Indonesia’s Digital Economy vs. Covid-19
How Indonesian Fintech companies support the government on economic recovery.
The covid-19 pandemic has taken a toll on many things. Ever since the virus hit, countries around the world have been struggling to keep the economy going due to lockdown, travel restrictions, and many other things. This has been harder for developing countries, including Indonesia. Almost all industry sectors have been affected by the pandemic. However, there are several sectors that have taken the hardest fall, such as aviation, tourism, and retail. The pandemic has also hit Indonesian small-medium enterprises (SMEs) quite hard.
SMEs play a significant role in boosting Indonesia’s communities and economy, contributing 60% to the nation’s GDP (UNDP, 2020). According to the United Nations Industrial Development Organization (UNIDO)’s survey, among 147 small businesses in Indonesia, only 60% of them might survive only for another six months (The Jakarta Post, 2020). In another survey done by Bank Mandiri, among 320 SMEs, 66% of them have continued operating in a limited manner, while 45% of them indicated that they only have the cash flow for another three months.
Access to funding has always been and still is the main challenge for SMEs in Indonesia. Moreover, during this trying time. This article will examine how fintech companies, along with the government, will support Indonesia’s economic recovery and help SMEs in particular.
Indonesia Fintech Sector
Fintech has positively contributed to the nations’ economy and have been rapidly developing — giving the community greater access to financing. The contribution of fintech to the distribution of national loans in 2020 is valued at IDR 128,7 trillion, growing 130% year-on-year (BPS, 2020). Per September 2020, there are 89 fintech companies that contributed IDR 9,87 trillion to the financial services transaction.
At the opening of the Indonesian Fintech Summit 2020, the President of Indonesia, Joko Widodo stated, “Indonesia still has a lot of work to do in the fintech sector. I hope that fintech innovators are not only acting as a lending service and online payment service. But also, the major driver for the country’s development in digital finance literacy.”
Indonesia’s fintech sector is considered to be one of the most competitive sectors in the world. It is proven by the emergence of 4 unicorn fintech companies, valued at USD 1 billion, and one decacorn with a value of more than USD 10 billion in Indonesia. The fintech sector was valued at USD 40 billion in 2019 and is expected to grow 49% each year. The sector is forecasted to be valued at USD 130 billion by 2025 (Indonesian Coordinating Ministry of Economic Affairs, 2020).
In the early fintech development year of 2016, the services solutions are being focused on payment and lending. Four years later, there are many fintech services available in Indonesia, including digital capital raising, InsurTech, and market provisioning. Per November 2020, there are a total of 156 fintech companies that are registered and licensed in the Indonesian Financial Services Authority or Otoritas Jasa Keuangan (OJK). However, the total of Fintech operating in Indonesia are 364 companies.
The leading Indonesian company in the fintech payment sector is OVO, with a 20% market share. Followed by Bank Mandiri and Gojek’s GoPay. Indonesia’s Gojek’s business deal series F valued at USD 3 billion, is among the top ten global fintech deals in the H1 2020 (KPMG, 2020). Singapore’s decacorn, Grab leads the series B funding for the Indonesian fintech payment company, LinkAja, valued at USD 100 million.
Indonesian Coordinating Minister of Economic Affairs, Airlangga Hartanto, stated that fintech has a great opportunity in fostering financial inclusion in Indonesia. The government has been carrying out a serious effort in increasing the country’s financial inclusion index from 76% in 2019 to 90% in 2024. Fintech will have an important role in the country’s digital transformation and financial inclusion. Indonesia’s digital economy is the biggest with the fastest development in Southeast Asia (Bain & Co, 2019). “Fintech, along with e-commerce and on-demand services has been the icon and showcase for the Indonesian digital economy in recent years,” Airlangga said.
The Government’s PEN
The Government of Indonesia has prepared an economic recovery program, known as Pemulihan Ekonomi Nasional (PEN). The purpose of this PEN is to protect, maintain, and improve the financial capacity of business actors during the Covid-19 pandemic. PEN is the government’s responsibility for the decreasing society activities that have affected the economy, specifically in the informal sector or MSMEs. The government’s support for MSMEs includes: tax incentives amounted to IDR 28,06 trillion, interest subsidies amounted to IDR 34,15 trillion, and new MSMEs working capital loans guarantee amounted to IDR 6 trillion.
According to the Indonesian Ministry of Finance, the national economic recovery is carried out by adopting comprehensive fiscal and monetary policies. The government has allocated a state budget for the economic recovery valued at IDR 695 trillion. One of the main drivers for the national economy is domestic consumption, which is highly affected by the pandemic. The budget allocated to boost the community’s buying power is valued at IDR 172,1 trillion will be distributed through direct cash assistance, Kartu Pra-Kerja (pre-employment cards), electricity exemption, and others.
In terms of the digital economy, the Minister of Finance, Sri Mulyani, stated that Indonesia possesses great opportunities. However, Indonesia must still enforce four things: infrastructure, human resources, institutions, and regulations. The Government has allocated IDR 413 trillion for infrastructure and IDR 30 trillion specifically for ICT in 2021. The state budget will be used to build a base transmission station in more than 5,000 villages, an internet connection in 13,000 public locations, a national data center, and digitalization in the educational sector.
Sri Mulyani stated that digitalization will really help with the distribution of PEN. “The financial aid should be distributed effectively, efficiently, and on target and therefore we need an effective database. Indonesia has approximately 60 million MSMEs and the database is still fragmented. We need to integrate the data with digitalization.”
Fintech Companies’ Initiatives for MSMEs During the Pandemic
99% of Indonesia’s businesses are in the micro-small-medium scale, contributing significantly to its GDP. Therefore, when the pandemic affected most of these MSMEs, it directly affected the whole nation’s economic performance. Indonesia’s fintech companies, along with banks and the government, are providing initiatives, especially lending initiatives, for MSMEs during this pandemic.
Chairman of AFPI (Indonesian Co-Funding Fintech Association), Adrian Gunadi stated that Among 156 fintech lending platforms in Indonesia, 40% are focusing on SMEs or productive loans. The total accumulative loan during 2020 saw a 120% growth, equating to USD 12 billion. “The trends indicated that despite the pandemic, fintech lending players are still facilitating SMEs in terms of loan and working capital solution,” stated Adrian.
Mostly, SMEs that are being supported are in the health, telecommunications, logistic and primary needs consumer goods sector. The members of AFPI have also contributed to supporting the Government’s PEN program.
Indonesia’s e-commerce giant Tokopedia, saw an increasing number of SMEs joining the digital marketplace. Since January, around 2 million SMEs have joined Tokopedia. Tokopedia has a capital borrowing platform that measures SMEs’ credit scoring based on the business performance on the platform, called TokoScore. Herman Widjaja, the CEO of TokoScore, stated, “Enabling SMEs during this pandemic is really important. Tokopedia is providing SMEs with a special program that enables them to get more exposure and help them in their business operation during this pandemic.”
Ronald Wijaya, the Chairman of Indonesia Sharia Fintech Association (AFSI), stated that in the sharia sector, there are three main initiatives during this pandemic situation for the SMEs. The first initiative is Qardhul Hasan — financing with an only capital return. The financing is impacting more to the SMEs directly. The second one is Hybrid Financing, a combination of commercial and social financing. This will allow a more affordable return for the SMEs on the repayment. The third one is more of a social initiative, for example, financing digitization in rural areas, digitalization of several areas such as education.
Indonesian banks have also been collaborating with fintech companies to provide initiatives and help MSMEs gain easier access to capital loans. A state-owned bank, Bank Rakyat Indonesia is collaborating with OVO, an Indonesian fintech giant, in distributing digital low-interest loans for MSMEs worth approximately IDR 20 million. The loans will be distributed in OVO’s ecosystem. The collaboration will allow both companies to complement each other’s data and therefore could target the MSMEs more effectively.
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Covid-19 pandemic ‘forced’ businesses to go digital and hence accelerated the development of the fintech market in Indonesia. Fintech companies strive to help the economy recover going smoother by collaborating and providing initiatives to the main economy driver, the MSMEs.
The digitalization of finance activities has been increasing during this pandemic. However, this behavioral shift is expected to stay even after the pandemic. The Indonesian fintech market will continue to grow and develop. Moreover, there are wide opportunities for investors in this industry.
Indonesia’s fintech sector has a lot of room to grow in the future. However, there is still limited funding available in the country, as stated by the President Director of OVO, Karaniya Dharmasaputra. To grow effectively, the sector is in need of investment, both from domestic and foreign investors. The current investment for Indonesia’s local fintech unicorn shows how Indonesian fintech companies have the potential to attract foreign investors.
