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Things about Fintech in Indonesia

Image: Tech Funnel

Hello WU Friends!

Let’s first briefly recall the opportunity that fintech lending presents. Indonesia’s finance authority (OJK) estimated a total of US$74 billion in unmet financing needs in 2016. This is due to a lack of credit data of loan applicants, a critical gap that is largely being served by unlicensed offline lenders (i.e. loan sharks).

This sizeable market opportunity for alternative lending has generated a myriad of fintech companies in the past several years. Indonesia’s Fintech Association’s latest data indicates that there are 134 fully registered fintech companies as of April 2018, a significant increase from only 55 in 2016.

Lending models

The existing fintech lending players can be categorized based on the recipient of loans, purpose of loans, and source of lending capital. Based on our study, here’s how fintech players in Indonesia are categorized according to the financial product/s they offer.

In terms of sources of lending capital, some startups combine various models. Here are some of the models we can identify today.

1. Crowd-lending or P2P Model

In P2P lending, a financial technology startup acts as a connector between borrowers and retail lenders, essentially becoming a marketplace for lending services. On top of being a connector, the company also runs a risk management platform to assess creditworthiness and assign interest rates.

The platform usually pools money from multiple retail lenders to fully satisfy the funding requirements. Since it only mediates the borrowing process, lenders carry the default risk. They see the risk level for each loan request and make a decision based on that.

Fintech companies using this model generate revenue by charging a service fee, which is usually deducted from the loans disbursed to borrowers. Meanwhile, lenders fully benefit from the interest payments.

2. Balance sheet model

Here, financial technology companies are the lenders; startups disburse loans directly from their own pocket. They assess risk, assign interest rates, and disburse loans from their own pockets (i.e. balance sheet). Naturally, they carry the default risk and fully benefit from interest payments.

Example startup: UangTeman

3. Institution-backed lending

Startups using this model partner with banks as their funding source. In general, the partnership could be one of the two models:

3.1 Pure institution-backed model

Here, the financial institutions stand as lenders as startups disburse loans directly from the former’s pocket. Fintech startups act as lead generators of creditworthy borrowers. Only borrowers that pass the fintech startup’s risk assessment would be sent to the financial institution.

Since financial institutions generate the loans, they also assume the default risk. Fintech companies make revenue from commission fees out of the loans disbursed.

3.2 Hybrid model

In the hybrid model, startups borrow money from financial institutions to make loans. Hence, startups incur cost of funds for each loan disbursed. Unlike the pure institution-backed model, fintech companies in the hybrid model act as lenders and therefore assume the default risk. They generate revenue from both origination fees and interest payments.

Example startup: Julo


Indonesia’s fintech lending landscape is heating up, and we are excited to see its impact in the future. But it is important to note that fintech lending cannot grow by itself. We need strong payment and remittance systems to ensure that lending facilities can serve the country’s entire population.

Fortunately, the developments in these sectors give us a strong reason to be hopeful.

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