Aisha Agustina is a cook who runs an online catering business from home and handles dozens of orders every day. Agustina doesn’t want to use credit cards due to the risk of incurring debt and increased interest rates. However, sometimes the business requires unexpected expenses that make instant loans become necessary. And that’s how she came across the PayLater service.
Given that her catering business relies on deliveries, Agustina said that the PayLater feature on the Gojek and Grab platforms is very helpful. “I always avoid shopping with installments but sometimes there are unexpected needs and PayLater comes in handy when I have to buy ingredients or fulfill catering orders via ride-hailing services,” said Agustina.
Sara Mandagie, a PR executive who often goes on business trips to various cities and countries, shares a similar view. She is an active user of the PayLater features in Gopay and Traveloka as they help her track monthly expenses. “Usually for Gojek transactions, I pay everything with PayLater so I can control my expenditure each month. As for Traveloka, this makes it easier when I have to go on sudden business trips so it does not interfere with my monthly cash flow, ” Mandagie told KrASIA.
Both Agustina and Mandagie are middle-class millennials based in Jakarta. Although they are not interested in taking quick loans from peer-to-peer lending platforms, they find the PayLater feature imperative to support their daily needs.
As the name suggests, PayLater is a new payment feature that facilitates customers with credit within a certain limit, allowing them to shop or make transactions now, and make repayments over time. According to Daily Social’s fintech report 2019, PayLater is the third most popular fintech product in Indonesia, with 56.7% of 787 respondents aware of the feature. The report was based on a nationwide survey encompassing responses from 1500 people nationwide. This report was conducted by DSResearch and supported by BRI & BRI Ventures.
The PayLater service is similar to a credit card but usually with a lower credit limit. Kredivo is a pioneer in this digital credit card segment. It was launched in 2016, and it arrived at the right time as limited access to credit is still a problem for many young people in the country.
Today, nearly all the big mobile wallet and e-commerce providers have this feature on their platforms. According to the report, Ovo is the most-used app for the PayLater feature, followed by Gojek’s fintech arm Gopay, Shopee PayLater, and Traveloka PayLater. Ant Financial-backed e-wallet Dana also quietly introduced its PayLater feature recently in collaboration with multi-financial platform Akulaku, while state-owned platform LinkAja is also testing this feature in partnership with Kredivo.
Will mobile wallets replace credit cards in Indonesia?
With about 52% of the Indonesian population still unbanked, owning a credit card is a luxury in Indonesia. The credit card is a desirable product among the middle class and professionals due to its convenience, however it is not always easy to apply for one. You’ll need to fill up long forms and sometimes provide salary slips to prove your financial ability.
According to JP Morgan’s 2019 Global Payments Trends Report, credit card penetration is very low in Indonesia, at just 0.07 credit cards per capita. Moreover, the Indonesian Credit Card Association recorded that the number of credit cards in circulation as of September 2019 was 17.3 million, an increase of only 1.3% from the previous year’s 17.2 million. Meanwhile, the number of transactions as of September 2019 was 250 million, down by 32% from 330 million in 2018. Compared to 2017, the volume of credit card transactions in 2018 only rose 3.4% from 319 million previously, while the number of credit cards remained stagnant at 17.2 million, which shows that the growth and frequency of credit card usage has begun to slow down in Indonesia.
On the contrary, electronic wallet usage has grown rapidly in the past two years. According to data from Bank Indonesia, the transaction volume by the end of 2018 surged by 209.8% to 2.9 billion transactions compared to 2017 which amounted to 943.3 million transactions. Until July 2019, the transaction volume of e-wallets had reached 2.7 billion. These figures signify the high demand and interest by Indonesians in adopting digital payment platforms, thus tearing down financial inclusion barriers.
Although there is no publicly available data on PayLater transactions, this feature seems set to become more and more popular this year, considering that fintech and e-commerce providers are competing to tap into this segment.
“The percentage of Indonesian banking consumers that are digitally active has grown 2.5 times since 2014, and they now comprise 32% of the banked population. Along with credit cards or bank loans, PayLater could further support the country’s lending system by providing more accessible and seamless digital loans to Indonesians,” Ovo’s managing director Harianto Gunawan toldKrASIA.
“Thus, the presence of Ovo PayLater will support the acceleration and growth of the country’s financial inclusion, alongside the government’s financial institutions, as well as local banks. Whether they decide to lend via credit card or digital payment platforms, depends on user needs, ” he continued.
Ovo PayLater was launched in May 2019 and this feature is also on Grab’s regional roadmap, Grab’s head of financial services told KrASIA in a recent interview. Ovo has also claimed that it has more active users than credit card companies do in Indonesia today.
User like the PayLater feature due to its flexibility, smaller installments, and affordable interest rates. To activate the PayLater service in a mobile payment platform, you need to upgrade to the premium service and fill out some data requirements and pictures with an ID card, but it only takes up to 24 hours. This is far more convenient than conventional credit cards, hence its rising popularity, especially among millennials.
Indonesian travel unicorn Traveloka was the first non-fintech platform to introduce this service, and the number of its PayLater transactions has increased fivefold since it was first launched in June 2018.
“The feature is very beneficial, especially when it comes to travel planning. Not only can users purchase plane and train tickets, and accommodation, they can also order products for their lifestyle and entertainment needs at Traveloka Xperience and Traveloka Eats,” Alvin Kumarga, senior vice president of financial products at Traveloka told KrASIA.
The growth of Traveloka PayLater’s users has increased more than ten times since the service was first introduced, therefore the firm is being optimistic that this feature will continue to grow and can become one of the alternative payment solutions that makes transactions easy for users.
According to Joshua Agusta, director of Mandiri Capital Indonesia, PayLater might even eventually overtake credit cards, in line with the strengthening consumption trends of Indonesia’s rising middle class.
“Indonesia’s economic growth is driven by consumption. Generally, fintech that focuses on consumptive services grows faster than its peers that play in the product segment. It is all about consumption and people’s purchasing power, and as PayLater facilitates these factors, I think it will grow even faster next year,” he said.
Conventional banks are not threatened…yet
With the fast growth of mobile payments among the large unbanked population, we will likely see digital and mobile-centric payment platforms leapfrog credit cards in Indonesia like what happened in China. Credit card usage for online transactions in China is lower than e-wallets, especially because American companies such as Visa and Mastercard cannot enter the country. Chinese consumers then went directly from paying with cash to using mobile payments like WeChat Pay and Alipay, skipping widespread credit card adoption in the process.
Responding to this phenomenon, conventional banks are not too worried about competition with fintech players, in fact, the presence of fintech and its innovations has encouraged banks to improve their services.
For instance, local media has reported that Bank BNI is in discussions with the central bank (BI) on how to simplify credit card applications, as it recognizes that the impractical process is an obstacle to credit card growth. As a result, BI has approved the digital signature feature for credit card applications with BNI next year, meaning that customers can apply for their card online.
Collaborations with fintech players could be another way to help banks reach a wider user segment. Take BRI for instance. In September, BRI teamed up with Traveloka to launch a PayLater Card, which can be used in Indonesia and around the world for both online and offline transactions by leveraging the network of global payments company Visa.
Visa is also reportedly in discussion with Gojek to bring new installment payment capabilities to reach more customers. Visa is one of Gojek’s investors.
Indonesian e-commerce Bukalapak also recently collaborated with fintech marketplace Cermati for an online credit card service. Powered by Cermati, Bukalapak users will be able to choose a credit card from various banks including BRI, Bank Mega, and Citi. The admission process takes up to three days, and users will be contacted via phone or e-mail by the Bukalapak team to confirm their application.
The PayLater feature is actually not a direct competitor to credit cards as it has different segments and ticket sizes. While PayLater is very beneficial, especially for those without bank accounts, the banked population will likely keep their existing cards for the next few years. Using a credit card is still a good way to build a solid credit history and is important for making big purchases when money is tight. Moreover, it is essential for those who travel often as major hotels require a credit or debit card to book a room.
However, with the rapid development of fintech and its innovations, it wouldn’t be a surprise to see PayLater players upgrading features and adding various limit options, similar to conventional credit cards. Therefore, banks still have the mammoth task of continuing to maintain and develop credit card services in order to compete with mobile wallets.