This study aims to explore the growth of financial technology (fintech) and its impact on the ability of small businesses to access funding in Indonesia with reference to peer-to-peer (P2P) lending. It adopted a case study methodology using a semistructured interview and a series of focus group discussions (FGDs) with 10 owners of small businesses and 30 owners or managers of peer-to-peer (P2P) lending companies. Two important findings were (1) the sampled small businesses benefited from P2P lending and (2) banks are the most important investor in P2P lending companies. However, this study has its limitations. First, the sample was too small to generalize to a broader population. Second, there is no national data on credit to small businesses from P2P lending to support the findings of the case. To the authors' knowledge, this is the first study on this topic, specifically in Indonesia. It takes stock of the empirical evidence in the literature through the lens of small business owners.
TopIntroduction
Now in the digital area, banks are making more non-face-to-face financial transactions. Twenty years ago, the organizations in the business ecosystem were banks and/or lenders, consumers and/or companies, e-commerce merchants, or credit reporting agencies; and the ecosystem of business funding was not so complex. But today, the ecosystem is changing. There are more organizations involved in the ecosystem and information from social media becomes more important. In Indonesia, the appearance of financial technology (fintech) based companies that have been grown rapidly since the past few years has made the business funding ecosystem in the country also more complex.
Fintech is an innovation in the financial services industry that utilizes the use of technology. Fintech products are usually in the form of a system built to carry out specific financial transaction mechanisms, including payments, funding or lending, banking (digital banking), capital market, insurance, supporting services, and many others.
According to a fintech global market report issued in 2020 by the Business Research Company, the global fintech market was valued at about $127.66 billion in 2018, and is expected to grow to $309.98 billion at an annual growth rate of 24.8% through 2022, with the United Kingdom (UK) as one of the most advanced fintech markets. Growth in the digital payments sector is driving the market for global fintech, and the growth in the digital commerce market and proliferation of mobile technology has contributed to the growth of the digital payments sector. For instance, companies such as Square and Stripe provide portable Point-of-Sale (POS) systems which can instantly read and process touchless payments like Apple Pay, along with credit cards. The report states that as an increasing number of businesses are adopting digital payment systems, the demand for fintech solutions is increasing and driving the growth of the market. The main players in the arena of fintech are government entities, which can range widely from regulators, central banks, sovereign wealth funds, and all the authorities that grant licenses and can actively influence the financial sector; traditional financial services firms; fintech companies that provide financial services alongside their core products like Uber and Amazon which have dedicated internal teams of engineers and experts making a strong push toward increasing their presence in the sector; companies that provide technology for financial [transactions such as Bloomberg, Thomson Reuters, American Express, Visa, etc; professional/individual investors; and new, disruptive companies operating in several different sectors (BRC, 2020).
Among fintech-based products, peer-to-peer (P2P) lending is the most popular and also important for funding micro and small enterprises (MSEs) that have difficulty accessing bank credit without collateral or financial records. Banks often consider these businesses as less profitable. P2P lending is one of the innovations in the financial services sector with the use of technology that enables lenders and loan recipients to conduct loan lending transactions without having to meet in person. The lending and borrowing transaction mechanism are carried out through an online system that has been provided by P2P lending provider, both through the application and on the website page. P2P lending only acts as a meeting mediator lenders and loan recipients. Lenders and loan recipients must first register and fill out the required personal data before can apply for loans or loan applications. P2P lending is different from fintech. Fintech is general and is not limited to one particular financial services industry. Whereas P2P lending is limited to financial service innovation in lending and borrowing transactions only. Hence, given the widely discussed failure of banks or other formal sources of funds in providing adequate loans to small businesses, the emergence of P2P fintech-based lending offers significant opportunities.
According to a recent report entitled Peer-to-peer Lending - Global Market Trajectory & Analytics, issued by Research and Markets in 2020, the global peer to peer (P2P) lending market grew at a compound annual growth rate of around 25% during 2014-2019. Increasing digitization in the banking industry is one of the key factors driving the growth of the market. Furthermore, the emergence of small businesses, especially in developing countries, is stimulating the market growth. These small businesses require financing alternatives with no collateral, minimal charging fees and convenient repayment options. Apart from this, as stated in the report, P2P lending platforms also eliminate the cost of establishing physical branches, staffing and maintenance, thereby gaining preference among the masses (RM, 2020a).