Growth, Turmoil and Change: How Indonesia’s Peer-to-Peer Lending Landscape Has Exploded
Financial services are the backbone of any economy, to help spur economic growth and welfare. The past few years have been exciting for Indonesian FinTech; and I’d like to take this opportunity to talk about the development of Peer-to-Peer (P2P) Lending in the country. I’ve observed the P2P lending industry in Indonesia from its nascent days in early 2016, when companies were just starting to form. There were no regulations then. I’ve taken part in the growth, turmoil, and changes of the industry until today, and want to share with you what’s happened over the past few years. I’ll walk you through:
- 🤔 What is peer-to-peer lending?
- 🌏 P2P Regulation in Indonesia
- 💸Industry Disbursement Data
- 💹Potential Market Size
- 👩🏼🤝🧑🏾The Borrowers and Lenders of P2P Lending
- ✍How a company does underwriting and credit scoring
- 📛Tumultuous Period of the P2P Industry
- 🔮Future of P2P Lending in Indonesia
🤔 What is peer-to-peer lending?
Peer-to-peer (P2P) lending websites connect borrowers directly to investors, removing middlemen such as traditional financial institutions. The borrowers and investors can be companies or individuals. The platform usually underwrites and computes credit scores for borrowers, to set appropriate loan terms. P2P lenders are investors who want to get a higher return on savings, while P2P borrowers seek an easier alternative to traditional banks. They also seek a lower interest rate than what banks offer.
There could be multiple people contributing to one loan (ie 10 people contributing $10 to a $100 loan), or one person contributing to multiple loans at the same time (one person lending $1000 to ten different $100 loans).
P2P Lending in Indonesia — the early days
In early 2016, P2P lending companies in Indonesia were just starting to form. There were no regulations yet, and thus, a lot of people launched companies to capture opportunities in the market. Indonesia is a large country with high mobile and internet penetration rates, presenting a fertile environment for P2P lending.
Quick numbers about Indonesia
- 👩🏻💼Population: 274.9 Million
- 📱Mobile Connections: 345.3 Million (125.6% of population)
- 📶 Internet Users: 202.6 million (73.7% of population)
- 🏦Number of Underbanked: 47 million (17% of population)
- 💰Number of Unbanked adults: 92 million (33% of population)
Almost 74% of the Indonesian population is already connected to the internet, and the government is in the middle of building a massive infrastructure project of thousands of kilometers of cables connecting rural parts of Indonesia to high-speed internet. Given the high level of connectivity (with internet users growing by 15% a year), both P2P lenders and borrowers can be connected in an extremely efficient manner.
The Indonesian Financial Service Authority (Otoritas Jasa Keuangan or OJK) regulates the banks, insurance companies, and multi-finance companies in Indonesia. OJK observed the P2P trend and what happened in other countries (in China, regulators were late to regulate the massive P2P bubble). Therefore, they were proactive and open to constant discussion with industry players, regulatory bodies in other countries, the public, and other government agencies. OJK formulated and signed into law Regulation 77/2016 on December 28, 2016 . Given that there were many players pre-regulation, the main objective of the law was to require existing P2P lending platforms to register and apply with OJK. It also set industry ground rules.
⚖ P2P Regulation in Indonesia
The official regulation is 31 pages long, but some of the key points are:
· P2P lending are financial services provided via online systems, which facilitate meetings between lenders and borrowers for the purpose of entering into loan agreements in the Indonesian Rupiah currency.
· The P2P lending scheme involves three parties:
(i) Providers (the P2P lending platform), which are Indonesian legal entities that obtain funds from lenders and pass them on to borrowers;
(ii) Borrowers, which are Indonesian citizens or legal entities (companies); and
(iii) Lenders, which are Indonesian and/or foreign citizens and/or entities (companies).
· The lending transaction is supported by two types of agreements:
(1) Agreement between Providers and Lenders; and
(2) Agreement between Lenders and Borrowers.
· The maximum direct or indirect foreign share ownership in Providers, in the form of a limited-liability company, owned by foreign citizens and/or legal entities is 85% of the total issued capital.
· Providers are required to have IDR 1 billion ($68,745) in capital at the time they apply for registration and IDR 2.5 billion ($171,863) at the time they apply for the license.
· Providers are prohibited from conducting other businesses outside P2P Lending Services, such as acting as lender or borrower, providing security or guarantee for other parties’ debt, and issuing bonds.
· Maximum Loan amount is IDR 2 billion ($137,476) per loan
From the official OJK 77/2016 regulation, P2P lending companies are prohibited from balance sheet lending, prohibited from doing any other business outside of P2P lending, and prohibited from guaranteeing the loans on its platform. It should purely be a match making company connecting lenders, that choose by themselves, the loans the lenders want to fund.
There are other rules which are not written in OJK regulation 77/2016, but are required. These can be caps on interest rates (0.8%/day), limits on data access to device camera, microphone, and location (CAMILAN). They are also required to publish company information on platform websites (loans disbursed, repayment rates, company director and commissioner profiles), and other rules that are issued by the industry association or the regulators via circular letters.
As of November 2020, there are talks and drafts between OJK, the P2P lending industry, and the general public about revising the 2016 law to be more updated. I won’t dive into the details here because nothing is set in stone yet; but maybe when the regulation is officially ratified, I can do a comparison and update post.
Right now, there are two stages to the licensing process, the first is a registration letter (a license to prove business concept). A year after the registration letter the P2P platform, needs to apply for a license (sometimes also called “full license”). The requirements and regulatory approval needed to get a full license is much harder than getting a registration letter.
As of April 2021, according to the OJK website, there are 46 fully licensed P2P platforms in Indonesia, and 100 companies with registration letters:
Segments and Sizing of P2P Lending in Indonesia
With 146 P2P lending companies, people must wonder, ‘Is the pie big enough?’ The answer is YES. You can categorize Indonesian P2P lending companies into 4 big buckets:
But these categories can even be more specific and narrow such as:
- 🚺 Some platforms only serve female borrowers
- ☪🕉☸✡☯✝ Some platforms only serve certain religious groups
- 🗺 Some platforms only serve certain geographical areas
- and more…
Pre-pandemic, the industry was disbursing about 22 billion IDR ($1,511,265) worth of loans per month. With the onset of lockdowns and the economy taking a hit, a lot of platforms stopped underwriting loans to manage risk, before starting again in earnest by October 2020. The industry is currently disbursing 9.5 trillion IDR ($618,245,100) worth of loans monthly. Despite the loan values increasing significantly, we see that the loss rate (defined as no payment after 90 days due) is better than before.
OJK provides monthly data about loan disbursement on its website, however it’s not broken down by individual platform, so there’s no clear breakdown about market share. Based on the platforms stated disbursement numbers on their websites, the top 5–6 platforms (such as Kredit Pintar, Investree, Modalku, Asetku, AdaKami, DanaRupiah) contribute to about 50–70% of the total P2P disbursement volume.
💹Potential Market Size
The credit gap in Indonesia (defined as credit needs not currently fulfilled by traditional lending institutions such as banks and multifinance companies) is anywhere between $68 billion (1,000 trillion IDR) to $165 billion (2,398 trillion IDR). This gap exists because a few different reasons, such as risk appetite of banks, location/geography limitations, high barriers to obtain a loan (such as security, paperwork, reference checks, etc). There’s still a big need of consumer and SME financing that the P2P lending market has the opportunity to tap.
For simplicity purposes let’s say the credit gap in Indonesia is 1,000 trillion IDR. In 2020 as an industry/among all 146 P2P registered and licensed P2P lending platforms, disbursed 73 trillion IDR, or only 7.3% of the existing credit needs. So there’s still a big opportunity for P2P lending companies to further tap into underserved markets that traditional financial lenders do not/cannot serve.
I spoke with Indonesian Joint Funding Fintech Association (AFPI) Daily Chair Kuseryansyah about the potential size and targets of the P2P lending industry, and he mentioned that:
“Hopefully by the end of this year, the disbursement will reach 100 trillion IDR (about 30–40% growth from last year), and will continue to grow because in Indonesia the telecommunication / internet infrastructure is continuing to get better everyday. Many individuals and MSMEs in rural areas still have not reliable access to the internet, and when they are included in the digital ecosystem, fintech companies can serve them better. The next few years are still very bright and continued opportunity for significant growth for the P2P lending industry, if regulations remain conducive and progressive in line with the market realities.”
Even if the industry achieves 100 trillion IDR disbursement ($6.9 billion) this year, that’s still only 10% from the total credit gap. I asked Kuseryansyah how much does he think the P2P industry cover, and his answer is that:
“Ideally, the portion of the credit gap covered by the P2P industry would be 30–35% (350 trillion IDR or $24.1 billion). I think once it reaches around that level, it will stay there because it is not possible for the P2P industry to cover every single credit need. Maybe in the future there will be a new business that covers higher risk credit needs, outside the comfort zone of P2P companies.”
The Borrowers and Lenders of P2P Lending👩🏼🤝🧑🏾
Having discussed the size of the P2P lending market, let’s talk about who’s receiving these funds and who’s lending. One of the benefits of P2P lending is that financial inclusion increases in Indonesia (a country with 18,000 islands). Traditional rural places historically have less access to finance, but with access to internet connectivity improving every year, they can access more financial needs at their finger tips.
As of December 31, 2020, there were an accumulated 248 million transactions since the inception of P2P lending, spread across 43 million borrowing accounts.
We can see that most of the lending accounts are still from Indonesia, with 81% of lending accounts coming from 6 provinces located on the Island of Java, and only 0.5% (3,930 accounts) of lending accounts coming from outside of Indonesia. So with more lenders and funds from outside of Indonesia, I believe that the P2P lending industry can grow even further and close more of the credit gap.
✍How a company does underwriting and credit scoring
Each company has their own secret sauce in how they underwrite customers, but I’m going to highlight 2 major customer/borrower segments which are MSMEs and individual borrowers.
P2P lending companies that serve MSMEs, try to automate as much as possible, but some manual work is still needed. Manual work such as reviewing company documents (like deed of establishment, company licenses), reviewing financial statements and company invoices, visiting the office location, talking with employees and the company directors, as well as observing potential sales are things that cannot be fully automated.
For companies that are doing cash/multipurpose loans targeted at individual borrowers, they mostly use alternative data combined phone data (taken from the loan app). This WSJ article about alternative credit scoring in China explains how countries that are underbanked and don’t have a well established credit bureau (like Indonesia), are able to underwrite and approval loans in a matter of seconds.
📱 From a smart phone, any app (in this case the P2P lending app) can collect thousands of data points, such as what phone a person uses, how many calls go unanswered, who is frequently called, how many pictures exist in the “Photo Gallery”, what websites are visited, what other apps are installed, how often the phone’s battery is low, and more. Companies use artificial intelligence and machine learning to analyze swaths of unconventional data, that can show the behavior and credit score of a borrower.
For example, if your battery is constantly low it could mean you are a bad borrower. If you put someone as an “Emergency Contact”, however barely call them in the last month is a bad sign, if your phone only has 10 pictures in the gallery or only 10 contacts in the contact book, that could show that this is a burner or fraudster phone, if you have gambling apps installed on your phone, or if you have a lot of other lending apps installed, etc.
So combine phone data with alternative data (such as telco data, Know Your Customer/KYC providers, etc), a P2P company is able to get a good idea of who this customer is and how trust worthy they are to be able to pay back a loan they are given.
📛Tumultuous Period of the P2P Industry
During 2018–2019 with over 100+ registered P2P companies and counting, there were (and today still are) many companies who are considered “illegal P2P Lending Fintechs” because they do not have the registration or license from the regulator OJK. They were able to get onto the app stores, or encourage people to download an APK from a website. Now, you can imagine the intense competition and pressure for growth from these companies, P2P companies are focused on increasing approval rates while minimizing the loss rate.
With all that phone data, as you can imagine a lot of personal information (pictures, contacts, SMS, etc) is available to P2P lending companies. And companies, whether mostly illegal (although some registered with OJK), started using improper methods to collect from customers by abusing the data collected from phones. There were no firm rules about collection practices at the time. Debt collectors would do social shaming by randomly call phone numbers from the borrower’s phone to collect or pressure the borrower to repay, create whatsapp groups and share the brorrowers information, or even share private pictures from the phone gallery. This method was very inhumane, shameful, and not approved by OJK.
One institute called Jakarta Legal Aid Institute (LBH Jakarta), which is an organization that provides legal aid for the poor, law illiterate and suppressed, recorded 4,500 complaints and requests for help against P2P lending companies back in June 2019. And there are many other legal institutes and law firms that represented borrowers of various P2P lending companies. Things got so bad, that back in December 2019, Indonesian police took down an illegal P2P collection center. Customer Complaints and illegal Fintechs continue to happen, and most recently Official OJK complaint numbers record 11,368 complaints regarding P2P lenders from Januariy— March 2021 this year.
The government has created a task force called the “Illegal Investments” task force which is a coordination and combination of 13 ministries and government bodies which include OJK, Bank Indonesia (Indonesia’ Central Bank), Ministry of Trade, Ministry of Communication and Information, Ministry of Home Affairs, Ministry of Religion, Ministry of Education and Culture, Ministry of Research, Technology and Higher Education, Ministry of Cooperatives and SMEs, Attorney General’s Office, Police, Investment Coordinating Board (BKPM), and the Center for Reporting and Financial Transaction Analysis (PPATK).
The illegal investments task force not only searches and shut downs illegal P2P platforms, but also other types of apps/communities that are not licensed and cause loss to the general public. The head of the OJK illegal investments task force Tongam L. Tobing said that in the last 10 years, platforms like this have caused 114 trillion IDR ($7.8 billion) in losses to the general public.
As issues arise, OJK has been reactive in terms of issuing circular letters (such as the camera, microphone, location restriction), doing random app testing and viewing security permissions, working with other authorities and AFPI to clamp down on illegal platforms, as well as improve the behavior and standards of registered and licensed companies. Overall, for the last 12 months between 2020–2021, I personally think things have improved and have been better compared to 2018–2019, with still room for improvement.
🔮Future of P2P Lending in Indonesia
I asked Indonesian Joint Funding Fintech Association (AFPI) Daily Chair Kuseryansyah and he mentioned that:
“The current P2P model remains a portrait for the future, where more productive loans will increase in terms of percentage, but the cash/multipurpose sector will also continue to grow because it is large and there is a big need. The challenge for the industry is how to create a good image with better collection practices and even better interest rates. If that can be continuously improved, the confidence level of regulators, stakeholders, and general public will be good. If things somehow get out of control, there will be a reaction from the regulators and government.”
At the beginning of the Covid-19 pandemic, I thought there was going to be a significant amount consolidation, from 160+ platforms in Feb 2020 I thought it would consolidate to maybe around 100 platforms, but it’s now April 2021 and there are still 146 platforms. So as explained above, it seems the opportunity is big enough, and the platforms are strong and well enough to survive the Covid-19 pandemic.
The regulatory team supervising and licensing at OJK has also changed in mid-2020, the previous team in place having overseen the industry from late 2016. So with a new set of eyes and personnel managing the industry, the hope is that P2P lending can continue to improve for the better and the industry can enter the next stage of the cycle.
Personally, I think the 80–20 rule will apply even in an oligopoly. The top four to five P2P platforms will contribute 80% of the volume, and the rest will contribute the remaining 20%. I think new licenses will become scarce, as OJK will push for consolidation (like it is doing right now in the Indonesian banking sector). As a data point, the last batch of P2P registration letters was given in 20 December 2019, but with the potential new regulation of the P2P Lending industry coming out this year, I’m sure we’ll see a few new players. I think it’s a tough balance for OJK, to oversee hundreds of P2P companies and hold them to high standards, while pushing for further financial inclusion.
I think Google Play store and Apple Store will continue to clamp down and ban personal loans which require full repayment in 60 days or less. As data becomes more integrated over the next few years (Fintech Data Center, Credit Bureau, etc) the underbanked segment will become more bankable and viable for traditional financial institutions to serve (having access to credit cards💳 , mortgages🏠, car/motorcyle loans🚗 🛵 , etc). That being said, I think Indonesian P2P lending companies will continue to innovate and serve people across Southeast Asia. Where there is a big problem, big solutions by creative thinkers will come to solve those problems. We’ve even seen a few Indonesian P2P lending companies expand to other countries, so the future for the industry is very bright.
“What people in London, New York and Silicon Valley don’t understand is that Asia is now setting the pace in financial services innovation” James Lloyd, EY Asia-Pacific.