MSMEs Battle Royale - The New Champions of Indonesia's Tech Startups

MACRO OVERVIEW

It has become quite apparent that new unicorns in the next few years in Indonesia will come from fintech and logistics – two industries that are adjacent to the first wave that is consumer internet. However, the second wave will ride on a segment that has long been untapped and underserved by incumbent players: MSMEs & the unbanked.

In the last 2 years, VCs are pouring capital to lead the race into creating financial profiles of the 181.5 million unbanked population in Indonesia. Even more, out of the 60 million MSMEs in Indonesia, only 9% of them have adopted technology. There are several different approaches to winning the MSMEs market in Indonesia, which includes bookkeeping app, inventory & supply chain management, and agent-driven digital banking products.

The one that recently caught fire was bookkeeping app. For instance, BukuWarung, BukuKas, and Credibook have all amassed $146 Million in equity financing. While the likes of Fazz Financial Group (Payfazz) and Finaccel (Kredivo) are also diversifying their services towards providing this service. Payfazz did so by doing strategic investments – they led the seed round of Credibook along with Insignia Venture Partners while investing in Xfers earlier this year to launch Fazz Financial Group.

At the other part of the spectrum, the likes of Ula, Warung Pintar, Super, and GudangAda (raised $100 Million Series B as this is written) going the routes of B2B consumer goods. There are also Finaccel (Kredivo), Amartha, and Funding Societies (Modalku) who go the route of productive & personal loan. While major ecommerce Bukalapak (Mitra Bukalapak) and Tokopedia (Mitra Tokopedia) have their own initiatives to tap into this huge market potential.

However, all of the players have a similar end game business model: provide value added services, digitize & capture transactional data, create credit/financial profile of users, and offer financial products to the underbanked.

At the end of the day, just like how the competition of ecommerce eventually diversifies into similar products, so does the competition for Indonesia’s underbanked population. The key to winning this battle is in ecosystem building and product diversification.

ECOSYSTEM BUILDING & STRATEGIC INVESTMENTS

PayFazz, of course, was one of the pioneers who tapped into this segment. Started in 2016, it started with an offline to online approach to banking products via agents in rural areas which proves to still be the flagship product until today.

Last year, PayFazz has raised $82 Million in a Series B round led by Insignia Ventures Partners & B Capital with a post money valuation of $214 Million. It has also processed $2 Billion in annualized GTV, while empowering 500k agents who are serving 50 million unbanked population.

Assuming 20% MAU ratio, that means each agent would have processed $20,000 in banking transaction per year while serving on average 100 users per agent. Assuming a 5% commission model with agents, an agent could potentially generate at least IDR 1.2 – 1.5 Million per month from being a Payfazz agent alone. That is around 35% of the highest minimum wage in Indonesia.

On top of that, Payfazz is ahead of its competition in building a financial inclusion ecosystem. Through smart strategic investment, they are building an end-to-end financial supermarket for MSMEs. From POS, bookkeeping (Credibook), P2P lending (ModalRakyat), and bill aggregator (Billfazz). Moreover, their strategic investment in payment gateway startup Xfers earlier this year kicked off the formation of Fazz Financial Group.

Aside from Payfazz, Finaccel (Kredivo) is another one who’s ahead of the curve in building their own ecosystem of financial supermarket through consumptive loan (Kredivo & Kredifazz) and bookkeeping app Halokas.

WHERE IT WILL BE WON AND LOST

All the players above are well funded – Finaccel & Payfazz raised a total of $226 Million, the bookkeeping apps accumulated $146 Million, while Ula, GudangAda, and WarungPintar raised $206 Million. So size of prize is the main focus while feasibility of strategy is not of the essence with huge budgets to be spent.

Keeping in mind the macro trend of product diversification and ecosystem building where the endgame model is creating a financial supermarket for the underbanked, here are some potential strategy that befit the mold of that roadmap:

• Quick Wins

All the players above have millions of users at their disposal already. To move ahead of the curve, the general theme is to start monetizing through the most lucrative financial product that is loan. A strategic partnership approach can help any of the players to launch quickly and then look at the adoption data for future iteration and prioritization.

• Strategic Investments

While strategic investment has proven to strengthen the position of Fazz Financial Group and Finaccel’s position in the market, it takes a lot of time and resources. More strategic investment can be expected in the next few years to startups who are tackling other parts of the unbanked. The key is finding use cases for future financial products.

• Regional Expansion

Countries across SEA have similar problems to Indonesia in terms of financial inclusion, although the strategy and localization has to be right

Overall, MSME is an exciting space to be in. They are the people who are neglected by the majority of incumbent players that are banks. The fact that these segments are driving the growth and attracting huge amount of capital from investors is a reflection of what makes SEA and Indonesia unique as a region. Our economies are driven by local heroes on the ground.