Grab, Gojek draw new battle lines in Indonesia's rural areas

Singapore

SUPER app rivals Grab and Gojek might be fighting it out in the first-tier cities of Indonesia, but both players know that the real battle to be won is out in the countryside.

It is where established financial institutions know it doesn't make financial sense to set up physical branches, making the digital financial services space a big, untapped growth area.

In the race to acquire users in these areas, Grab is in talks to merge Indonesian payments firm Ovo with Ant Financial-backed DANA, Reuters reported on Wednesday, citing sources. Fintech platform DANA is eyeing expansion in rural Indonesia to set itself apart in digital payments, news site DealStreetAsia reported.

In the other corner, Grab's rival Gojek is planning to integrate LinkAja, a mobile wallet aiming to increase financial inclusion in remote areas, with its platform by year-end.

Chia Hock Lai, president of the Singapore Fintech Association, said: "These are the areas where bank branches are not cost-effective, so digital wallets will be popular."

The World Bank noted in 2018 that about half of Indonesia's adult population is "unbanked", and a large portion of the population remains dispersed outside major cities.

This makes physical bank branches expensive to maintain; moreover, the population density in the countryside isn't high enough for banks to justify expanding into those areas, said Mr Chia.

Underpinning Grab and Gojek's strategy of partnerships and mergers and acquisitions is the hefty cost of customer acquisition.

Zennon Kapron, director of financial services consulting firm Kapronasia, noted that the discounts and promos these platforms have to dangle to woo customers are very large, "so it becomes very difficult to afford to continue to grow the customer base".

"This investment, acquisition or subsequent merger that might happen would go a long way to continue to build Grab's positioning in the market and build its customer base."

DANA, a newcomer to the space, launched its platform last November. The company, a joint venture between Ant Financial and Indonesian conglomerate Emtek, has claimed that it had, by the end of the first quarter of this year, 15 million users in the bag.

Its founder Vincent Iswara told DealStreetAsia that the platform processes over 1.5 million transactions a day.

Mr Chia of the Singapore Fintech Association said: "Scale matters in the payment space, where margins are razor-thin; very often, the massive payment data that is collected is as important for further monetisation."

He said a merger between DANA and Ovo, in which Grab has an undisclosed stake, could enable the merged entity to extend its lead over Gojek's Go-Pay.

It could also reap a network effect and build a ecosystem that extends beyond payment, much like what happened in China with Tencent's WeChat Pay and Ant Financial's Alipay, he added.

It is unclear what the ownership structure of the merged entity would look like, but the deal would have to comply with regulations that put a 49 per cent foreign-ownership cap on e-money issuers. (DANA's majority shareholder is Emtek.)

In the Gojek camp, its partner LinkAja was set up by a number of state-owned enterprises.

Even as opportunities in the untapped space abound, industry watchers told The Business Times that the super apps must keep a close eye on profitability.

Foo Tiang Lim, a partner at venture capital firm SeedPlus, said the challenge of operating in second-, third- or even fourth-tier cities is that monetisation is probably quite far away.

"I think ultimately, if you look at it in terms of resources or technical capabilities, there are very few players in the ecosystem that are able to do something like this," he said.

"So if not them, who? That in itself is a pretty good opportunity because it also means that there will be very few competitors doing the same thing in the category.

"Again, that doesn't mean that they will be profitable. But at least there is less competitive pressure to realise profitability in the short term."