Sea and Gojek can target Indonesia's 83 million who lack bank access

Banking services through mobile phones offer a solution to those strewn across thousands of islands and lack access to banks. PHOTO: REUTERS

JAKARTA (BLOOMBERG) - Sea Ltd and Gojek are snapping up Indonesian lenders, betting they can make headway into one of the world's largest unbanked markets.

The buying spree is set to continue as financial technology firms set their sights on the nation's more than 175 million Internet users, many of whom rely on online banking services. Sea has purchased PT Bank Kesejahteraan Ekonomi this year, while Gojek made its biggest fintech investment by spending about US$160 million (S$212.9 million) to boost its stake in PT Bank Jago in December.

While Indonesia is by far the largest fintech market in South-east Asia, it's one of the few that don't license digital-only banks. The UK, Hong Kong and Singapore have allowed virtual lenders, while neighboring Thailand and the Philippines are actively studying the matter. That means acquisitions are the only way into Indonesia and the Financial Services Authority is pushing for more consolidation among its more than 1,600 commercial and rural banks in lieu of issuing new licenses.

Fintech firms should "cooperate with existing banks like what has happened so far," said Wimboh Santoso, who heads the regulator. "Banks aren't prohibited from working with companies in the form of ownership, operational and product development synergy."

One-Stop Shop

For Indonesia, the entry of tech giants presents an opportunity to reach more than 83 million people - nearly a third of its population - who still lack access to formal financial services. As the country's banks struggle to reach a population strewn across thousands of islands, banking services through mobile phones offer a solution.

South-east Asia's digital financial services' revenue is estimated to be around US$11 billion, or 5 per cent of the regional pie with room to grow as people shift toward more virtual transactions, according to a Bain & Company report in partnership with Google and Temasek.

Tech firms such as Gojek and Grab have expanded beyond transportation services to become one-stop shops for services, from hairdressing to finance.

These so-called "neo banks" are well-positioned to target underserved but higher-margin segments like the younger and lower-income population, said Tamma Febrian, associate director of Fitch Ratings in Singapore. They can use data from e-commerce and payment arms to assess borrowers usually shunned by banks due to lack of collateral and credit history. That's even with the possibility that the data may be from "relatively benign times" before the crisis and underestimate the risks, he said.

For Indonesia's smaller lenders, partnerships with fintech firms would help them meet requirements to raise their core capital to at least 3 trillion rupiah (S$280 million) by 2022, and help them compete in a market that's growing increasingly digital.

First Movers

"Fintech has a much stronger data and technology capacity to capture potential customers. On the other hand, banks have a much larger funding capacity to channel credit, as well as a regulatory structure," said Aviliani, an economist at the Institute for Development of Economics and Finance. "Without each other, they will not be able to expand bigger."

Lenders are also realizing that fee-based income is a key source of earnings in this era of low interest rates, she added.

Fintech firms would likely prefer to retain the control that comes from getting their own banking license, but their priority will be to get their foot in Indonesia's door regardless, according to Gary Hanniffy, Fitch Ratings director in Jakarta.

"As we see deals take place, other interested parties will be flushed out if they're serious about Indonesia as a location," he said. "There are first-mover advantages at play. I wouldn't be surprised to hear of other approaches in the near-term."

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