnam, and climbing up the ladder to become the top free lending app in the Finance category of Indonesia’s Google Play Store since 22 May 2017.
It takes the Wecash village — comprising of our team, lending partners and tech partners — to raise the TunaiKita child. It would take everyone to embrace the gotong royong spirit (and each other) if we are to move the fintech-finance industry forward in the coming years.
Indonesia Fintech’s Four Horsemen: Fear, Uncertainty, Doubt and Greed
Yet, all our talk about collaboration in Indonesia fintech will go nowhere if we allow ourselves to be blinded by fintech-finance industry’s Four Horsemen.
Let me start with Fear.
There is a common misconception that fintech companies should have higher non-performing loan (NPL) ratios compared to traditional banks and consumer finance companies. Purporters of this fallacy fail to recognize the technological prowess of big data, machine learning and artificial intelligence to collect vastly more data and to dynamically train and tune credit models and cut-offs to achieve far better and responsive results than traditional underwriting typically conducted in mainstream financial institutions. By conflating NPL of consumer loans to that of corporate loans, or by relying on snapshot portfolio NPL instead of more indicative NPL figures via vintage analysis, we allow ourselves to be distracted by the shadows of fintech’s “high NPL” and fail to appreciate its benefits in providing greater financial access to the missing middle in the Indonesian society.
Next comes Uncertainty.
Another common misconception is that higher NPL by fintech companies relative to banks and multifinance companies’ NPL ratios equals higher risk and implies poorer credit quality and portfolio performance. Propagators of these falsehoods fail to recognize that thin-file, new-to-credit customers are inherently higher-risk and harder to acquire compared to more digitally aware, bankable consumers. Interest rates for shorter-term loans will always be higher for riskier borrowers than installment loans for borrowers with better credit scores, to account for higher loan delinquencies in those borrower segments. The NPL of any new loan portfolio with new borrower segments will always take time to stabilize as credit models get trained and underwriting improves.
And then there’s Doubt.
How could fintech companies ever identify and approve borrowers without requiring a wet (ink) signature? Indonesian banks need to comply with face-to-face Customer Due Diligence (CDD) KYC processes or fallback to biometric (face, fingerprint and/or iris scanning) protocols. How can Indonesian regulators so cavalierly permit fintech companies without greater levels of equity capitalization to perform seemingly weaker versions of e-KYC act as peer-to-peer arrangers of loans? Can Indonesian banks act as institutional lenders via fintech P2P regulatory frameworks? How would banks’ CDD KYC requirements work under P.OJK77/2016? Should peer-to-peer fintech companies be subjected to greater equity capitalization requirements than just the minimum IDR 2.5 billion OJK mandated?
There are so many questions lingering on our minds, yet so few ready answers to blow away the clouds of Doubt. Yet, if there is a will, there will be a way. You can be a doubter by the sidelines, or you can be a do-er and build this industry up, felling one doubt at a time alongside the rest of us in the fintech-finance industry.
Last but not least, we are left with Greed.
As the old saying goes, “the enemy of my enemy is my friend”. Yet, even amongst fintech players, there are some who view other peers as competitors out to starve each other of oxygen in the room. I think the fintech industry is currently far too nascent in development to focus on competing with our peers. The market is large and early enough such that we aren’t yet bumping into each others’ elbows (yet!). The finance industry is also unique in the sense that no one winner can ever take all. It behaves more like a network of centralized trust nodes. Banks lend to each other and also to multi-finance companies, while consumers borrow from different banks and multi-finance at different times for different purposes. We have also seen how a bank’s popular loan product often quickly inspires countless other me-toos by other banks.
And in other news, money is green.
This same network effect between capital, corporations and consumers is set to repeat itself in the fintech-finance industry where sharing, collaboration and frenemies should always trump outright disdain, antagonistic relationships and petty squabbles between competitors.
I’m pretty sure fintech naysayers are gleefully clapping when we fight among ourselves and jostle for favour with regulators. I have come to learn about interest groups that lobby regulators for an interest rate cap to create greater distinction between lintah darat-like payday loans and peer-to-peer platform loans. This goes against the spirit of “gotong royong”. First up, payday loans are short-term loans alongside installment loans for consumers and corporate loans for businesses, with each serving entirely different borrower segments and risk profiles. Peer-to-peer is a mechanism of loan arrangement and co-underwriting, and can be used to facilitate loans to consumers or companies. It does not make sense to compare the two. Secondly, I do not believe it is pareto-efficient to prematurely introduce lending interest rate controls in the name of “consumer protection” from “predatory interest rates” this early in our growth curve when Indonesia will be better served in letting the market undergo several years of price discovery (just like China did) and permitting fintechs to bring thin-file, new-to-credit customers onto the SLIK system and our newly formed credit bureau databases.
Profit (or Loss) = Principal x (1 — NPL) x (1+loan interest) less Operating Expenses less User Acquisition Cost less Cost of Funds
No matter whether you are a fintech peer-to-peer arranger, a bank or multi-finance, we all operate upon the same universal formula (above). With or without enforced interest rate caps, the inherent NPL of subprime new-to-credit customers will stay the same; capping loan interest can only result in an increase in the Cost of Funds to maintain overall profitability. A clearer distinction needs to be made on consumer protection as applied to consumers as lenders and consumers as borrowers. In deliberating on consumer protection where consumers are borrowers, regulators should avoid the heavy hand of interest rate caps and focus more on consumers’ financial literacy, standardized interest calculation and fee representation by peer-to-peer platforms.
Gotong royong is the only way for Indonesia fintech. What do you think?
It’s been an exciting past year and a half in the Indonesian fintech industry, and I thank my team and institutional lending partners for their support. I’ve learnt a ton from my friends and partners in the industry and look forward to speaking to more like-minded folks on how we can harness the kampung “gotong royong” spirit to transform the consumer finance experience for individuals across Indonesia.
You can write to me at firstname.lastname@example.org or email@example.com.