Indonesia is the most important digital financial services market in Southeast Asia, given its overall size, unbanked population of 181 million, and island geography. With 6,000 populated islands, Indonesia is almost uniquely suited for branchless banking.

It is thus no surprise that the region's most prominent platform companies, all in search of a shorter road to profitability after burning cash in the days of low interest rates and easy venture funding, are betting big on the Indonesian market. Singapore's Grab and Sea Group, as well as Indonesia's own GoTo and Bukalapak, are all vying for market share in Indonesia's burgeoning digibanking market.

Data from Redseer suggests that Indonesia's "total addressable market for financial technology services" will reach US$70.1 billion in 2025, up from US$17.8 billion in 2020.

While the Singaporean firms have deeper pockets and arguably a larger talent pool they can deploy, GoTo and Bukalapak have a certain homefield advantage. They understand the market better, and their resources are not spread as thin because they do not have large operations outside of Indonesia.

Buying the way to success

Unlike some other regulators in Asia, Indonesia's Financial Services Authority (the OJK) has made it relatively easy for foreign firms to move into digital banking. It has actively encouraged the purchase of incumbent lenders that can be rejigged as digital banks. The OJK sees that model as a win-win, allowing a local bank that might otherwise have been uncompetitive to improve the quality of its services, while big tech companies that make the investments do not need to apply for a digital banking license: They can use the license of the bank they buy.

This strategy is working out well for Sea Group, which bought Indonesia's Bank BKE in early 2021 and revamped it as SeaBank Indonesia. It was easy for Sea to meet the 3 trillion rupiah capitalization requirement for digital banks.

It did not take long for the undisclosed investment to pay off, especially given the synergies between Shopee's e-commerce ecosystem and digital banking. SeaBank Indonesia recorded a net profit of 269.2 billion rupiah ($18 million) in FY 2022, compared with a loss of 313.4 billion rupiah ($21 million) in FY 2021. Not a huge profit by financial industry standards, but certainly a step in the right direction. Furthermore, SeaBank's loans disbursed climbed to 15.9 trillion rupiah ($1.1 billion) in FY 2022 from 6.1 trillion rupiah ($409.2 million) the year before.

Thus far, Sea is the only major platform company to acquire a local bank outright. GoTo has a 22% stake in the local bank Bank Jago through a US$160 million investment Gojek made in late 2020, while the Grab-Singtel consortium has a minority stake in Indonesia's PT Bank Fama.

Laser focus on Indonesia

Local platform company Bukalapak has also leveraged its e-commerce ecosystem, but in a different way than Sea Group. In fact, such is the company's experience with merchants that it is now moving into the offline segment with its Mitra business to help the owners of small shops known as warung digitalize their operations.

According to venture capital firm Flourish Venture, traditional warung represents 70% of sales in Indonesia's US$257 billion grocery market. Given that the roadside kiosk operators are facing increasingly tough competition from modern, larger retailers, Bukalapak reckons that better digital connectivity can help them compete more effectively against the big players.

Thriving amid competition

As platform companies battle it out for dominance in Indonesia's digibanking market, the country's unique landscape and unbanked population present a vast opportunity for growth. With Singaporean giants like Grab and Sea Group, along with local players GoTo and Bukalapak, vying for market share, the race is on to capture a piece of Indonesia's booming digital financial services sector.

As these platform companies continue to streamline their operations and focus on profitability, Indonesia's digibanking market holds immense potential, and all four companies have a chance to thrive if they adapt to the evolving landscape and embrace a profitability-first approach. The pie is certainly big enough.

The great irony of digital banking in East Asia is that it most often refers to large incumbent banks, conglomerates, Big Tech or a combination of the three launching online-only lenders. Not the Philippines’ Tonik Bank though. It’s a genuine startup that began as a rural bank and morphed into a digital one. Tonik’s financials for 2022 recently appeared in several media reports, and by the looks of things, the three-year-old digibank is doing reasonably well in terms of customer acquisition, but its losses are widening.

Japan’s financial sector has been on a shopping spree in Indonesia, with an eye on digital finance opportunities. Though Japan has gradually been increasing financial sector digitization, the pace is slow compared to Indonesia and financial inclusion needs are limited given the country’s advanced stage of development and high per-capita GDP. Japan’s megabanks have been the most active buyers of assets in Indonesia, but other financial firms are also starting to look into opportunities in segments like banking and payments.

With a population of 169 million, of whom 40% to 50% lack a bank account, Bangladesh is a prime candidate for digital banks. Unlike the advanced economies of East Asia, Bangladesh can genuinely benefit from online banks that can rapidly bring more people into the formal financial system. With that in mind, the Bangladeshi central bank in June announced that it is ready to approve a framework for digital banks.

Digital transformation in Japan’s financial sector has been a gradual process, with the earliest pure-play online lenders dating back to the early 2000s, but limited change occurring until recently. Among East Asia’s developed economies, Japan is unique in that it has an unusual number of barriers to digitization of financial services: limited financial inclusion needs, a deep affinity for cash, a comprehensive and mature banking system with branches almost anywhere customers would need them, and the world’s most elderly population. That said, the pandemic spurred Japan to speed up financial digitization, and the trend is proving to be enduring.

When will Ant Group’s transformation be complete? Once China’s and probably the world’s most prominent fintech firm, the company has been caught up in political and regulatory headwinds since November 2020. Each time the light at the end of the tunnel has seemingly been in view, the expected revival of its IPO – the only definitive signal that would signal the company were out of the woods – has failed to materialize. Recent moves by Ant Group suggest that it still has some work to do before its transition to a technology company that works for the national interest is complete. That seems to be what Beijing expects of Ant.

Platform companies in Southeast Asia all want to capitalize on fintech opportunities, but Indonesia’s Bukalapak may be better positioned than others to do so. The reason is simple: First of all, Bukalapak’s core offering is e-commerce, which is the online service that best syncs with digital financial services, especially compared to something like ride hailing. Sorry, Grab and Gojek. Second, Bukalapak is based in Indonesia, which has a huge unbanked but digitally forward population. The company can ride the waves of both surging e-commerce and digital finance adoption rates.

For the longest time, the China payments market was an oligopoly of the privileged three: first the state-owned UnionPay, and then as the country transitioned to mobile payments, Alipay and Tenpay. U.S. card giants like Visa, Mastercard, and American Express as well as PayPal could only look on with envy and frustration as Beijing kicked the can down the road on boosting market access – which was supposed to have been complete by 2006 per the conditions it agreed to upon accession to the World Trade Organization in 2001.

It was bound to happen: South Korea’s most successful digital bank has started to have global – or at least regional – ambitions. Kakao Bank is one of the few digital lenders in Asia to reach profitability quickly (within just two years) and stay there. In fact, Kakao accomplished the unlikely feat of reaching profitability and going public within five years. One of the reasons Kakao has been successful is that it has eschewed gung-ho global expansion, which has helped keep its costs at a more reasonable level than most neobanks. Now, however, it is eager to try its hand in several Southeast Asian markets.

They say it’s lonely at the top, and once you get there, someone always wants to take you down. Revolut must feel that way. It towers above most fintech startups in this era of slashed valuations, more-demanding investors and scaled-down expansion. Though Revolut’s valuation has fallen from the absurdly high US$33 billion of 2021 to a still-lofty $18 billion today, its ambitions have not diminished. The company is trumpeting the fact it now has 30 million retail customers. But there remains one factor that could cut Revolut down to size: being denied a banking license in the UK.