Digital Credit Transforms Indonesia’s Finance System, With Uneven Gains and Risks

Indonesia’s fintech boom has brought millions of first-time borrowers into the formal credit system, but most digital loans are small, urban, and used for consumption, while borrowers who start with fintech face persistently higher default risks. The research shows that digital credit can serve as a gateway to banking for some, but lasting financial inclusion will require stronger banks, better credit data, and smarter regulation beyond fintech alone.

Over the past decade, digital lenders have transformed how Indonesians borrow money. Smartphone apps offering instant loans spread rapidly, promising to bring millions of people into the formal financial system for the first time. A new study by researchers from the World Bank’s Development Research Group, together with economists from Harvard University, the National Bureau of Economic Research, and the Centre for Economic Policy Research, shows just how dramatic this shift has been, and why it comes with serious challenges.

Using detailed credit bureau data covering more than 139,000 borrowers between 2018 and 2024, the study finds that digital credit has moved from the margins to the mainstream. By the end of 2024, more than 40 percent of borrowers held at least one fintech loan, compared with less than three percent just five years earlier. Few financial products in Indonesia’s history have spread so quickly.

Big Reach, Small Loans

Despite its massive reach, fintech lending plays a surprisingly small role in the overall credit market. Digital loans account for only about five percent of total consumer credit by value. The reason is simple: most fintech loans are small, short-term, and designed to cover day-to-day expenses rather than major investments.

Nearly 90 percent of digital credit finances consumption, things like household purchases, bills, or emergencies, rather than business expansion or long-term investment. Fintech borrowing is also heavily concentrated in cities, especially on the island of Java. Rural and non-metropolitan areas still depend largely on conventional and Islamic banks, which provide bigger loans and support more productive activities. Rather than closing geographic gaps in finance, digital credit has mostly followed existing economic patterns.

A Doorway Into the System

One of the key questions the study asks is whether fintech loans trap borrowers in expensive debt or help them move toward better financial options. The answer is mixed but important. Many borrowers who start with digital loans do not stay there forever. Within a year, reliance on fintech loans falls by about 25 percent, and a meaningful share of borrowers manage to secure lower-interest loans from banks or other traditional lenders.

For these people, digital credit acts as a doorway into the formal financial system. It allows them to build a credit history where none existed before, making it easier to qualify for cheaper and longer-term loans. This shows that fintech can support financial inclusion, at least for some borrowers.

The Hidden Risk Problem

However, the study also uncovers a persistent risk. Borrowers who begin with fintech loans are much more likely to fall behind on payments than those who start with conventional credit. Their default rates are 5 to 7 percentage points higher, and this gap does not disappear over time. Even after they graduate to bank loans, former fintech borrowers continue to default more often than others.

This suggests that the problem is not just high interest rates. Many fintech borrowers are younger, less financially secure, and more vulnerable to economic shocks. Digital credit brings them into the system, but it also exposes lenders to higher long-term risk. This tension between inclusion and stability lies at the heart of Indonesia’s fintech debate.

Regulation and the Way Forward

In 2024, Indonesian regulators introduced interest rate caps on fintech loans to protect consumers. The policy reduced borrowing costs but also had an unintended effect: lenders cut back sharply on loans to new and unbanked borrowers, focusing instead on safer clients with existing credit histories. As a result, financial inclusion slowed, especially in cities where risky consumer lending had been most common.

The study argues that price caps alone are a blunt tool. A better solution lies in improving how risk is measured and shared. Stronger credit reporting rules, now being rolled out, will help ensure fintech loans are recorded like bank loans, making borrower histories more complete. At the same time, private credit bureaus must continue to play a role by collecting alternative data, such as utility payments, that help assess first-time borrowers.

The message is clear: digital credit can open doors, but it cannot carry the full weight of financial inclusion on its own. Lasting progress will require digital tools, strong banks, good data, and smart regulation working together.