Fintech Penetration to Financing: Threat or Opportunity for Banking?

Penulis: Safrezi Fitra

Editor: Amal Ihsan Hadian

Senin 19/11/2018, 17.27 WIB

Finance Minister Sri Mulyani warned that banks would face the risk of extinction if they are not able to compete with fintech firms.

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Penetration of financial technology (fintech) firms into the financing sector is very massive nowadays. Last year, financing disbursement from fintech even grew 800 percent. For many people, this raises the question whether its penetration into the sector will be a threat or opportunity for banking industry.

Finance Minister Sri Mulyani reminded that banking industry must be able to adjust to the rapid technological change nowadays. This is because banks would face the risk of extinction if they are not able to compete with fintech firms. “Do not let banking become extinct like dinosaurs,” he said at the 2018 Indonesian Banking Expo (IBEX) in Jakarta, Thursday (11/15).

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The results of research by international consultant Pricewaterhouse Coopers (PwC) Indonesia show that fintech development is one of the risks for the national banking industry. This is based on the 2018 Indonesia Banking Survey report on 65 respondents from 49 banks in Indonesia, where 41 percent of respondents from large banks stated that fintech would be a serious threat in the next five years.

People’s behaviour who like to conduct digital transactions brings benefits to the existence of fintech. The trend of doing digital transactions in banks rose by 35 percent. Three years ago, 75 percent of bankers estimated that more than half of the transactions were carried out in branch offices. Currently, the number dropped to 34 percent.

“Five years ago, the use of mobile apps became a new thing. Now, it is a normal thing. Fintech utilises it. If banks do not immediately make improvements, they will be left behind,” PwC Indonesia Advisor Chan Cheong said.

Based on World Bank data, financial penetration in Indonesia is still low compared to other countries, including India. Currently, Indonesia’s financial penetration index is only 48 percent, rising from the previous position of 36 percent. Despite the increase, more than half of Indonesia’s population are still unbankable.

In the midst of banking conditions that are unable to reach out the unbankable, fintech firms emerged and offered various facilities. Fintech peer-to-peer (P2P) lending cuts time and complexity in applying and taking loans. Prospective customers can do this through online access without the need to come to the office to apply for loans.

One part of financial inclusion is people’s access to get a loan. Fintech also facilitates lenders with borrowers through the digital market. This is very much needed for Micro, Small and Medium Enterprises (MSMEs) that face difficulties in obtaining banking funds.

Based on data from the Financial Services Authority (OJK), the loan needs for national MSMEs reached Rp 1,700 trillion per year. Financial institutions can only fulfil Rp 700 trillion, so there is still a shortfall of up to Rp 1,000 trillion.

P2P lending seeks to fill the funding gap for the MSME segment. OJK data also shows that the P2P lending sector in Indonesia has disbursed loans of Rp 1.6 trillion to date, which is still a small part (0.16 percent) of the current funding gap.

With enormous potential, the Indonesian Financial Technology Association (Aftech) noted that the growth jumped to 9 percent in 2013-2014 from 6 percent in 2011-2012, which then soared to 78 percent in 2015-2016. The figure is predicted to continue to grow because the Indonesian market still has huge potential. Moreover, the use of Internet is growing very fast here, which is estimated to reach 145 million users or 53 percent of the population by 2020. About 73 percent of total Internet access is done using smart phones.

According to the OJK, the number of borrowers through P2P lending reached 1.8 million as of September 2018. “We anticipate the number will reach 3 million people by the end of this year,” OJK’s Fintech Licensing and Supervision Director Hendrikus Passagi said last October.

There are 73 registered P2P lending-based fintech firms as of September 2018, but only one has obtained permission. About 17 of the remaining 72 companies are currently applying for licenses. This business will continue to grow because hundreds of companies are still lining up to get registered.