The use of alternative data is expected to be on the rise in 2022 as Indonesian lenders internalise the need to leverage new data sources and harness insights from existing data as top priorities for the year ahead.

According to the latest Experian Credit Decisioning Trends 2022: Indonesia, 88% of those surveyed view leveraging new data sources as “high” to “critical” priority in credit risk assessment. Lenders are not only aiming to harness insights from existing data, but they also want more data, regardless of whether it comes from traditional or alternative sources, the study found.

Nearly 70% of senior risk decision-makers surveyed said they turn away viable customers due to insufficient credit bureau data. As such, leveraging alternative data is especially helpful in achieving financial inclusion by reaching thin-file customers who are otherwise excluded from financial services.

In Indonesia, there have been considerable efforts toward achieving financial inclusion, driven mainly through government support and the rise of fintech companies that offer fast and affordable loan products to those who need it most. Buy Now Pay Later (BNPL) and peer-to-peer (P2P) lending services are fast becoming alternative solutions to traditional financing methods, which benefit many Indonesian consumers.

As the Otoritas Jasa Keuangan (OJK) continues to strengthen its inclusion efforts, banks and other credit providers are urged to respond quickly to the needs of consumers and micro, small, and medium enterprises (MSME) by improving their credit risk management capabilities.

Turning alternative data into insight

For lenders, alternative data offers a solution to the otherwise opaque and fragmented system of assessing risk among the unbanked and underbanked. Alternative data gives financial institutions a fuller picture of their customers by using data that these customers are likely to have, such as telecom and utility data. This especially benefits those who lack traditional credit documents and history.

Fintech companies are also hurdling the challenges of fraud checks as digital adoption accelerates. As discussed in our previous blog, alternative data, including telco data, can be a powerful tool to detect fraud and, therefore, improve the customer journey.

Currently, risk decision-makers rely primarily on traditional data to guide their credit risk and fraud decisions. Compared to its Asia-Pacific neighbours like Australia and India, Indonesia uses alternative data at higher rates, according to the Experian study. This is driven primarily by the country’s burgeoning fintech sector and the fragmentation of data systems.

Utility data is fast catching up with credit bureau data in terms of usage. One key source of alternative data is telecom information. Almost half of those surveyed in the Experian study say that they use insights derived from this type of data to drive their credit risk and fraud decisions.

With the smartphone penetration rate in Indonesia reaching 72% in 2021, Experian PowerScore leverages telco data and other sources like consumer and e-commerce data to make fairer assessments about a customer’s creditworthiness. This solution allows lenders to acquire more good prospect customers and grow their customer base. More importantly, lenders have been able to increase their approval rates while keeping the rate of bad debt constant.

What’s in store for 2022

In the Experian study, at least 70% of those surveyed revealed that their credit decisioning process is already mostly or fully automated.

As the COVID-19 pandemic accelerated the adoption of online services, competition in Indonesia’s digital banking sector is heating up. Fintech players and traditional banks alike are making their foray into the digital banking space.

In a news report, at least seven firms have been regarded as digital banks beginning in 2021, while seven more were on standby for their license from the OJK. Once they get their license, they can start offering digital banking services as well. According to estimates from Bank Indonesia (BI), digital banking transactions increased 19.1% to US$2.25 trillion in 2021, compared to a growth of a mere 1.5% in 2020.

Time is of the essence when it comes to loan approvals, with today’s consumers expecting loan applications to be digital and with minimal friction. As a result, many lenders are working toward automating their credit decisioning process to keep up with the rapid pace of innovation that is disrupting the financial services sector.

Learn more about how Experian PowerScore can help your organisation tap the immense potential of Indonesia’s digital economy with “ready-to-use” alternative data to enrich your credit risk decisioning in 2022. 

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