Jakarta Globe | Insight

Digital Disruption Takes Indonesia by Storm

Jakarta. The Indonesian government has tried to accommodate digital disruption, which is changing the rules of the game in many industries, by adjusting policies in an effort to create a level playing field while leaving enough room for new developments.

“Innovation won’t be happening if there are too many rules in this country,” President Joko “Jokowi” Widodo said on Wednesday (20/09) at the 2017 Indonesia Business and Development Expo in Jakarta.

“This is my job, to reduce [unnecessary] regulations so we can be more agile and flexible in creating innovation […] Give as much room as possible for startups to develop,” he said.

Jokowi is well aware that technology has changed lifestyles and consumption methods. New small and medium enterprises, which are often called startups, are using digital technology to offer simpler solutions for day-to-day problems such as high unemployment and providing services to unbanked residents across the archipelago.

Transportation is one of the sectors that has been the most disrupted by technology. Ride-hailing services, such as Go-Jek, Grab and Uber, use the popularity of smartphones to meet the growing demand for a safe, reliable and affordable transportation alternative in cities where public mass transportation systems are not operating on schedule and taxis are considered expensive.

Go-Jek claims to have 250,000 partner drivers in the country while Grab said it has “hundreds of thousands” of partners throughout the archipelago. These companies help people move from one point to another while helping the government lower rising unemployment in the country.

According to the country’s Central Statistics Agency (BPS), more than 7 million of the country’s workforce of 131.55 million people did not have jobs in February 2017. That number represents an unemployment rate of 5.3 percent, compared to 5.6 percent in August 2016 and 5.5 percent in February 2016.

Suhariyanto, the head of BPS, agreed that ride-hailing platforms have helped Indonesia reduce unemployment. He said in November last year that the number of unemployed in the country has dropped significantly in the past year, thanks to new opportunities offered by ride-hailing services.

Ride-hailing companies also help other small businesses thrive by offering food-delivery services. Go-Jek even offers on-demand massage, makeup and cleaning services.

“When I crave gado-gado, I use Go-Food, and my food will come in 30 minutes,” Jokowi said, showing his support for the on-demand food delivery service.

Go-Food is part of Go-Jek’s diversified services — including Go-Clean, to help customers find on-demand cleaning services, Go-Massage to find professional masseuses or Go-Glam to find professional makeup artists — in which customers can buy food from partner restaurants and then have it delivered right to their doorstep in a matter of minutes.

Still, disrupting well-established industries comes with a price. Before coming to terms with the local taxi industry, ride-hailing apps saw protests from taxi drivers who felt they were being cheated by unregulated services.

Go-Jek began its operations by offering a platform for ojek, or motorcycle taxi, drivers but then expanded its services to include car-hailing operations to compete with companies like Grab and Uber and conventional taxis.

But because the government never officially acknowledged the existence of motorcycle taxis, these kinds of transportation went unregulated. However, the on-demand car-hailing service — as well as taxis, pool and rented cars — falls under the Ministry of Transportation’s regulation on public transportation services without fixed routes.

The government stepped in and amended the regulation in a bid to include online taxis to the system, set safety standards and create a level playing field with existing taxi operators. The regulation set minimum and maximum tariffs for online car-hailing services, hoping to have comparable pricing with conventional taxis.

That amendment, however, was later annulled by the Supreme Court due to contradictions with other laws and regulations. So far, the Transportation Ministry is still mulling its next step as the Supreme Court’s decision will take effect in November.

The Jakarta Globe spoke with Go-Jek, Grab and Uber drivers, who said they continue working as usual despite the Supreme Court’s decision. An Uber driver, who preferred not to be named, said all he needed to do is to avoid places like airports in Jakarta to avoid confrontation with airport security and taxi drivers. Another Uber driver in Bali also said he is cautious when picking up customers at tourist spots to avoid a problems with taxi or rental car drivers.

Surprisingly, ride-hailing services are also disrupting the country’s banking industry by offering electronic wallets as the first step to introduce banking products to previously unbanked residents.

In fact, there are other financial technology companies in Indonesia that offer small loans — such as UangTeman, Kredivo, Doctor Rupiah — or peer-to-peer lending marketplaces that offer both investment opportunities and quick cash — such as Investree, Modalku or KoinWorks — that are competing with traditional lenders.

According to the World Bank’s Global Findex Database, only 36 percent of adults in a population of about 250 million owned bank accounts in Indonesia in 2014. At the same time, mobile cellular subscriptions in the country reached 325.6 million.

Separate data from the Indonesian Internet Service Provider Association (APJII) said Internet users in Indonesia reached 132.7 million, or nearly 52 percent of the total population, last year.

“This is a challenge for the banking industry,” Coordinating Economic Affairs Minister Darmin Nasution said.

“We’ve bypassed the use of [traveler’s] checks, so we could bypass conventional banking right to digital banking. This is an opportunity,” Darmin said.

The intersection of financial services and technology involves everyone in the financial industry, from well-established banks, non-bank financial services such as insurance or investment companies, startups and companies that provide infrastructure for financial transactions.

Bank Indonesia, the country’s central bank, and the Financial Services Authority (OJK) set up the so-called regulatory sandbox last year for testing upcoming policies ad ensuring customer protection and sustainable growth for fintech businesses.

Since then, OJK issued several new regulations on financial technology, including the regulation on IT-based lending; a circular letter issued by the central bank as a guidance for processing payment transactions; and a regulation on a national payment gateway.

Previously, the regulation on IT-based lending barred a balance sheet lending model due to similarities between services offered by more conventional financial companies and banks, though OJK later amended the regulation to provide more financing choices for the public.

Phillia Wibowo, a partner at McKinsey & Company, said that digital technology is changing the rules of the game. The success stories of Go-Jek, Amazon Web Services or Airbnb have debunked the belief that firms need to own assets to maximize their value or that their core services must be delivered by the company’s own employees.

“We once believed it would take years for a competitor to equal and overtake an established business, but companies like Airbnb have demonstrated how fast a digital enterprise can scale up,” she said in a report.

According to another McKinsey report, Indonesia can add about $150 billion — roughly 10 percent of its gross domestic product — to its yearly economic output by 2025 if the country manages to boost productivity across sectors by utilizing new digital technology.

Closing his remarks at Wednesday’s event, Jokowi said he is determined to reduce unnecessary regulations for startups, build ICT infrastructure and focus more heavily on cybersecurity to reap full benefits of digital disruption in the country.