This is series of study case analysis that i like to write from time to time. I am a big fan of Ben Thompson’s Stratechery and these essays are inspired by Ben’s work. Check out my last post on LinkAja.
On second week of April, Dealstreetasia broke the news that Indonesian payment wallet provider OVO has acquired online mutual fund startups, Bareksa, for 20 mio USD. This news came just merely a month after OVO acquisition of P2P Platform Taralite. Taralite acquisition has enabled OVO to offer credit-card-like Paylater which at the moment only available in Tokopedia. Bareksa on the other was used to power OVO Invest feature which can be accessed after user do advanced KYC by submitting their E-KTP.
As a country with massive unbanked population and asymmetric banking industry , Indonesia is a lucrative ground for fintech. These recent developments is a clear attempt to expand into wider financial services and having Lippo and Grab as their backer, OVO have ample warchest to start landgrab in multiple fronts.
In this essay, i will share my analysis on rationale, challenge and predictions on OVO next step in Indonesia financial industry.
Massive Yet Vulnerable Grounds On Wallet
Electronic wallet market has been growing significantly last year. Total transaction value in 2017 to 2018 rose up from 12 to 47 trillion IDR. With its increasing presence in Indonesian modern merchants, E-Wallet has become convenient cashless payment options. This function is traditionally filled by credit cards in other developed countries but in Indonesia less than 7% of population have access to it. Wallet providers also start to penetrate into traditional market which makes it even more ubiquitous than conventional credit cards.
For more data on Indonesia wallet market space, check out my previous articles on LinkAja
Despite massive growth last year, there are two challenges in the current wallet space which OVO and other wallet operator have to face:
- Transaction Amount is Still Small
- High Acquisition Cost with Low Switching Barrier
Main revenue model for digital wallet like OVO is taking percentage commission from each transaction. Based on Bank Indonesia statistics on payment system, average amount per transaction of electronic money still around 23 thousand rupiah. If OVO charged 1 to 3 percent, this is still minuscule meanwhile they have fixed cost to pay for each transaction served. The whole industry is new hence people still use wallet in a small amount transaction such as paying meals. To boost revenue and reach profitability, OVO has to incentivise user to increase their transaction amount in higher value purchase.
One of the reasons why last year digital wallet users spiked so much is because OVO and other wallet operator fueled their growth through cashback wars. Cashback sometimes can be up to 60%. The problem is, with such steep acquisition cost, there are no strong benefits to keep using one wallet over another apart from some loyalty points. User can easily make multiple wallets and just top up whoever has better cashback deals that day.
Lending to Boost Revenue
Main reason for OVO to offer lending is to move into higher transaction amount. They did this by acquiring P2P lending Taralite. By offering lending and installment services, OVO can slowly nudge users to spend more without asking big commitment upfront. Lending also provide additional revenue for OVO in shape of interest fee.
OVO Paylater launched first exclusively in Tokopedia last February. As follow-up, Paylater also available in their own app and can be used in more than 20 thousand merchants. The mechanism is similar like credit card with fixed 30 day cycle, fixed deadline and minimum payment mechanism. With both installment and payment mechanism already in place, OVO just need to launch physical card to offer full-fledged credit card experience.
Since they acquired Taralite, OVO can pursue other potential lending products such as :
- Financing for OVO merchant
- Tiered credit-lines based on usage for OVO users
- Cash loan
One of the low-hanging fruits is to offer loans for merchants. OVO as payment system store historical transaction of each merchant payments. This can be used as income proxy for credit scoring. By offering credit lines, OVO can incentivise merchants to advocate their usage over other wallet. Similar mechanism can be used for end-user as well. Credit lines for Paylater can be increased based on their usage or similar to credit limit in an conventional credit card. Other riskier options will be cash loan. High usage OVO users can be offered cash loans facilities which can be transferred through bank account.
Investment for Stickiness
After Taralite, OVO also reported to have acquired leading mutual fund marketplace Bareksa. Bareksa have mutual fund agent license and currently carries 192 mutual funds product on their marketplace.
Whats the play behind this move ? its stickiness. I mentioned above that OVO has burnt a lot of cashback money to get users on board. Since every other operator are doing the same , OVO need ways to make users stick to increase their lifetime value. Getting users to invest might be a good way to tie them down. Mutual fund is also good investment instrument because it can be purchased as low as 10 thousand IDR per unit, align with 23k industry average of amount per transaction.
Investment is also huge untapped market in Indonesia. Registered investor ID, a mandatory requirement to invest in Indonesia capital market, as per March 2019 is still less than 2 million. Half of that number are contributed by mutual fund (reksadana). In the nation of 250 million that is less than one percent. Whats interesting is year on year growth on the number of mutual fund investors 2017 to 2018 is 50%, from 600 to 1 million. Out of 300 thousands new investor, 210 is millenial investors. Driven by fintech trends, investment market are growing double digit with younger population.
Millenial and fintech are exactly what OVO is. Going forward, investment not only can solve OVO stickiness problem but it can also become their lucrative playing field.
Right now, OVO invest feature only provide one mutual fund product with minimum order as low as 10 thousand IDR. This feature only available for users who already do advanced KYCs in the app.
Savings for Profitability
According to Global Fintech Trends report by CB Insights, majority of fintech who expand from single to multi-services in 2019, most of them branched out into savings and deposit. By offering saving features with interest, fintech can incentivise user to store funds with bigger value and longer period.
I believe this a logical step that OVO should do in order to drive revenue per users. Having bigger average funds will make it easier for OVO to develop new financial services down the road because the experience will be seamless. Savings also open new revenue stream with interest income. Furthermore if OVO can channel user savings through Taralite P2P system, they can also get lower cost-of-fund for their Lending features. Seems like savings the key for OVO to achieve overall profitability.
To offer savings, OVO need bank license but they can circumvent this by doing integration with banks. Right now they are heavily supported by Bank Nobu which also part of LippoGroup. With this asset at hand, OVO can seamlessly make their balance transferable to Nobu savings with better interest as carrot. Going forward, with OVO having bigger user base and better brand equity, its not possible that OVO will takeover bank Nobu to get full bank license.
Insurance for Nice Cherry on Top
Albert Lucius, OVO Chief of Product, has stated that insurance is one of the services that OVO plan to venture. The opportunity for this i think is in selling specific and micro insurance which still align with average transaction value. For example device and travel insurance ranging from 50 to 100k IDR. Slightly on higher value is motorcycle insurance which generally come at 150 to 300k IDR price. Health insurance might be hard due to 81 coverage of BPKS Kesehatan.
Value proposition which OVO can offer is convenient access inside their app from selecting, purchasing and also claim management. Fastest way to do this is by collaborate with insurance aggregator such as Cermati, Qoala or PasarPolis. Ovo then can charge leads fee for every sales happening at their platform.
In my opinion, Insurance have lesser strategic value to OVO compared to other financial services. Insurance can be valuable to give stickiness similar to investment. Leads fee from insurance sales can also be additional revenue source but amount might be small. However, by providing insurance on top of other financial services, OVO can claim that they offer one-stop digital financial services platform.
The utopia of majority of fintech apps is to capture the whole financial aspect of their users. Companies or startup might start from one financial services while slowly expanding into other services as they grow. OVO as a prominent digital wallet operator has started their second act towards this goal by doing multiple acquisitions. By having multiple financial product will give OVO not only diversified revenue source but also a bigger share of their users income.
Their conquest however wont be without enemies. Gopay as their competitor have already Findaya as their lending portfolio under Gojek. Gojek also have asset in insurance through their investment in PasarPolis. With these portfolio at hand, Gopay can engage OVO in whichever financial services they choose to expand.
And finally, another potential roadblock for OVO ambitions is regulatory. As digital wallet, OVO is being regulated by Bank Indonesia. However other financial services such as Lending, Investment and Insurance falls within responsibility of OJK. Dancing with these two big regulatory bodies might cost OVO significant effort and focus.