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Jakarta Post
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How to unlock the hidden potential of FinTech

  • Amanah Ramadiah

    The Jakarta Post

Jakarta | Tue, February 23 2016 | 09:41 am

Unsurprisingly, many appearing on Forbes'€™ annual list of the wealthiest people are pursuing careers either in technology or finance. Bill Gates with his Microsoft and Warren Buffet with his Berkshire Hathaway are among the billionaires who are consistently on the list.

Now, what will we have by combining those two sectors? One might say '€œFinTech'€ is the answer.

The promising potential of FinTech seems to be well perceived by the business. In the latest World Economic Forum in Davos, which carried the theme, the '€œFourth Industrial Revolution'€, FinTech became every banker'€™s jargon.

The forum discussed the implication of the FinTech revolution on the financial industry. Deutsche Bank AG CEO John Cryan believed that physical cash will soon vanish.

Bank of America Corp. CEO Brian Moynihan admitted more than 5 percent (US$3 billion) of his corporation'€™s yearly spending was on coding. Some other top-tier banks revealed their investment in a block chain start-up.

FinTech, formed from the words '€œfinancial'€ and '€œtechnology'€, is defined as an innovation in financial services by the National Digital Research Centre in Dublin, Ireland.
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FinTech provides access to the unbanked in ways traditional financial institutions never can.

It may refer to new products from new start-ups, or the implementation of new approaches by existing players. The application of FinTech might be broad, from front-end customer products to a new paradigm such as digital currency.

The total global investment in FinTech is expected to increase. A report from Accenture in 2014 stated it grew three times from only $4.05 billion in 2013 to $12.21 billion in 2014.

Compared to the 63 percent growth in overall venture-capital investment, the investment in FinTech grew by 201 percent globally. This confirms FinTech has been considered a hot sector by the industry worldwide.

Is profit the only interesting factor about FinTech? FinTech currently is considered to play an important part in providing the unbanked access to banking services and institutions.

The unbanked are the people who have never been in the formal financial system; they use cash for everyday transactions, they do not have bank accounts and cannot apply for loans.

FinTech provides access to the unbanked in ways traditional financial institutions never can.

It helps achieve full financial inclusion by providing alternative approaches that may impact financial services needed by the unbanked, such as microfinancing, money transfers, credit histories and cashless payments.

In other words, FinTech has an ability to solve financial inclusion challenges by enabling the technology to deliver financial services.

Initiatives in using technology to solve financial inclusion challenges has actually been around for several years. Prominent examples include Vodaphone'€™s money product M-Pesa in Kenya and mBank in Poland.

Bank Indonesia, in a 2014 booklet, defines financial inclusion as an effort to eliminate all forms of constraints on public access to use of financial services. Bank Indonesia has also stated financial inclusion is an important agenda item.

This is not surprising given the fact the total percentage of adults who have financial institution accounts in Indonesia is relatively low.

Data from the World Bank in 2014 revealed the number was only 35.9 percent of the total adult population of 177.7 million, compared to 68.8 percent for the East Asia and Pacific region. Given this fact, Indonesia should be more prepared to receive the technological solutions that FinTech brings.

There are two parties that are interested most in implementing FinTech: start-ups and existing banks. Each side faces different opportunities and threats.

The process of entering the market and acquiring clients would be relatively hard and costly for a company like a start-up.

The compliance associated with providing financial services will also block the way.

The new entrant FinTech start-up will find it difficult to gain market coverage or the experience needed to compete with the big financial service players.

On the other side, the existing players will experience frustration when trying to keep up with the speed of start-ups to innovate.

The big size of the established banks will delay them in following the rapid change of technology in the financial sector.

They will need relatively more time to build FinTech in-house. Finding the best ambitious talent to be their employees will be another headache for banks.

Therefore, to achieve the full advantage that FinTech can bring, specifically to achieve financial inclusion in Indonesia, both parties need to cooperate.

A notable collaboration that needs to be emulated is being done by Bank Mandiri as the largest bank in Indonesia in terms of assets, loans and deposits.

In January 2016, Bank Mandiri injected fresh capital in the amount of Rp 350 billion ($26 million) into PT Mandiri Capital Indonesia, which will specifically focus on supporting FinTech start-ups.

To conclude, FinTech start-ups will need a conducive atmosphere, such as could be created by funding or mentoring support from banks, to grow. Existing players have to embrace and to partner with new entrant start-ups.

In the end, this is a win-win solution where the start-up is able to penetrate the market and the bank is equipped with the new weapon.
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The writer, a researcher at the Institute for Development of Economics and Finance (Indef), is also a teaching assistant at the School of Computer Science, University of Indonesia. She holds an MSc in financial risk management UCL with an LPDP scholarship.


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