Fintech: Disruptive Innovation

The fintech association and the government are collaborating to help grow fintech.

Financial inclusion in Indonesia is underdeveloped. Only 22% of the population has a bank account, 17% an insurance policy and 0.2% a brokerage account. In comparison, half of all U.S. citizens are invested in stocks, either directly or through mutual funds or other vehicles.

Hopes are running high that the emerging financial technology (fintech) industry can encourage more financial inclusion and increase the use of financial services. Secretary General of the Indonesia Fintech Association Karaniya Dharmasaputra, who is also the founder and chief executive of fintech site Bareksa, explains that fintech companies can use the Internet to help encourage more financial inclusion. “On the Internet, everything is transparent, so people can learn by themselves what are mutual funds and how investments work,” he says. Bareksa, for example, allows users to buy mutual funds from local e-commerce company Bukalapak, with every step now available online and with an initial investment as low as Rp 10,000.

The association’s mission is to support and encourage the fintech industry, on issues such as regulation and transparency. The value of fintech transactions in 2016 was estimated at $14.5 billion, according to Bank Indonesia (BI) data. Currently there are 156 fintech companies in Indonesia classified into four categories: market provisioning such as Cekaja and Cermati; deposit, lending, and capital raising such as Uangteman and Investree; investment and risk management such as Bareksa and Stockbit; and payment, clearing, and settlement such as Midtrans and Doku.

These startups are now disrupting the financial services industry. These companies are overtaking the role of banks, which used to pioneer new technology in retail financial services, such as ATMs and Internet banking, says Junanto Herdiawan, the BI’s acting head of the Financial Technology Office in Payment System Policy and Supervision Department (DKSP). Therefore, banks are now playing catch-up, and beginning to develop their own fintech. Major banks, such as BCA and Bank Mandiri, already have electronic payment services—and electronic payments have reached Rp 750 billion per month in December 2016. Banks and other traditional financial services firms are also setting up venture capital firms to invest in fintech startups.

However, there is a risk that fintech can be used to cheat investors. Investment scams are nothing new—Charles Ponzi was cheating investors in the U.S. in the 1920s. However, now these scams have been going online. In China, fintech firm Ezubao cheated more than 900,000 investors out of $7.6 billion in 2015. A Xinhua article quotes a senior manager at the company saying that 95% of its investment were fake, making it one of the biggest scams in the Chinese fintech industry.

Published on Forbes Indonesia Financial Revolution issue (03/17). Read full version of the article here.