Picture this: Indonesia pre-pandemic. The financial services industry remains largely centred around banks while alternative digital services offered by tech firms such as mobile wallets or P2P (peer-to-peer) lending are still developing.
According to Google, Temasek, and Bain & Company’s joint study in 2019, there were around 92 million unbanked and 47 million underbanked adults in the country. In the following year, cash also still accounted for 77 per cent of POS (point of sale) purchases as well.
However, things have changed drastically since then. Post-pandemic, Indonesia’s financial sector has since undergone an unprecedented digital transformation.
A 2022 report by Google, Temasek, and Bain & Company revealed that the country’s digital economy has grown from US$41 billion in 2019 to US$77 billion in 2022 and is expected to surge further to around US$130 billion by 2025.
The digital financial services industry has experienced similar growth during this time, and I foresee digital payments, investment, remittance, and lending continuing to maintain this growth momentum.
The driver behind digital transformation
Being actively involved in Indonesia’s growing fintech industry both before and during the pandemic, I have observed that the increasing prominence of the API (application programming interface) economy is driving the rapid digital transformation of Indonesia’s financial services sector.
Through the widespread use of APIs via the open banking system, it’s easier now for organisations to share their digital services, assets, and data with external parties to facilitate secure, seamless integration across platforms.
As a result, both financial and non-financial institutions in Indonesia have been able to collaborate and offer a wider range of digital services more efficiently and at lower costs. This revolution is expected to catalyse financial inclusion across Indonesia (particularly in remote areas).
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Looking back, how has the API economy successfully driven the digital transformation of Indonesia’s financial services sector throughout the pandemic? From my perspective, there are three critical factors at play:
Strong backing by regulatory bodies
Indonesia’s regulatory bodies, Bank Indonesia (BI) and the Financial Services Authority (OJK) have been promoting open banking and standardising Open APIs for years, but in my view, their efforts to digitise financial and payment systems have intensified during the pandemic. One key initiative is the QRIS payment system, which now has over 22 million registered users and has streamlined payment processes for micro, small, and medium-sized enterprises (MSMEs).
In 2021, BI also launched BI-FAST, a real-time and cost-effective payment system, and introduced a legal framework for APIs through SNAP. Meanwhile, OJK has increased its efforts in monitoring the fintech industry, constantly updating information on licensed P2P digital lending institutions on its website for public awareness.
OJK is also committed to resuming executing its “Indonesian Financial Services Sector Master Plan 2021-2025,” with open banking being a top priority. This involves fostering innovation and driving digital transformation in the financial sector through various measures, as outlined in the master plan. Indeed, I am looking forward to the impact that these efforts will have on Indonesia’s financial landscape in the future.
Increased collaboration for innovation and growth
With the regulatory bodies driving open banking and digitalisation in the financial industry, traditional financial institutions such as banks, are collaborating positively with non-traditional institutions like e-commerce and digital lending providers.
These partnerships have resulted in the emergence of numerous alternative digital financial services, providing new value propositions that weren’t previously available before. As the popularity of these services continues to rise in demand amongst Indonesian consumers, I see an ongoing need to develop more API solutions to meet this demand.
Some popular examples are lending startups supported by traditional banks that offer digital micro-loans for MSMEs and e-commerce platforms that provide buy-now-pay-later (BNPL) options.
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Alternatively, banking apps now also integrate digital wallet features, offering customers more convenience and flexibility. The P2P lending sector has also experienced remarkable growth, with a 95 per cent year-over-year increase in loan disbursements in December 2021, enabling easier access to alternative individual lending.
In my assessment, the increasing penetration of tech firms in the financial sector has led to a higher willingness among customers to explore novel offerings from these players. This trend is backed by the findings of EY’s “NextWave Global Consumer Banking Survey,” which indicates that 91 per cent of respondents from Indonesia “completely or mostly trust their primary financial relationships.”
This figure is notably higher than the global average of 82 per cent. As the market continues to seek out innovation, ease of use, and greater inclusivity, I anticipate that the demand for API-driven solutions will persist.
Access to more consumer segments
With the emergence of alternative financial services, made possible by API, some financial institutions can target more niche market segments, such as those with specific business sizes and needs, with lending for MSMEs as an example.
Other companies are honing in on particular market segments, like agritech firms offering fintech solutions for key players in domestic agriculture or insurtechs providing smaller to micro retail insurance plans.
The presence of API has allowed businesses to offer these customised financial services without having to build them from scratch and make them available in a timely manner. On the other hand, among the niche market segments that rely on traditional financial services, the pandemic has accelerated the adoption of digitised financial services.
Having been in Indonesia’s fintech startup scene since the early 2010s, I have witnessed firsthand the country’s rapid digital transformation. What began as simple online marketplaces has evolved into super-apps that have become integral to people’s daily lives, providing not only e-commerce services but also a wide range of financial services such as bill payments or insurance purchases.
This transformation has been made possible by APIs, and I believe it is only the beginning of the API economy in Indonesia. As challenges are overcome, the API economy will continue to grow at an unprecedented pace, eventually reaching every corner of the nation.
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