‘Edfintech’ in Indonesia: the billion-dollar opportunity

Previously, Tech in Asia highlighted why Indonesia was an attractive market for education-focused fintech players, introducing the major startups, stakeholders, and issues.

Here, we explore how investors think about this space and how it is likely to develop.

The market size for edfintech platforms is the product of the number of students, the average loan size, and the platform’s margin.

The Indonesian market could potentially exceed US$1 billion, but this hinges on growing student enrolment rates. Note that the figures below provide a range with respect to tertiary student loans only. The market size will increase if you account for loans to K12 students, to students purchasing learning support products, and to education institutions.

Annual school fees typically cost between US$3,000 to US$5,000, while a platform is able to make a margin of between 1% to 1.5% from each loan.

In the long run, the biggest players will have the advantage

Costs incurred by edfintech platforms can be divided into two buckets, operational and credit.

The former comprises mostly salary and development expenses, followed by sales and marketing, which might be proportionally lower compared to startups in other sectors. Mark Hew, investment analyst at social impact fund Garden Impact, attributes this to the fact that “the channels are very focused…all you need to do is target the institution.”

Credit costs comprise the lenders’ costs of funds, or the rate of return that lenders on the platform expect to receive.

These costs generally drop as the platform scales. Dondi Hananto, partner at venture capital firm Patamar Capital, illustrates how this works. “You may need 50 people now to set up your business and disburse a couple of million dollars a year. But what we hope is that even if you disburse a lot more in the future, your operational costs don’t need to grow in line, so that as a percentage it goes lower.”

This also applies to the costs of funds. “Once you get to attract lenders and they are happy with your performance, they can reduce the interest charged to you. So the net interest margin usually gets better over time because then you can pay less to your lenders.”

Loan performance depends on the extent of credit losses – “the biggest unknown right now,” as Hananto puts it. “You can only have a working credit model after you actually collect data on repayments,” he adds. As the industry is still new and education loan tenures tend to be longer, there is still uncertainty around this.

What it takes

Do good and do well

Educating the market is crucial

Future tense