As COVID-19 restrictions halted many economic activities, entire industries and livelihoods were upended one way or another. By the end of 2020, Indonesia officially entered into an economic recession—its first since the 1998 Asian Financial Crisis.


The downturn was attributed, among others, to the decline in household spending, as well as the fall of imports and exports.


And yet, in light of the challenges brought about by the pandemic, there are indeed bright spots in the efforts toward financial inclusion and credit lending. With the help of alternative data, the credit lending process was also made easier for those without a traditional credit history.


The first article in the series set the context for Indonesia’s financial inclusion efforts and what has been achieved thus far. This second article will dig deeper into the roles of the different players in Indonesia’s credit lending system. It presents solutions, such as the use of alternative data, and trends that could be leveraged to achieve financial inclusion, especially in light of COVID-19.


Financial inclusion and the impact of COVID-19


In the wake of a global pandemic, financial inclusion is more important than ever.


Experts are seeing financial inclusion as a way to mitigate the impact of the pandemic on the lives of the unbanked and underbanked sectors. Asian Development Bank Vice-President Ahmed Saeed said that the rapid digitalisation of financial services and other innovative ways to foster financial inclusion would help accelerate the recovery process.


An IMF blog article suggests that the pandemic could actually be a “game-changer’ for digital financial services, with low-income households and small firms greatly benefiting from strides in fintech services, mobile money, and online banking.


However, the article warns that while the pandemic could hasten the adoption of these services, it could also underscore “unequal access to digital infrastructure” and hamper the growth of small industry players.


The Center for Financial Inclusion notes, for instance, that many micro, small, and medium enterprises (MSMEs) in Indonesia struggled to remain open as the pandemic led to “dramatic declines in profits.” The data was drawn from the owners’ use of financial tools.


Financial services for all Indonesians


Indonesia has long acknowledged the need for financial inclusion. The rise of peer-to-peer (P2P) lending platforms, Buy Now, Pay Later (BNPL) services, and digital banks are evidence of the enabling environment that exists in the country today.


Though in many ways cash is still king in Indonesia, data from the ADB shows that the country is well on its way toward becoming a robust digital economy.

  • 16th-largest economy in the world, on track to becoming the 7th-largest by 2030
  • 5% of the total population or 132.7 million Indonesians use the internet
  • Over 50 million micro, small and medium-sized enterprises (MSMEs), 70% of which do not have access to bank financing or traditional credit lending systems
  • 6 million MSMEs being encouraged by the government to go digital to gain access to finance

Indonesia recognises the role of fintech in driving financial inclusion, as seen in the initiatives of the Indonesia Financial Services Authority (OJK). The significant increase in membership in the Indonesia Fintech Association (Aftech) from 24 in 2016 to 362 by the second quarter of 2020, as reported by KrAsia, also reflects this.  


Peer-to-Peer lending


Peer-to-peer lending or P2P is becoming one of the most preferred methods of getting financing among those who don’t have the credit lending data that banks require. As a result, P2P has been steadily gaining ground in Indonesia’s fast-growing fintech space.


Despite the impact of COVID-19, the country’s P2P platforms expect further growth in 2021, with OJK data showing that the country’s fintech lending platforms have given out US$3.88 billion in new loans as of October of last year.  


To sustain this growth, P2Ps must expand their reach to areas outside Java, for example, where the loans disbursed are significantly lower.


Some P2Ps have risen to the challenge by reaching out to businesses in less urbanised areas, with alternative scoring becoming increasingly vital to their ability to provide loans to underserved markets.


With the help of Experian PowerScore, a leading P2P lending platform is able to approve those who are creditworthy despite not having a bank account or collateral. Experian PowerScore is an advanced credit assessment approach that combines “ready-to-use” alternative data with adaptive learning. 


By using telco data, Experian can create a bespoke risk assessment of the loan applicants such that the P2P lender can make well-informed evaluations of a customer’s ability to repay.


Buy Now, Pay Later


For many Indonesians, owning a credit card is still unattainable with a mere 6% penetration rate, based on data from PwC. What often prevents people from getting a credit card are lengthy application processes and requirements, such as proof of income, that many may not have.


As COVID-19 restrictions pushed consumers to use e-commerce platforms, however, Buy Now, Pay Later (BNPL) firms served as an alternative solution to credit cards.


By enabling customers to pay online and gain access to financing without a credit card, BNPL has become popular especially among young, urbanised Indonesians, as well as daily wage and gig workers.


Notable BNPL players include Akulaku, GoJek through its GoPay PayLater service, and Kredivo, among others.  


Because of its ease of use, smaller installments, and lower interest rates, BNPL is expected to continue on its growth trajectory.


Banks go digital


When the pandemic hit, many Indonesians turned to digital financial services to lessen face-to-face interactions and trips to physical banks. Digital banks became no longer a choice, but a necessity.


And for players in Indonesia’s banking industry, this trend meant that they had to step up and innovate.


The largest private bank in Indonesia, Bank Central Asia (BCA), for instance, acquired Bank Royal Indonesia in 2019 and will turn the latter into a fully-digital bank catering to millennials. Singapore tech startup Sea Ltd. acquired Indonesia’s Bank Kesejahteraan Ekonomi, which will operate as a digital bank. 


Meanwhile, Amar Bank reportedly became the first fintech bank in the country, owing to the launch of Tunaiku, an app-only banking service. The cloud-based solution allows users to open an online account and manage their finances with their smartphones.


As the world emerges from COVID-19, efficient and equitable access to these financial products and services will be key to mitigating the pandemic’s economic impact. From the looks of it, increased adoption and penetration of digital financial services seem like a good sign.


This article is part of a special blog series on financial inclusion in Indonesia.