Indonesia offers unique opportunities for AI-based fintech solutions to bridge the financing gap

The Asian Banker’s survey across financial institutions in South East Asia showed that in four out of six markets, banks are surpassed by disruptors in customer acquisition. Institutions increasingly realise the need to move towards customer centric services with 50% of the banks saying that they want to be more like a technology or platform company.

 One country in this region that is witnessing a rapidly growing fintech sector is Indonesia, although the country has some glaring market inefficiencies. Seventy-four percent of micro, small and medium enterprises (MSME) in this archipelago do not have access to finance and 50% of the adult population is unbanked. The mobile penetration is however high with 69% of unbanked segment having mobile access. Regulatory frameworks is in place and the market is ripe with unique opportunities for fintech growth, especially in payments, lending and mobile-based services.

Key fintech trends and opportunities in Indonesia

Indonesia is a growing fintech market with an estimate of around 450 fintechs, yet well behind regional leaders India with over 2,500 fintechs, and China with around 1,900 fintechs. Payment and lending are the two most dominant sectors that have seen the largest fintech growth. Not surprising as the country is characterised with a large underserved segment population. 

“Indonesia has a unique characteristic of having majority in low income segment and over 90% is micro enterprises, so you can develop a business model specially catering to that segment. There is still big enough opportunity to leverage on fintech. How do you convert with small mom and pop shops to be able to introduce finance to them and work together with other financial institutions?” pointed out Melisa Irene, partner, East Ventures.

She added that there are big opportunities for investments in Indonesia. “Indonesia has a huge working-class segment of that majority, about 60% are lower income segment. These are segments that earlier no one was touching. Here there is need for payment and lending,” she explained.

Several challenges are faced in access to finances as traditional institutions require collaterals, charge high interest rates and the evaluation process is lengthy.

“With companies using AI and machine learning technologies, there are a lot of opportunities for banks to collaborate with fintechs, whether in customer experience or back end efficiencies,” noted Wilson Chia, former regional head of consumer and SME Banking South East Asia, Standard Chartered Bank.

He added that bigger SMEs need more than transaction or lending capability. They need to manage cash flow and supply chain financing and that is an opportunity where fintechs can really participate.”

The investment and partnership opportunities are growing, which require detailed evaluation of a range of fintech companies, a challenging task.

Sharing his experiences, Renier Lemmens, venture partner at DN Capital and a professor of fintech and innovation at the London Institute of Banking & Finance pointed out that “Venture capitalists do not really know that they have a winner until they know. No one has a particular insight or the ability to spot a winner long before the winner has materialised”. He added that the success of the company today is more about access to funding than access to market.

“When we evaluate a company, first we look at the market need that the company is addressing and if it is being meaningful. Second, does the company show a pattern of accelerating growth, ideally month on month growth acceleration? For a business-to-consumer (B2C) company, we ask what the ratio between their customer acquisition and customer lifetime value is, and if the company is making more on a customer than what it takes to acquire them,” he explained.

Chia commented that they look at the space that the company is operating in and what are the changes expected in the future. Second, they evaluate the fintech in the whole ecosystem and its ability to scale. Third is the trust level they are able to develop.

Sharing his view on future fintech trends, Jaspar Roos, founding partner of Limpid & Co & Playbooktoolkit.com commented that “Everything will be disrupted there is no doubt”. He added that there is need for technology environment, but along with that, also the human interface. Ethics and human context are two umbrellas where he expected to see greater focus in the future.

A glimpse of innovative breakthroughs in fintech companies

Explaining about the current market inefficiencies and their service offerings, Jonathan Bryan, chief marketing officer of KoinWorks shared that there are 59.2 million SME players in Indonesia of which 3.79 million are digital and 64% are underbanked. The current financing solutions in the market take 14 days to process a working capital loan and have high non-performing loans (NPL) of 3.23% of working capital loans.

KoinWorks targets to solve this market inefficiency through peer-to-peer (P2P) loan products like online SME, employee loan, supply chain financing and business loans at low interest rates. It also provides education loans to students.

The key feature that sets it apart from its competitors are its machine learning and psychometric analysis-based data driven credit scoring models.  

Through this process the company conducts a detailed analysis and yet has a shorter processing and approval time. It offers loan size of $21,300 (IDR 300 million) to $35,500 (IDR500 million) and leads in the market with over 300,000 users. The key achievements are same-day disbursement, low NPL of about 1% and 40%-60% revenue growth.

KoinWorks started its operations in 2016 and received its license for P2P lending in 2017. Since then it has raised three rounds of funding, with main investors being Mandiri Capital Indonesia, Gunung Sewu & Convergence Venture, Quona Capital and EV Growth.

CICIL, an Indonesia based-fintech addresses the market scarcity and expensive finance for university students. It offers instalment loan and tuition short term loans, typically for less than a year and often financed in partnership with institutions. It also started a placement service for these students.

It uses alternate credit model that includes identity verification through online application and social media checking, supplemented with GPS tracking and Google street view. For financial capability analysis telco behaviour, student fees and spending behaviour are assessed. The character assessment is through the academic and payment records. CICIL managed a volume growth of four times since last year and default rate ranging from 3% to 4%.

“We have built a large ecosystem and are active across 201 universities in 36 different cities. The company has helped more than 40,000 students over 1,700 student ambassadors,” said Leslie Lim, chief executive officer of CICIL.

Julo, a P2P lending company has built its own machine learning-based credit assessment model using big data files that have been iterating over the last two years. It provides unsecured money loan service to unbanked and sub-prime customers of small values ranging from $30 to $570, with short term payments from one to six months. With its credit evaluation capability, it charges comparatively lower interest rates. It offers fast approval and applicants can get their loan in 15 minutes. It processes 250,000 applications per month, which has been growing at a rate of 20% per month. It has so far raised Series A funding of $5 million.   

With the use of emerging AI and machine learning technologies, fintechs seem to have gleaned a deeper understanding of customers in order to better serve the extensive underserved and underbanked segments in Indonesia.