Exploring Cooperation

in Financial Technology
between Indonesia and
Luxembourg

Prepared by:
Irene Margaret1

© 2021

1 Doctoral researcher; KU Leuven, Belgium. All queries should be directed to:

margaret.irene83@gmail.com

The findings, interpretations, and conclusions expressed in this article reflect the views of the
author and do not necessarily reflect the views of the Embassy of Indonesia accredited to Belgium,
Luxembourg, and European Union. The author takes full responsibility for all possible errors.
EXPLORING COOPERATION IN FINANCIAL DAFTAR ISI RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND SERIES
LUXEMBOURG

Contents

1 A. Background

B. Recent Development of Financial Technology and FinTech

4 companies in Asia and Indonesia

7 C. Characteristics of Financial Sector in Europe and Luxembourg

D. Potential Cooperation between Indonesia and Luxembourg in

10 Financial Technology

E. Attempts to Overcome the Cooperation during the COVID19

16 Pandemic

17 F. Conclusion

18 G. Policy Recommendation

19 References
EXPLORING COOPERATION IN FINANCIAL BACKGROUND
TECHNOLOGY BETWEEN INDONESIA AND
LUXEMBOURG
A Background
A.1. World’s Current Financial Situation
A
fter the last global financial crisis, mainly
triggered by the subprime mortgage crisis
in the United States, the global economy
continues to recover over the last decade. The
positive growth of the world’s per capita GDP since
2010 suggests that people around the world are
experiencing economic prosperity. This positive
trend in per capita income is observed alongside
a rapid increase in the level of digital penetration
as reflected in the proportion of internet users and
the number of mobile cellular subscriptions. As
illustrated in Figure 1, there are more than eight
billion mobile cellular subscriptions worldwide by
2019, almost double the number of subscriptions
in 2008. Likewise, the proportion of the world
population using the internet has grown from
less than 25% to around 50% between 2008
and 2017. Besides lending support to the
correlation between technology and welfare, this
parallel trend in economic prosperity and digital
penetration implies that the diffusion of technology
in day-to-day life becomes more pronounced as
Figure 1 GDP per capita and digital penetration
Source: World Bank (author calculation)
RESEARCH
SERIES
people can afford to buy technological devices
and are exposed to various digital platforms.
Although the COVID-19 pandemic undoubtedly
introduces a negative shock to the global
economy, which likely hurts economic prosperity
in the short run, digital penetration is still expected
to grow at a greater pace. Restrictions imposed in
many parts of the world highlight the importance
of technology as schools shift to home-schooling
and restaurants turn to home delivery in exchange
for indoor dining.
Despite the rapid increase in digital penetration
mainly in the low- and middle-income economies,
the developing countries are still lagging behind
the developed countries in financial development.
The plot of IMF’s financial development index in
Figure 2 reveals a persistent gap of depth, access,
and efficiency of financial institutions and financial
markets between advanced and emerging
markets despite the accelerated growth in mobile
cellular subscriptions within the last decade.
Figure 2 Mobile subscriptions and financial
development
Source: World Bank (author calculation)
1
EXPLORING COOPERATION IN FINANCIAL BACKGROUND RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND SERIES
LUXEMBOURG

A.2. Financial Technology and FinTech companies:

Definition and Recent Development

At the intersection of technology and the
financial domain is the financial technology
and the FinTech companies (Alt, Beck, &
Smits, 2018). Besides boosting the efficiency of
financial institutions (Wilson Jr., 2017), which is
substantial for country’s financial development,
financial technology is needed to facilitate
financial inclusion (Gnirck & Visser, 2016; Iwasaki,
2018; World Bank, 2016), which offers up to 6%
incremental increase to emerging economies
GDP (McKinsey Global Institute, 2016).
In the existing literature, financial technology
is often used interchangeably with the term
FinTech. However, in contrast to FinTech, which
started to gain traction as early as the year 2014
following the surge of the term in Google Trends,
financial technology has a long legacy and can
be traced way back to the era of e-Finance in the
1980s (Arner, Barberis, & Buckley, 2016; Gomber,
Kauffman, Parker, & Weber, 2018). While FinTech
is mainly directed to “companies that primarily use
technology to generate revenue through providing
financial services to the customer either directly
or through a partnership with financial institutions”
(Wilson Jr., 2017, p. 5, emphasize added),
financial technology can be broadly defined as the
applications of technology to change, improve,
and transform the delivery and use of banking and
financial services (Alt et al., 2018; Kshetri, 2020).
development and attractiveness of each FinTech
category. Payment services particularly consumer
payments, appear to be the most attractive
category as indicated by the highest average
funding. Lending, both consumer and business
lending, also gains traction despite the relatively
young company age. Notable newcomers are
digital banking start-ups that operate virtual and
branchless banks like UK-based Mondo or US-
based Chime. A related sector like insurance
technology (InsurTech) is also expanding with the
number of companies quadrupled in less than five
years; from 449 in 2017 to 1,653 in 2021.
The COVID19 pandemic placed a temporary
break to FinTech’s growth. After enjoying a
massive annual growth of more than 25% since
2014, Dealroom data shows that the growth of
venture capital funding for FinTech has dropped
to 11% globally (McKinsey&Company, 2020). The
disruptive impact was more severe in Europe with
a 30% drop in funding for the first half of 2020,
compared to the same period in 2019. Multiple
reports nonetheless indicate that across the globe,
venture capital funding in FinTech already started
picking up in the second half of 2020 (Dealroom &
BCG, 2020; Oliver Wyman, 2020).

Besides the long-established FinTech

companies like VISA Inc. or PayPal Inc.,
disproportionate attention has been given to the
FinTech start-ups which have buffeted the financial
services industry with technology innovation,
process disruption, and services transformation.
Based on recent statistics from VentureScanner,
which tracks new ventures in many different
start-up areas, there are 3,180 FinTech start-
ups worldwide by early 2021. The innovation
quadrants in Figure 3 give some ideas on the

2
EXPLORING COOPERATION IN FINANCIAL BACKGROUND RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND SERIES
LUXEMBOURG

Figure 3 Innovation quadrants of FinTech start-ups

Source: VentureScanner

3
EXPLORING COOPERATION IN FINANCIAL RECENT DEVELOPMENT OF FINANCIAL RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND TECHNOLOGY AND FINTECH COMPANIES IN SERIES
LUXEMBOURG ASIA AND INDONESIA

Recent Development of Financial Technology

B and FinTech companies in Asia and Indonesia

S
everal relevant indicators namely the
proportion of internet users and banked
population together with the trend in digital
payment activities are observed in Table 1 to
capture the progress of digital penetration and the
development of financial technology in Southeast
Asia. In relatively advanced Asian economies,
the internet has reached almost all people in
the population. The proportion of internet users
in South Korea, the home of technology giants
Samsung Electronics and the recently IPO-ed
marketplace Coupang Inc., has surpassed the
United States (88%) and is on par with Europe’s
financial center Luxembourg (97%). This high
degree of digital penetration comes together with
high digital payment activities and a cashless
society as observed from the low proportion of
wage-earners paid only in cash (<5%). A similar
situation is observed in Hong Kong and Singapore,
which have been dubbed as the financial centers
of Asia.
A different picture is however painted in
the more populated ASEAN markets namely
Indonesia, Vietnam, Thailand, Malaysia, and the
Philippines. Although the internet has reached a
larger population, the pace of financial technology
adoption remains to vary. While digital payment
in Malaysia and Thailand has grown by more
than 15% and 21%, respectively, the growth
rate is below 10% in Vietnam and Indonesia. A
similar pattern is also observed for mobile money
account. In contrast to Thailand that has rapidly
moved toward a cashless society, Vietnam,
Indonesia, and the Philippines struggle to
transform their cash-based societies. As indicated
in Table 1, the rate of wage-earners paid only in
cash remains high at 71% and 60% for Indonesia
and Vietnam, respectively. For Thailand, this
number has been dropped as low as 45%.
This situation is likely associated with the high
proportion of the unbanked population because
people who received their wages only in cash are
less likely to have a bank account. These statistics
give an early indication of the potential of FinTech
start-ups in facilitating financial inclusion in Asian
emerging markets.

Table 1 Digital penetration and digital financial activities across Asian countries

Source: World Bank Global Financial Inclusion (author calculation)

4
EXPLORING COOPERATION IN FINANCIAL RECENT DEVELOPMENT OF FINANCIAL RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND TECHNOLOGY AND FINTECH COMPANIES SERIES
LUXEMBOURG IN ASIA AND INDONESIA

Besides the opportunity to reach the high proportion of the unbanked population and transforming
the cash-based societies, FinTech companies can help addressing the financing gap of micro and
small-medium enterprises (MSMEs) in southeast Asia (Iwasaki, 2018). As can be seen from Figure 4, this
issue is more pronounced in Indonesia and Thailand. According to IFC statistics, there are more than 62
million micro-enterprises in Indonesia as of 2019, way exceeding China with 54 million micro-enterprises,
with around 52% of them find it challenging to secure loans from banks and other financial institutions.
For Indonesian SMEs, this proportion is slightly lower at 49% with estimated potential demand of over
140 million USD, greater than the combined potential demand of Malaysian SMEs (84 million USD) and
Vietnamese SMEs (32 million USD).

Figure 4 Finance gap for MSME in four ASEAN countries

Source: IFC MSME Finance Gap (author calculation)

Within ASEAN, Indonesia is trailing Singapore
as the most preferred headquarter location
hosting around 20% of FinTech companies in the
region (UOB, 2017). Besides the demographic
potential, commitment to fostering FinTech
start-ups supports the well-being of the FinTech
ecosystem in Indonesia. Alongside the conducive
regulatory environment, Indonesia Financial
Services Authority (OJK) has officially appointed
Indonesia FinTech Association (AFTECH) as
the umbrella organization for digital financial
innovation with members comprising not only
start-ups and financial institutions but also
regulators, technology, and research partners. As
this report is written, there are 362 start-ups listed
as the AFTEC members together with 24 financial
institutions and 15 research and technology
partners. These member companies comprise
80% of licensed FinTech start-ups in Indonesia.
In an analysis using CB Insights data, Oliver
Wyman (2020) reported that Indonesian FinTech
companies managed to secure 654 million USD2
of private-sector funding between 2015 and 2019.
Albeit still smaller than the cumulative FinTech
investment in Singapore, this number is larger by at
least fourfold compared to the FinTech investment
in Thailand and Vietnam within the same period.
The latest AFTECH annual member survey
nonetheless reveals that the majority of foreign
FinTech investment in Indonesia is sourced from
other Asian countries namely Singapore (18%),
China (8%), and Japan (7%), while only a small
portion is contributed by the EU (2%). The majority
of Indonesian FinTech start-ups in this survey are
classified as series A and above, suggesting
the valuation of these companies is continuously
increasing.
Based on the existing regulations, AFTECH
classified Indonesian FinTech into four business
models: digital payment, online lending,
digital financial innovation (DFI), and equity
crowdfunding. Digital payment includes
payments-relevant licenses issued by the Bank of
Indonesia, namely e-money, e-wallet, remittance,

2 In the report, Gojek investment is excluded for Indonesia, while Grab investment is excluded for Singapore.

5
EXPLORING COOPERATION IN FINANCIAL RECENT DEVELOPMENT OF FINANCIAL RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND TECHNOLOGY AND FINTECH COMPANIES IN SERIES
LUXEMBOURG ASIA AND INDONESIA

payment gateway, and QR Code Indonesian
Standard (QRIS). Online lending comprises
peer-to-peer (P2P) lending for multi-purposes,
productive, and sharia. Similar to the pattern at
the global level, Indonesia’s digital payment and
online lending start-ups continue to gain traction
compared to the remaining FinTech categories.
Besides facilitating retail transactions, digital
payment is considered a strategic tool for non-
bank financial institutions. For example, the
recently announced partnership between digital
payment platform OVO and insurance company
Prudential Indonesia is expected to boost
insurance penetration through digital sharia life
insurance products. Online lending continues
to record positive growth both in volume and
value, which is likely accelerated by the COVID19
pandemic. Based on OJK data, there are 45
licensed and 103 registered FinTech lending as
of February 2021 with the total cumulative value
of loan disbursement exceeding IDR 169 billion
(around 11.7 billion USD) since 2014. Most of
these FinTechs operate for less than five years.
DFI covers business models under OJK
Regulation No. 13/2018 and is defined as business
process update activity, business model, and
financial instruments that provide newly added
value in the financial services sector by involving
the digital ecosystem. There are three stages in
the overall licensing process of DFI: recorded
(tercatat), registered (terdaftar), and licensed
(berlisensi). According to data from OJK’s
dedicated website for DFI – Gesit, 87 applicants
representing 15 DFI clusters, such as e-KYC,
InsurTech, financial planner, and credit scoring
to name a few, have been given the recorded
status as of December 2020. Equity crowdfunding
is a nascent category in Indonesia with raising-
fund activities directed at increasing the MSMEs
capital. AFTECH reported that there are three
licensed start-ups and another ten still in the
process of obtaining a license. Citing a study from
the Institute for Development of Economics and
Finance (INDEF), AFTECH reported that the three
start-ups managed to accumulate investment of
IDR 15.5 billion (around 1.07 million USD) by the
end of 2019.

6
EXPLORING COOPERATION IN FINANCIAL CHARACTERISTICS OF FINANCIAL
TECHNOLOGY BETWEEN INDONESIA AND SECTOR IN EUROPE AND
LUXEMBOURG LUXEMBOURG
Characteristics of Financial Sector in
C Europe and Luxembourg
E
urope is a global leader in the development
of both financial institutions and financial
markets as indicated by IMF’s financial
development index (Figure 5). For instance, the
development of both financial institutions and
financial markets of the least developed countries
in Europe on average are still ahead of the ASEAN
and Middle East countries. In general, Europe
is a cashless society with a very high banked
population (Table 2). Middle-income European
economies, like Poland, recorded less than 3%
of the wage-earners are paid only in cash. In
relatively more advanced economies, like the
Benelux Union, this statistic is close to zero. In
addition to the highly educated and digitally
savvy population, the cashless European society
is facilitated by the single euro payments area
(SEPA) which harmonizes financial transactions
across 36 European countries. Many European
banks offer online application for opening
current and saving account, and the availability
of automated teller machines (ATM) is notably
higher in Europe than elsewhere. These combined
observations suggest that financial inclusion is
less of an issue for the European economies and
FinTech may play a different role in the European
financial services industry.
Figure 5 Financial development across the region
RESEARCH
SERIES
While the emergence of FinTech in developing
countries is mainly triggered by pain-points in
traditional banking services and is expected to
create substantial benefit from financial inclusion
(Iwasaki, 2018; Kern & Karametaxas, 2021), the
presence of FinTech in the developed countries
is often depicted as a threat, particularly to
community banks and smaller regional banks
with monopolistic positions (Gomber et al.,
2018; Wilson Jr., 2017). This posture is less
surprising since traditional banks have dedicated
a substantial amount to digitalization. According
to the European Banking Authority (2019), IT-
related expenses absorbed about one-third of
banks administrative expenses albeit only 17.5%
of the IT expenses is used for digital innovation
or new technologies. There is however an
opportunity for cooperation between European
FinTech companies and banks in reducing costs,
especially those related to compliance.
Table 2 Financial inclusion (selected European
countries)
Source: World Bank Global Financial Inclusion
7
EXPLORING COOPERATION IN FINANCIAL CHARACTERISTICS OF FINANCIAL
TECHNOLOGY BETWEEN INDONESIA AND SECTOR IN EUROPE AND
LUXEMBOURG LUXEMBOURG
Compliance with financial regulations is
mandatory for the long-term survival of FinTech
start-ups. Yet financial regulations vary across
countries, which poses a challenge to expansion.
Such a challenge is nonetheless minimized in
Europe. Compared to the complex, multi-level
regulations in the United States, financial regulation
in Europe is relatively harmonized following
the implementation of the Single Supervisory
Mechanism (SSM) in 2014 (Wendenburg, 2016).
There are 27 European member states under SSM.
When expanding to other European countries,
a company should work with the local national
competent authority (NCA), i.e., the Autorité de
contrôle prudentiel et de résolution in France and
Commission de Surveillance du Secteur Financier
in Luxembourg, both are based on a similar
regulatory and legal stack as Germany. The digital
finance package that was launched in 2020 by the
European Commission is also intended to further
reduce obstacles to cross-border operations and
help European FinTech to scale up. Europe is
also considered as a breeding ground for global
financial regulation. The General Data Protection
Regulation (GDPR) of the European Union is
recognized as the best practice for data protection
and privacy. Europe also hosts the Financial
Action Task Force on Money Laundering (FATF)
whose comprehensive framework against money
laundering and financing terrorism is accepted
globally.
Compared to the harmonized financial
regulation in Europe, financial regulation in
ASEAN is fragmented (UOB, 2017; Wendenburg,
2016) which poses a challenge on cross-border
operations of FinTech companies at the regional
level. Several initiatives have been taken to
reduce the complexity of financial regulations
and to increase collaboration between ASEAN
FinTech players, such as the ASEAN Framework
Agreement on Services (AFAS) negotiations and
the foundation of the ASEAN FinTech Network in
2017. The network would nonetheless benefit from
benchmarking with European Union.
8
RESEARCH
SERIES
FinTech is Europe’s largest investment
category with a cumulative value of venture
capital investment reaching 30 billion euros since
2014, with most contribution from the London hub
(Dealroom & BCG, 2020). There is nonetheless
disproportionate attention directed at Luxembourg
as the key FinTech hub especially post Brexit. By
hosting big names like PayPal, Rakuten, Amazon
Pay as well as the European-based Payconiq,
Luxembourg has established its role as the central
hub for digital payment.
Based on UNCTAD’s Technology and
Innovation report (2021), Luxembourg is classified
as one of the countries with high readiness for
frontier technology and ranked third globally
in terms of ICT deployment, ahead of United
Kingdom, Germany, and France. This trait confirms
Luxembourg’s status as the international financial
center alongside Berlin and London. The general
digital economy of Luxembourg and its FinTech in
particular benefits from the relatively abundant ICT
talents and strong security policy. Based on Table
3, IT specialists are present in 22% of the firm
population in Luxembourg. As a key element of
successful digital transformation, a workforce with
ICT skills facilitates the effective use of e-business
and e-commerce. Besides streamlining the
business processes and commercial transactions,
the presence of ICT specialists is also essential for
ICT security. As can be observed from Table 3,
46% of firms in Luxembourg perform ICT security
independently rather than outsourcing this activity
from external parties. Since fraud and cyber-
attack pose a high risk to the development of
Fintech, the ability of Luxembourg firms to perform
ICT security internally signals the presence of
talents with specialized ICT skills.
EXPLORING COOPERATION IN FINANCIAL CHARACTERISTICS OF FINANCIAL RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND SECTOR IN EUROPE AND SERIES
LUXEMBOURG LUXEMBOURG

Table 3 ICT & security indicators across European FinTech hubs

Information society United Kingdom Germany Belgium Netherlands Luxembourg Lithuania

indicator (%) (UK) (DE) (BE) (NL) (LU) (LI)

Firms with IT
specialist 29 19 30 25 22 16

Data backup to a
separate location 75 89 80 86 79 68
(cloud)

ICT security
performed by 48 43 40 48 46 46
employees

Source: Eurostat

Besides the high quality of ICT infrastructure and the prevalence of ICT talents, Luxembourg’s
competitiveness also lies in its flexible regulations. The country is recognized by IMF as one of the national
authorities that have undertaken law reform initiatives, in consultation with private sector stakeholders and
experts, to enact or announce amendments to ensure legal principles attract and nurture fintech industries
in their countries (IMF, 2019). Luxembourg is recognized for its best access to finance as measured by
the World Economic Forum venture capital availability index. This strength can be attributed partly to the
high investor confidence in the country’s human capital and regulatory quality. Luxembourg is also known
for its effective data storage system. Luxembourg also hosts multicultural talents with more than 70% of its
workforce being foreigners (Faid, 2016). To foster innovation, Luxembourg initiated the Luxembourg House
of Financial Technology (LHoFT) in which players in private and public sectors collaborate.

9
EXPLORING COOPERATION IN FINANCIAL POTENTIAL COOPERATION BETWEEN RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND INDONESIA AND LUXEMBOURG IN SERIES
LUXEMBOURG FINANCIAL TECHNOLOGY

Potential Cooperation between Indonesia

D and Luxembourg in Financial Technology

T
he objective of this study is to explore
the potential cooperation in financial
technology between Luxembourg and
Indonesia, thereby boosting future investment-
related activities in banking and financial services
between the two countries. Given the exploratory
nature of the research and the relatively short
study period, we identify the potential areas by
examining the competitive advantage alongside
the risk and challenges in financial technology
between the two countries. To examine the
competitive advantage of Indonesia among
the ASEAN markets as well as the competitive
position of Luxembourg against other European
FinTech hubs, we conduct quantitative analysis by
adapting the outranking methods in multicriteria
analysis known as the Preference Ranking
Organization Method for Enrichment Evaluation
(PROMETHEE) (Brans, Vincke, & Mareschal,
1986). This method has been widely used to
identify both the preferred FDI location and the
prospective projects (e.g., Diakoulaki et al., 2007).
We complement findings from the quantitative
methods with qualitative content analysis.
in Indonesia. We subsequently examine how major
European Fintech hubs particularly Luxembourg
helps to address these risks and challenges. This
part of the analysis would inform Luxembourg’s
competitive positioning against other European
countries and expose Indonesian FinTech firms to
Luxembourg’s traits which potentially address the
risks and challenges.
We begin the first part of the analysis by
looking at the composition of FinTech products
in ASEAN together with the composition in each
country. As can be observed from Table 4, there
is a substantial variation in the focus category
for FinTech products across ASEAN countries.
For countries with a high proportion of unbanked
population like Indonesia and the Philippines (see
Table 1 in Section B as a reference), online lending
is the most growing category with the greatest
number of FinTech products. The rapid growth
of online lending start-ups is further accelerated
by the aggressive goal of Indonesia to achieve
financial inclusion by 2024, which includes
effective access to credit.

We divide the analysis into two parts. In the In terms of business consumers, Indonesia
first part of the analysis, we examine the FinTech dominated the ASEAN market for online lending
category in ASEAN and subsequently identify for SMEs. The market for personal lending in
the business model with the highest potential for Indonesia is only second to the Philippines,
Indonesia. Since collaborative FinTech investment which suggests that despite the relatively mature
depends on the characteristics of the FinTech category, this business model is likely to show
ecosystem (Lee & Shin, 2018), we evaluate the steady growth in the future.
FinTech ecosystem for the associated business
model using the PROMETHEE II method. This part
of the analysis would benefit Luxembourg investors
who look for an opportunity to explore Indonesia
as an FDI target location by informing not only the
potential of the Indonesian FinTech market but also
the regulatory aspect. In the second part of the
analysis, we explore the perceived risks and major
challenges associated with FinTech development

10
EXPLORING COOPERATION IN FINANCIAL POTENTIAL COOPERATION BETWEEN RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND INDONESIA AND LUXEMBOURG IN SERIES
LUXEMBOURG FINANCIAL TECHNOLOGY

Table 4 Proportion of FinTech products in each Fintech category across ASEAN

Singapore Indonesia Malaysia Philippines Thailand

FinTech Category ASEAN
(SG) (ID) (MY) (PH) (TH)

Digital payment 26 34 21 32 29 5

Online lending 32 23 55 27 57 25

Ent. Tech for Finance 17 18 6 14 21 5

Crowdfunding 21 13 24 41 14 45

Trading capital markets 10 13 6 5 0 5

AI/ML/BigData 15 13 12 5 14 0

Asset Management 9 11 3 5 0 0

Personal Fin Mgmnt 11 8 0 23 7 5

Enterprise Fin Mgmnt 10 7 3 5 0 5

InsurTech 8 5 0 5 0 20

Source: Cambridge Center for Alternative Finance

To assess the potential development of
FinTech in Indonesia, we evaluate the three
elements of the FinTech ecosystem namely
financial customers, financial regulators, and
traditional financial institutions (Lee & Shin, 2018).
For financial consumers, we use the proportion
of the banked population as a proxy for personal
consumers and the proportion of SMEs with
unconstrained finance as a proxy for business
consumers. The lower these proportions, the
greater the market opportunity to grow as financial
consumers are the source of revenue generation
for the FinTech firms. We use the quality of FinTech
regulation and the association with bank and
financial service regulation as proxies for financial
regulation. When there is a moderate degree
of government intervention and low adoption
of banking and financial service regulation,
collaborative FinTech investment is less likely to
be created through the formal channel. Therefore,
intermediary institutions like AFTECH become
increasingly important to facilitate collaborative
investment when regulations are less tight and the
connection to banks is loose. We additionally add
political stability to assess the potential threats
from frequent regulatory change. In Table 5, we
provide the evaluation matrix for the FinTech
ecosystem in Indonesia.

Table 5 The evaluation matrix of FinTech ecosystem in ASEAN

FinTech Singapore Indonesia Malaysia Philippines Thailand

Data Source Proxy
ecosystem (SG) (ID) (MY) (PH) (TH)

Financial consumers (f1) World Bank Banked population min 99.15 52.59 88.71 35.50 83.40

Financial consumers (f2) IMF Unconstrained SMEs min 10 51.71 59.98 80.66 45.60

Government (f3) WGI Political stability max 1.59 -0.51 0.16 -1.24 -0.76

Government (f4) CCAF Excessive regulation min 10 33 15 9 40

Government (f5) CCAF Banking/FS regulation max 43 37 56 71 17

Traditional FI (f6) IMF Financial institution index max 0.76 0.43 0.67 0.38 0.74

11
EXPLORING COOPERATION IN FINANCIAL POTENTIAL COOPERATION BETWEEN RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND INDONESIA AND LUXEMBOURG IN SERIES
LUXEMBOURG FINANCIAL TECHNOLOGY

We present the results from the PROMETHEE II method assessing the comparative evaluation of the
FinTech ecosystem for online lending in Table 6. For the overall weighting scenario, Indonesia places 2nd
which confirms the attractiveness of the Indonesian market for FinTech firms. When we look further into the
specific element of the ecosystem, regulation is available although not excessively imposed and FinTech
firms are regulated separately from banks and other formal institutions. This suggests that FinTech startups
in Indonesia tend to be less collaborative with established financial institutions.

Table 6 Results using PROMETHEE II

Positive flow Negative flow Net flow Rank

Singapore (SG) 0.122 0.436 -0.314 5

Indonesia (ID) 0.309 0.141 0.168 2

Malaysia (MY) 0.169 0.235 -0.066 4

Philippines (PH) 0.292 0.303 -0.012 3

Thailand (TH) 0.358 0.135 0.223 1

Source: Author calculation based on Table 5

Now we proceed to the second part of
the analysis by looking at the perceived risk
and challenges of Indonesian FinTech firms.
According to a survey on 251 CEOs of Asian
FinTech firms reported by Statista, talent shortage
has been quoted as a major challenge for growth
(see Table 7). This result is also confirmed by
another research. In a joint study of Google,
Temasek, and Bain & Company (2019), the size
of Indonesia’s digital economy was estimated to
reach 130 billion USD by 2025, almost half of the
overall size of Southeast Asia’s digital economy.
While the hardware tools for reaching this number
have been continuously sharpened, as evidenced
in the infrastructure development initiatives
across the archipelago, the software is relatively
underdeveloped. As projected in a study by World
Bank (2018), there will be a shortage of 9 million
skilled and semi-skilled ICT workers in Indonesia. In
line with this projection, the latest AFTECH annual
member survey (2020) pointed that the talent gap
in the Fintech sector is attributed to shortages in
talents for data analytics and programming as
well as professionals in service management,
such as risk and business management. Since
scale-up requires not only sufficient funding but
also sufficient talent, this challenge poses a risk
especially in the more mature categories, like
online lending, if they consider upgrading from
start-up to scale-up.
Besides the need for talents, FinTech
players, primarily in the online lending category in
Indonesia, consider fraud and cyber security as
a source of threats for their operation and future
growth. The risk of fraud is not only sourced
from the hardware but also the lack of consumer
literacy in digital finance. Although various reports
and statistics indicate that the breadth of digital
penetration, either measured by the proportion of
internet users or the number of mobile phone and
social media users, has increased substantially
throughout Indonesia, there is still a big homework
in the use of technology for financial activities.
The latest annual survey conducted by Indonesia
Internet Service Provider Association (APJII, 2020)
shows that although the internet has reached
73.7% of Indonesia’s population, 80.2% of the
survey respondents reported that they do not use
e-money. Furthermore, 56.7% of the respondents
claimed that they do not have mobile banking and
61.2% said that they never use internet banking.
One possible explanation for the imbalance
between the ubiquity of the internet and mobile
phones and the low digital banking activities is
financial literacy.

12
EXPLORING COOPERATION IN FINANCIAL POTENTIAL COOPERATION BETWEEN RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND INDONESIA AND LUXEMBOURG IN SERIES
LUXEMBOURG FINANCIAL TECHNOLOGY

Improving consumers’ financial literacy is
important for banks because better understanding
and usage of online banking services increase
the likelihood of long-term customer retention
(Campbell & Frei, 2010). For Fintech companies,
financial literacy is substantial for outreach and
to enlarge their customer base. AFTECH survey
shows that although the transaction value of
e-money keeps growing year on year, FinTech’s
markets remain highly concentrated in Greater
Jakarta and major cities in Java Island. This
implies that the opportunity to improve financial
literacy outside Java Island might be necessary to
increase the transaction volume of digital financial
services. Besides creating viable benefits to
financial service providers, financial literacy is
also important for consumer protection against
crimes, such as illegal peer-to-peer (P2P) lenders
or voice phishing.

Table 7 Perceived risks (up) and challenges (bottom) of FinTech in Indonesia

Perceived challenges Response

Attracting the right talent 39%

Product development 25%

Convincing investors of start-up potential 22%

Creating suitable system and process 18%

Maintaining high-performance culture 17%

Business model viability 15%

Product-market fit 14%

Source: Statista

Indonesia Malaysia Philippines Thailand

Risk Factor
Very High Risk High Risk Very High Risk High Risk Very High Risk High Risk Very High Risk High Risk

Fraud 8 31 0 40 0 55 15 8

Cyber Attack 15 23 0 53 9 55 7 21

Regulatory 23 46 19 7 9 9 23 31
change

Delicensing 24 19 0 0 11 33 17 17

Customer 10 0 0 36 0 22 27 27
loyalty

Source: Cambridge Center for Alternative Finance

13
EXPLORING COOPERATION IN FINANCIAL POTENTIAL COOPERATION BETWEEN RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND INDONESIA AND LUXEMBOURG IN SERIES
LUXEMBOURG FINANCIAL TECHNOLOGY

Another potential source of growth for
Indonesian FinTech comes from the DFI category.
DFI operators offer a unique business model,
often is inspired by local community practices.
Take the example of crowdfunding FinTech
MAPAN3 which business model is inspired by
Indonesian culture arisan, a social gathering in
which members agree to pay a fixed amount of
money during a certain period and take turns
in getting the “potluck” money. For the DFI
operators, one of the challenges for growth is
to secure sufficient funding. The latest AFTECH
survey shows that 67% of DFI operators are trying
to raise investment while only 26% have managed
to raise as much as needed. Another persistent
challenge is regulation. Given the uniqueness of
the DFI business model in the existing financial
service sector, regulators need to search for a
reference when evaluating the proposal from the
DFI operators. Most of the time, it is not easy to
find such a reference while regulators need to
make a timely and robust assessment in order to
secure maximum consumer protection.
While the risks associated with regulatory
changes and delicensing are less likely to be
addressed through cooperation with foreign
partners, Indonesian FinTech firms would be
more likely to seek support in addressing the
talent shortage and security-related risks. To
explore this potential area of collaboration, we
adapt the PROMETHEE II method and examine
Luxembourg’s competitive positioning against
major European FinTech hubs like London and
Berlin, and the growing hub Vilnius. We use the
value and volume of FDI inflow to Indonesia to reflect
historical bilateral investment with Indonesia. To
evaluate specific traits relevant to talent shortage
and cyber security, we use the proportion of firms
with IT specialists, the proportion of firms in which
ICT security is performed by employees, and
the proportion of firms that have data backup
including cloud storage.
In Table 8, we provide the five evaluation
criteria that we use for examining the comparative
advantage of the selected European FinTech
hubs. Subsequently, we analyze the results from
the PROMETHEE II method in Table 9 to assess
the competitive positioning of Luxembourg
compared with other European Fintech hubs.

Table 8 The evaluation matrix on ICT talents and cyber security capability of European FinTech hubs

Evaluation criteria Data Source Netherlands Germany France UK Luxembourg Belgium Lithuania

FDI to Indonesia (value) BKPM max 176.7 95.7 39.3 17.8 14.9 13.6 0.4

FDI to Indonesia (project) BKPM max 598 215 212 303 87 79 3

Firms with IT specialist Eurostat max 25 19 18 29 22 30 16

Data backup to a separate

Eurostat max 86 89 68 75 79 80 68
location (cloud)

ICT security performed by

employees Eurostat max 48 43 40 48 46 40 46

3 Acquired by Gojek in 2017

14
EXPLORING COOPERATION IN FINANCIAL POTENTIAL COOPERATION BETWEEN RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND INDONESIA AND LUXEMBOURG IN SERIES
LUXEMBOURG FINANCIAL TECHNOLOGY

Based on the results of PROMETHEE II that mainly targeted at value-generating projects,

we present in Table 9, Luxembourg places 4th
based on the overall using the five evaluation
criteria. However, this rank is more likely
driven by the historical bilateral investment
with Indonesia. In terms of investment value in
Indonesia, Luxembourg is on par with the UK
and Belgium while below France, Germany, and
the Netherlands. However, the value per FDI
project for Luxembourg is significantly larger than
the UK and on par with France. This suggests
that Luxembourg’s investment in Indonesia is
such as those in the service sector. As reported
by Indonesia’s investment promotion agency
(BKPM), the tertiary sector occupies 32.98%
of Luxembourg’s investment in Indonesia. As a
comparison, the share of investment in the tertiary
sector from Belgium is only around 15.41%.
In terms of ICT-related traits, Luxembourg is
at least on par with other main European hubs
such as London and Berlin as reflected in the
high presence of ICT talents and cyber-security
measures.

Table 9 Results using PROMETHEE II

Positive flow Negative flow Net flow Rank

Netherlands (NL) 0.517 0.029 0.488 1

United Kingdom (UK) 0.325 0.116 0.209 2

Germany (DE) 0.283 0.192 0.091 3

France (FR) 0.028 0.473 -0.445 7

Belgium (BE) 0.196 0.284 -0.088 5

Luxemburg (LU) 0.191 0.164 0.027 4

Lithuania (LI) 0.094 0.376 -0.282 6

15
EXPLORING COOPERATION IN FINANCIAL ATTEMPTS TO OVERCOME THE
TECHNOLOGY BETWEEN INDONESIA AND COOPERATION DURING THE
LUXEMBOURG COVID19 PANDEMIC
Attempts to Overcome the Cooperation
E during the COVID19 Pandemic
O
n the 9th of September 2021, Indonesia
Embassy in Brussels facilitated a tripartite
meeting with FinTech associations of the
two cooperating countries, AFTECH and LHoFT.
Given the ongoing pandemic, the meeting was
held online with the agenda of fine-tuning the
direction of cooperation by sharing updates on
the development of FinTech start-ups and the
respective FinTech environment in each country.
Both AFTECH and LHoFT also shared the
direction for the future development of FinTech in
their respective country. In this meeting, we also
find an opportunity to verify the empirical findings
in Section D.
Both parties confirm that talents and cyber
security are the two important challenges for
the future development of FinTech not only in
Indonesia but also in Luxembourg. As confirmed
by AFTECH, Indonesia continues to face
shortages in talent quality despite the surplus in
talent quantity. In response to this issue, LHoFT
responds positively by sharing their experience
in building ICT skills of FinTech in emerging
economies. Rather than conducting a 3-months
incubator or accelerator program, LHoFT offers
short-term intensive boot camps which allow the
young FinTech entrepreneurs to learn the gist of
running and surviving in the FinTech industry.
One of the examples is catapult (https://catapult.
lu/) which targeted not only the African FinTech
start-ups but also the European start-ups aiming
at the African markets. Such a capability-building
program is further supported by Luxembourg’s
experience as an international financial service
center and the use of English as the commonly
used language for business. Compared to other
European hubs like Brussels, in which French
and Dutch are used as the primary language, the
use of English is more suitable for the Indonesian
audience.
16
RESEARCH
SERIES
To overcome the issue of cyber security, both
parties are willing to explore the opportunity to
share knowledge like sharing the finding from
AFTECH’s task force on cyber security. Likewise,
such knowledge sharing can also be conducted
for regulatory technology. For example, AFTECH
and LHoFT could organize sharing sessions
where Indonesian FinTech regulators (e.g., OJK)
meet not only Luxembourg RegTech players but
also the relevant regulatory bodies.
Besides confirming the similar interests
between the two countries, the meeting also
reveals the different focus on the FinTech category.
While AFTECH confirms that online lending (P2P)
remains the focus category in Indonesia, LHoFT
indicates that Luxembourg FinTech firms put less
focus on consumer lending (B2C). Rather, the
focus is more on helping banks and other formal
financial institutions to reduce costs (B2B), such
as the 27% expense on compliance cost. This part
of the discussion is in line with our observation
that Fintech plays different roles in emerging and
developed economies. While FinTech in Indonesia
is needed to facilitate financial inclusion, FinTech
in Luxembourg is needed to drive down the
operating costs of the established financial
institutions.
EXPLORING COOPERATION IN FINANCIAL CONCLUSION RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND SERIES
LUXEMBOURG

F Conclusion

F inTech plays a different role in emerging economies compared to

the developed economies. For emerging markets like Indonesia
FinTech provides better access to financial products and services;
thus, facilitates financial inclusion. In contrast, the presence of FinTech
in developed economies like Luxembourg aims primarily at reducing
the operating costs of banks and other established financial institutions.

Despite the different roles of FinTech start-ups in the financial

service industry of Indonesia and Luxembourg, cooperation between
Indonesia and Luxembourg in financial technology is possible. This
study identifies that the cooperation covers not only the area of talent
development and cyber security but can be extended to regulatory
technology. In the area of talent development, Indonesia might respond
to Luxembourg’s invitation on having a short-term boot camp as a
capability-building program for Indonesian FinTech entrepreneurs.
In the area of cyber security, both Indonesia and Luxembourg may
develop a sharing session in which the task forces of AFTECH could
share their findings and knowledge. This type of knowledge-sharing
activity can also be extended to involve FinTech regulators in Indonesia
and Luxembourg particularly to regulators who set up the regulatory
sandbox for business models under the digital financial innovation
category.

17
EXPLORING COOPERATION IN FINANCIAL LATAR BELAKANG RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND SERIES
LUXEMBOURG

G Policy Recommendation

G iven Indonesia’s ambition to achieve financial inclusion by 2024,

cooperation with an international financial center like Luxembourg
becomes important particularly in accelerating the growth of FinTech
in Indonesia. Although at this stage the cooperation in financial
technology between Indonesia and Luxembourg is still limited to
sharing knowledge, the bilateral relationship can be leveled up to
sharing technology. For future development of the cooperation, we
recommend the following,

First, given the early stage of cooperation and the limited knowledge
of the Indonesian audience on Luxembourg traits primarily in the ICT
area, the two countries need to maintain regular communication. It
is therefore recommended for AFTECH and LHoFT to maintain close
contact as these two organizations play a crucial role in connecting
all members of the FinTech ecosystem in Indonesia and Luxembourg,
respectively. Another way to maintain communication is by inviting
LHoFT to the upcoming FinTech summit.

Second, Indonesia may leverage the advancement of RegTech in

Luxembourg to accelerate the growth of the DFI category. With the
rapid increase of Fintech start-ups with business models under the
digital financial innovation cluster, Indonesian regulators may look at
Luxembourg as a reference for the regulatory framework. It is therefore
recommended to involve OJK in the next group meeting together with
AFTECH and LHoFT.

Finally, both Indonesia and Luxembourg should translate the

findings from this study into more tangible activities in order to boost
confidence for future cooperation. The short-term boot camp could be
a good starter. To increase the probability of success, AFTECH may
help to select a balance of FinTech start-ups that are already in the A
series with those at the pre-seeding stage to attend this boot camp.

18
EXPLORING COOPERATION IN FINANCIAL BAHAN ALAMI DAN RESEARCH
TECHNOLOGY BETWEEN INDONESIA AND PRODUK KOSMETIK SERIES
LUXEMBOURG

References
1. AFTECH. (2020). Annual member survey 2019/2020. Retrieved from Jakarta: https://fintech.id/
dokumen/aftech-annual-member-survey-report-20192020
2. Alt, R., Beck, R., & Smits, M. T. (2018). FinTech and the transformation of the financial indus-
try. Electronic Markets, 28, 235-243.
3. APJII, A. P. J. I. I. (2020). Laporan survei internet APJII 2019-2020 (Q2). Retrieved from Jakar-
ta: https://apjii.or.id/content/read/39/521/Laporan-Survei-Internet-APJII-2019---2020-Q2
4. Arner, D. W., Barberis, J., & Buckley, R. P. (2016). The evolution of Fintech: A new post-crisis
paradigm. Georgetown Journal of International Law, 47(4), 1271-1319.
5. Brans, J.-P., Vincke, P., & Mareschal, B. (1986). How to select and how to rank projects: The
PROMETHEE method. European Journal of Operational Research, 24(2), 228-238.
6. Campbell, D., & Frei, F. (2010). Cost structure, customer profitability, and retention impli-
cations of self-service distribution channels: Evidence from customer behavior in an online
banking channel. Management Science, 56(1), 4-24.
7. Dealroom & BCG. (2020). The European Fintech ecosystem navigating COVID19.
8. Diakoulaki, D., Georgiou, P., Tourkolias, C., Georgopoulou, E., Lalas, D., Mirasgedis, S., &
Sarafidis, Y. (2007). A multicriteria approach to identify investment opportunities for the ex-
ploitation of the clean development mechanism. Energy Policy, 35(2), 1088-1099.
9. European Banking Authority (EBA). (2019). Risk assessment of the European banking system.
Retrieved from https://www.eba.europa.eu/
10. Faid, N. (2016). Luxembourg, a future FinTech hub? In S. Chishti & J. Barberis (Eds.), The
FinTech book: The financial technology handbook for investors, entrepreneurs, and visionar-
ies. Cornwall: Wiley.
11. Gnirck, M., & Visser, G. (2016). Singapore, the FinTech hub for southeast Asia. In S. Chishti &
J. Barberis (Eds.), The FinTech book: The financial technology handbook for investors, entre-
preneurs, and visionaries. Cornwall: Wiley.
12. Gomber, P., Kauffman, R. J., Parker, C., & Weber, B. W. (2018). On the fintech revolution: In-
terpreting the forces of innovation, disruption, and transformation in financial services. Journal
of Management Information Systems, 35(1), 220-265.
13. Google, Temasek, & and Bain&Company. (2019). e-Conomy SEA 2019 - Swipe up and to the
right: Southeast Asia’ $100 billion internet economy. Retrieved from https://www.blog.google/
documents/47/SEA_Internet_Economy_Report_2019.pdf
14. IMF. (2019). FinTech: The experience so far. Retrieved from Washington DC,: https://www.imf.
org/en/Publications/Policy-Papers/Issues/2019/06/27/Fintech-The-Experience-So-Far-47056
15. Iwasaki, K. (2018). Emergence of Fintech Companies in Southeast Asia—Rising Hopes of a
Solution to Financial Issues. Pacific Business and Industries, 18(68), 1-32.
16. Kern, A., & Karametaxas, X. (2021). Digital transformation and financial inclusion. In I. H.-Y.
Chiu & G. Deipenbrock (Eds.), Routledge handbook of financial technology and law (1st ed.,
pp. 273-290). Oxon & New York: Routledge.
17. Kshetri, N. (2020). China’s Emergence as the Global Fintech Capital and Implications for
Southeast Asia. Asia Policy, 27(1), 61-81.
18. Lee, I., & Shin, Y. J. (2018). Fintech: Ecosystem, business models, investment decisions, and
challenges. Business Horizons, 61(1), 35-46.

19
19. McKinsey Global Institute. (2016). Digital finance for all: Powering inclusive growth in emerg-
ing economies. Retrieved from https://www.mckinsey.com/MGI-Digital-Finance-For-All-Execu-
tive-summary-September-2016.ashx
20. McKinsey&Company. (2020). Detour: An altered path to profit for European fintechs.
21. Oliver Wyman. (2020). Singapore FinTech landscape 2020 and beyond. Retrieved from
https://www.oliverwyman.com/content/dam/oliver-wyman/v2/publications/2020/dec/singa-
pore-fintech-landscape-2020-and-beyond.pdf
22. UNCTAD. (2021). Technology and innovation report 2021: Catching technological waves, in-
novation with equity. Retrieved from Geneva: https://unctad.org/system/files/official-document/
tir2020_en.pdf
23. UOB. (2017). State of FinTech in ASEAN. Retrieved from https://www.uobgroup.com/techeco-
system/news-insights-fintech-in-asean-2017.html
24. Wendenburg, J. C. (2016). Global compliance is key. In S. Chishti & J. Barberis (Eds.), The
FinTech book: The financial technology handbook for investors, entrepreneurs, and visionar-
ies. Cornwall: Wiley.
25. Wilson Jr., J. D. (2017). Creating strategic value through financial technology. New Jersey:
John Wiley & Sons.
26. World Bank. (2016). World development report 2016: Digital dividends (1464806713). Re-
trieved from https://www.worldbank.org/en/publication/wdr2016
27. World Bank. (2018). Preparing ICT skills for digital economy: Indonesia within the ASEAN con-
text. Retrieved from https://blogs.worldbank.org/sites/default/files/preparing_ict_skills_for_dig-
ital_economy-revised_7mar2018.pdf

20