Like other countries globally, Indonesia is entering the digital era or is widely referred to as the fourth industrial revolution. The rapid penetration of the internet in Indonesia has triggered this development, where the number of internet users has jumped from 8.1 million (2005) to 143 million (2019) (Jurriens & Tapsel, 2017, APJII, 2019). Digitalization affects the economy through three things, first changing the market, secondly changing the transaction, third changing the economic system from being centered on the company to the community (Pangestu & Dewi, 2017).
The convenience obtained when transacting in E-commerce causes a shift in people’s behavior, affecting the payment market. Advances in digital technology have led to changes in payment patterns from physical to virtual. Most of these changes have been driven by fintech companies that have succeeded in creating comfortable, fast, and secure payments that attract consumers’ attention.
The development of Indonesia’s fintech industry is also swift. The number of Indonesian fintech companies has grown rapidly over the past two years. In part, this condition is caused by the high demand for financial services and the large population of Indonesia that has not been touched by this sector. Besides, the increased penetration of smartphones and the internet, respectively 47% and 53%, has made fintech a significant player in supporting the government’s financial inclusion target.
Digital Payment transactions in 2018 are estimated to reach USD 26.88 billion and are growing at an annual rate of 20%. The 2019 Global Startup Ecosystem Report places fintech as a sub-sector force for Indonesia’s digital economy. The Financial Technology (Fintech) sector is growing rapidly and currently offers a wide range of services. Daily Social (2019) estimates that the fintech investment value disclosed in 2017 will reach USD 175.75 million. The projected transaction value across the fintech market in 2018 is USD 22.34 billion, and the transaction value is expected to grow by 16.3 % every year. Based on data from the Financial Services Authority (OJK), the total value of Peer to peer lending transactions in 2018 reached IDR 20 trillion (USD 1.4 billion) or an increase of 680% compared to 2017.
COVID-19 pandemic pushed our schedule on digital transformation. Aside from that, the change of people’s behavior — either on payment, credit, or saving. As a result, Fintech sector in Indonesia rises significantly. According to AFTECH, the association’s members increased from 24 members in 2016 into 362 members in the second quarter of 2020. The adoption of Fintech solution also increased significantly, with IDR 16.1 B worth of transactions of e-money with more than five million agents involved.
During the pandemic, Fintech sector contributed to recovering the economy by reaching more individuals and MSMEs on the transaction and financial access. Fintech sector also boosts mutual funds investment and accelerate the distribution of government retail obligation. To encourage financial technology further, OJK has established a regulatory sandbox and assisted AFTECH in making Fintech Code of Conduct build a responsible Fintech ecosystem. Nevertheless, as fintech keeps on growing, financial inclusion needs to be considered as well.