F

intech is the latest buzzword taking over the local startup scene by storm. According to the Indonesian Fintech Association (IFA), the number of Indonesian fintech startups, defined as young companies that use technology to create new or optimize existing financial services, grew by 78 percent in a short span of two years and at the same time, funding to regional and local fintech startups is at an all time high.

Is fintech merely a fad like the daily deal phenomenon or is it an unstoppable tide that will wrought disruptions similar to how the travel agency, retail and transport industries has been swept away in the past couple of years by tech players in those industries?

We believe that fintech is here to stay and the years to come will usher in new startups that will give the current incumbent financial services players a run for their money (pardon the pun). No sectors in the financial services industry are immune; payments, banking, multi-finance, insurance and asset management has the potential to be disrupted.

There are several important factors converging into a perfect storm for fintech disruptions in Indonesia. The first factor is the availability and accessibility of technology and information. Smartphone penetration, currently at 65 million users, is projected to grow by at least 30 percent per year to reach 100 in a couple of years time.

This is important, as together with the availability of cheap data connection, it allows consumers to access online financial services easily and instantly. Equally as important is the availability and accessibility of technology for the fintech startups themselves.

Through the open-source movement, advanced platforms and technologies are made available for free by various developer communities and software giants for anybody to use, making it cheaper and faster for startups to build advanced applications.

As a recent example, Google’s Tensorflow, a machine learning technology that was used in Google Translate and Android’s speech recognition system, is now available for startups to build upon with no payments to Google.

The second important development is the availability of risk capital in the form of venture capital (VC) firms or larger tech companies willing to bet on fintech startups. It is estimated that there are currently around 20 to 30 active VC firms focusing in Indonesia with at least US$300 to $500 million of “dry powder,” funds ready to be invested into startups.

On top of this, the Chinese and Japanese technology firms have recently shown that they are ready to invest huge sums of money into Indonesian startups.

Finally, and probably the most important factor, is the talent that has and will continue to pour into the fintech industry. Indonesian engineers and developers are leaving their established jobs at foreign tech giants such Amazon, Facebook and Google or the local tech powerhouses to join fintech startups.

Unlike just a few years ago when there was no visible success stories in the Indonesian tech sector, now potential founders can look up to some role models who successfully built Unicorns and get very wealthy in the process.

This financial incentive and the opportunity to chart their own course makes it difficult for the traditional incumbents to attract top talents required to compete with the fintech startups.

We believe the main disruptions that fintech startups will be in the form of cost efficiencies and individualized products.

Fintech startups will be more cost efficient by making use of online distribution channels and getting rid of manual processes; smartphones instead of physical branches, chatbots instead of customer service agents and algorithms instead of credit analysts.

These cost efficiencies will enable lower costs of services (higher deposit rates but lower borrowing costs, admin fees, premiums, commissions, etc) for customers and expand the market by allowing them to serve the unbanked population that was previously unserved due to the higher cost structure of traditional financial services players.

The second form of disruption will take shape in custom individualized products and services with instant availability.

This is becoming possible as fintech startups figure out how to access and process the digital footprint that consumers leave behind either on their mobile, the cloud or other internet of things (IOT) devices around them.

Lending fintech startups are developing ways to produce individualized credit scores and hence different interest rates based on a customer’s mobile phone data. Insurance startups are figuring out ways to charge different premium rates based on their customers’ heart rate patterns and physical activities records on their wearable devices.

The next five years is going to be an interesting time for the financial industry, with many potential changes in the horizon. Incumbents should not take for granted that their positions would remain secure and should figure out ways to be involved in the fintech tide.
__________________________

The writer is the founder and part of the Skystar Capital, a venture capital investing in technology start-up companies in Asia Pacific region, especially Indonesia.