Mobile Payments: Grab’s angle for Indonesia?

With the announcement for a $700 million investment in Indonesia over the net four years, Grab is paving the way for an intense three-way contest between itself, Go-Jek and Uber Technologies.

However, what was most revealing was its plans for to expand its mobile service offerings, with a particular focus on mobile payments via GrabPay Credits, its cashless stored value option, its e-Cash solution offered in partnership with Bank Mandiri and the continued development of its shared e-money payments platform with Lippo Group and Nobu Bank.

It comes at a time when Go-Jek is also building its footprint in this space, having evolved from being a ride-hailing app to offering multiple products and services. In October 2016, it purchased e-payments startup MVCommerce.

According to Go-Jek, this acquisition was aimed at accelerating the development of Go-Jek’s logistics and transportation platforms to support its rapidly growing Indonesian operations. This comes at Go-Jek announced plans to launch an on-demand healthcare product.

In an interaction with Bloomberg in January 2017,  CEO Nadiem Makarim highlighted plans to double its engineering team in India to more than 200. Go-Juek has acquired the talent of four startups in has acquired in India in 2016 working towards this.

As they have matured, Grab and Go-Jek are not just ride hailing apps that offer fintech products but have offerings that affect all socioeconomic classes in Indonesia. This also comes at a time when Uber is shifting more engineers to focus on Southeast Asia.

The long-term angle for Grab is ultimately to entrench itself in the finance sector, given its footprint in both transport services and logistics; its plans to provide drivers with financing opportunities to purchase smartphones and vehicles is aimed at deepening its footprint in these sectors.

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Countries with highest digital payments. Credit: Statista

In terms of mobile payments, China is projected to lead the world with a total transaction value of US$138. 272 billion in 2017. Mobile payments include mobile Wallet Point-of-Sale (POS) payments processed on any kind of personal smart devices; contactless, app-based transactions with a suitable payment terminal belonging to the merchant;  and NFC, QR-Code or Bluetooth-based payment transactions.

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Growth of mobile payments transaction value in Indonesia. Credit: Statista

In Indonesia, the transaction value in the mobile payments segment is forecast to amount to $9 million in 2017, with a compound annual growth rate of 61.7 per cent for the 2017-2021 period, growing to $59 million in 2021 and growing to 1.6 million users based on prevailing trends. The average transaction value per user in the “Mobile Payments” segment is forecast to reach $10.63 in 2017 and grow to $36.62 by 2021.

However, according to information compiled by Statista, mobile payments in Indonesia will also see declining transaction growth even as user numbers and transaction value grows.

With financial services in Indonesia expanding their reach through the Internet, mobile payment solutions are a conduit for reaching out and engaging with the unbanked. It also positions Grab to expand, attract and retain consumers into its services ecosystem, given that mobile payments will allow it to tap Indonesia’s latent markets.

This is combined with demographic trends favouring smaller and more flexible solutions, which enables startup ventures to gain a competitive advantage over established banks in domains such as peer-to-peer (P2P) finance, mobile payments and crowdfinance.

It also offers Grab the possibility of integrating virtual currencies like Bitcoin and Ethereum into its payment, given that Indonesia’s population continues to be largely unbanked and such decentralised virtual currencies offer consumers an option to bypass banks and other financial institutions. However, this is unlikely given Grabs’ corporate nature and its existing bank partnerships.

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Chart extract from Deloitte report. Credit: Deloitte Touch Tohmatsu

Grab, like Uber and Go-Jek, have the opportunity to capitalise upon the growth of Indonesia’s middle class and its increasing urbanisation, given that urban centres aggregate a sufficient customer base and enable the unit economics for these enterprises to be profitable.

According to a Deloitte report, “Deloitte Consumer Insights:Capturing Indonesia’s latent markets“, Indonesia’s retail market is fragmented, characterised by underdeveloped infrastructure and continues to be dominated by traditional trade outlets such as Warungs and Minimarkets, which are preferred by the majority of consumers and still account for the majority of the retail presence in Indonesia.

Also Read: Global M&A activity kicks off with a bang, has best start to the year since 2000

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Digital payments in Indonesia

According to Go-Jek’s Makarim, digital payments are a way to differentiate from competitors like Uber and Grab, which is used by its customers to keep cash stored on their mobile phones like a digital debit card, with customers able to add to their accounts from bank accounts or ATMs. Additionally, those lacking a bank account can hand cash to Go-Jek’s drivers for immediate deposition into their accounts.

Its payment service can now be used in its services (i.e. rides and grocery deliveries), with plans for. For 2017, it will be extended to other merchants. In a statement to Bloomberg, Fransisca Widjaja, an analyst at Macquarie Capital Securities, said, “In Indonesia, people are already using the Go-Jek app and it’s convenient to have an e-wallet, so it won’t be difficult to convert them.”

Google Inc. and Temasek Holdings Pte released joint research last year that forecast Southeast Asia’s digital economy – including segments that includes e-commerce, online games, and online advertising – will rise to $200 billion by 2025, with Indonesia accounting for 40.5 per cent ($81 billion) of the region’s total market. At $46 billion, Indonesia’s e-ocmmerce sector is the largest contributor.

Indonesia’s Financial Services Authority (OJK) chairman Muliaman D. Hadad has highlighted that the country is encouraging more innovation by technology companies to support the country’s financial inclusion program; this is aimed at incorporate four million Indonesian into the banking system per annum.

This makes the launch of Grabs’ $100m fund meaningful and strategic, given its focus on fintech. With its focus on growing entrepreneurship at the grassroots level and focus on micro-entrepreneurs, as well as its fintech orientation, the launch of its $100 million fund will enable Grab to build a fintech ecosystem. The fund by itself renders Grab larger than almost every Indonesian VC firm.

In a commentary on Founding Fuel, Haresh Chawla, a partner at True North, observed: “You’ve got to get comfortable with the idea of owning minority stakes in many entities and tie them together. Eventually, the thread that binds these properties delivers natural control. Tencent, Baidu and the other Chinese players have already begun making the moves, picking up small stakes in Hike Messenger, digital media firm Hungama and online healthcare service provider Practo. Several other deals are in the works, and we’ll hear of them soon.”

He adds, “In China, they’ve figured that while everyone in the world is playing on the economies of scale, or economies of scope—to battle the low average revenue per user (ARPU) and high friction structures, the weapon lies in creating economies of ecosystems—as they’ve done for the BAT (Baidu, Alibaba & Tencent) companies. Each member of this trio has a network of properties that feed off each other.”

This may be what Grab and Go-Jek are angling for in Indonesia. The Alibaba Group, through its acquisitions of Lazada and Redmart, has built a footprint in Southeast Asia and is planning to extend its ecosystem of payments, marketplace and logistics into the region.

Similarly, on-boarding users into its payment platform will require sophisticated use of social media, given the nature of Indonesia’s mobile-first Internet market.

Also Read: Indonesia’s transport and logistic startup Go-Jek can teach Uber a few Asian tricks

India: RBI backs independent regulator for digital payments

Digital financial services

Digital Financial Services (DFS) are a domain with significant market potential in Indonesia, given that it combines existing (and growing) mobile phone usage with a growing appetite for nancial services.

A 2015 Deloitte report notes: “The prospective entry of millions of unbanked and underbanked consumers into the nancial system is the result of the increasing prevalence of mobile devices. DFS not only promises accelerated economic growth in Indonesia, but also will yield signi cant changes in business practices and replace traditional methods of nancing. Most importantly, DFS will likely extend its reach beyond major city centres and into the provincial hinterland, where the bulk of unbanked and underbanked consumers reside.”

In Indonesia, DFS offers opportunities for an estimated 110 million bankable unbanked citizens to access banking services and products, given that Internet penetration – alongside and corresponding to smartphone growth – was forecast to reach 100 million Internet users in the 2015-2017 period.

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Indonesia digital financial services landscape. Credit: Deloitte Touch Tohmatsu

This growth represents business prospects for the various market participants in Indonesia’s DFS market space. And particularly for GrabPay, which could easily infiltrate all segments of the DFS landscape in Indonesia over the next four years.

A 2014 EY report on mobile money, “Mobile money- the next wave of growth“, notes that government and central bank support provide the foundation for scalable mobile money transfer services, sector-specific policies and consumer protection frameworks needing alignment to overcome fragmentation in mobile payments. Grab is aware of this, given its recruitment of senior executives with government connections.

However, with the universe of mobile payments services rapidly expanding, Grab also has the opportunity to integrate not only payments but marketing and shopping services into its offering, as Uber has done with its UberEats services.

A prevailing danger for Grab is creating partnering models that result in competing ecosystems and offerings as they grow, given the range of operators and regions within Indonesia itself.

Its experiment with mobile payments in Indonesia also represent a testbed for growth tactics and strategy for expanding and deepening their footprint in markets like the Philippines, Taiwan and possibly India and East Africa, should Grab progress that far.

EY suggests: “Operators should widen their service portfolios to include a greater range of financial services while also combining payments with related functionalities in location-sensitive marketing and advertising for consumers, businesses and partners alike.”

What will be key to Grab is to maintain flexible business and operating models as it grows, in order to meet evolving customer demands as Indonesia’s consumer profile matures and becomes more sophisticated. This is likely to see the emergence of new pricing and partnership models on the part of Grab, as well as more targeted acquisitions in the digital finance space.

Also Read:

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Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.

Singapore Reporter/s

In Singapore, we are looking to double our reporting team by this year-end to comprehensively cover the fast-moving world of funded startups and VC, PE & M&A deals. We want reporters who can tell our readers what is really happening in these sectors and why it matters to markets, companies and consumers. The ability to write precisely and urgently is crucial for these roles. Ideal candidates must have to ability to work in a collaborative, dynamic, and fast-changing environment. We want our new hires to be digitally savvy and ready to experiment with new forms of storytelling. Most importantly, we are looking for hard-hitting reporters who work well in a team. Collaboration and collegiality are a must.

Following vacancies can be applied for (only in Singapore).

Following vacancies can be applied for (only in Singapore).   

  • A reporter to track companies/startups that have raised private capital, and have the potential to become unicorns. SEA currently has over 40 companies with a valuation of over $100 million and under $1 billion.
  • A reporter who can get behind the scenes and reveal how funding rounds are put together, or why they’ve failed to materialise. She/he in this role will largely focus on long-format stories. 
  • A journalist to track special situations funds, distressed debt and private credit (from the PE angle) across Asia.