Many Chinese families spent the eve of the 2014 Lunar New Year huddled around a smartphone. The child of each family tried, and perhaps failed, to explain the bizarre phenomenon of virtual red packets to their older relative members. One simply scans another user’s unique QR code to claim the red packet money. Eyes glazing over their grandchild’s deft movements, the elders may have thought, “What has our over 2,000 years-old tradition been reduced to?”
Fast forward to the year of 2018 and this formerly sacrilegious practice of sending virtual red packets has become a norm in China. According to a survey carried out by Lightspeed Research, 80 percent of the respondents are agreeable to digitalizing this ancient practice. Tencent Holdings’ social messaging app, WeChat, rolled out their digital red packet service in 2014 and they haven’t looked back since. On the eve of 2018 Lunar New Year, WeChat recorded a whoping 688 million users who used their ‘hongbao’ (red packet) feature. The positive reception by the consumers and convenience of exchange has prompted other companies to follow suit.
Digital payments through social messaging apps are one example among the vast services, products, and capabilities of FinTech. FinTech, which stands for financial technologies, is as it sounds – the innovative use of technology to provide financial services and products. Any financial transactions where technology is involved could be considered FinTech, including online banking or even receiving your bank statements electronically, but those services barely skim the surface of the variety of solutions that exists in the FinTech industry.
Innovation is the key word in FinTech, closely followed by disruption. While there remains to be some dispute around the origin of FinTech, most of the industry professionals and research firms agree that it stemmed from the bureaucratic nature of traditional banking. Banks are governed by numerous rules and regulations imposed by multiple parties, ranging from the government of the country in which they operate in and market leaders of different industries, to international institutions and consumer demand. Innovation and technological integration has taken a back seat in the face of tight governance.
Banking practices have remained more or less the same in the past decade, whilst technology continued to develop at an exponential rate. The emergence of AI, big data, and automation bolstered a complex and interconnected technological ecosystem and wiggled their way into the daily lives of consumers in the form of our smartphones. The gap between what banks have to offer versus the consumer’s expectation of convenience is where FinTech comes in. By providing fast and convenient alternatives to bank services and cash, FinTech attracts a multi-generation customer base that wishes to have their money readily accessible.
That is not to say that the banking industry has been left in the dust. Banks are adapting to emerging technologies and trends by digitalising their processes, products, and even services. In an increasingly interconnected world, digital banking allows both bank tellers and customers to cut back on physical ‘face-time’ by integrating chatbots to address common customer queries. PT Bank Tabungan Pensiunan Nasional Tbk (BTPN), and Indonesian commercial bank headquartered in Jakarta, is a model example of how a bank has successfully capitalised on a burgeoning digital banking market. BTPN’s integrated digital bank, Jenius, has all the services and products of a traditional bank and more, all accessible and performed through a mobile app. Capitalising on 47.5% of the total population that uses a smartphone device, BTPN’s Jenius allows their customers — who are inadvertently their app users as well — to make payment transfers from bank-to-bank and app user-to-user, manage their personal finances, and even make purchases via a virtual debit-card, which is a duplicate of their physical Visa debit card all customers receive upon opening an account. The introduction of Jenius is not only an innovative step on the tech and banking front, but it is also changing how we perceive customer experience in an evolving tech age.
Common FinTech services and products
Peer-to-peer (P2P) Payments
When one thinks of digital payment platforms, there are a few household names that come to mind: OVO, Dana, LinkAja, GoPay and many more. But before tech conglomerates shrunk our bank accounts to the size of our palms, digital payments have been around for quite some while ago. By definition, digital payments, or sometimes also known as peer-to-peer (P2P) payments, are any non-cash transactions that take place through digital channels, including any online bank-to-bank transfers and online payments.
As technology evolved, so did cyber security, and we slowly warmed up to the idea of having our credit/debit card numbers saved on our Google or Apple accounts. Since these softwares store our payment information on our laptop, tablet, phone, or the cloud electronically, they came to be known as digital wallets. Mobile wallets are phone variants of digital wallets that allow you to make POS payments by scanning the unique QR code of the merchant or purchaser’s payment terminal. Naturally, digital wallets simplify payment between individuals. Whether it’s to split a dinner bill or pay rent, there are many peer-to-peer payment platforms or features in existing digital wallet softwares that consolidates the entire e-payment experience.
As a business owner, your biggest concern is receiving and sending payments to your customers, suppliers, and employees. It sounds easy enough at first – one simply needs to make an online transfer, issue a cheque or meet and exchange cash. This method may have once worked for traditional brick-and-mortar stores but constantly hounding your customers and suppliers to make a transfer or risk misplacing cash is a dangerous way to run a business. We live in an era of convenience, reliability and speed. And now thanks to the advent of technology, it would be a sure miss if business owners do not take advantage of the ease and benefits of online transactions.
Payment gateways facilitate online transactions that occur between businesses and their customers. It is a secure infrastructure that authorizes the transfer of funds conveniently from your customers’ bank account to your business’. And like all gates, the flow of traffic goes both ways; businesses can make secure payments to their vendors, business partners and employees. Payment gateways are especially essential to ecommerce sites because it is the most convenient way for online stores to offer multiple payment options to their customers without having to go through the manual process of setting up an account with each individual payment method partner.
The services of a payment gateway can range from just being a conduit between the online business and the bank that authorizes payments. Payment gateways like Xendit offers businesses a fully integrated software with advanced features such as fraud detection, activity dashboard, or even automatically add tax. For more information on payment gateways, please refer to this article here.
Where peer-to-peer payment is a digital payment transaction that occurs between individuals — often among friends and family, peer-to-peer lending is very different. Suppose that you would like to start your own palm sugar coffee and sell your product to the masses, but you do not have the capital to even procure the necessary ingredients. In the past, the first instinct would be to take a business loan from the bank and gradually pay off the debt and high interest rates as your business flourishes. But the process of filing the paperwork, getting credit checks, declaring any business assets, and pledging your assets as collateral can be tedious and daunting. Worse still, the banks will not have the slightest interest that palm sugar coffee is the next Teh Botol. Luckily, there are other investors out there who do.
Peer-to-peer (P2P) lending, sometimes called people-to-people lending, connects prospective business owners with interested investors through a digital platform, to provide funding based on mutual terms and conditions at low-interest rates. P2P lending is a blessing for MSMEs especially, who sometimes lack the necessary requirements to obtain financing from a bank. P2P lending platforms matches the investors’ money to loan requests and serves as a middleman between the investor and loaners. Similar to bank loans, the money needs to be repaid over the defined time and investors earn in interest.
The practice of investing has never come without risks and this principle applies to P2P lending as well. There is always a chance that the borrower’s business may never flourish and would not have the money to pay back the loan. Without an asset pledged by the borrower as required by banks, investors have no collaterals to collect in exchange. However, some P2P lending platforms have a provision fund set aside to cover the losses of investors. The provision fund is typically made up of contributions from borrowers either as a form of donation or part of their loan contract.
Bitcoin. This buzzword has seen the most headlines in recent years due to its peculiarity. Used mainly by the likes of the traditional global banking industry, cryptocurrencies like Bitcoin, Ethereum, NEO can be somewhat of a mystery to ordinary consumers. For the purpose of explaining the concept, we will focus on bitcoin to showcase the main capabilities of cryptocurrencies.
In all of the different fintech products and services shows above, there is always an intermediary, be it the bank, payment gateway software providers, or even tech companies. Having intermediaries negotiate on your behalf is convenient, especially if you are not familiar with the finance industry’s lingua franca, but it also poses the risk of having your money unknowingly used, scammed, or stolen in the middle of a transaction. Or what if your bank registered that you have made two online transactions when you have actually only successfully processed one?
The main appeal of a crypto-currency is that it is decentralised, meaning that no single institution owns the digital cash network and owners have full control over how their money is used. In the case of bitcoin, every transaction you make on the bitcoin network is tagged with your unique digital signature, which allows both you and the other party to ensure the transaction is authentic. Every single bitcoin transaction every processed is recorded in a shared, public ledger called the block chain, so it is close to impossible to fraud the transaction.
In its simplest explanation, bitcoin allows for a completely digital peer-to-peer payment between buyers and sellers. This digital currency can be used to pay and purchase just about anything from groceries, clothes, and last night’s dinner, to stocks, insurance and college tuition fees.
The adoption of crypto-currency is a slow and steady process for most people. Since crypto-currencies are still at their infant states, their values fluctuate more so that fiat currencies. The fluctuations are often caused by external factors, such as government regulations banning crypto-currency trades or a sudden influx of investment in the crypto-currency. However, it is difficult to ignore the potential of crypto-currencies, even for countries like Indonesia, whose government has expressed concern of its high volatility and the potential of it being used for illegal activities.
In early 2019, Indonesia’s Commodity Futures Trading Regulatory Agency (Bappebti), officially recognised crypto assets as commodities that can be traded on the country’s future exchange. The rule passed states that cryptocurrency futures exchanges must be registered, approved, and have secured a paid-up capital of at least IDR1.5 trillion before operating. Though some crypto-currency traders have balked at the high minimum capital requirement, it is a small step on the country’s part to explore the opportunities that crypto-currencies can bring.
As if digital money wasn’t sci-fi enough, imagine a future where robots do all the investing for you. Robo-advisors are financial planning platforms that assist with investment goal planning and asset management. One of the most notable and advanced features is the use of algorithms, AI and machine learning to predict the best time to invest client assets, sometimes done with no human supervision. Some robo-advisors are even capable of investment selection, retirement planning, and tax-loss harvesting.
The pinnacle of robo-advisors is that it should be smart enough to plan and invest your finances on your behalf — like a pixelated clone of yourself that spends every hour observing market fluctuations and making predictions. But not even technology can calculate how much you should put aside for the unexpected ups-and-downs of life. Money-related concerns arise at different moments of your day, week, month, year, and it can only be assuaged with a human being.
Bibit is a good example of balancing human interactions with automated software, and one of many homegrown start-ups that is spearheading Indonesia’s FinTech industry through robo-advisors. Recently acquired by Stockbit, Bibit is a smart investment app that showcases the rudimentary features of robo-advisors. The app helps people build a personalised portfolio of their investment interests and consolidates important information necessary to make an investment decision. Features such as virtual trading, social discussions, and real-time updates help new and experienced investors navigate the fast-changing nature of the stock market.
Indonesia’s FinTech landscape
Indonesia’s FinTech industry has enjoyed a growth spurt in the last few years, but none more so than the P2P lending companies. As of December 2019, Indonesia’s government agency that supervises and regulates the financial services sector (Otoritas Jasa Keuangan, OJK) has registered a total of 25 licensed FinTech lending companies and the number is expected to grow even more in the coming years.
In order to legally operate as a FinTech company in Indonesia, prospects need to register their company with the OJK and go through a Regulatory Sandbox, where OJK evaluates the [effectiveness] of the company. Once the company has been registered, it needs to apply for an Electronic System Operators (PSE) license from the Department of Communication and Information and Technology. The license is to ensure the company is a legal entity and verifies its rights to operate in Indonesia. After a P2P business collapse in China where many users suffered insurmountable losses, OJK requires Indonesia P2P Lending businesses to apply for an extra license, where companies must submit a one-year business plan detailing their goals, activities, KPIs, and financial projections. For a more detailed breakdown of the requirements, processes, and time frame of the registration and permit application, please refer to this article.
The lines between financial institutions and tech companies are blurring and the result is a new and competitive field that would push the country’s economy forward. More importantly, FinTech in Indonesia is promoting financial inclusion to burgeoning businesses operating in rural areas. Due to the size and geographical nature of the country, traditional financial systems have difficulty scaling up and transferring physical assets. With FinTech services like P2P lending, family-owned SMEs located outside of metropolitan cities allow them to obtain a variety of loan amount and durations with just being connected to the internet.
By providing better access to financing, the country will benefit from boost in economic growth and consumer spending. As Indonesia moves closer to becoming a full-fledged, technology-driven country, the local FinTech industry will continue to evolve and provide financial access to businesses of all shapes and sizes.