Carro’s Indonesia bank play could spell big returns

PEER-to-peer lending platform Funding Societies’ co-investment into Indonesian Bank Index on April 26 is just one of a long list of startups buying a piece of the many Indonesian banks, including Hong Kong digital lender WeLab.

But what was interesting was their co-investor, used car marketplace Carro. This investment was Carro’s second investment in an Indonesian bank, coming on the heels of an earlier co-investment into Allo Bank with Salim Group, CT Corp, e-commerce platform Bukalapak and Grab in March 2022.

Carro’s moves in the banking arena come as no surprise. The company was part of the Razer Youth Bank consortium comprising Razer, Insignia Ventures, Sheng Siong and FWD, that was vying for a Singapore digital bank licence. The consortium failed to get a licence, but Carro’s financial services ambitions continued to grow.

Part of Carro’s revenue stream lies in financing, from used cars to certificate of entitlement renewals. And this part of its business has been ramped up in recent years.

Carro’s hire purchase receivables, or amount owed for car loans, grew 82.2 per cent from S$26.4 million in 2019 to S$48.1 million in 2020, compared to S$26.6 million in 2018. Revenue for the period grew in tandem, up 78.2 per cent from S$66.1 million in 2019 to S$117.8 million in 2020.

Reselling used cars and financing their sale has sizable margins, with estimates hitting as high as 20 per cent in Indonesia, according to a 2020 report by Momentum Works. The country also leads sales of used cars in South-east Asia in 2020, making it a lucrative market for Carro next to the other regional markets it operates in - Malaysia and Singapore.

With the Indonesian financial regulator not handing out any digital bank licences, anyone with ambitions to do more in the financial services space in the island archipelago will have to look at acquiring an Indonesian bank. And Carro is no different from the rest of the pack in snapping up stakes in Indonesian banks for a licence to offer more financing in the used car space.

Rather than just tapping these banks for cheap capital, Carro, like others eyeing Indonesian banking, is likely tapping them for the coveted banking licence. The fiduciary duty of the bank might preclude their owners from getting access to credit lines at favourable rates, as their business models have not yet shown any track record of profitability.

But a banking licence affords these banks the leeway to provide financing services, one that Carro can take advantage of to add volume to its car purchase financing business on its platform. The banks could provide loans to Carro’s customers, as the used car marketplace assesses and values each used car accurately, and reaps the margins from selling the used cars.

The stakes in the 2 Indonesian banks could go a long way in boosting Carro’s sales in the country. Indonesia’s used car market was estimated to be worth US$20 billion, compared to Singapore’s US$2.4 billion and Malaysia’s US$9.5 billion, according to the 2020 report by Momentum Works. The island archipelago also grew at a compounded annual growth rate of 8 per cent from 2010 to 2019, second-fastest in the region behind Thailand at 14 per cent.

Indonesia has been the site of a fierce battle between Carro and Malaysian used car marketplace Carsome, with both advertising their services via walking billboards in front of their rival’s branches. The sales volumes both seen from Indonesia and Thailand are currently small according to Momentum Works, and hints at either’s market share being not significant compared to local dealers, but Carsome is seen as being slightly ahead.

As more financing is made available to customers, a flywheel effect could kick in for Carro. Giving customers more options to finance their purchases could in turn increase the sales volume and inventory turnover.

Carro’s objective for getting into an Indonesian bank would then clearly manifest as more than just a method of market access, but as a way to turbo charge its efforts.