Amartha's Taufan and Widyanto: "Our algorithm is designed to predict the creditworthiness of the underserved"

Andi Taufan, founder and CEO of Amartha, an Indonesia-based fintech social enterprise is working to support female borrowers with no credit history to raise funds for their businesses.  They started in a small village in Bogor, West Java. They have a keyfocus on women empowerment in rural Indonesia.

The number of micro-entrepreneurs who had difficulties raising funds for their business due to limited access, income fluctuation, and no credit history was the beginning of Amartha’s story. They believe these micro-entrepreneurs can evolve to become quality borrowers with the right technology and the spirit of cooperation. Investing in microbusinesses is also proven to create a great deal of social impact.

They have nearly 4000 field agents who verify potential borrowers on the field. Aria Widyanto, chief risk and sustainability officer at Amartha believes that economic empowerment can be achieved through technology. He and his team have created a scoring system that understands borrowers' credit history. They also use technology to quantify every physical asset and use machine learning to assign creditworthiness. They are using technology to get a real-time understanding of how their investments are doing. This is how they are empowering borrowers using technology.  Credit scoring is a proprietary algorithm they have built. They build this for underserved communities that may have a very limited credit history.

Amartha is looking for cheaper funding channels so that they can reduce interest rates for their borrowers. Since its founding in 2010, Amartha has disbursed $440 million in funds from mostly urban lenders to 1 million women micro-entrepreneurs across more than 20,000 villages in Java, Sulawesi and Sumatra. It generated total revenue $8.95 million as of August 2021, growing 13.3% year-on-year, amid COVID-19 disruptions on the Indonesian economy.

The following key points were discussed:

• Amartha has a huge ambition to democratise peer to peer (P2P) financing in Indonesia with a business strategy that combines online and offline activities to maintain and increase borrowers' business activities during the COVID-19 pandemic.
• Amartha provides easy access for women in rural areas to receive business funds from urban lenders through financial technology so they can start their own businesses or expand their existing businesses.
• It is also a signatory of the Women Empowerment Principle (WEP).
• Aria Widyanto believes that economic empowerment can be achieved through technology.
• In the future, if the borrowers require bigger funding from banks or other financial institutions, their credit history in Amartha can be used as a reference.
• 80% of their entrepreneurs are new customers without any previous access to banks or financial institutions. 

 Here is the complete transcript:

Gordian Gaeta (GG): Well, Andy and Aria, thank you very much for joining us, we greatly appreciate you taking the time and making the effort to come together. I'm the chairman of the Advisory Council of Wealth and Society, and we aim to bring to a wider audience this concept of wealth and society, which is doing better for other people, while not giving up what you're doing for yourself.

Andy Taufan (AT): Thank you. We are also excited to share more about our mission at Amartha. And thank you for acknowledging what we have built so far.

GG: Yeah, very impressive I myself was invested in micro-finance in Cambodia, and in other places. So I'm pretty familiar with the concept of micro-finance or mini finance. But I have to say, when I look at what you're doing, that is really very worthwhile. Now, I think that the people who look at that will want to know a little bit more about how you got to where you are, your journey, want to understand a little bit about how you transformed yourself from initial beginning to what you are today. And tell us a bit a little bit about your personal story.

AT: Amartha started back in 2010. We are an impact-driven financial technology company providing access to working capital to the underserved, especially women. Our mission at Amartha is to bring prosperity to everyone, especially to those at the bottom of the pyramid. Our business model is like a marketplace for micro-finance. Our borrowers can get loans through Amartha, starting from $200 to $300 to start their business or to scale up their business, and most of our customers usually own mom-and-pop shops, selling groceries, fruits, or food stalls across the country’s villages. In some areas, we also serve home industries, farmers and fishermen. On the other side of the platform, we are also building an alternative impact investing platform. So, at Amartha everyone can invest their money directly to the micro/small businesses thereby empowering these micro-businesses to grow further. And as investors, you will get attractive returns apart from the impact that is delivered through us. We are serving more than 1 million customers/borrowers across Indonesia, across more than 20,000 villages, most of which are remote. We are on a mission to scale and grow further and digitise these segments.

GG: Okay, that's useful, thank you. I think that the idea that you go to remote areas and you support entrepreneurship, small scale entrepreneurship is very important. In the global banking market, there is almost impossible for small businesses, let alone micro businesses to access funding. And I know from my own experience, how much little can do to take a business forward, it is immensely rewarding to see what you can do with very little. Now one of the areas that people are interested in is, technologically, how do you deploy your various technology? How do you get to people? How do you maintain some order and discipline? And how do you look after that, because you're dealing with very remote areas, and you're dealing with rather disparate logistics? So maybe you can tell us a little bit about how people, you know, just the value chain, how do people come to you? How do you get to them? How do they repay, how do you assess them because you have to do some assessment? And, you know, how do you make sure that things run smoothly?

AT: Sure. Maybe I'll share three key technology roles and the way we serve these customers. First, we are building an offline-to-online model. Since we are serving people in villages with very limited knowledge or digital literacy, their businesses tend to be offline as most are physical stalls. What we do is we deploy our field agents on the ground, to be able to verify, validate and quantify all the potential applicants or borrowers for us. Our field agents are equipped with android smartphones and thus they can then evaluate potential borrowers for Amartha. The second role of technology is, that we are building a credit scoring engine. We are serving people with very limited banking track records. What we do is identify their capabilities, quantify every physical asset they have and then convert this into an algorithm, and through our machine learnings we can validate how much is their creditworthiness. If there is a certain type of farmer, small grocery shop, mid-sized grocery shop, or large grocery shop, in different locations in West Java, Sumatra, or Sulawesi, we have at our use different angles of credit scoring. The third is that we leverage technology for fundraising. Most of our funding comes from individuals, so everyone can go to Amartha applications - we have both mobile and web applications. Anyone can invest their money directly to these potential borrowers, and in turn they can monitor the performance of their assets and portfolio through a market platform, so they can diversify their investments, not only invest in stocks or training but also can invest directly into micro, small businesses and get attractive returns up to 15% flat per year from us.

GG: Now, that's interesting. The second one, your credit scoring, you do depend on agents, you have to have somebody who checks if there is a stall there, does this person live? And if you want to do a great scoring based on assets or previous income or turnover, then you have to physically inspect that. Given the diversity and the spread, you must have a large number of agents helping you.

AT: We do have more than 4000 agents on the ground right now helping us to monitor and acquire potential borrowers. We have Aria who built our credit scoring engine, so maybe Aria please share more on the credit scoring.

Aria Widyanto (AW): Yes, thanks Taufan. Gordian, our credit scoring is designed specifically to cater the underserved and the underbanked segment. It is a proprietary algorithm that we developed ourselves from the ground. There is no such thing in the market now and we are leading the way towards developing a specific credit scoring for the segment that you've just mentioned, those without credit histories and also without a digital track record. Our algorithm is designed to predict the creditworthiness of our potential borrowers, even with the very limited information. We crack the financial inclusion issues because, today, banks do not serve these segments, due to regulations. 

GG: Absolutely, and I think that's why your effort is a lot, I understand that from the bank's point of view, it's just that the cost of service is just a multiple of your cost of service, they don't have 4000 people running around. They also have processes and compliance; they are not nimble in developing well. Now, having you here, I'm sure you back tested your algorithm, how successful is your algorithm?

AW: Currently, we adjust our algorithm to be sensitive enough towards the aftermath of COVID-19. With the continuous revamp of our credit scoring, we can manage our NPL ratio below 1%, which now is 0.3%. It's predictive enough and we regularly revise, validate and do back-testing from time to time. And that's why we deploy machine learning technology so that the engine will learn by itself and adjust the algorithm according to the risk occurrence and the indicators of a risk potential that we encounter on the ground.

GG: Yeah, that's another reason why banks are not interested, they couldn't sustain a point zero NPA ratio, because it is just not in the bank's DNA, so that is a problem. Very impressive. Now, tell me, typically, what is the interest rate that people pay?

AT: For our customers in the micro small segments, our interest rate is very competitive with the market.

GG: Now, that brings me to a subject I read in my background notes that you have some very prominent partners who provide some funding and you also have some wholesale funding. When you have professional investors that provides funding, I always found that there's a dilemma they want performance, while to some extent you want to impact. So how do you resolve this dilemma because ideally, you want to be as close as possible to not being charitable but to being truly supportive of the economic developments of micro-organisations?

AT: To answer your question, in terms of capital as equity investors and partners in Amartha, we do have investors, both reputable local and global investors, who share the same mission as us. On a national level, we have Bank Mandiri group, the largest financial services company in Indonesia and Telkom through MDI ventures, the largest telco company in Indonesia. 

AT: We have impact investors like Bamboo Capital, Women’s World Banking, Impact fund based in New York and UOB ventures and Credit Suisse through their Asia impact investment fund. That's aligned with their interests as commercial investors who are also looking for impact, and Amartha fits with their investment mandate.

GG: Let me get ask you what is your operating margin, that's something you can disclose?

AT: Amartha like many other financial institutions, we make sure that the business runs as efficiently as possible. Amartha, we have recorded a  positive EBITDA, and we have also received global recognition for our impact that we deliver to our society, two of them from the UN Women.

GG: Just as a digression maybe, I mean, most of your funding will come in US dollars, and most of your loans are in local currency. Don't you run into legal issues?

AT: No, most of our funding is in Indonesian Rupiah. We channel funds through our marketplace from individual investors, we have over 100,000 who invest their money directly to our marketplace and choose the borrowers based on their risk appetite. 

GG: I think people will be interested how this COVID pandemic has caused a little bit of havoc around and how did that affect you? What did you do against it? Or to support the people in need? Is that something that was important to you?

AW: Yes, the pandemic has impacted our market, which is operating in the ultra-micro segment, because most of our customers are small merchants, who rely on face-to-face transactions. During the pandemic, physical interactions are prohibited as a part of the social distancing measures. So, it directly impacted their businesses. From our survey, almost 75% of our borrowers experienced an income decline during the pandemic in 2020. But their situation gradually improved and that's where Amartha comes in with the interventions and programmes that help them to build better business models, to be able to survive during the most difficult times. We deploy our field agents to educate them on how to survive during the pandemic, with additional trainings on new business opportunities, such as: mask creation. Amartha also provided and disbursed loans to our customers, even with caution. So, we continuously disbursed our loans, and then we provided interventions so that the borrowers could not only survive, but gradually recover from the pandemic. One year after the pandemic, in late 2021, we conducted another survey. We are pleased that with our efforts our borrowers experienced a 10.5% rise in income as compared to the previous year. So, there was some gradual recovery in our market.

GG: Okay, so you also supported your lenders, or your borrowers, if they were in temporary difficulties, either through new funding or probably making concessions on repayment on schedules in order to help them get out of out of the temporary problems?

AW: Yes, correct. For some areas or some types of businesses that are severely impacted, we also have some remedials like payment holidays to help them recover. There are many measures that we deploy to help our borrowers survive and even fully recover from the pandemic. 

GG: I think it's very impressive. I can only say I wish that the financial institutions would take the same view for small and medium enterprises (SMEs), because they didn't do that most of the support came from government initiatives. But for you, government probably has not done very much have you had the support from the government? 

AT:  We did collaborate with the government to help these segments, especially these micro-small businesses to recover and rebound. We helped with initiatives such as providing access to working capital, especially to those impacted by the pandemic. Another initiative is that we helped adapt or pivot their business. Some do their business and sell physical goods or groceries products in the public space, but because of lockdown, they need to grow, they need to improvise, they need to adapt. So we educate them about digital literacy and educate them on how they can sell their product, through a digital channel, eCommerce, via WhatsApp.

GG: How good are the electronic channels in Indonesia at the moment, in your view?

AT: Especially in Java, more people are adapting to these electronic and digital platforms. For people outside Java, like Sumatra, Sulawesi, access to the internet is still very limited. In most remote villages, there’s limited access altogether. At Amartha we saw the urgency to adopt a hybrid model where we can also provide services like physical cash transactions. As of today, approximately 30% of the people across villages have access to the internet and 70% still lack access to digital. Yet we are talking about 20 to 30 million micro-small businesses and only 30% have access to digital, and so most of them run their business on a physical model or offline.

GG: What are your plans? Given that you started such an impressive setup, and there is so much demand in the market, I suppose that your business model is pretty clear and you intend to grow and improve your operations and the efficiency and your algorithms or do you have any wider plans?

AT: At Amartha, we are very grateful to have reached our milestone, we are now serving more than 1 million customers across Indonesia. And we see that through our performance over the last few years, we can continue to serve more, we are talking about 20 to 30 million customers now. I think serving 10 million customers in the next three to five years is achievable for us. So that's our first goal - to continue expanding our outreach to serve many more borrowers. And the second one is about educating or inviting more individuals to channel their investment through our platform. So, they can be a part of the mission of impact investing, directly channelling their investments, diversifying their asset classes, not only in financial stock markets but also directed to micro-small businesses. And the last one is about providing more digital financial products to these customers. We started with lending, helping our customers to increase their income. We want to see how we can help them to become more prosperous, we see that we can provide them with other digital financial products, including other financial services such as payments, as an investment for these customers. 

AW:  Yes, just to add to that, Amartha also believes that when we create impact for our customers, financial literacy should go hand in hand with digital literacy. As Gordian mentioned earlier, there is a huge potential in the future. We want to help customers transform themselves into digitally savvy people. One of our impact intervention programmes is to educate them on how to onboard themselves into a digital world. For example, by introducing the Amartha+ application, it's a very simple app designed specifically for the underserved and rural communities like housewives and women with lower educational levels. Here, we try to reduce the barrier to access. Most of the problems in accessing financial services is the paperwork and procedures related to complicated transactions. That's why we try to optimise our operations by streamlining and going paperless and digitising our processes. We also help upgrade our customer businesses. Most of Amartha’s customers own small shops we call “warung”. In this network of small shops, we see the potential to upgrade into digital hub or digital points in villages. So, if we are talking about the future of narrowband in rural villages, then Amartha customer's “warung” is the next neo-bank in the rural areas.

GG: I think that is really phenomenal because leaving aside the funding, what you really are doing is you are training your customers to be more literate. And to be more in line with the business requirements. As I understand the vast majority of your customers, if not almost all, are females. Very often in the country scene is even less educated because for cultural reasons or other reasons, they don't have access to the same level of education. So you're doing in pursuing your business model, you're actually making a major contribution to the development the education of the rural population?

AW: Yes Gordian. Amartha was born with the mission of creating shared prosperity, reducing the gap, especially at the grassroots level. Amartha now has served more than 1 million people. All-female customers in Java, Sumatra, and Sulawesi, these three major islands constitute 70% of Indonesia’s population. So, on daily basis, we hear stories about women who are eventually able to send their children to school, even though they were not able to in the past. With our working capital, we help them build their assets and savings, and even hire other women in the villages, so that we are creating jobs. Based on our social accountability report, in the past three years, on average, Amartha has created at least 87000 new jobs as a direct result of our working capital, which will eventually help businesses and stimulate the economy at the grassroots level. This new job creation will also prevent these women from immigrating to the big cities, becoming migrant workers which makes them exposed to the problems of many migrant workers. By creating these jobs, we also help reduce the economic gaps between rural villages and the big cities. And that's the indirect impact of lending money to rural women. So, when we are talking about provisions of working capital or access to finance, we should not only see it as a credit provider, but we should see it in a bigger context, which is empowering women and empowering the rural economy and reducing the gap between cities and villages.

GG: What are your greatest challenges, the three greatest challenges?

AT: The three greatest challenges for us in Amartha are: first, educating our customers to go digital. Second, internet penetration, access to the internet, as in most villages it’s still very limited. We need to encourage and push and drive our government to bring more connectivity to most remote villages, too. And third, how we can continue to innovate, serving these customers beyond just the lending. Because yes, we are confident we are one of the forefront players in terms of access to lending or access to finance. But I think we need to continue to innovate so we can continue to give the best services to our customers beyond just lending products.

GG: And you're, I mean, To some extent, you are a business to business platform p2p. And so you depend very much that both sides behave as businesses Yeah. Which in my view is probably more given on the borrowing side. Because, for them, it is a necessary condition. It's a survival condition. It is a future prosperity. Are you concerned that on the funding side on the supply side, that people look at that as an opportunity to extract additional returns or higher returns?

AT: I think that's also the main challenge, how we educate more individuals to join our mission to be part of Amartha, providing access to the borrowers, how we can educate more individuals from the wealthy part of society to also diversify their assets to these micro-small businesses. It is expected that we can serve 20 million as fast as we can if we have more individual investors on board.

GG: Of course, you have the advantage that big subject sustainability, environmental and office that I assume that most of your businesses in the wider sense are not really harmful to the environment. Of course, the grocery shops will use plastic bottles and they will have some issues and some of the agriculture may use pesticides and in some of the fishery may be using it too, but typically, do you look at the app from a sustainability from an environmental sustainability point of view?

AW: Yes, Gordian. Because Amartha is voluntarily engaged in the global community to comply with ESG standards. And that's why, even though it's not required by our regulators, Amartha is now using ESG standards, like GRI metrics, and so on, just to make sure that we speak the same languages with other folks in the world about sustainability. And through our businesses, Amartha is also keen on promoting more environmentally friendly businesses. For example, last year, we conducted impact interventions in Sumatra by providing villages with solar panels to educate communities to use cleaner energy resources. And in the future, this will be Amartha's loan product, which we will incentivise more, let's say, through a cheaper interest rate for those businesses who are willing to transform themselves into a more environmentally friendly regime. That's one of many examples. As global citizens, we actively engage in communities such as UN Women and we are proud signatories of women empowerment principles. Again, it's not mandatory in the business or regulatory requirements, but we are willing to upgrade ourselves to contribute to a more equitable society by providing inclusive workplaces and incentivize efforts that will promote woman empowerment in society to name a few. It is from start to end, a very, very impressive story. And so I congratulate you and all of your colleagues who are on the call and all quiet. You have done a very impressive job. And that's all I can say. And I talked to many people who do interesting and laudable efforts, but you're surely one of one of the more important ones, and then not that many in Indonesia. So if you have nothing else, then thank you very much. Congratulations, well done. Very impressed. And thank you for your time, and we'll try and spread the word and you keep soaring like an eagle and flying forward so you can touch more people's lives and do even better.