Potential, Barriers and Investment Solutions in the Digital Age

What's the difference between parenting problems in educating children at home in 1970 and 2017? Answer: In 1970, children were overworked and physically outdoors and hard to get home, while in 2017 children were playing too much and digital activities in the house and hard to get out of the house. Of course the answer is a humorous answer. Nevertheless, there is an interesting phenomenon that arises from the situation: the digital age has changed the behavior and lifestyle of many people.

Related to the phenomenon, recently President Joko Widodo (famous for his close call Pak Jokowi), dialogue with an elementary school child and ask the child about his ideals. If this question was asked to children in the 1970s, the popular answers of the time were: Engineer, Doctor, Pilot, etc. The answer of the child interviewed by Mr. Jokowi is so different and makes Mr. Jokowi and the audience amazed. He wanted to be a YouTuber, a profession that did not exist and was never imagined in the 1970s.

Changes in behavior, lifestyle, and aspirations is inseparable from the changing trend that swept the world. This big change trend arose from the rapid development of information and communication technology in the last 25 years. Due to the rapid development in this field, the cost of interaction between human beings becomes much easier, faster, and easier. According to the leading consulting firm, McKinsey & Co., the interaction cost is one of the two dominant costs in the business. The 2009 Nobel laureate of the Economy-Oliver Williamson-prefers the terms of transaction costs, for the cost of interaction in business and economics.

Trends in investments world

In the old days, when financial innovation was still minimal, people who had excess money found it difficult to find a place to invest (had to meet physically one by one with many people to offer funds), while people who needed money found it difficult to get funding to grow the business ( Should also seek information by physically meeting one by one with many people to offer their business proposals). As a result, people are forced to keep their investment resources in the form of physical assets stored at home or literally stored under a mattress. The initial innovation to solve the problem was the banking mechanism. People with excess money simply come to one place - that is a bank - to put their funds, while people who need money also simply come to one place - that is a bank - to get a loan.

The business process chain is still relatively costly interaction and less information transparency. When the cost of interaction is still relatively high, the business world is forced to use this relatively long business process chain because it requires a lot of people or physical activity and an intermediary manual in the middle that bridges the supplier of goods / services / money and the end user. As a result, the difference in yields or interest earned by investors differs considerably from the interest paid by the borrower. This large gap (meaning the macro transaction costs are still high) reduces the interest of people to transact.

With the cheaper cost of interaction due to the development of information and communication technology, the role of banks began to be replaced with institutions that more directly bring together investors and borrowers, namely capital market institutions. Through the capital market, the difference between the yield received by the investor and the interest paid by the borrower is more efficient (small). At the beginning of the development of the capital market, market participants still have to meet physically in the capital market place in the form of physical location (trading pit with open-cry system).

With the development of information and communication technology, through digital technology, meeting physical market participants is no longer needed. They can meet virtually automated via computer servers.
The continued decline in interaction costs makes the process of bringing together virtually the over-priced parties but lacking business ideas and the money-strapped but the advantages of business ideas getting easier, faster and cheaper. As a result, more automated and personal 'capital market' mechanisms are increasingly feasible and start booming.

Businesses that are formed through such mechanisms include crowd funding via open and / or peer-to-peer lending platforms, alternative payment mechanisms, as well as alternative currency (eg, cross-country cryptocurrencies that are not under control) Government of any country). The new business is often widely categorized as the Financial Technology (Fin-tech) industry.

In Indonesia, there have been many emerging institutions offering these financial services and instruments, such as Crowdo. The fin-tech industry in Indonesia is still in the embryonic stage but has great potential to grow in line with the penetration of the use of computers, internet and smart phones that have reached relative tipping points or critical mass to support fin-tech quantum leaps. The number of internet users who have exceeded the psychological limit of 100 million, the number of mobile users who have exceeded the population (more than 100% penetration, as there are many people who subscribe more than one phone card), and the number of social media users are increasing rapidly (Indonesia occupied Ranked top 3-5 world for users of various types of social media) to make the fin-tech industry in Indonesia is ready to skyrocket. If this is realizable, there will be more choice of investment instruments that provide higher yields with controlled risks, and can be enjoyed widely by the general public.

The obstacles that arise are changing habits or behavior of human investment is much slower than the development of technology and financial innovation. Currently, the total investors in the capital market both in Indonesia who invest directly or through instruments such as mutual funds, still less than one percent of the total population of Indonesia. Intensive and widespread socialization and education is needed to socialize the mechanisms and instruments of capital market investments and new investments based on fin-tech / digital technology. Security in financial transactions through the virtual world is also still a constraint. In addition, regulations for the protection of society against potential misuse and fraud under the guise of fin-tech services are also still minimal.

These obstacles can be overcome if we are all compact to work together to find solutions, and work hard, work smart, and work wholeheartedly to implement continuous improvement. Together we can!

Roy Sembel
LinkedIn / Facebook: Prof. Roy Sembel ; Twitter / Instagram: @ProfRoySembel
Dean and Finance Professor, IPMI International Business School (http://www.ipmi.ac.id)