Fintech companies providing lending services are on the rise in Indonesia.
Driven by the increased appetite for credit among micro, small and medium-sized enterprises (MSMEs), lending platforms make up half of the 362 registered fintech companies in Indonesia.
Peer-to-peer (P2P) lenders are the main beneficiaries. These lenders act as the intermediary between consumer-issued loans and entrepreneurs or MSMEs who request them.
The primary benefit they provide for entrepreneurs and MSMEs are the low collateral and credit requirements needed to secure a loan.
Previously, entrepreneurs and MSMEs faced difficulties taking out a loan at traditional financial institutions such as banks.
These institutions required them to show at least two years of profits and had large collateral requirements that these small businesses and entrepreneurs could not afford.
Employing more than 97 per cent of the national workforce and contributing 61 per cent of the annual GDP, the 64 million MSMEs in Indonesia form a crucial part of the economy.
Yet, they were financially underserved. Their growth has been hampered by the lack of access to credit.
That is where P2P lending platforms come into play. Instead of imposing unrealistic metrics on these small businesses, these platforms focus on cash flows and contracts with blue-chip companies.
This has greatly lowered the barriers for an MSME or entrepreneur to take out a business loan.
Despite the rise of MSMEs within Indonesia fuelling the growth of P2P lending platforms, there are hurdles handicapping the growth of the latter.
With the pandemic ravaging economies worldwide, Indonesia was not spared. For the first time in two decades, the archipelago’s economy contracted. MSMEs were badly hit by lockdowns as businesses shuttered.
P2P lending platforms witnessed a spike in the percentage of non-performing loans (NPLs) - loans in which the borrower defaults and has not made any scheduled repayments for a period of time.
According to the Jakarta Post, P2P lending platforms reported an 8 per cent increase in NPLs in July 2020.
As MSMEs lack the financial resources of their larger counterparts, it should come as no surprise that they were heavily impacted by the economic crisis.
However, can more be done by P2P lending platforms to improve their quality of lenders? Can they better ascertain the ability of their customers to repay?
With the fintech industry in Indonesia growing at a rapid pace, there is a multitude of fintech companies for MSMEs and individuals to choose from.
From accounting and bookkeeping to payments and supply sourcing, businesses are no longer run on physical invoices and excel spreadsheets.
Today, digitalisation is the new normal.
With financial operations such as accounting and payments moving online, it should be easier for P2P lending platforms to track cash flow and ascertain the ability of a business to repay its loan.
However, this is not the case. Lending companies are still facing issues obtaining financial data from other platforms.
Besides the unwillingness of platforms to exchange financial data with each other, there was previously no adequate technical infrastructure to facilitate this.
However, that is no longer the case.
Driven by the desire of regulators to build an Open Finance ecosystem, financial API providers like Finantier are taking the lead and building APIs that allow the exchange of financial data between platforms.
How can P2P lenders benefit from this? Firstly, they would gain access to more sources of data to facilitate the credit scoring process of lenders.
With a holistic view of a company or individual’s digital footprint, lending platforms are better equipped to gauge the ability of their users to repay.
Besides reducing NPLs, this move enables lenders to focus on their “winning” customers - those who repay their loans on time.
With over 180 P2P lending platforms in Indonesia, consumers and MSMEs have a wide choice of providers to pick from.
With such a competitive lending landscape, how can providers stand out?
The answer lies in providing a great user experience.
Applications for loans have been notoriously troublesome and time-consuming. Besides furnishing income and credit histories, one must also provide proof of identity. And what do consumers dislike the most? Friction.
The greater the inconvenience of signing up, the higher the drop-off rates will be.
Therefore, it is now crucial for P2P lending platforms to provide a stress-free and convenient signup process for their customers.
By aggregating income and identity information from different financial platforms, Finantier’s APIs serve as a direct link for lending platforms to conduct their necessary diligence within minutes.
This move would be welcomed by consumers and companies alike as the frictionless registration process would see them onboarded in minutes, instead of weeks.
Satisfied customers, coupled with the assurance that their income and identity were accurately verified, certainly bodes well for lending platforms.
The future of financial services
With open API serving as the bedrock for the drive towards Open Finance, it is crucial for fintechs - including lending platforms - to take advantage of this and build the next generation of financial services, where personalisation and convenience would be critical.
Finantier is working with a growing number of lending platforms to assist them in building products that would put them ahead of the competition.
Speak to us today and join us in building better financial services for everyone.