Evolving financial services: Online lending and digital payments lead the way

While other tech-powered innovations in finance like wealth management, insurance technology, cryptocurrencies and personal finance management will experience growth, it will be at a more gradual pace.


File photo of a consumer making a digital payment. PHOTO: UNSPLASH

February 8, 2024

JAKARTAAs technology continues to reshape the global financial services landscape, Indonesia is expected to witness significant growth in two key sub sectors in the coming year: online lending and digital payments.

“Against the backdrop of payments democratization and commoditization, digital payments are poised for high single-digit or even double-digit growth in the years ahead. Lending and banking are also expected to outpace other verticals,” predicts Natasha Ardiani, co founder and COO of payment aggregator Durian Pay.

While other tech-powered innovations in finance like wealth management, insurtech (insurance technology), cryptocurrencies and personal finance management will experience growth, it will be at a more gradual pace, she said.

However, it is the services aimed at serving Indonesia’s large unbanked population—still comprising 97.7 million people, 48 percent of the total population—that will continue to transform the financial landscape dramatically.

Online lending momentum

Alternative sources of loans and credit, such as peer-to-peer (P2P) lending services and buy-now-pay-later (BNPL) schemes, have seen incredible growth over the past year.

According to data from the Financial Services Authority (OJK), P2P lending experienced robust 18.05 percent year-on-year (yoy) growth as of November 2023, reaching a substantial nominal financing of Rp 59.38 trillion (US$3.75 billion).

Data from Kredivo & Kata Data Insight Center also showed that the percentage of users preferring BNPL as a payment mode on e-commerce platforms grew from 28.2 percent in 2022 to 45.9 percent as of mid-2023.

The younger generation receives the most funding from digital lending. According to the OJK, a total of Rp 26.87 trillion was disbursed to 10.91 million bank accounts held by individuals aged 19 to 34 as of June 2023.

By 2025, Indonesia is projected to see more than $40 billion in digital loans—almost double from last year—according to the annual e-Conomy Southeast Asia report by tech giant Google, Singapore-based Temasek and the United States-based research firm Bain & Company.

Heru Sutadi, executive director of the Indonesia ICT Institute, anticipates that up to 90 percent of transactions in Indonesia could be cashless by 2024, driven by the significant surge in the adoption of the Quick Response Code Indonesian Standard (QRIS).

Bank Indonesia reports that QRIS transactions witnessed remarkable 130 percent yoy growth, reaching Rp 229.96 trillion, in 2023. This growth came from 45.78 million QRIS users who transacted with 30.41 million QRIS merchants, most of which were micro, small and medium enterprises (MSMEs).

This year, the central bank projects QRIS users to grow by 20 percent to 55 million, who will conduct more than 2 billion transactions, up from last year’s 1.6 billion.

This growth will continue to be fueled by the increasing number of ways people can use QR codes, ranging from paying for nasi goreng (fried rice) in a rural warung (food stall) to a pad thai meal while traveling in Bangkok.

As part of ASEAN’S payment connectivity plan, Indonesians can already make instant retail payments in Thailand, Malaysia and Singapore just by scanning the local QR codes. In the coming year, Bank Indonesia plans to expand these cross-border e-payment links further to India, Japan, China and the United Arab Emirates.

“QRIS is a very convenient way to pay. It’s interoperable, online and hassle-free. Customers can pay from any source of funds, be it a mobile banking app or e-money. Enabling cross-border QRIS has definitely increased utilization from the consumer perspective as well as creating new revenue streams for all players involved,” Natasha said.

These alternative payment services are now so convenient that even those with debit and credit cards seem to prefer using them and other forms of electronic money. In 2023, transactions using traditional ATM cards, debit cards and credit cards declined by 0.8 percent to Rp 8.17 quadrillion, according to Bank Indonesia.

Addressing risks

Despite the promising growth prospects, the fintech landscape faces significant challenges that pose a risk to this expansion.

Maintaining trust in financial technology is critical, especially with increasing concerns over cyberattacks and data security, according to Heru. Issues like identity theft, phishing attacks and other fraudulent schemes pose a threat to maintaining and growing trust in tech-powered financial services.

Nailul Huda, director of digital economy at the Center of Economic and Law Studies (CELIOS), also said the increasing accessibility of online lending services to the younger generation had raised concerns over credit risks.

OJK data as of April 2023 showed that almost half of BNPL users who defaulted on payments were in their 20s.

“Getting a loan is as simple as providing your ID card and a selfie. However, this information doesn’t adequately reflect the borrower’s ability to repay the debt,” Nailul says.

He suggests that digital lending platforms should enhance their credit scoring systems and methods to more accurately assess the risk posed by borrowers. A more effective approach could involve comparing their scoring mechanisms with data from the banking sector to better measure a borrower’s risk profile.

Addressing these challenges would help ensure the sustained growth of the sector.

“The industry is poised for continued expansion and innovation, fostering financial inclusion and convenience for users. We’ll probably see a higher degree of foreign investments in these sectors in 2024,” Natasha says.

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