Indonesia has long been seen as one of the fastest-growing mobile commerce markets in the world. But the country’s domestic market presents its own, unique challenges both for merchants and online payment providers.
In this article, we’re looking at:
- the current e-commerce payment market and how it’s evolving
- the main challenges for merchants and online payment providers
- the impact of the COVID-19 pandemic and what it means for market growth.
But to write about the trends and predictions, we first need to understand the specifics of the Indonesian market.
The current e-commerce landscape in Indonesia
Indonesia is the fourth most populated country in the world, but it’s also been known as the least developed e-commerce market in Southeast Asia.
The country is spread over 17,000 islands, 6,000 inhabited, with around 580 languages spoken. The tricky geographical location has traditionally posed a significant challenge in delivering products ordered online, right with duplicated street names or no official street address in some rural areas. And that’s not the end of the challenge list. Rates of online fraud in Indonesia are also still high. A lot of the population is still unbanked, with a 48% bank penetration.
Along with low trust in online transactions, all this contributes to the fact that cash on delivery is still a popular payment method, and cash payments make up 14% of the country’s e-commerce payments.
Indonesia’s growth has mostly been happening due to export. But at the same time, with a growing and very active group of smartphone users, the digital commerce market has been rising. And as an emerging market, Indonesia has a lot of the characteristics that are key for online payment adoption, with the value of goods sold online doubling every year since 2015, according to The Economist.
The top e-commerce merchant segments in Indonesia are:
- consumer electronics
- health and beauty.
Indonesia’s leading e-commerce payment methods
In a survey carried out in February 2020, about 84% of online payment users stated that they used online payment transactions to pay for online purchases. The leading reasons where convenience and practicality. Most paid online several times a week – and perhaps not surprisingly, most of them were in the 35-54 age group. But while the e-commerce market is growing, leading to a growth in online payments, cards are still dominant, with a 34% market share, according to a JPMorgan’s report. Bank transfers come second at 26%. But predictions are this method is going to be slowly declining, making way for digital wallets that now come third, but are rapidly growing in popularity.
It’s interesting to note that mobile shopping is the most popular way people buy online in Indonesia, making up 52% of all online transactions. Most of it – almost three-quarters – happens within mobile apps, amounting to over $5 billion in sales.
This is not surprising when you look at the fact that the growing use of smartphones contributes to a clear shift in e-commerce shopping habits, with 90% of online users surfing the web on their phones.
Social selling – a big e-commerce trend
What’s also interesting is that – just as in other Southeast Asian countries – a lot of sales happens through social media channels. Some of the most popular ones are:
The trend is mostly relevant to micro-businesses but is estimated to make up a whopping 40% of all e-commerce sales in Indonesia, as reported by JPMorgan.
According to a Goldman Sachs report, with only a 7% penetration of e-commerce platforms, dedicated social commerce platforms like Woobiz have adjusted by using a hybrid of online and offline selling methods to cater for the specific “micro” character of the Indonesian e-commerce market.
Challenges for digital wallet adoption
Digital wallets are expected to grow, along with rising smartphone penetration. Unfortunately, Indonesian regulations don’t make it easy for online payment providers. They have to wait to obtain the domestic banking license, necessary if you want to operate on the Indonesian market. And then obtain further approvals when they surpass 300,000 active users. But even given these hurdles, digital wallets are the fastest-growing payment method, expected to be used in almost a third of all online transactions by 2021. According to Statista’s research, nearly half of Indonesian online shoppers will use an e-wallet by 2023, compared to only about 6% in 2017.
The impact of the COVID-19 pandemic
And of course, there’s the ongoing pandemic, which has accelerated the growth of online and especially mobile payments worldwide and hasn’t omitted the Asia-Pacific region. Some even notice that the change that was predicted to take years has now happened within several months since the pandemic started.
The outbreak has, in a way, helped the e-commerce sector grow, now expecting 50% year-on-year growth, according to a survey cited by the Jakarta Post. The survey also showed what we’re observing around the world: the shifts in consumer behaviour are going to stay with us for longer, in the so-called “new normal”.
This is confirmed further by the survey results, with 40% of participants confirming they indent to keep using e-commerce even after the pandemic.
In another survey conducted by Rakuten Insight, 55% of the respondents said they bought more online during the COVID-19 pandemic in Indonesia as of May 2020. And only 9% said they didn’t buy online at all.
What’s next for Indonesia’s e-commerce?
Domestic e-wallets are becoming increasingly popular during the pandemic. This is happening as the Indonesian central bank introduced standardised Indonesian QR codes and a single integrated platform for all QR-code transactions across multiple digital wallet providers.
Experts predict that the growth of foreign payment services catering to higher consumer demand, along with creating the digital infrastructure to enable higher payment volumes, is leading Indonesia to become “Southeast Asia’s next digital payments battleground”.
And with the still very fragmented market when it comes to online payments, both merchants and payment service providers need to focus on enabling local payment methods that Indonesians already know and trust, before global ones can become more popular.