China fintech in Indonesia: Uncertainty bites

Anonymous phone calls made to borrowers’ relatives demanding repayment; debt collectors asking that debtors strip naked and dance on trains; and a middle-aged Jakarta taxi driver committing suicide after failing to repay a IDR500,000 ($36) loan due to usurious interest rates. These are some the disturbing stories from Indonesia’s peer-to-peer (P2P) lending space – and many hold China accountable. The Financial Services Authority (OJK) said there were more than 230 illegal P2P platforms in Indonesia in 2018, and “most of them came from China.”

Chinese financial services start-ups operating in the country, regardless of whether they acted illegally, have been tainted by association, prompting features of a long-lasting stigma that could impede expansion in Southeast Asia. Picking the right market at the right time has never been more important for investors targeting the China-Southeast Asia angle.   

“For now, we are adopting a ‘wait-and-see’ attitude regarding Chinese P2P players. I am worried that some bad actors replicating in Indonesia what they did back home will cause a huge backlash against all Chinese fintech companies,” says a Beijing-based investor who has backed a Chinese fintech player that primarily operates in Indonesia. On the other hand, he is more positive about technology providers that facilitate sales of financial products such as insurance policies because they are one step removed from the transaction process.

China incoming

Chinese P2P players started descending on Indonesia in 2017 after Beijing instigated a crackdown on such platforms, according to industry sources. Tens of thousands of “P2P refugees” – retail lenders who lost their life savings after platforms were exposed as Ponzi schemes – staged protests across China, asking for the repayment of their money. The wave of collapses and enforced closures saw the number of P2P lenders in the country fall from more than 2,000 in early 2018 to 1,000 in the first three months this year, Chinese media reported.

Companies refocusing on foreign markets typically establish an offshore entity in Hong Kong or Singapore to bypass Chinese restrictions on capital outflows. They then hire proxy agents as local partners or work in conjunction with local lending apps in the region – although such alignments are unlikely to be publicized for regulatory reasons, industry observers say.

Problems began to emerge in Indonesia when some of these migrant P2P lenders began engaging in the same activities that prompted their censure in China. Aggressive debt collection methods became commonplace. It did not go down well with the authorities. “Those practices go against God. We are a religious country. In Indonesia, if I lend the money to you and you don’t pay, I will not come to your house and humiliate you,” Hendrikus Passagi, who oversees fintech for Indonesia’s financial regulator OJK told local media last year.

It is estimated there are still at least 100 Chinese P2P lenders in Indonesia, but their future prospects largely depend on the attitude of the regulator. It has said that platforms engaged in “productive lending” – referring to lenders like Go-Jek’s a ride-hailing platform that operates the Go-Pay service, which target specific customer groups – would be encouraged. Those focused on micro-lending to random online consumers would not.

This is not the scenario investors had in mind when they encouraged Chinese fintech players to enter Indonesia. The plan was to leverage the rapid economic growth, rising disposable incomes, favorable demographics and untapped opportunities that had once characterized their home market. With China now more saturated, regulated, and competitive, Indonesia could provide a sustainable future.

Indonesia’s population is tech-savvy but woefully underbanked – around two-thirds of the country’s 260 million residents don’t have bank accounts. There is also high-level government support for an ecosystem that would have fintech at its heart. This includes President Joko Widodo’s ambitious push to fast-track a digital economy: the plan is to achieve annual e-commerce transaction value of $130 billion and crate 1,000 tech start-ups with a value of $10 billion by 2020.

Indonesia also appealed because of how it differed from China. Whereas electronic payments and transfers account for more than 80% of fintech activity in the latter market, the former is dominated by P2P as well as e-payments, according to EY. Cumulative e-money transactions in Indonesia grew six-fold between 2012 and 2017, reaching IDR12.3 trillion. Meanwhile, P2P loan issuance doubled year-on-year to IDR6.2 trillion between January and May of 2018 alone.

However, the approach taken by small tech start-ups is far removed from that of established technology players like Alibaba Group and Tencent Holdings. Organic expansion is on the agenda, but these giants have tended to establish partnerships and make minority investments in local groups. In 2018, Alibaba launched a mobile wallet with local media company Emtek, while Tencent backed Go-Jek. Domestic fintech companies can therefore benefit from capital and strategic support.

“Large Chinese tech groups do not only make investments in Indonesia and Southeast Asia to generate financial returns, they also look at whether they can leverage operating experience and technologies developed in China to support those local players. . In a highly competitive market like Indonesia, having a deep-pocketed Chinese investor can bring significant security to a young fintech company,” says Hans De Back, a partner at Finch Capital.

By contrast, the P2P platforms have no well-structured strategic rationale. They came to Indonesia largely because they could no longer do business in China. “It is because their house is on fire back home. Of course, established P2P players like Lufax will continue operating in China, but for the smaller ones, getting out of China seems to be the only option,” says Zennon Kapron, founder of Kapronasia, an Asia-focused fintech consultancy.

Playing it safe

Given the regulatory uncertainty and negative public response, investors have largely avoided the P2P and instead focused on fintech companies in other segments. One example is CashCash, which facilitates the sale of products provided by more than 60 Indonesian online lending platforms.

“CashCash is a pure technology platform and thus is not involved with the lending side. We think credit assessment platforms like this have the highest value in Indonesia’s fintech sector. If there are any products deemed having violated some regulations, all the company needs to do is take them down,” says a Beijing-based investor who participated in the company’s Series A round.

Wecash, another VC-backed Chinese start-up, meets the same criteria. The company, which uses big data and machine learning to help banks make credit assessments, co-underwrite consumer loans and detect fraud, has set up a joint venture with local fintech specialists Kresna Investments and JAS Kapital.

“A lot of the local big boys work closely with their Chinese counterparts because the business models of those Chinese players are probably 5-10 years ahead of Indonesia in fintech. But it remains to seen whether those models can be replicated on a like-for-like basis in Indonesia, where borrowing and payment practices are quite different from China,” says Fong Jek Gan, a founding managing partner at Jubilee Capital, which makes tech investments in the US and Asia Pacific.

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• Topics
• Southeast Asia
• Greater China
• Financials
• Early-stage
• Technology
• China
• Indonesia
• regulation
• Jubilee Capital Management
• Finch Capital