Indonesian fintech’s spectacular 2021 is just the beginning

Following years of steady funding growth, 2021 was the year that Indonesian fintech exploded. This year saw Southeast Asia's largest economy attract fintech venture inflows of over $1 billion, minting two new unicorns in the process; Xendit and Ajaib joining Gojek and Ovo at the pinnacle. The catalysts accelerating this growth have long been evident but crucially, these are structural factors which have yet to fully mature. As these macro tailwinds continue to drive the sector forward, the breathless pace of growth and innovation will only accelerate in the world’s largest island nation.  

Ultra-mobile, but underbanked 

The first factor is Indonesia’s population. With a median age of just 29.7, Indonesia has a young, dynamic population and workforce, primed to adopt innovation. And this is reflected in another key metric, smartphone adoption. With 81.7 million smartphone users, the nation ranks fourth in the world for digital penetration. These two factors alone create conditions favourable to technology adoption. But crucially, the banking and infrastructure and financial conditions of the nation make Indonesia specifically amenable to financial technology uptake. 

Despite healthy economic growth in recent decades, the Indonesian population remains underserved by a fragmented, low-penetration banking environment. The demand is clear - Indonesia’s young, digital, and underbanked population ready to adopt financial technology solutions. And as mentioned, there is reason to expect that demand is far from peaking. Despite the pandemic, GDP per capita has trended significantly upwards, increasing over five times since 2000.  

As wealth rises, the need for robust banking options will become increasingly pronounced. And with a population that expects app-based, innovative solutions, fintech solutions providers have a ready-made audience. Without the need to convince consumers to abandon traditional banks, innovative providers can capture this audience unobstructed. On a regional level, we are already seeing this acceleration of demand, as downloads of banking and alternative lending backs in South and Southeast Asia increased eight times over 2020. 

A business landscape primed for innovation 

Beyond personal finance, there is significant business appetite for fintech. Indonesia’s domestic economy consists of a somewhat overweight private sector, with a multitude of fragmented SMEs accounting for the majority of employment. At 62 million the number of these businesses is staggering, with one SME for every five Indonesians. Combined, this MSME space accounts for 61% of nominal GDP. But despite this scale, many SMEs remain unbanked, lacking access to credit and financial tools- a vacuum that fintech is poised to fill.  

Such a fragmented market generates competition, just as it creates opportunity for entrepreneurs. In both cases, the demand for solutions that can enable greater agility, efficiency, and integration is pronounced. Indonesia’s young entrepreneurs will be searching for app based, data-driven solutions that will enable them to scale and optimise their operations. 

As fintech empowers businesses to launch anywhere, sell anywhere, and operate anywhere, the rewards are great for early adopters and indeed, for pioneering solutions providers with knowledge of the market. The Indonesian SME sector has significant potential to develop, and is far from exhibiting the high levels of consolidation and integration characteristic of mature markets. Fintech will accelerate this process as it develops, indicating a greater ceiling still for the still nascent space.  

Looking forward 

It is clear that Indonesian fintech adoption and provision is just beginning. This makes the industry’s 2021 performance even more remarkable - these numbers are not the ceiling for the sector. As Indonesia’s youthful, upwardly mobile population continues to clammer towards setting up an ever-increasing number of SMEs, adoption of fintech solutions to both serve basic needs and deliver a fintech-driven competitive edge will be essential. Expect to see the breathless space of innovation continue into 2022 and beyond.