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Jakarta Post

Fintech Talk: How fintech shapes millennials’ financial behavior

  • Ibnu Hajar Ulinnuha

    Member of the Indonesian Fintech Association and co-founder and CEO

Jakarta   /   Tue, February 14, 2017   /  05:25 pm
Fintech Talk: How fintech shapes millennials’ financial behavior Data compiled by Alvara Research suggested that the population of the urban-middle-class-millennials in Indonesia will have reached 35 million by 2020. (Shutterstock/File)

When you find yourself relaxing at a café, shopping center or urban recreational venue, then the common sight you will most likely see are young people busy fiddling with their smartphones; chatting via text message, then taking selfies to upload to multiple social media accounts.

This is probably an accurate rendering of the habitual lifestyle of that demographic often referred to as urban-middle-class-millennials.

They are what are often described as “early adopters” of new emerging technologies, and are highly acclimatized to the concept of shopping through social media (Facebook, Instagram, WhatsApp, Blackberry Messenger, etc.) often known as social commerce, or even shopping on e-commerce platforms with higher sophistication of payment methods — primarily provided by financial technology (fintech).

Based on data acquired by the Boston Consulting Group the predicted population of middle-class and affluent customers (MAC) in Indonesia by 2020 will have reached 141 million, or approximately 64 percent of the country’s current population.

In the same year, the predicted population of the urban-middle-class-millennials in Indonesia alone — as exhibited by data compiled by Alvara Research gathered from various sources — will have reached 35 million.

(Read also: The emergence of fintech: disruptive or collaborative?)

This vast population of social media users and the growing volume of e-commerce transactions in Indonesia are expected to result in a US$130 billion market by 2020, attracting many platforms to invest trillions of rupiah to ensure that their systems allow customers to experience their marketplaces without a hassle; both offline and online.

This explains, based on the data gathered by the Indonesian Fintech Association, why 43 percent of the 140 fintech companies in Indonesia operate a core payment service business.

Apart from the fact that the positive repercussions of a growing economy is the growth of volume and value in transactions, the online and cashless shopping lifestyle of the youth demographic may result in a negative social phenomenon: the rise of consumerism.

Data from the Financial Services Authority (OJK) taken from the fourth quarter (Q4) of 2015 reflect this by exhibiting the continuous decline of the marginal propensity to save (MPS) and the rise of the marginal propensity to consume (MPC). This was not a novel feature of that year, as the MPS ratio has been below the MPC ratio since 2013. This is a clear indication that more people are opting to allocate their income for consumer spending rather than building their savings portfolio.

This illustration is further proven by the Manulife Investor Sentiment Index Survey in Q4 2015 which found that 53 percent of respondents spent 70 percent of their income on shopping and 10 percent spent a whopping 90 percent of their income on shopping.

From the vantage point of state building, the decline in the MPS ratio will impact on the liquidity of financial institutions, meaning that in the long run the government will be forced to rely on sovereign debt to finance its infrastructure projects.

From an individual vantage point, the declining tendency to build up savings will significantly decrease the opportunity for millennials to accumulate wealth, which is necessary to secure livelihoods and sustenance for when they are no longer of a productive age.

The growth of cashless transactions enables millennials to easily spend their money as there is no actual exchange of physical money. The innovation in fintech products and services, which provides comfort and ease for millennials, needs to be matched with efforts to balance the situation.

Fintech needs to be a catalyst for healthy financial behavior.

The Manulife Investor Sentiment Index Survey found that 60 percent of the respondents wished that they were better able to control their expenditure but did not possess the necessary equipment or tools, while 53 percent admitted to feelings of guilt about being financially unprepared against the future.

Fintech financial planners may be an alternative solution for providing education and comprehensive integrated financial products aligned to the millennial lifestyle. Fintech financial planners not only offer connectivity among several bank accounts, which automatically allows users to have access to cashless transactions, but also offer financial planning services, or auto budgeting, that may help users to plan an ideal budget allocation for every category of expenditure.

Furthermore, fintech financial planners may even be the gateway for millennials to extended forms of financial planning tools such as insurance and mutual funds. One of the leading companies in Indonesia that offers these services is Dompetsehat.

Another unique approach has also been introduced by Acorns, a US-based fintech company that “forces” its users to build savings by rounding up to the nearest 10 any expenditure spent on shopping and allocating the difference to an investment account. This is an interesting business model that may be adopted as it does not attempt to completely end the shopping habit, but rather takes advantage of it for saving purposes. This may be an alternative solution to Indonesians’ incurable love of shopping.

The key to success in financial education is the underlying longterm commitment of all relevant stakeholders to ensure people are not trapped in a consumeristic lifestyle and are able to make sound financial decisions for future welfare and security.

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