P2P lending platform development in Indonesia (Part one)

Because of the rapid economic development, the SMEs’(small-medium entrepreneurs) capital demand, and the restricted accessibility to banking, Indonesia is the very place to develop P2P lending platforms.

Economic overview of Indonesia

Indonesia Jakarta

Great South East Asia is a fast-developing region economically, and Indonesia, the largest economy in Southeast Asia, can be seen as the locomotive. Today, Indonesia is the world’s fourth most populous nation, the world’s 10th largest economy in terms of purchasing power parity, and a member of the G-20. Furthermore, Indonesia has made enormous gains in poverty reduction, cutting the poverty rate by more than half since 1999, to 9.78% in 2020.

As a huge potential market, Indonesia attracts entrepreneurs and founders all over the world. Indonesia is home to large international players: a growing number of investors and inflow of foreign capitals and international startups. According to J.P. Morgan, Its e-commerce market is anticipated to touch $46 billion before 2021.

Furthermore, the government focuses on infrastructure, rising incubators for startups and culture of mentor-ship, increasing talent pool for startups, and fast-rising middle-class population with rising incomes. These are all competitive edges for Indonesia to be a fertile ground for international founders and investors.

Background for the banking system in Indonesia

1. Geographical challenges. It’s hard for banks to reach out to 260M unbaked people. → Indonesia is a diverse archipelago nation of more than 300 ethnic groups. People live on thousands of Islands; the Indonesian Government and bank can’t build every basic infrastructure to reach out to the people there

Indonesia is located in the world’s most active seismic zone

2. Indonesia’s internet economy was valued at USD 40 billion in 2019, with an average growth rate of 49% a year since 2015. → Most of them are contributed to E-commerce and other online Fintech platforms. For these players, inventory turnover and cash flow would be enormous problems if they don’t have access to banks. They need institution provide liquidity.

Internet market size

3. Statistics show that:

A. Low banking penetration Bank penetration: 49%; B. Banking weak loans: 11% to 80%→ not having access to required financing. C. Low credit card penetration: 2.4%; D. Mobile money account: 3.1%; E. SMEs access to credit: 26%. Compared to healthy economic growth in Indonesia, 5% on average per year, these figures are dragged down the performance of economics

Compared to other countries, Indonesia has huge potential to exploit

To wrap up, Indonesia has a vast market potential for Fintech startups. Indonesia is a very country suitable for a P2P lending platform because of the growing economic but limited access to money for SMEs, which accounts for 60% of Indonesia GDP. It can help the Indonesian SMEs meet the demand and supply.

What is P2P lending platform

• P2P (peer to peer) lending websites connect borrowers directly to investors, cutting out the financial institution as the middleman. The site sets the rates and terms and enables the transactions.
• P2P lenders are individual investors who want to better return on their cash savings than a bank savings account or CD offers.
• P2P borrowers seek an alternative to traditional banks or a better rate than banks offer.
• The loan applicant posts a financial profile assigned a risk category that determines the interest rate the applicant will pay. The loan applicant can review offers and accept one. (Some applicants break up their requests into chunks and receive multiple offers.) The money transfer and the monthly payments are handled through the platform. The process can be entirely automated, or lenders and borrowers can choose to haggle.
• Credit intermediary Vs. Information intermediary. Some people will be concerned that if it’s another Ponzi Scheme because they thought the platform would collect the money from the lender in the platform’s capital pool. But actually, the real P2P lending is an information intermediary: they should not take the responsibility and have no guaranteed return to the investor. Most important of all is compliance with regulations. In China, from 2012 to 2018, most of the platforms do not comply with the rules. These platforms have to attract more capital by high guarantee returns, leading to a vicious cycle: raising new debt to repay an old debt.

Why P2P platform in Indonesia?

• The bank focuses on the corporate sector more than SMEs because SMEs’ financial requirement is too large for microfinance but too small for the corporate banking model. Banks also require high bank cost (fee + interest margin)
• Traditional banks lack robust credit scoring, and it’s a labor-intensive process. Credit scoring/rating models of P2P based on non-traditional data sources is more accurate and efficient to judge the credit on multi-dimensional perspectives.
• Compared to traditional banks, a P2P lending platform is more straightforward: simple steps, easy to process, and fast, catering to the problems that SMEs lack financial knowledge. Furthermore, over 60M SMEs in Indonesia are unbreakable, a vast market
• Strong regulation of government: Indonesia has lots of government-regulated authority to supersede the Fintech startup. For example, OJK, the financial services authority, especially for the P2P lending platform; Bank Indonesia, Indonesia’s central bank; and Ministry of Communication and information. They prepared well to handle the regulation problem with Chinese experience.

Strengths of Fintech and Weakness of Banking system

Advantages of P2P lending for borrowers and lenders

1. Faster process (1 day approval)
2. Efficiency (Simple steps and not so much bureaucracy)
3. Flexibility (Loan term loan can be split down into many short term loan)
4. Higher return (compared to bank deposit)
5. No collateral (but not for all platforms)
6. Better access for intangible asset valuation (some SMEs have strong operating index but they can’t be used in the process of credit rationing, but in latest P2P lending platform, these index are sufficient for evaluation.)

Unstoppable Fintech startup trend

Stunning fact: P2P lending platform growing rate: 160%, compared to bank: 5% in 2020

P2P lending platforms in Indonesia provide liquidity for SMEs to solve short-term capital problems, making Indonesia’s economic growth more efficient. In the next episode, we will discuss business models, significant products, and traction differences among popular P2P lending platforms.