‘Gotong Royong’ is the Only Way for Indonesia Fintech

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”

My talk at Money 20/20 Asia titled “Enabling Smarter Credit Decisions with New Datasets and Models”.

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.

Conquest, War, Famine and Death, reborn as Fear, Uncertainty, Doubt & Greed

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 james@wecash.asia or james@tunaikita.com.

Pulling the (virtual) World to Singapore

Until the invention of the first electronic general-purpose computer in 1946, humanity sought to bring order to our analog world by sorting and classifying information through manual, then electro-mechanical means. Networking technologies became tinder to the kindle that is computers, eventually becoming the fire of the Internet.

Apart from changing the way we create, connect, communicate and consume, the Internet has brought about dramatic shifts in how businesses compete, underpinning wave after wave of fast-growing companies that create a slew of intelligent software and networked machines.

These are displacing an increasing number of jobs in offices, factories and even on the road. Jobs are being polarised not just in Singapore but also in other advanced economies. To make matters worse, the network effects of the Internet encourage winner-takes-all outcomes, with a handful of companies making most of the profits. Today, we are faced with the Internet Condition — a new paradigm where such companies transcend geography and sovereignty, with some becoming more powerful than countries.

In 2015, Facebook’s 15,879 employees generated revenues of US$17.9 billion while Google’s 61,814 employees generated revenues of US$74.5 billion. Combined, the two behemoths have a “GDP per capita” exceeding 20 times that of Singapore. Eight of the biggest United States technology companies, accounting for more than a fifth of the US$2.1 trillion in profits that US companies hold overseas, added US$69 billion to their cash hoard in 2015.

In comparison, the Singapore Government had an operating revenue of S$64.2 billion [1] and over 146,000 public servants [2].

Singapore’s economic restructuring has entered its next lap with the formation of a Committee on the Future Economy. But this is in itself may not suffice in transforming Singapore’s economy as our world moves beyond the Internet to the Internet-of-Everything.

Singapore needs to nimbly refashion itself to benefit from this technology-accelerated paradigm shift. The Internet, an interplay between Capital and Data, is a stateless and potentially chaotic global commons where rule of law, equality, and general good sense do not always prevail. Some free software and services are not actually free, as they often result in the service providers obtaining and monetising valuable personal information of users. The cross-border distortions brought on by such witting and unwitting trades will not be accurately represented by a national statistic such as the Gini coefficient, which measures distortions between Capital and Labour.

Currently, governments can address income inequality arising from existing distortions through transfers. However, Internet-exacerbated gaps create natural monopolies in a virtual world. These do not require physical presence in-country to generate revenues and do not necessarily contribute meaningful tax revenue to their foreign markets.

Google made £6 billion in profits from the UK in the decade after 2005 but paid less than 3 percent in taxes. Granted, Google had contributed non-tax value to the UK economy by investing £1 billion to build a 5,000-employee office in London, but not every country will be as fortunate. The Economic Development Board estimates inbound investments of US$8 to 10 billion into Singapore for this year, down from US$11.5 billion in 2015 and our lowest in a decade [3].

The case for a more Internet-oriented dimension to Singapore’s restructuring efforts is clear when one considers the massive opportunities latent in the fact that two-thirds of the world’s 7.4 billion people remain disconnected from the Internet, and are more likely to get online through either closed platforms by Facebook or Google, or open-source initiatives by the likes of Mozilla Foundation.

Facebook launched Internet.org in 2013 alongside Samsung, Ericsson, MediaTek, Opera Software, Nokia and Qualcomm to provide affordable internet access to all. That same year, Google announced Project Loon to provide Internet access to remote areas through high-altitude balloons. Despite declines in recent years, Mozilla’s Firefox browser remains the third most popular browser on desktop and mobile in the world.

We should not distrust the chaos of the Internet or seek to control it; it is intrinsically anarchic. Yet, there is no reason why Singapore cannot learn from these companies and organisations to embrace the principles of the Internet itself — collaboration, sharing, transparency, and empowerment — and augment our traditional twin economic “actors” of Capital and Labour with Data.

Mozilla started in 1998 as a free-software community created by members of Netscape but has since evolved to champion an open and participatory Internet for everyone. Just as Singapore’s National Trades Union Congress is our national advocate for the unique tripartism between our labour unions, employers and the Government, the Mozilla Manifesto guides its own form of “networked tripartism”: among Mozilla Foundation as a non-profit, Mozilla Corporation as a taxable entity generating US$329.5 million in revenues from over 1,000 employees, and Mozilla’s online user and contributor community.

Such tripartism could well be Singapore’s next big thing; there is no reason why governments cannot compete with technology giants for the trust of their populace [4]. The Smart Nation effort is an important first step, but we can do more, quicker and better; and offer platforms that not only improve the lives of our people and spur commerce and innovation, but also strengthen Singapore’s thought leadership and international stature.

Citizens around the world rely on government-issued documents for proof of identity. Our government could consider developing a framework for a nation-wide digital identity and payments platform that compete with existing solutions by the likes of Apple, Google, Facebook and WeChat.

For instance, Singapore could update SingPass, the Singapore Government’s online tool for access to local e-services, to employ a combination of block-chain based Public Key Infrastructure, user behaviour monitoring and multi-modal biometrics (such as voiceprints, facial and iris recognition) for more robust user authentication and fraud detection. A more secure SingPass with the potential to substitute the need for in-person identity checks could serve as a robust gatekeeper to MyInfo, and catalyse the adoption of SingPass and MyInfo not just in public e-services, but also in banking and payments, both on our shores and beyond.

This can equip Singapore to not only serve its resident populace well, but also give our country the ability to reach out to overseas Singaporeans while inducting e-citizens — aspiring businessmen, foreign workers, emigrants, and individuals abroad — who want to invest, interact or associate with “virtual” Singapore.

Singapore can then build a “national operating system” around the SingPass-MyInfo core that manages, stores and permits appropriate access to data gleaned from the tens of millions of smart objects embedded throughout our homes, neighbourhoods and work places.

While working towards widespread adoption within Singapore, our government can leverage upon the Smart Nation-inspired execution to drive international conversations around the ethics, regulations and standards for similar implementations in other countries; partially open-sourced, with the remainder rebuilt locally due to local conditions or data and security concerns.

Over time, this could create an online federation of e-national identities that, when linked to an individual’s e-identity and database, could permit quicker, easier and more transparent immigrations and customs activity.

An Applications Programming Interface — a set of protocols that allow apps to talk to one another across different services and technology platforms — could be provided for the same system.

From this, a national or regional online developer community could be fostered and encouraged to develop its own applications, thereby spurring innovation and lower cost.

Conceptually, this is no different from how our country courted multi-national corporations and their technology and investments during our industrialisation years of the seventies to the nineties. However, instead of attracting Capital and offering Labour, Singapore needs to offer a firehose of Data to appeal to future innovators. We urgently need to skate away from our physical waterways of today, towards the digital river pucks of tomorrow.

Our past was built on intelligent and audacious risk-taking. We will need similar courage in the future. Our next phase of evolution will need us to exert a virtual “pull” on the world, rather than simply pushing ourselves onto and into it.


View the original essay in The Birthday Book 2016: “What is Singapore’s Next Big Thing?”


REFERENCES:

[1] Budget 2016 — Analysis of Revenue and Expenditure

[2] Straits Times — Parliament: Singapore’s public sector workforce expected to grow 2.5% a year

[3] Straits Times — Foreign investments to drop but more skilled jobs ahead

[4] lithub.com — Why do we trust a corporation more than the government?

I first authored this piece for The Birthday Book 2016, a book of essays by 51 different authors on Singapore’s Next Big Thing that launched in end-Aug 2016. I made further tweaks to my piece thanks to TODAY’s editorial team, which was published on 16 December 2016. I then merged the best bits of the original piece and TODAY’s version for the article’s v3.0. You can find the original article at the end of this page.