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Sep 18, 2015

The Kejora Series: Fall 2016 Startup Trends Pt. 1

In our first story, we gave you an introduction about venture capitals and other investors that you can approach to get funding. In our second story, we guided you to the steps in approaching a potential investor through our checklist of materials you need to prepare and the guide to approach your potential investors. Ending the previous story, we briefly talk about the Investor Funding Trend. Just like fashion and lifestyle trends, investors also have funding trends for startups they are interested in funding. By knowing this trend you would be able to find out whether your startup is going with or against the funding trend. Our Kejora Fall 2016 Funding Trend Guide will help you determine how much effort you need to put into persuading your potential investor in order to fund your business.


Due to the length of the story, we intend to split the article into five parts for the five categories of startups that we believe Indonesian investors are looking to invest. In each part of the article, we will focus in the sub-categories of types of startups that is "hot" in that category and talk about what they are and how they work. We will also talk about how the startup is doing in the global market, why is there a market opportunity for that startup in Indonesia. Lastly, we will mention some International Startup that fits in the specific sub-category mentioned so that you can have a heads-start to work on in creating your case-study research.


The FinTech Startups



"Indonesia Versus Other Countries" by Tracxn


When looking at the graph above, we can see that our progress in microfinance is quite behind in comparison with the other countries considering the fact we started going into the microfinance industry earlier than the other countries mentioned. Directly pointing back to the graph, India situation is very similar with Indonesia, the country has a large population spread out to rural, financially-difficult to reach areas by the traditional financial institutions. Despite starting 70 years later than Indonesia, their microfinance industry manage to beat Indonesia's by 5.5%. This occurred because Indian investors believed in the microfinance industry and aggressively invested in India's microfinance industry. Now with the rise of interest in the technology industry in Indonesia, there's no doubt that Indonesia's microfinance industry can grow as big as India's, in fact we believe that there's a potential for Indonesian microfinance industry to grow even larger than India's.



"Fintech Investment Deals Statistics" by Life. SREDA Venture Capital


First in our Kejora Fall 2016 Funding Trend Guide is the Fintech category. There's no doubt that this isn't a secret for individuals who like to follow news from venture capitals and other investors. However, here are the two types of Fintech startups that we believe to be trending for the coming year: Online Lending Startups and Online Payment Startups (that can reach rural areas of Indonesia).


Online Lending Platform


So what are these financing startups we are talking about? These startups are businesses that service help the public by providing them with temporary loans services or by creating a marketplace that provides the lending services that they need. Online lending startups exist due to the fact that the most Indonesians tend to be limited in accessing the traditional methods of lending due to a less-than-perfect credit scoring and insufficient collateral. In addition, the rigid and expensive structure of the traditional lending services are too costly for most Indonesian.  Unfortunately, these online lending startups comes in many different approaches, structures and business model. To make it easier for us to explain these startups, we will break them to four different types of startup: direct lending, B2C and B2B lending, B2C and B2B Lending Marketplace and P2P Lending Marketplace.


Starting from direct lending startups, direct lending startups provides users with a platform with the approved lending licenses and take loans on their own books. These startups tend to be more independent when compared to their three counterparts mentioned. Direct lending startups have their own team of financing professionals and accounting specialist to manage everything in-house, from reviewing finance applications, run credit checks, and handling underwriting to handling approvals for their clients. This one-step process makes lending easier for clients as they would not have to deal with working with a third-party entity.


Unfortunately, simplicity comes with a price. It is usually more complex and expensive to build these kind of startups in Indonesia.  Firstly, the regulations of these types of startups are not clear yet in Indonesia. The' license to lend' is difficult to get as requirements are quite stringent. This leads us to the second disadvantage in building direct lending startups, which is the risks. Because direct lending startups are using their own funds to provide loans for their users, they are risking themselves to bigger hit in the case of loan default. However, vice versa, direct lending startups will get a higher return when their clients pay back their loan.


"Infographic Digital Investment Bank Lendico launches in South Africa" by African Business Review


B2C and B2B Lending Startups provide platforms that work together with a single lender for loan origination. Keep in mind that B2C and B2B lending startups are two completely different type of startups. B2B lending startups approaches businesses as their clients while as B2C lending startups are more commercial and approaches the general public. But due to their similarity in structure, we decided to group these two startups together. These type of startups are using working with one of the bigger banks in Indonesia like BCA or Mandiri. These type of startups appear in the market because banks are starting to notice the technological trend taking place global. Instead of competing with technological innovation, they collaborate with tech startups to expand their services outside the traditional method.


The benefits to building these types of startups is that you would have an authorized institution to support your business. In comparison with direct lending startups, the risk-bearer in regards to loan default would be your partnered bank or institution. In addition, due to connecting their business to an authorized institution, B2B and B2C lending startups tend to be less costly to build in comparison to direct lending startups. Another benefit of B2B and B2C lending startups is that their lending partner can guide the founder team in running their company. Looking at the disadvantage side of building a B2B and B2C lending startup is that due to relying on one single lender for loan origination, the business have to be somewhat dependent on the single lender. Decision-making will involve more parties and there will be more pressure for the founders to succeed. Again comparing these startups with direct lending startups, B2B and B2C lending startups will get less return when clients pay back their loan.


B2C and B2B Lending Marketplace Startups provide platforms that work with multiple lenders for loan origination. These lenders tend to include financial institutions and other accredited investors. Again due to the similar structure of the B2B and B2C Lending Marketplace, we decided to group these two types of startups together. B2B and B2C Lending Marketplace Startups can be more complex to build in comparison to B2B and B2C Lending Platforms as they work together with more agents for loan origination. The founder team can be more flexible in terms that their company functions, however at the same time they have to meet the criteria of multiple stakeholders. Decision-making will be made by the startup but with the interest of the lenders in the back of their minds.


One benefit that B2B and B2C Lending Marketplace startups have in comparison with direct lending startups and B2B and B2C lending startups is that they have more source of loan originations. Of course, with the cost of less return when clients pay back their loan hence they will have to focus in the quantity of user acquisitions to their platform.


"Marketplace Lending Model" by

Looking at the diagram above, Figure 1 clearly describes the business structure of direct lending startups. The lender/investor being the direct lending startup. Figure 2 on the other hand fits more closely to B2B and B2C Lending startups, B2B and B2C Marketplace Lending Startups and P2P Marketplace Lending Startups. The difference between the two is just the number of actors involved in the lender-side of the model. B2B and B2C lending startups tend to act as agents for one or two financial institution whilst as B2B, B2C and P2P Marketplace lending startups would have more actors as investors. Difference is that P2P Marketplace lending startups includes non-accredited investors in their platform.


P2P (Peer-to-peer) Lending Marketplace Startups provides the public with platforms that allow multiple lenders including non-accredited individual investors. In comparison to direct lending startups, these startups do not have to worry as much in the industry regulations because non-accredited individual investors are harder to regulate. These startups have to be more sensitive in their decision-making because they want to attract more lenders to join their platform. In the same time, they also have to attract even more users to their platform in comparison to the other mentioned lending startups mentioned previously.


Although P2P lending marketplace startups often have the most source of loan originations compared to the other types of lending platforms, they also have the lowest return when clients pay back their loan. Unfortunately due to accepting loan originations from non-accredited individual investors, P2P lending marketplace startups tend to be perceived as being a higher risk investment from accredited investors.


"P2P Lending Process" by PwC


"How Peer-to-peer Lending Works?" by BI Intelligence.


Why is it so alluring to Indonesian investors?

Globally, the trend in investing and creating online lending platforms have been accredit to various factors. These startups do not have to follow the reserve requirement regulations that traditional lenders (banks) have to follow. Secondly, these startups have a lower fixed and operating cost in comparison to their traditional counterparts. Some of these startups can customized their interest rates for their service, which makes it more attractive for investors and entrepreneurs due to the creation of a new type of market. Due to the flexible nature of business, these startups are very useful for quick loan processing and convenience for users.


"Total Funding and Number of Funding Rounds between 2005-2015 (YTD)" by Tracxn


According to the graph above, it shows that there has been over $95B has been invested in the sector for 645 funding rounds until 2015 in the global market. This graph signals that the interest in the global online lending service industry is quite high. Based on the graph above, we can't exactly state whether the trend is at it's peak or beginning to decline. We know however that the trend in Indonesia is still at its initial stage as there are less than 10 startups in the online lending service industry.


SMEs are the backbone of the Indonesia's economy. With 57.9% of the country's GDP coming from SMEs and 97.2% of the population being employed by SMEs, it is very important that they have the financial help that they need. Unfortunately, most of the SME business owners does not qualify to get loan from the traditional financial institution hence limiting them from being able to run with their best potential and growing. By introducing online alternative lending startups, these SME owners can grow their companies further because now they can borrow money to invest in their company. If these SMEs grow, then the Indonesian economy will grow. In return, the online alternative lending startups and their investors can get more return. Overall, there will be an upwards cycle of growth when investing in this industry.


When looking at online lending startups from a commercial point of view, with more than 51% of the Indonesian population being under the age of 29 years old, most of these Indonesians are not qualified to lend from traditional financial institutions due to their lack of credit history. Unfortunately, these Indonesians are at the age where they need the most money to invest in their personal growth. They would need these loans to invest in their education, invest in their future and slowly becoming shifting away from their dependence to their parents.


The following list contains some lending startups from outside Indonesia. We encourage you to do case-studies of these companies if you are interested in creating or already have created a startup in the online lending industry. By doing a case-study of foreign startups in the related field, you can find new insights and solutions to current problems or concerns. In the case that you would like to get Series C or above Funding and attempt for global scaling, it will be more crucial that you have done your research about your competition in the global market.


"Alternative Lending Report Dec 2015" by Tracxn


Digital Payment Services for Rural Areas

Indonesia have a huge potential for economic growth, however to due its status as developing country we still have many rural areas that traditional financial institutions cannot cover. One of Indonesia's biggest barrier to economic growth has been the limitation in bring our financial institution to the rural parts of the country. Unfortunately, there is still a huge portion of Indonesia population still living in these rural areas.


With the introduction of technological innovation, we believe that we have the potential to solve this problem by creating a digital payment startup that specializes in the financial services for rural areas. Not only will this create a new market, it will also integrate the Indonesian economy better and improve the quality of life for these Indonesians living in the rural areas.


By introducing technology innovation and online payment services to the rural areas of Indonesia, alot of the payment and financial problems in infrastructure can be solved. But the challenge is to find an effective way to educate the public about fintech and digital payment startups.


There are many different types of digital payment startups that provide online payment service to users. However, we will keep it simple by introducing five different types of online payment startup model: net banking, mobile banking, e-cash (or e-money), e-wallet and smart cards.


"Banking in the Digital World" by A. T. Kearney Analysis


Net Banking also known as Internet Banking allows any user with a personal computer and a browser to get connected to his or her bank account to perform any of the virtual banking function that is electronically-possible to do. This type of startup allow their users to be able to satisfy their banking needs without having to visit their bank. The following diagram shows the behind-the-scenes workings of the internet banking.


"Internet Banking" by Calvin D. Johnson (Electronic Commerce & Online Financial Services Consultant)


Mobile Banking allows any users with a mobile phone and phone credits to get connected to his or her bank account to perform any of the virtual banking function that is electronically-possible to do. This type of startup allow their users to satisfy their banking needs in any location through their mobile or table devices.


"Evolving Online, Mobile and Tablet Banking Opportunities" by Mercator Advisory Group


In Indonesia, we can see the opportunity in Internet and mobile banking to improve financial institution of the rural areas. With 85% of the adult population owning a mobile phone, we can see that mobile banking is a great financial alternative for the rural parts of Indonesia. The challenge is educating the rural population in switching from using cash to using mobile banking. Internet banking is also plausible in the future as internet coverage throughout Indonesia needs to be improved before we can convince the rural population to use internet banking. In conclusion, we believe that mobile banking industry is a great investment for the near future to service the rural population.


E-Cash (E-money) is used over the Internet, email, or personal computer to other workstations in the form of secured payments of "cash" that is virtually untraceable to the user. Using real currency from real banks, e-cash works similarly to electronic fund transfers. The following diagram shows the steps process of how e-money works.


"Digital Cash Model" by UC Berkeley Edu


E-cash is also a great alternative for rural Indonesia in comparison to cash. Especially for individuals or SME owners without bank accounts. They can easily do their financial transactions without having to travel long distance and hours to get to their nearest city. Unfortunately, due to the lack in internet coverage is several rural locations in Indonesia, companies would have to set up workstations in the rural locations. Without these workstations, it would be very difficult for companies to get the rural population to use e-cash transactions.


E-wallet refers to an electronic platform that allows a user to make electronic commerce transactions. By linking an individual's bank account to the e-wallet, individuals can purchase items online and in traditional stored with a computer or a smartphone. Individuals can also have their driver's license, health card, loyalty card(s) and other ID documents stored on the individuals' smartphone to help merchants in identification purposes. E-wallets can be an alternative to Debit card and cash for those individuals that find carrying a wallet around is troublesome.


"Type of Digital Wallet" by Mint Research


There are three types of e-wallet: closed, semi-closed and open, and these three types of e-wallet determines what type of access the user has to the e-wallet. These three different e-wallet types differs based on the limitations of the access to the account.



"Converging Services" by Mint Research


Another alternative that can help the rural population of Indonesia is E-wallet. If the rural population switched from using cash to using e-wallet, financial transactions would be more simpler for them. They can pay their bills from their homes through internet or SMS. In addition, it allows the rural population to make online purchases to stores that are further away from their area, allowing them to have more access to a wider range of goods and services. From a commerce point of view, business owners from rural areas can conduct commerce to a larger customer base that was previously restricted due to financial barriers.


Smart Cards are devices that includes an embedded integrated circuit that can be either a secure micro-controller or an equivalent intelligence with internal memory or memory chip. The smart card is used by connecting it to a reader through direct physical contact or remote contactless radio frequency interface. The embedded micro-controller allows smart cards to have the unique ability to store large amounts of data and carry out their own on-card functions. When using it for payments purposes, it can be used as an alternative to cash and debit cards.


"Fare Payment System" by MetroPlus Card


The above diagram shows an example of how smart card payments works for transport payments in other countries from the back-end perspective. The front-end system is more simple for users, they simply buy the card and store balance into the card using the ticket machine or counter and the smart card will be ready to use. You just have to tap the card to the card reader at the entrance of the transport gate.


Other uses for smart cards includes services for e-tickets, e-government services, Cash advance payments, Electronic toll collection, loyalty program, entertainment passes, and many more. Not just limited to rural areas, smart cards can be very useful for small, daily transactions.


Keep in mind that there are still so many things we can update with the business models mentioned. With more technology advancement and other types of innovation, we believe the global market for the online payment industry for servicing rural areas can grow tremendously. We believe that with a successful model, the online payment industry will become a game-changer in the Indonesian economy.


Why is it so alluring to Indonesian investors?


"Indonesian Unbanked Population" by Mountain Kejora Ventures


Our team found that in 2013, about 60% of entire Indonesian bankable population did not have a bank account. We predicted that in 2020, this bankable unbanked will grow to approximately 113 million individuals. This is a huge market in need of digital banking startups, they just don't know it yet. However, once the service is ready and the public have agreed to adopt it, the return for investors will be enormous.


By introducing digital banking startups, we can slowly turn Indonesia from being cash-dependent to a cashless society. With this change in financial habit, the Indonesia economy can flourish as financial and commercial infrastructure of the Indonesian economy improve. In addition, with this transition to digital banking, more businesses in the rural areas can grow as they can now provide goods and services across the country due to the increase in customer-base. In addition, with the improvement in financial infrastructure, the improvement of other areas such as transportation, economic and other types of infrastructure will follow right after.


Because creating a successful business model for online payment gateway for the rural population of Indonesia is still a challenge for Indonesia, we have no choice but to look overseas to find references for building our business model. The following companies are some companies that we believe are quite successful in solving their country's rural population financial needs.


"Digital Banking Market Map" by CB Insights


"Digital Banking Market Map" by CB Insights


Find Out What's the Second Trending Startup Category for Indonesian Investors!


In this article we have talked about the top three fintech startup trend we believe will be trending in the coming year. We explained the startup and how it works. We talked about how it is doing in the global market and how it has great growth potential in Indonesia. We also mentioned a couple foreign startups that can be used as case-studies in order to learn more about the startup business model and the industry. We do realize that the fintech and the tech industry is quite an intriguing and complex industry, and that it will require more time and information in order to understand it. One article is definitely not enough to cover even the basics of the industry. Therefore, we would like to encourage you to join more of our events and follow our blog as we go into the details in our future Kejora Series. You can also contact us on if you have specific questions about our article.


Following the Fintech category, we have the E-commerce and Logistic category second in our Fall 2016 Kejora Funding Trend List. Read next week's article to find out more about the types of companies that we are looking for in this category and why we believe that it will be the Next Big Thing for this coming year.

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