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Cash-burning Indonesian payment apps seek profit in credit

Wary of Uber's losses, Go-Pay and Ovo tap into new stream of revenue and data

Go-Pay and Ovo have burned cash by offering numerous discounts and incentives. (Photo by Kosaku Mimura)

JAKARTA -- The two leading contenders in Indonesia's digital payments sector have shown their willingness to spend without thought for the bottom line, but now the battle for dominance has entered a new phase as Go-Pay and Ovo offer credit-like services aimed at recouping their investments.

The greater potential for achieving a profit matters more to Go-Pay, the payment arm of local ride-hailing startup Go-Jek, as its parent considers an initial public offering.

But this shift also matters for the growth of consumer finance in Southeast Asia's biggest economy, where much of the population uses neither bank accounts nor credit cards.

Go-Pay and rival Ovo, which is backed by Indonesian conglomerate Lippo Group, have each launched a consumer credit service that lets users pay for their purchases on the platform all at once at the end of the month.

These "pay later" services can carry a fee -- a de facto interest charge -- allowing Go-Pay and Ovo to earn bigger returns than from payment transaction fees.

Go-Pay typically charges a monthly fee of 25,000 rupiah ($2) with a credit limit of 500,000 rupiah. Ovo has made its service free for now, but looks to introduce fees soon, said Makoto Honda, head of Tokyo Century in Indonesia. Tokyo Century is an investor in Ovo.

"This is an expected shift as the purely payment-system model has low, or even negative, profitability," said Johan Sulaeman, associate professor of finance at NUS Business School in Singapore. Pay-later services "can provide additional benefits to the platform in the form of high implicit interest rates -- service and late fees -- and credit scoring using users' activities in the platform."

An industry insider who requested anonymity said the returns from pay-later services will not be enough to make the payment platforms profitable, at least in the near term.

But for Go-Pay and Ovo, which have burned cash by offering numerous discounts and incentives, revenue from the services "could help to recoup their investments faster, while offering upside in the future," said Mulya Chandra, equity analyst at Morgan Stanley Sekuritas Indonesia.

Online trip booking service Traveloka -- which, like Go-Jek, is one of Indonesia's "unicorn" startups valued at over $1 billion -- ventured into pay-later services ahead of the competition last June. Go-Pay followed in September, initially limiting the feature to food delivery before extending it to other parts of Go-Jek's network. By July, it will make delayed payment available for purchases at physical stores that accept Go-Pay.

Ovo introduced the feature in January for purchases at its partner e-commerce company Tokopedia and extended the option to offline merchants in May. Plans call for expanding it to other verticals like Singapore-based Grab, Go-Jek's ride-hailing rival and an investor in Ovo.

Both U.S. ride-hailers Uber Technologies and Lyft suffered lackluster IPOs after their documents showed significant operating losses. Observers say that if Go-Jek goes public, it will need to show a clear path to positive cash flow and profitability.

Go-Jek founder Nadiem Makarim has targeted the company's payment arm as the bearer of that burden. In a recent interview with the Nikkei Asian Review, he said ride-hailing represents "less than a quarter" of Go-Jek's overall gross merchandise value, and that "food [delivery] is bigger and payment is even much bigger." Even with ride-hailing at break-even, "we can hit profitability" when the company goes public, he said.

Go-Pay and Ovo also hope the pay-later services help transform them into full-fledged financial platforms. More than half of Indonesians older than 15 remain unbanked and unable to build a credit history, preventing them from obtaining loans via regular financial institutions.

Both payment platforms already possess vast data on their users accumulated from daily transactions in ride-hailing, e-commerce, utility payments and more. They hope additional data from the pay-later services allows for more efficient and accurate credit scoring, eventually letting them provide their banked and unbanked users with financial products on the platform through partner banks. This also represents a more profitable business than the platforms' mainstay payment transactions.

Pay later "is the beginning" for the company to "provide a wide array of financial products" to users, a segment it has left untouched, Go-Pay CEO Aldi Haryopratomo told the Nikkei Asian Review.

The next stage in the evolution of financial technology will allow users "who are unbanked and never had access to these financial services ... [to] grow their credit history and move up the economic ladder," Haryopratomo said, adding that granular data eventually will help "deconstruct the financial products."

Ovo has similar plans, according to Tokyo Century's Honda.

"We already offer mutual funds to some users [through a partnership with mutual fund marketplace Bareksa]," he said. "Our plan is to expand the product offering, be it financing, lending, asset management. We don't know if payment [transactions] will ultimately make money, but financing can contribute to our revenues."

A challenge for both may come in the form of regulation, Sulaeman said.

"While social credit scoring within the platform can facilitate access to offer higher-value financial services and other auxiliary services, it may have privacy and welfare implications that attract the attention of financial and economic regulators," the associate professor said.

In China, where social credit scoring took off in the form of Ant Financial Services Group's Zhima Credit and Tencent Holdings' Tencent Credit, the country's central bank last year stopped allowing independent companies to provide credit ratings, and required all credit ratings to be given by a new public body called Baihang, according to the Financial Times.

The consumer credit data Go-Pay and Ovo possess is something Jakarta will want to have as it pushes for more financial inclusion. China's case is an extreme example, but Indonesia's government has its own digital payment platform LinkAja through state-owned banks, and may yet provide a regulatory boost to help it follow in the footsteps of Go-Pay and Ovo.

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