Aadarsh Baijal

Southeast Asia’s digital financial sector is expected to generate US$38 billion in annual revenue by 2025 from $11 billion booked in 2019, during which Indonesia contributed up to 40 percent of the total revenue, according to a recent study.

Titled The Future of Southeast Asia’s Digital Financial Services by Bain & Company in collaboration with tech giant Google and Singaporean holding company Temasek, the study revealed that digital lending will make up about half of the opportunities because of its greater ability to generate revenue and profit compared to other services, such as digital payments.

The Jakarta Post’s Adrian Wail Akhlas recently spoke with Bain & Company partner Aadarsh Baijal to discuss the findings, particularly on the future of digital financial services in Indonesia and the key factors to developing the sector. Here is an edited excerpt of the interview.

Question: What is the state of Indonesia’s digital financial sector compared to that of other countries in Southeast Asia?

Answer: Indonesia has been one of the fastest-growing digital financial services across the markets in Southeast Asia, together with Vietnam in terms of revenue pool. I would say that Indonesia contributed to 30 to 40 percent of the total $11 billion in revenue in the past 12 months. That is the same rate I expect going forward in Indonesia across all digital financial services.

We expect that most activities in 2020 would be centered on e-wallets and lending, with the latter probably going to be the most action-packed. There is already a lot of traction in terms of innovation in the market on both products, particularly on lending as it is expected to be the most profitable among other services. Meanwhile, the digital investment and insurance industries will also start to pick up by 2021.

The study mentions that digital lending will make up about half the opportunities, despite digital payment being the largest market in terms of gross transaction value. Could you elaborate on that?

Digital payment services are the first among the digital financial services in terms of gross transaction value because of the high adoption rate. However, as digital lending evolves and matures, it will eventually become bigger, as in the offline world, it is a much bigger industry.

Another reason is that digital lending allows you to make more money as a digital platform. There is hardly any money to be made by e-wallet platforms in terms of a revenue pool.

Although the gross transaction value is very large, the revenue pool is not that large and not growing as fast because there is pressure on the margins.

Meanwhile, lending will be the revenue driver of digital financial services. Thus, there is a lot of focus to develop the lending industry, even though consumers will use payment services every day. Consumers will certainly use digital payment services much more than they will use lending. However, in terms of revenue, lending will be higher as the market grows.

Digital lending will be across different types of models such as peer-to-peer [P2P] lending, lending backed by banks and lending backed by institutional investors. As the market grows, P2P lending will become smaller as lending backed by banks and institutional investors will dominate the market.

There is a fierce competition going on right now among digital financial businesses in Indonesia. How do you think the competition will play out?

There are many different types of players that are trying to go after the digital financial market, namely established players such as private lender Bank Central Asia and listed multinational company BFI Finance. There are also consumer service players that don’t have financial service backgrounds, such as ride-hailing app Gojek and marketplace Tokopedia. Furthermore, there is also the “pure-play” financial technology companies, such as mobile point of sales service Moka.

It’s true that there is a lot of competition in the market, but our view is that it will continue over the next five years because the market is still at the very early stages of development. However, Indonesia will only have a few digital financial companies as there will be a shakeout where many of the smaller players may not survive unless they can scale and find a more sustainable model. Several companies will start to establish much larger positions, but there is still a lot of competition in the next five years.

We expect to see more companies across the different groups striking partnerships in the coming years. To give you a clearer picture, we expect to see more collaboration between banks and consumer technology players or “pure-play” financial technology players as it has already been happening in the last few years.

What are the key factors for developing the digital financial sector?

Three factors will need to be addressed to develop the sector. The first is that the country will need financial infrastructure such as digital IDs to enable an electronic know-your-customer identification process, a standardized real-time payment system that will lower the cost for payments and effective credit bureaus to give credit scores. All of these need to expand and become much bigger.

The second factor would be continued funding into the development of digital financial services because there are still a lot of problems, particularly a slowdown in funding, either because of global macroeconomic pressures or venture capitalists have come under pressure. If there is no slowdown, that will be a big driver for the digital financial sector to reach its full potential.

The third factor would be the country’s regulations as the digital financial sector would need regulators to support innovation and growth. Indonesia is doing a good job in terms of working toward supportive regulations, so we feel optimistic that regulators are aiming to unlock the sector’s potential.

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