Can financial technology, also known as fintech, accelerate the financial inclusion of micro enterprises across the Indonesian archipelago? As a follow up to our Banking on Fintech research project, Pulse Lab Jakarta teamed up with the United Nations Capital Development Fund — Shaping Inclusive Finance Transformations (UNCDF-SHIFT) programme to launch a fund which challenged fintech companies to come up with innovative ideas on how to get micro enterprises digitally included. From the initial applications, a rigorous vetting process was applied and we’re delighted to announce the six winning pitches that will be piloted in the coming months under the mentorship of several industry experts.
Why a Challenge Fund?
Fintech is rapidly growing in Indonesia. According to the Indonesia Fintech Association, there are more than 200 financial technology companies operational across the country. Catering to the financial needs of micro enterprises — the small shop owners, street food vendors and merchants who earn a maximum of IDR 300 million per annum — is critical for accelerating financial inclusion in the country. Yet, micro enterprises present a challenge because they are harder to reach compared to small and medium enterprises and are usually not the priority target market of fintech companies.
The Microenterprise Fintech Innovation Challenge Fund provides financial grants to incentivise the adoption and use of digital business solutions for micro enterprises operating in Indonesia. The expectation is that pilot-ready innovations funded under this fund will increase micro enterprises’ use of digital business solutions (challenging existing formal and informal barriers to such services), as well as promote safe and formal usage of available solutions, products, services and business models to ultimately promote inclusive growth in Indonesia. This Challenge Fund is a unique venture, because it shares risks by offering co-funding to private sector entities to pilot new or scalable business models. So the challenge was laid out to fintech companies to create or adapt a product or service for the unique needs of micro enterprises in Indonesia.
Overall, we received 33 applications. A review team made up of industry experts selected 12 projects from 11 fintech companies. From here, the projects shortlisted were invited to a pitching session, where they presented their proposed solutions to an evaluation committee, comprising of representatives from the Indonesian Government (the Financial Services Authority/OJK), development partners (Better than Cash Alliance and Pulse Lab Jakarta), and industry experts (Indonesia Fintech Association and investor representatives). We are grateful to VISA, who was instrumental in the process and offered an intensive mentoring session for the shortlisted candidates prior to their presentations to the evaluation committee. It was then up to the evaluation committee to select the top six pitches based on a mix of criteria, including original innovation idea, impact and scale, relevance to challenge and pitch quality.
The six winning pitches were then given the opportunity to present their proposed solutions at the 2018 Singapore Fintech Festival, which was well-attended by various financial institutions, associations and regulators. Each winner presented a short pitch of their ideas during a session that focused on fintech business models and they all had an opportunity to share the stage with esteemed industry players such as Consultative Group to Assist the Poor (CGAP), Oracle, and UNCDF SHIFT.
So Who are the Winners?
1. Amartha: Youth-Led Digital Literacy Scheme
Amartha proposes to train young people among its existing loan customers (predominantly older female micro entrepreneurs) to use a cellphone for productive use cases, such as loan repayments.
2. AwanTunai: Mobile app platform for providing micro enterprise loans
AwanTunai plans to develop a digital system for fast moving consumer goods suppliers — and use this system to deliver working capital loans to micro merchants. This credit would replace and formalise the informal kasbon credit that micro merchants provide to customers.
3. Duithape: Cashless payment system for distributors
Duithape plans to develop a cashless payment system that will allow distributors to collect payments from micro enterprises without the inefficiency and risk of physical cash pickup, enabling micro enterprises to perform transactions with greater ease and security.
4. Gandengtangan: Digital inventory management and cashless payment app for micro enterprises
Gandengtangan plans to develop a mobile platform that connects distributors and micro enterprises, offering digital inventory management, cashless payments and credit products. This project is an enhancement of the distributors’ traditional loan schemes.
5. JULO: Digital loan product for female micro entrepreneurs
JULO intends to launch a new loan product specifically for female micro entrepreneurs, using its existing app and proprietary data-driven credit scoring algorithm.
6. Modalku: Mobile agent network for micro-financing of micro enterprises
Modalku plans to develop a network of agents to offer micro-loans to underserved or unserved micro enterprises. The loans can be used for a variety of purposes, such as investing in opportunities or to bridge short-term cash flow gaps.
These projects will also incorporate a number of insights drawn from our Banking on Fintech research to tap into the micro merchant and micro enterprise market.
Awantunai and Gandengtangan have already taken into consideration the notion that “agents and users view each other as people, not functions”. So, both companies will test the use of merchants and distributors as “agents” to connect with borrowers: kiosk and end customers. A merchant and a distributor are seen as individuals who are familiar with the borrowers, which means it is not entirely necessary to recruit new agents as connectors. This human interaction insight from our research will also be experimented with in Modalku’s micro-financing scheme, where they plan to tap into the “missing micro” segment between bottom poverty and bankable micro enterprises. This is a market that is not yet included in their existing portfolio.
Amartha is similarly trying to decrease their borrowers’ high dependency on agents and instead promote the increased use of technology. Their proposal focuses on using youth who are borrowers to help deliver digital literacy training to other existing borrowers, thus becoming agents of digital literacy. Digitising the last mile delivery (repayments by borrowers) is also one way to address one of the company’s main pain points related to relying on cash and people to transport it. Relatedly, Awantunai believe that creating digital trails will place micro merchants in a better position to have access to working capital.
As regards “planning for the short term” which emerged as a key issue among micro merchants in our research, Gandengtangan plans to use purchase orders with 14 to 30 days tenor as a collateral. The tweak in their existing loan scheme is that they will no longer depend on distributors to collect repayments from micro merchants. Meanwhile, Awantunai will use a range of short-term repayment schemes for micro merchants and customers based on purchase orders or kasbon. JULO will test a monthly repayment scheme among female micro enterprises, a market they are yet to tap into. They plan to use their existing loan disbursement portfolio to tap into the captive market of women micro enterprises.
These fintech companies will also be testing what kind of incentives work best for their agents, customers and micro enterprises, in addition to exploring the most convenient models. Although the “cash is king” mentality which we encountered during our research is still pervasive among micro entrepreneurs, Duithape believe there are patterns which suggest that the shift to more digital transactions (cash light instead of cashless) is still possible. The company will test this assumption among existing distributors by embedding a payment system in distributors’ existing purchase order platform.
Mentorship and more to come
We are excited to follow the journeys of these six projects as they embark on the piloting phase of the project over the coming months. Apart from seed funding, the winners will also receive mentoring from industry experts to help shape and refine their solutions throughout the piloting phase. We’ll be back with more stories and lessons learned from each of the winners as we follow how they use fintech to accelerate financial inclusion of micro enterprises in Indonesia!
Pulse Lab Jakarta and the UNCDF SHIFT are grateful for the generous support from the Government of Australia.