Will pay later services overtake credit cards in Indonesia?

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, the business sometimes requires unexpected expenses that make instant loans necessary. That’s how she came across the pay later service.

Photo credit: Mohamad Trilaksono

Given that her catering business relies on deliveries, Agustina said that the pay later feature on the Gojek and Grab platforms is very helpful. “I always avoid shopping with installments but sometimes there are unexpected needs and pay later 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 pay later feature 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 pay later 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 1,500 people nationwide. This report was conducted by DSResearch and supported by BRI and BRI Ventures.

The pay later 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 fintech and ecommerce providers have this feature on their platforms. According to the report, Ovo is the most used app for the pay later 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 have begun to slow down in Indonesia.

On the contrary, e-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 of Indonesians in adopting digital payment platforms, thus tearing down financial inclusion barriers.

Although there is no publicly available data on pay later transactions, this feature seems set to become more and more popular this year, considering that fintech and ecommerce 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 told KrAsia.

Conventional banks are not threatened…yet