Home to one of the world’s youngest, largest, and most tech-centric populations, Indonesia is banking hard on the following trends to launch the nation into a golden age of prosperity.

The country’s industry has increased more than fourfold while supporting other initiatives, ranking itself as the largest and most attractive investment destination among the ASEAN Member States. The high potential to grow and diversify trumps the current looming economic decline that Indonesia is facing. Also, Indonesia has developed a strong foundation consisting of a strong penetration rate and a large millennial and Gen-Z population, which will play a significant role in the future.

The private sector and the Indonesian government have started numerous projects focusing on key initiatives. These include the following:

• Improving the physical and digital telecommunications infrastructure,
• Unlocking more investments in startup enterprises (micro, small and medium-sized),
• Making business acts easier overall¹.

Indonesia aims to reach US$ 228 billion in its digital economy by 2027, with e-Commerce as its primary driver.

3 key pillars to drive growth for Indonesia

Note: Gross merchandise value (GMV) refers to the value of goods sold via customer-to-customer or e-commerce platforms.

Fintech and e-Commerce continue to dominate Indonesia’s digital economy. Also, the country’s various industries have more opportunities to prosper as more sectors become more connected.

e-Commerce

Key highlights of the e-Commerce industry:

• Millennials and Gen-Z continue to propel e-Commerce

1. Millennials are willing to spend more for premium and exclusive products or services because of their stable spending power and growing family size.
2. Gen Z tends to shop more but with smaller transaction values, as they look ready to be the primary demographic entering the labour market within the next 5 years.
3. There will be 128 million online shoppers by 2027, the critical driver for e-Commerce to continue growing.

• The online grocery market place displays potential for growth

1. The online grocery marketplace is still in its early stages of development.
2. Logistic infrastructure and transport networks have rapidly improved to facilitate and ease online users, significantly increasing the growth and penetration of Indonesian grocery spending.

*Food expenditure includes – cereals, tubers, seafood, meat, eggs and milk, vegetables, legumes, fruits, oil, spices, prepared food and beverages.

Urban areas remain the main fighting ground in this segment because of better logistic infrastructure and workforce availability to support rapid delivery and quick commerce.

• Gen-Z and the rural community are beginning to drive social commerce

What is social commerce?

Social commerce is the process of selling products and services directly through social media. With social commerce, the entire shopping experience from product discovery and research to checkout, takes place right on social media.

Social commerce startups usually provide innovative solutions such as group buying or buying through an agent to overcome logistic barriers with competitive pricing. The popularity of social commerce is growing in rural areas. It enables businesses to leverage social networks and connections to drive online or offline sales. There are two standard models within social commerce.

• Agent or Group Buying Model

Shoppers can browse or buy products through an agent on the platform or join a group purchase to enjoy discounts or promotions. This model usually targets small towns and rural areas with innovative solutions to overcome logistic barriers, such as community heads gathering orders and building logistic centres.

• Social Media Platform Model

Businesses engage audiences or shoppers through social media, such as live streams and online posts. As a result, purchases often occur on the same app without diverting users to another marketplace platform. Also, Gen Z can use the social media platform to scour information from cheaper acquisition costs to higher sales conversions.

For instance, Tiktok leverages the media consumption behaviours that Gen-Z inhabits today. As a result, short-form video content is viral in encouraging users to make purchases without diverting to marketplace platforms. This success has led to TikTok being Gen-Z’s favourite social media platform, generating GMV (Gross merchandise value) of US$ 666 million in 2021 in Indonesia.

Fintech

The development of digital finance, e-Wallet mass adoption, and P2P lending has accelerated Fintech growth in Indonesia.

Key highlights of the Fintech industry:

• The rise in Fintechs presents high growth opportunities

• Headroom for e-Wallet to continue penetrating consumer transaction

E-Commerce and e-Wallet adoption has drastically increased in Indonesia since the COVID-19 pandemic. However, only a fraction of consumer spending happens through e-Wallet.

Consumer expenditure includes:

1. Food expenditure – cereals, tubers, seafood, meat, eggs and milk, vegetables, legumes, fruits, oil, spices, prepared food and beverages
2. Non-food expenditure – Housing/household facilities, Goods and services, clothing/footwear/headgear, Durable goods, Taxes/Insurance, Parties/Ceremonies

• High growth is expected for P2P lending as a huge credit gap exists

The Indonesian Joint Funding Fintech Association estimated a credit gap of US$ 70 billion per year.

Only 28% of the population have knowledge or access to credit, indicating a huge untapped market. Besides, areas outside Java Island could fuel the growth as 43% of the population resides outside Java but only accounted for 20% of the P2P borrowers.

• Improvement in financial literacy driving digital finance in Indonesia

Wealth management platforms and digital insurance are still in the early development stage in Indonesia but with substantial untapped potential.

$150 billion Individual Outstanding Savings as of July 2022

Improvement in financial literacy will see a growing number of capital market investors. As of 2021, only 2% of the total population traded in the stock market. $150 billion of outstanding savings could stimulate the vitality of Indonesia’s capital market to drive economic growth.

$17 billion Life insurance and General insurance premium income in 2021

28% of Indonesia is well-informed on insurance. However, the insurance penetration rate in Indonesia is only 3% which is extremely low. Digital insurers could play a role in closing the opportunity gap.

• The rise of the all-in-one super e-Wallet, an integrated digital financial services platform

Online media

Digital ads spending will drive the online media sector in Indonesia by an expected spending growth of 19% by 2027.

Key highlights of the online media industry:

• Indonesians spent 5.5 hours on the phone on average

Indonesia is the top country spending the most hours on the phone daily. This sets the base for digital advertising spending to skyrocket in the next five years. In addition, Internet users ages 15+ are set to reach 190 million by 2027, pushing businesses to spend more on digital advertising.

• OTT platforms growth to be driven by telco bundles

Disney+, Netflix, Vidio and Viu dominate Indonesia. However, with Amazon and Hulu entering the Indonesian market, competition will intensify in the next 5 years. On average, consumers subscribe to around 3 SVoD (video streaming) latforms, and this habit is likely to stay as subscriptions to an OTT platform usually come with a telco bundle package.

• The continuous growth of internet penetration to fuel the gaming market

Indonesia is one of the most promising markets for game makers, following China, India, and the US. This is because 90% of Indonesians access the internet through mobile phones. Hence, mobile gaming is the main contributor to the Indonesian gaming market.

A surge in funding and investments, especially in Fintech during 2022

Investors have dramatically shifted funding flow from e-Commerce to Fintech between 2021 to 2022 as the adoption and usage of Fintech are growing. Fintech funding surged by US$ 2 bn – players are poised for development.

B2B e-Comm funding has taken a significant chunk of the 2022 total e-Comm funding. Similarly, mobility has received limited interest due to market maturity. This has been a downward trend since 2019. As a result, ed-tech and health-tech players receive lower amounts of funding. However, today, leaders from these sectors generate revenues with positive cash flow, allowing them to reinvest in growth.

Institutions can now identify the best opportunities by learning more about Indonesia’s wider market and developing strong in-market partnerships. With the next 10 years shaping to be Indonesia’s digital decade, now is the perfect time for global investors to invest and benefit from everything this incredible nation offers.

A way forward

The digital economy will continue attracting new customers, businesses, and startups. Many have become used to buying their products and services online, from tech products to food. For instance, digital wallet apps such as GoPay, GrabPay, OVO, and Shopee Pay in Indonesia continue to remain popular. In addition, digital entertainment, e-sports, and online mobile gaming have also experienced a rise in popularity among the millennials and Gen-Z, with the industry anticipating continuous growth and innovation.

In conclusion, the large and young population, the improving digital infrastructure, and the supportive government policies prove that the digital economy in Indonesia looks ready to create new job opportunities, boost economic growth, and improve access to goods and services for the country’s citizens in 2023.

End notes:

¹(East Ventures, 2021)