In Indonesia, more than half of the adult population remains unbanked and lack access to financing. The consumers’ short-term credit needs have increased amid the financial uncertainties. Consumer expectations and needs have evolved, the smartphone and internet penetration increased while the digital payments and online shopping volumes surged especially during the pandemic. These have accelerated the growth momentum of credit-based payments propositions such as buy now, pay later (BNPL) in the country.

Indonesia is characterised by low credit card penetration and high e-commerce growth, presenting unique opportunities for innovative digital lending models. According to JP Morgan’s 2020 e-commerce report, the country has a credit card per capita penetration of 0.06% while the smartphone penetration is 28% and the e-commerce is valued at $19 billion. It forecasts Indonesia’s business to consumer e-commerce to grow at a compound annual growth rate (CAGR) of 14.8% from 2019 to 2023. Meanwhile, the credit cards as well as the cards transaction value further dropped in the country in 2020, according to the Indonesia Credit Card Association.

“Less than 10% of the eligible population in Indonesia has access to credit cards. We target to primarily solve this problem of access to credit in the country,” said Akshay Garg, CEO and founder of FinAccel. The company offers digital credit card equivalent BNPL and loans through its platform Kredivo.

Addressing key challenges in credit finance

Fintech companies are nimble in developing stronger data insight capabilities that allow them to target new customer segments. In the lending business, the risk assessment ability can become a key differentiator but in emerging economies like Indonesia, the lack of customer credit data poses unique challenges.

“In Indonesia, credit bureau penetration is about 20%-25%. More than half the time you can’t even get any data on that individual in the credit bureau. We have a deeper technology stack for credit scoring and are building proprietary data pipes, data integrations, credit assessment systems to address this challenge,” explained Garg.

Globally, many fintech companies use traditional data and alternate data from digital ecosystems and partner with real-time credit assessment systems to build stronger credit scores. In addition, behavioural analysis using web and device data (that is not personally identifiable information) can further strengthen credit assessment.

“We have built some of the largest data hooks with telcos, e-commerce companies and location-based engines,” stated Garg. The company uses machine learning algorithms for credit scoring. Its default rates were impacted by the pandemic but it claims to have managed to bring them to pre-pandemic levels in the fourth quarter of 2020.

“The second pain point is the lack of lending capital in our country. Unsecured lending like credit cards is historically viewed as a very high-risk sector by banks. As banks often have high liquidity, we end up being a value driver and enabler for them,” explained Garg. “The third challenge is that the regulations in emerging countries have not caught up with the reality of the digital industry,” he added.

The lending capital for BNPL companies often comes from third parties, financial institutions and credit funds. Last year, FinAccel acquired a $100 million credit line with Victory Park Capital which gave an impetus to its growth. The company also raised Series C funding of $90 million in November 2019 led by Asia Growth Fund and Square Peg.

Most global BNPL companies earn from merchant fees but in Indonesia the companies tend to charge interest from customers. For instance, FinAccel primarily earns from interest income but has a merchant fee component as well. It offers both online and offline BNPL services.

Garg claims that the company is the market leader in BNPL in the country, available at eight out of the top 10 e-commerce merchants. It has posted 200% growth per year in gross merchandise value (GMV) despite the slowdown during the pandemic.

Meanwhile, the competition in BNPL in the country has increased significantly over the last few years as new companies entered the space. Among the early entrants was Akulaku that started with virtual credit card services before expanding into credit finance and e-commerce. In 2018, Go-Jek expanded its payment products with pay later service. In the same year, Indonesia’s leading online travel and bookings platform Traveloka also launched its instalment-based pay later services. Australia’s AfterPay has reportedly acquired EmpatKali recently to expand its presence in Indonesia. Other leading players include Ovo and ShopeePayLater.

Outlook

As the requirement for financial inclusion, consumer credit and embedded financing in payment grow across Southeast Asia, the region offers expansion opportunities especially where the customers seek short-term credit.

“Singapore is not a focus market for us as it is a small market and it is not credit starved. As things start normalising over the next three to six months, we plan to expand in one to two countries this year and these would be in the emerging economies in the region,” shared Garg.

BNPL is reshaping the short-term credit propositions in Indonesia especially among the millennials in the e-commerce segment, although the offline segment is still highly fragmented. As more players enter the market, the critical ingredients for future success will be the unique customer-centric propositions, strong real-time credit analytics capability and completely digital experience.