The Double-Edged Sword of Fintech Lending

May 30, 2022 10:46 pm || By

Author: Katya Athiyyaputri Loviana
Editor: Amelinda Pandu Kusumaningtyas

The development of financial technology, or fintech in short, has rocketed over the last decade in Indonesia. Many innovations emerge, ranging in almost every financial aspect, including lending. The SME-dominated business environment of Indonesia provides a stimulating ecosystem for fintech lendings growth, along with high digital product usage. During the pandemic, fintech lending use grow positively while bank lending remains flat.[1] Then, by 2021, fintech lending contributed to 24 percent of Indonesia’s digital investment.[2] In support of that, Otoritas Jasa Keuangan (OJK) has regulated it in under Peraturan Otoritas Jasa Keuangan (POJK) Nomor 77/POJK.01/2016 and actively supervises the industry with 68,414,603 borrowers by August 2021 and 103 licensed fintech lending companies by January 2022. [3] These show that fintech lending innovation in Indonesia is well accepted and widely used. However, like any other innovation, fintech lending is a double-edged sword that can lead to favorable and unfavorable consequences for its consumers.  

The Favorable Consequences

Fintech lending lowers the barriers for previously unbanked. Easier access with less restriction and lower minimum amount presents opportunities for MSMEs and lower-income households to obtain credit. From raw materials producers, processing players, to end users, all can benefit. Further, many fintech lending companies in Indonesia also imply a large market segment. For instance, SMEs in major cities are covered by Investree, Amartha covers microbusiness led by women, while TaniFund covers farmers.

Capital is key to business establishment and growth, yet it remains one of the most common issues MSMEs face.[4] Banks mainly distribute credit to large firms as they possess more credibility. In this case, fintech lending’s existence plays a significant role in including them into the formal financial market because the requirements are less complex. Further, they provide their services in a more accessible approach, that is through pressing buttons on smartphones. Thus, MSMEs established with lower capital are now offered the opportunity to grow their business through this ease of fund obtaining provided by fintech lending.

Other than business players, fintech lending also benefits individuals. Previously, services offered by banks through consumptive loans or credit cards had higher barriers for individuals. Again, fintech lending fills the gap by lowering the requirements. For example, Cicil offers loans for paying students’ tuition fee and goods that support education process, Shopee PayLater and GoPayLater offer credit for transactions within their app range. Thus, individuals in need can now obtain funds easily for emergency purposes.

With a pool of unbanked population gaining the previously unavailable access, financial inclusion increases. This helps boost economic growth as economic participation also increases. Fintech lending is estimated to generate IDR 45 trillion through productive loans and IDR 35 trillion of Gross Value Added through consumptive loans throughout 2018—2019.[5] Further, mid pandemic, government also collaborate with fintech lending to utilize its wide consumer market in stimulating economic recovery through the distribution of direct cash transfer to the poor and loans to affected MSMEs. [6] Hence, with the benefits it provides, fintech lending is expected to carry its significancy in Indonesia’s economy throughout its growth.

The Unfavorable Consequences

Aside from its abundance of benefits, fintech lending innovation also comes with negative consequences. Throughout 2018—2021, OJK has stopped 3,516 illegal fintech lending companies. Further, OJK has also reported that there are 19,711 complaints filed with 47,03 percent of serious violations, including unauthorized loan disbursement and unsecured data privacy breaches.[7] This puts illiterate consumers who are unable to differentiate between legal and illegal fintech lending companies at risk.

Among the legal companies, risks still also exist among the illiterate. Fintech lending in general tends to have higher interest rates as they face riskier consumers. Thus, predatory companies can take advantage of illiterate consumers, most of which are low-income individuals, by charging very high-interest rates. Moreover, predatory companies that could also take advantage of fintech-bank partnerships that enable them to lend with money originating from the bank, which leaves consumer data privacy unprotected.[8] This led to another common problem of fintech lending, data security.

Data security remains an ongoing issue among fintech developments. For example, Cermati, a fintech lending company, had a security breach in 2020 where its 2,9 million user data were leaked and sold.[9] Further, there are many cases where consumers face photos, ID, and face with ID photos are used by another person to apply for credit at fintech lending companies. Unfortunately, this issue is still commonly seen, and individuals affected are at risk for severe consequences.

Other than problems sourcing from the company, consumers are also responsible for their use of fintech lending. Financial and digital literation is key to reliable and efficient use of fintech. In Indonesia, a large portion of fintech consumers were previously underserved, such as lower-income households and women. In other words, most are unfamiliar with financial lending services.[10] Cases are seen where consumers borrow from one fintech company to pay for the other, or in Indonesian saying, gali lubang tutup lubang. Innovations such as Shopee PayLater also ease consumers in obtaining credit for any transactions, including those that are not in urgency. Further, OJK reported that factors of illegal fintech lending cases include not being aware of legality status and limited knowledge of fintech lending.[11] Thus, financial and digital literacy is needed to ensure responsible use and anticipate the unfavorable consequences of fintech lending.

In conclusion, it can be seen that fintech lending in Indonesia is projected to grow and more innovations are expected to come. With its benefit, authorities and society should keep supporting and utilizing its existence. However, its unfavorable consequences must also be supervised. More innovations may imply more problems solved, yet also imply the potential of problems. Therefore, government must regularly update its regulations and focus on improving society’s financial literacy. Meanwhile, the society itself should also be initiative in raising awareness in lending and all types of fintech innovation. With that, fintech lending positive and negative impact can be balanced.

[1] Habir, M., 2021. The Pandemic’s Benefits for Indonesia’s Fintech Sector. ISEAS Perspective. [online] ISEAS – Yusof Ishak Institute. Available at: <> [Accessed 10 February 2022].

[2] Market Research Indonesia, 2022. Fintech Lending Indonesia: Key Enabling Sector in 2022. [online] Available at: <> [Accessed 10 February 2022].

[3] Otoritas Jasa Keungan, 2022. Penyelenggara Fintech Lending Berizin di OJK per 3 Januari 2022. [online] Available at: <> [Accessed 10 February 2022].

[4] World Bank, n.d. Improving SMEs’ access to finance and finding innovative solutions to unlock sources of capital. [online] Available at: <> [Accessed 10 February 2022].

[5] PwC, 2019. Indonesia’s Fintech Lending: Driving Economic Growth Through Financial Inclusion. PwC Indonesia – Fintech Series. [online] PwC. Available at: <> [Accessed 10 February 2022].

[6] Sugandi, E., 2021. The COVID-19 Pandemic and Indonesia’s Fintech Markets. ADBI Working Paper Series 1281, [online] Available at: <> [Accessed 10 February 2022].

[7] Otoritas Jasa Keuangan, 2021. Perkembangan Industri Fintech Peer-to-Peer Lending. [image] Available at: <> [Accessed 10 February 2022].

[8] Minhas, S., Emamian, M., Siegmund, L. and Rose, N., 2021. Stopping Predatory Fintech Lending | The Regulatory Review. [online] The Regulatory Review. Available at: <> [Accessed 10 February 2022].

[9] Florene, U., 2020. Indonesian fintech Cermati reports data breach, 2.9 million users affected | KrASIA. [online] KrASIA. Available at: <> [Accessed 10 February 2022].

[10] Otoritas Jasa Keuangan, 2020. Digital Finance Innovation Road Map and Action Plan 2020-2024.

[11] ibid