#General27 Dec

Fintech-on-rise: Indonesia

Alisa Tkach

An overview of the Indonesian fintech landscape, its current challenges, prospects, and crypto regulatory policy.

An overview of the Indonesian fintech landscape, its current challenges, prospects, and crypto regulatory policy.
Being the fourth most populous country, Indonesia boasts the largest economy in South East Asia and the tenth biggest economy in the world. It’s only fair that the country’s growth prospects are quite ambitious. 

Although the pandemic has slowed down Indonesia’s rapid economic growth, it still demonstrates steady progress in certain areas. One of the industries that managed to benefit from lockdowns and social distancing is fintech. 

Indo Fintech in a Nutshell

The fact that there are more Indonesians owning a cell phone than those who have a bank account is one of the major pre-conditions of fintech growth in the area. The internet coverage is slowly expanding to the most remote parts; at the same time, the services provided by the country’s banks are not up to date, compared to the western countries. 

Moreover, if you want to pay for your online order on one of the country’s most popular marketplaces, using a local payment provider such as GoPay is a lot more convenient than using your online banking. On top of that, these marketplaces do not support the use of foreign-issued credit and debit cards that typically allow finalizing the purchase in a heartbeat.

The lack of accessible and straightforward payment methods alongside growing purchasing power paved the way for various fintech firms. According to the report, the Indonesian fintech space is largely represented by lending companies, followed by payments, blockchain and crypto startups, personal finance apps, and others.

Indonesian payment-focused fintech projects have started actively partnering and merging with e-commerce companies, following substantial financial backing and increasing competition. In turn, lending companies focused on the SME sector, often underestimated by banks.

Like in the rest of the world, the pandemic has positively impacted the Indonesian digital payments industry. In 2020, e-wallet transactions started forcing out card payments and bank transfers, totalling its volume up to $14 billion. Consumers use e-wallets to pay for daily necessities, from retail purchases to bills and online deliveries. In 2021, the trend continues to pick up the pace while cash transactions demonstrate a steady decline. 

What About Crypto?

Although the National Ulema Council (MUI) recognizes crypto as haram and forbids its use on religious grounds, digital currencies are not illegal in Indonesia. Cryptocurrency trading and investing is a legal tender, considering the processes is carried out via authorized and recognized platforms. So far, 229 cryptocurrencies are approved for trading in the country. 

Since the state has officially approved crypto, the space has been getting many tractions. In just five months of 2021, crypto transactions amounted to 370 trillion IDR ($26 billion). The amount of traders is growing exponentially, outnumbering stock investors. 

Indonesian authorities started expressing their position towards positive perspectives of cryptocurrency. For instance, the Ministry of Trade admits that crypto tech can help boost the development of Indonesian startups and prevent them from moving abroad, assuming that the country will come up with a solid regulatory framework.

When it comes to adopting cryptocurrency tech, regulations are the main roadblock. Currently, Indonesia is testing out a policy sandbox aiming to protect and regulate crypto trading activities. Chances are, the initiative will help form new policies not only related to trading but benefiting the economy in general. As of now, Indonesia still does not allow using cryptocurrency as a payment method.

The Fintech Challenge

It is not only the crypto space that is affected by unstable regulations; the fintech industry also suffers from uncertainty. Not all fintech firms are officially authorized in the country, yet they operate regardless, competing against those who abide by the law. Thousands of illegal websites have been blocked in the past few years. 

OJK, Indonesia’s Financial Services Authority, is currently drafting a new regulatory framework that is expected to be stricter than the current one and will significantly raise the entry barrier for fintech startups. Some of the changes include a required capital increase (from $174,000 up to over $1 million). 

The availability of data is another severe issue fintech firms face daily. Data is essential for determining whether a borrower is eligible enough to get the loan. However, obtaining this data is not easy, especially when dealing with SMEs, as they do not have a habit of providing financial statements. As a result, fintech has to work with unreliable data.

The Bottom Line

Indonesian fintech space is in the stage of explosive growth, dominated by numerous lending services. Despite a favourable environment for development, the industry is not fully regulated and faces quite a few challenges. 

For Indonesian fintech startups, it is only the beginning of the journey. Still, they have an excellent chance of improving the current state of SME operations and significantly increasing the level of financial inclusion in the country. 

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