After years of steady growth in finance, 2021 was the year when Indonesian fintech took off. This year saw Southeast Asia’s largest economy attract more than $1 billion in fintech inflows, minting two new units in the process; Xendit and Ajaib join Gojek and Ovo at the top. The catalysts accelerating this growth have long been apparent, but crucially, these are the structural factors that have not yet fully matured. As these big winds continue to drive the sector forward, the explosive pace of growth and innovation will only accelerate in the world’s largest island nation.
Ultra-mobile, but not enough banking
The first factor is the population of Indonesia. With an average age of just 29.7 years, Indonesia has a young and dynamic population and workforce, poised to embrace innovation. This is reflected in another key metric, smartphone adoption. With 81.7 million smartphone users, the country ranks fourth in the world in terms of digital penetration. These two factors alone create favorable conditions for technology adoption. But most importantly, the banking, infrastructure and financial conditions of the nation make Indonesia specifically amenable to the uptake of fintech.
Despite healthy economic growth in recent decades, the Indonesian population is still deprived of a fragmented, low-penetration banking environment. The demand is clear – Indonesia’s young, digital, and underbanked population is willing to embrace Fintech solutions. As mentioned, there is reason to expect that demand is far from peaking. Despite the pandemic, GDP per capita has trended significantly higher, increasing more than fivefold since 2000.
As wealth rises, the need for robust banking options will become more and more apparent. And with the population expecting innovative application-based solutions, fintech solution providers have a ready audience. Without having to convince consumers to abandon traditional banks, innovative service providers can attract this audience without hindrance. Regionally, we are already seeing this acceleration in demand, as downloads of banking and alternative lending in South and Southeast Asia increased eightfold during 2020.
A business landscape ripe for innovation
Besides personal finance, there is a huge demand for businesses in the field of fintech. Indonesia’s domestic economy consists of a somewhat overweight private sector, with a large number of fragmented SMEs accounting for the majority of employment. At 62 million, the number of such companies is staggering, with one small and medium business for every five Indonesians. Taken together, the area of these MSMEs accounts for 61% of the nominal GDP. But despite this size, many small and medium-sized businesses remain unbanked, lacking access to credit and financial tools – a void that fintech is preparing to fill.
Such a segmented market generates competition, just as it creates opportunity for entrepreneurs. In either case, the demand is for solutions that can provide greater flexibility, efficiency, and integration. Young entrepreneurs in Indonesia will look for application-based and data-driven solutions that will enable them to scale and improve their operations.
As fintech enables businesses to launch anywhere, sell anywhere, and operate anywhere, the rewards are great for early adopters and, indeed, for leading solution providers with market knowledge. The Indonesian SME sector has great potential for development, and is far from showing the high levels of standardization and integration characteristic of mature markets. Fintech will accelerate this process as it evolves, indicating a greater ceiling for the nascent space.
It is clear that the adoption and provision of Indonesian fintech is just beginning. This makes the industry’s performance in 2021 even more remarkable – these numbers are not the ceiling for this sector. As a young and increasingly mobile Indonesia continues to rush to create a growing number of small and medium businesses, adopting FinTech solutions to serve basic needs and deliver a competitive advantage driven by Fintech will be essential. Expect to see the incredible innovation space continue into 2022 and beyond.