Lippo-backed cashless payment service OVO has announced a partnership with Tokopedia, Indonesia's largest e-commerce platform. (B1 Photo/Mohammad Defrizal)

Fintech Startups vs Conventional Banks: Who Will Win?


APRIL 12, 2018

Jakarta. As Indonesians embrace digital innovations such as ride-hailing services, e-commerce and smartphone banking, the financial technology industry will likely continue to grow in the world's fourth-most populous country.

While conventional banks have strong capital, human resources, networks and databases, they are still bound by strict regulations that could hamper innovation. Fintech startups on the other hand, tend to offer innovative, fast services with superior technology.

Tapping into the increasing number of Indonesians with internet access, the fintech industry has been growing fast over the past few years, offering peer-to-peer lending, crowdfunding, market aggregation, risk and investment management and payment services.

According to a study by multinational professional services firm Ernst & Young, Indonesia has approximately 93.4 million internet users and 74 million smartphone users, which helped spur digital transactions, projected to amount to $14.5 billion this year.


During the "Fintech: Bank vs Nonbank Competition" seminar hosted by Investor Daily in Jakarta on Tuesday (11/04), Sukarela Batunanggar, a deputy commissioner at the Financial Services Authority (OJK), said that in contrast with conventional bank, fintech startups are not bogged down by having to open physical branch offices. This allows them to rapidly reach market segments that have yet to be penetrated by conventional banks.

But that also means regulators must keep up with developments to allow fintech growth while at the same time guaranteeing customer security. Under current regulations, Indonesia's central bank is responsible for regulating payment services, while the OJK oversees other fintech services, such as lending and online marketplaces.

"In the near future, the OJK will issue an innovation guideline as a broader umbrella for digital financial innovation," Sukarela said.

Indonesia's fintech industry is currently regulated through a regulatory sandbox, which allows fintech startups and innovators to conduct live experiments of new products or business models in a controlled environment. This also allows the regulator to receive immediate feedback and test upcoming regulations.

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Despite initial worries about the potential disruptive effect fintech would have on conventional banking, in many cases their coexistence has led to effective integration and gap-bridging, which proved to be more useful than otherwise.

For example, the ease and flexibility of fintech services allow them to provide loans through a simpler process, while traditional banks have more strength in capital, network and security.

With clear regulations in place, the partnership between banks and fintech companies will become a powerful force in the financial services industry, said Ryan Kiryanto, corporate secretary of Bank Negara Indonesia.

He said fintech services have numerous advantages, such as being more flexible, innovative, creative, dynamic and responsive to meet customers' needs, while conventional banks offer security and stronger capital.

Imaduddin Sahabat, deputy director of Bank Indonesia's payment system regulation department, said the fintech industry still cannot be separated from conventional banking, because fintech startups require banks to hold their funds to prevent financial losses.

The central bank also encourages fintech startups to connect with each other, to establish and promote interoperability.

Financial Inclusion

Two fintech payment startups, OVO and TrueMoney, expect cooperation between fintech players and conventional banks to accelerate financial inclusion in Indonesia. Fintech companies should therefore not be seen challengers of conventional lenders, but instead be treated as partners that could accelerate the central bank's National Non-Cash Movement (GNNT), which seeks to promote a cashless society.

Setiawan Adhiputra, a director at OVO, said the Lippo Group-affiliated e-money transfer company wants to realize financial inclusion through the GNNT. To support the movement, OVO intensively cooperates with various partners, including conventional banks and other fintech startups.

"The challenge of fintech is sustainability. Bringing together an ecosystem in one application is also important, but it only gets to a certain point. To continue growing and breaking boundaries, it has to collaborate with various partners, such as banks and fellow fintech players," Setiawan said. He added that OVO has been actively introducing its platform to the public to educate people on fintech services.

"This year, we plan to cooperate with various partners, so penetration in the market can be faster and more massive," Setiawan said.

OVO has hundreds of brand partners, while its smartphone application currently has about 9 million active daily users.

Calindra da Cunha, operations director at TrueMoney Indonesia, said fintech penetration would slow down without cooperation with banks.

"Do not view fintech as a competitor to banking, but as a partner to accelerate the availability of financial services in the community," he said.

TrueMoney already acquired 15,000 agents by the end of last year, with 12,500 actively conducting financial transactions per day. The e-payment services platform, founded in Thailand in 2003, also actively cooperates with various parties, including fellow fintech players, financial institutions and the government.