How Indonesia’s booming FinTech sector can drive post-COVID-19 economic recovery

By Nick Basan, Research Intern

The economic shock of the COVID-19 pandemic has plunged Indonesia’s economy into a severe contraction. The Indonesian financial technology or “FinTech” sector has continued to help expand access to financial services during this period. Indonesian start-ups are shaping a sector that exists at the evolving intersection between financial services and emerging information technologies.
FinTech innovation in Indonesia can help drive economic recovery from the COVID-19 pandemic. The Indonesian FinTech sector provides quick and easy access to affordable financial products through services such as buy now pay later, which are critical to boosting economic growth and potentially reducing poverty.
However, Indonesia faces several challenges to maximise its FinTech potential. Two key challenges are the communities’ poor financial literacy and the overarching impact of burdensome government regulation.

The Indonesian FinTech sector can lead economic recovery

Indonesia’s economic policymakers have preferred regulatory stability over deregulation, regardless of its impact on economic growth. However, Indonesia’s current level of economic growth is insufficient to drive post-pandemic recovery. There is not enough job creation and economic transformation to satisfy development ambitions. As it looks towards economic recovery, Indonesia needs to focus on growth. This can be unlocked through embracing FinTech’s impact on financial inclusion.
Indonesia faces large problems in financial inclusion. Many of its citizens do not have access to financial services, with 99 million Indonesians unbanked and a third of all small and medium-sized enterprises (SMEs) without access to credit.
FinTech has the potential to service these untapped segments, serving as a critical driver of economic participation and in turn, growth. Social distancing requirements during the pandemic have acted as a catalyst for the early adoption of FinTech services, such as digital payments, as people opt to use contactless forms of payment. It is estimated that leveraging digital technology to ‘bank the unbanked’ could boost Indonesia’s GDP by 2-3 percent.

Indonesia has the potential for a unique FinTech ecosystem

Indonesia’s internet economy was valued at US$40 billion in 2019, having grown at an average rate of 49 per cent per year since 2015, and is forecast to reach US$130 billion by 2025. However, Indonesia’s fragmented island geography and infrastructure gaps create severe regional inequality and hinder it’s economic growth.
Development is spread unevenly across the archipelago. Urban centres such as Java and Sumatra contribute 80 percent of GDP, while provinces outside of these islands live just above the poverty line. FinTech offers new accessibility to remote areas lacking in physical banking infrastructure through a wide array of digital applications.
By leveraging the growing proliferation of smartphones and increased internet coverage, Indonesia can leapfrog over the need for certain kinds of infrastructure and overcome barrier to access for Indonesians in less-developed areas. As of 2019, Indonesia has 196 million internet users, with a penetration rate of 73.7 percent. These numbers are expected to become higher due to accelerated usage of online learning among people in remote areas during the pandemic.

Financial inclusion is rife with challenges

Indonesia’s low level of financial literacy puts customers at risk of electronic theft by scammers and loan sharks. With only 30 percent of Indonesians considered financially literate and able to make appropriate decisions regarding money, there is a greater risk that poor individuals will take loans that they cannot repay.
Low financial literacy limits the development of Indonesia’s FinTech ecosystem. Furthermore, there is little government support to overcome this issue. Its “National Strategy on Indonesian Financial Literacy” (SNLKI), aimed at increasing public awareness and understanding of finance for all Indonesians has not been revisited since 2017.
In the absence of government action, Fintech companies can play a role in improving financial literacy by taking a proactive stance. Companies can educate consumers through their platforms, integrating financial literacy into the applications. Private e-commerce platform Tokopedia has experienced substantial success with its campaign ‘Rabu Nabung’ (Savings Wednesdays) campaign. The campaign worked to promote superior financial management skills among Tokopedia customers of all ages by encouraging customers to save and invest their money routinely.

A fine balance: protecting customers versus fostering innovation

Indonesia faces a regulatory conundrum: how to provide banking services to a high-risk segment of the population, protect them from predatory practices, while not placing overbearing regulations so as to stifle innovation.  The rapid expansion of the FinTech industry has placed a strain on the ability of Indonesian regulators to keep up. The Indonesian government has publicly stated that it favours a principle-based system designed to accelerate innovation and drive collaboration while protecting customers, but is unable to cope with the inertia built into the current bureaucracy.
In practice, the regulatory environment is far from perfect, with Fintech firms forced to act like traditional banks. As of 2021, regulations have restricted new firms entering into the sector, altered governance structure, and tightened capital regulations. The new regulatory environment is squeezing the FinTech sector, adversely affecting the ability to raise capital and restricting growth.
As a result of the regulatory environment, an increasing number of firms are deciding to withdraw from the Indonesian market. To avoid this, the Indonesian government must better support FinTech companies by reducing regulatory burdens and cutting red. As the government reforms regulatory policy, it should seek consultation with stakeholders and adopt innovative ideas to protect customers.

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