Three Challenges Startup Faced in Serving Indonesia’s Unbanked Population

In Indonesia, access to basic financial service such as saving and lending is a priviledge. The country with more than 250 million people has only less than 40 million recorded bank account according to World Bank. The country stands at the top of  Asia Pacific in terms of unbanked population with three quarter of total population are still outside of conventional financial system.

At glance, these statistics looks bleak. But for entrepreneurs and startups, it means massive opportunity fintech. Indonesia is currently a fintech hotbed with more than 150 startups and record-high investment of USD 57 million in 42 deals by last year alone. Half of that deals went to lending and payment startups.

Picture of shallot sellers in Jogja, one of the many millions unbanked population in Indonesia. Photo by Andy Al Mesura on Unsplash

I work as a product and business development guy in a peer-to-peer lending startup. Our startup focus is to provide microlending to millions of unbanked and underbanked women entrepreneurs in Indonesia. In this post, i will share three challenges that i have to deal on a daily basis. The challenges will slightly skewed to lending business model but i try to make it relevant for other fintech as well.

Lets start!.

Assesing credit worthiness

Targeting unbanked population means serving people who doesnt have history in conventional financial system. This is a challenge for lending startup because they need to assess risk and repayment capabilites for each customer. Credit history is also major barrier for getting credit in Indonesia (only 12% of 60 million micro-SME could provide this according to KPMG). Eliminating this can be huge leverage for startups especially against old-school banks.

Alternative way to asses repayment capabilities is data aggregation. This method collect various non financial data such as mobile phone usage, social media, utilities bill. These data then used to build models for determining both ability and willingness to pay.  Ayannah, one of the leading fintech company in the Philipines, developed credit scoring engine based on electric bill payment. Partnering with electric utility company, Ayannah analyze historical payment data as a proxy for household revenue. Another company, Singapore-base Credo Lab, offer credit scoring solutions by extracting multiple data points from customer’s smartphone. Prospective lenders need to download their mobile app, the app will transfer multiple data points into Credolab servers then they will calculate the credit score

Credit scoring services,  Lenddo, combine both nonfinancial data and psychometric assesment

But how about when customer doesnt even have phones or utilities bill ? When its difficult to collect data, another way to do credit scoring is by doing psychometric evaluation. Pioneered by Entrepreneurial Finance Lab (EFL), this method use questionnaire to measure behavioural and psychological traits associated with willingness to repay. The test can be delivered face to face through manual form, back and forth using sms or using mobile apps.

BTPN, one of the Indonesian big bank, used this method for their sharia group-lending product which targeted unbankable micro entrepreneurs. BTPN partnered directly with EFL to asses credit worthiness of  hundred-thousand lenders across 600 branches in Indonesia.

More information on this topic : 

Managing cash operations

Serving unbankable populations means dealing with cash-heavy operations. Cash is still the number one payment method in Indonesia where non-cash only account for 10% of total (according to KPMG). In rural Indonesia, cash become the only choice due to the lack of financial infrastructure.

Dealing with cash can be a challenge both from logistics and risk perspective for startups. For example, last-mile payment services such as Kudo or Storeking collect huge amount of cash in each of their presence point. Within certain period, these cash will need to be regularly recorded, stored, transported and deposited to bank account. The bigger the cash amount, each of these steps are more prone to fraud and theft.

One way to reduce risk and simplify operations is to use pick up services. Several conventional bank offer service where they pick up cash, count it on site and deposit it to customer account. During transport, the cash will be insured and its included in the cost of service. Pick up period is usually agreed upon before hand and it can be every couple days or every working days.

The catch for using this, especially for startups, are the service require minimum amount of cash for every pick-up (varied between banks and contract negotiation). To make it cost-efficient, startup can aggregate collection from several points into one and the bank will collect from that one point only (hub and spoke model). For example, cash from every payment agents in one kecamatan (district) will be transported stored in branch office vault. The bank will then collect from branch office every 2 days. Risk will be only partially transfered to service provider but its still better than to do it end to end by yourself.

Almost all major banks offer cash pickup services. More about this service can be read here (All link is in Bahasa Indonesia):

Dealing with limited internet connectivity

Indonesia is a mobile first nation. There are more phones than people in the country and mobile data is the primary internet infrastructure due to poor cable internet availability. For fintech startup ( or even any tech company), mobile application is central for delivering services to customer or supporting day to day operations.

Serving unbanked population especially in rural areas has high risk of bad 3G or 4G coverage. Product managers have to consider this in mind when developing software to ensure business continuity and high service level.

One way to tackle this challenge is to leverage SMS. Using sms APIs such as Telerivet or Twilio, startup can develop services to reach even the most connectivity-challenged areas. For example, micro-lending company Kiva offer sms-based loan application process. With only a feature phone, prospective lender can fill forms and apply for loans without having to walk into nearest agents.

But what if the need of mobile apps is unavoidable? Offline-first design can be the solution. In offline-first paradigm, mobile apps is designed from the ground up to be working offline. Lack of connectivity is treated as a feature rather than an error. The app will also developed to be able to detect if there is available internet connection to do data synchronization.

Overview of offline first development. pic by

So lets say we have an Android app for field agent to register new user. While field agent go around canvassing the area, the app  is able to store data for many users offline. At the end of the day, they come back to the branch office with working wifi and the app will seamlessly upload all the new user data into the cloud.

The most popular implementation of this concept is progressive web application (PWA). PWA enable website to be available offline and treated as mobile apps. This concept has been evangelized by Google and currently gaining traction amongst web developer.

More about offline-first and PWA : 

Fintech startups in Indonesia are sitting on unbanked population gold mine. Extracting value from this potential however, wont be easy. Conventional bank such as BRI, which have the biggest asset and widest rural accessibility , still couldnt fully penetrate these segment.

Startups will have to constantly find smarter and more inclusive ways to capitalize these massive potential.

Thats all for this post. Do you agree with my essay ? do i miss something ? do you have any questions ? do drop comment here or you can also reach me in twitter. Thank you for reading!

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