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When Benedicto Haryono worked for his family’s agribusiness, he would travel to far-flung areas of Indonesia, where he saw communities that were underserved by traditional financial institutions.
Financing options for many Indonesians comprise of “either local cooperatives or real peer-to-peer lenders, such as parents or friends.”
This was true even in the more developed parts of the country, so in 2016, Haryono and co-founder Willy Arifin founded fintech startup.
A peer-to-peer (P2P) lending platform, KoinWorks connects lenders – a majority of whom are individual investors – with small-business owners in need of financing. Borrowers can take up loans of between 10 million and 2 billion rupiah (approximately US$700 to US$140,000).
KoinWorks has since become a player in Indonesia’s growing online lending scene. Since its founding, the company claims to have disbursed almost 2 trillion rupiah (around US$140 million) in loans.
Haryono thinks that P2P lending is a suitable business model for Indonesia because it helps build enterprises and “deliver solutions that impact people’s lives.”
Taking a pragmatic approach
About 95% of KoinWorks’ disbursements are tied to its bread-and-butter service: business loans. These can either be installment-type loans (with six to 36 months maturity) or short-term working capital loans such as receivables or purchase financing, which mature in one to six months.
Borrowers usually belong to the underbanked segment. Haryono describes them as people who have “the will or the ambition to make something better of their current situation,” but are unable to enjoy the full offering from banks, either because of their profile or inadequate collateral.
“These could be food and beverage businesses that rent their location, which means it can’t be collateralized, or online commerce businesses, which don’t have assets aside from their inventory,” he adds.
On the lender side, Haryono thinks KoinWorks is one of the “most pure P2P” businesses in Indonesia. The startup has 180,000 retail investors – i.e., mainly individuals – as opposed to institutions – on the platform.
These lenders are a mixed bunch. Anyone can start lending through KoinWorks with a mere 100,000 rupiah (roughly US$7), so it attracts everyone from blue-collar workers dipping their toes into investing to the well-heeled financiers who are looking to diversify their investments.
A majority of the startup’s lenders are also millennials. Those who are aged 35 and older make up a smaller portion, but they generally have bigger ticket sizes.
“Indonesia as a country still lacks product variation in terms of investment avenues,” Haryono observes. “Having an alternative product like ours gives investors decent returns but with low funding requirements, so most people can afford it. It is very viable for the market.”
When evaluating the creditworthiness of potential borrowers, KoinWorks goes through a standard know-your-customer process before examining two variables: the borrower’s willingness and ability to repay what they owe.
The willingness element tends to be more qualitative, according to Haryono, but it can also include checking the borrower’s overall credit profile, or if that’s unavailable, looking at other borrowers with a similar profile. After analyzing this factor, the company then measures the borrower’s income against obligations and expenses before coming up with a debt servicing ratio.
After the loan is disbursed, KoinWorks takes a commission out of every transaction. Haryono says that the company charges between 2% to 7% of the total loan value. Taking into account the company’s roughly US$140 million in disbursed loans, this would put their revenue from borrowers at somewhere between US$2.8 million and US$9.8 million.
KoinWorks also generates revenue from charging the lenders. Depending on the chosen product’s repayment method, the company charges either 1% of the principal amount plus interest (for monthly repayments) or 5% of interest (for lump sum repayments).
KoinWorks invests in technology – primarily on the product itself as well as underwriting and customer acquisition – but most of it is centered on automation instead of artificial intelligence, which is still in the works. With Indonesia’s fragmented data sets, Haryono finds that it’s still too early to come up with a one-size-fits-all solution, especially for business loans.
“In consumer loans, you can somewhat generalize more easily, [but] there’s less uniformity within business loans. It’s more difficult to generalize and to buy AI right off the bat,” he explains. “Our tech is developed towards more practical business solutions that can deliver value right away.”
Ultimately, pragmatism informs Koinworks’ overall approach to business. Haryono points out that the company typically looks in the middle segment of the market, where they are not “as micro or as high-end” as some of their peers.
“We’re not taking excessive risk all the time. We’re more selective of our [borrowers], and we don’t blindly give loans to anyone that wants them,” he says. “But given that, we are settling at a nice niche in the market, and we [are not] competing at a level where we need to expend a lot of operating expenses.”
Focusing on lending to businesses instead of individuals – which some of its P2P peers have done – also means lower risk overall for KoinWorks, though Haryono concedes that it would always depend on the customer segment. More mature businesses are predictable. Employee lending, one of KoinWorks’ newest products that’s akin to a salary advance, could also be safe in that these borrowers have a fixed monthly salary.
“It’s just a matter of how you can measure the risk to the best of the company’s ability,” he adds. “There are things you can’t control, but you score what you can in terms of the things that are within your control.”
2 million users in the next two years
Haryono claims that KoinWorks is close to profitability and recently hit 200 billion rupiah (US$14 million) in disbursements per month, with non-performing loans staying below 1%.
The Indonesian startup is also now offering education loans in addition to its business loans and employee lending. For the latter, KoinWorks manages risk by partnering with companies to extend loans to their staff, as opposed to giving the loans on an individual basis.
But Haryono says that one challenge for the P2P lender, now with 190 staff, is personnel management, especially as it scales. A bigger and longer-term concern is customer awareness – he believes it’s important to make KoinWorks’ products accessible and easily understandable to the public.
“When you think about loans, there’s always a fixed viewpoint on how a loan should behave,” he says. “Finance is not always intuitive, but we like to create products that are intuitive.”
KoinWorks’ investors include Indonesia’s Convergence Ventures and fintech-focused. It last banked from Quona Capital and EV Growth earlier this year.
Part of the investment will be spent to upgrade KoinWorks’ technology and for marketing, as the company aims to acquire 2 million users in the next two years, Haryono shares. The company also plans to use some of the funds for its own capital base so it can lend from its balance sheet, while working to get more banks and large institutional investors onboard.
Should something happen with the KoinWorks portfolio, the equity base could help stave off defaults within the platform, which would give institutional investors a measure of comfort. Of course, Haryono realizes that some banks may want to compete directly with KoinWorks, though he thinks that they stand to gain a lot by collaborating with the startup instead of building their own solutions.
“I think KoinWorks in a way will always be a unique platform where we don’t try to compete with banks or multifinance companies,” he says. “We were the first to launch ecommerce financing when the banks didn’t want to. But customers that we can’t cater to, we can feed to the banks. It’s a strategic relationship.”