As even the conglomerate giant feels the pain of OVO’s aggressive cash-burning, should digital payments players rethink their strategy to gain market share, beyond the usual discounts and subsidies?

In early September, Indonesian media went abuzz when OVO, the e-wallet arm of the Lippo Group conglomerate, was crowned the country’s fifth unicorn. Since then, however, OVO has had to deal with mounting uncertainty about its future – mainly, whether Lippo was bailing out of its costly loss-making unit.

In fact, just the day after the news of its unicorn status broke, Reuters, citing unnamed sources, reported that Singapore-based ride-hailing giant Grab was negotiating a merger between OVO and DANA, another Indonesian e-wallet, backed by Ant Financial, a Grab ally. 

Grab, which owns shares in OVO, wanted the merger to create a bigger and more powerful digital payments player that can overtake GoPay, the popular e-wallet by Gojek, Grab's rival for hegemony in Southeast Asia. No further details have been reported since.

More recently, eyebrows were raised when Lippo Group Chairman Mochtar Riady said the conglomerate had sold 70% of its stake in OVO. Lippo had been “letting go of part of our stake,” the 90-year-old patriarch said. “We keep burning money. How are we supposed to keep up?” 

The conglomerate, which has its roots in banking, was said to be considering exiting OVO as the e-wallet company was burning as much as US$50m a month. The Riadys are one of the richest and most powerful families in Indonesia, with a net worth of about US$2.5bn, according to Forbes. The Lippo Group has about US$8bn in annual revenue and over US$15bn in assets across banking, real estate, retail, hospitality, healthcare and more.

Not a complete surprise

Currently valued at US$2.5bn, OVO has been attracting new investors for at least the last two years. In 2017, financial services firm Tokyo Century acquired a 20% stake in OVO’s holding company for US$116m. Grab reportedly invested in OVO in 2018, after OVO became Grab’s payments partner in Indonesia. 

In March 2019 Indonesian e-commerce unicorn Tokopedia, which, like Grab, is backed by SoftBank, reportedly invested in OVO as well, following a partnership between the two that enabled Tokopedia users to pay with OVO. 

In a March 2019 interview with Indonesian financial news site Bisnis.com, John Riady, heir apparent to the Lippo Group, neither confirmed nor denied whether Tokopedia held a stake in OVO. However, he said the conglomerate is focusing on real estate and healthcare, two of its core businesses. 

“Maybe we’ll try to find partners whose core businesses are in these sectors [businesses that are not property or health], and then we become partners, support them,” he said.

John Riady also said the partnerships with Grab and Tokopedia have allowed OVO to “ride on existing ecosystems and use cases.” He added: “Of course, we might not be the controlling shareholder… [I]t will be because the company is owned by what I like to call ‘natural owners.’ When the business is owned by ‘natural owners,’ their performance will be better.”

The Lippo advantage, eroded

Over the past two years, while it has been divesting its shares in OVO, the Lippo Group has also milked its network and infrastructure to back up its e-wallet unit. Lippo-linked retailers and businesses, from shopping malls to hospitals, put up discount campaigns that encouraged customers to try out the e-wallet. It also absorbed bank transfer fees for topping up the e-wallet balance, something it has stopped. The widespread adoption of OVO helped it catch up with GoPay. Some surveys say OVO is the leading e-wallet in the Indonesian cashless payment markets, while others say it is a close second to GoPay.

The massive promotional campaigns might have cost OVO dearly, however, as it has had to keep up its spending spree to stay in the fight against GoPay, which is flush with VC cash. GoPay is in the midst of raising a Series F round with a target of $2bn, and plans to close the round in January 2020. OVO's smaller investor pool likely meant that Lippo has had to bear the bulk of its costly cash-burning campaigns.

In addition, unlike Gojek’s super-app platform, OVO does not control most of the services that OVO is linked to. Retailers and partners are free to accept other forms of payment, including cash, bank transfer, and other e-wallets. Even Grab, for example, has begun accepting payments via state-owned e-wallet LinkAja. OVO and the Lippo Group is also under investigation for suspected monopolistic practices, after they allegedly obligated customers to use OVO to pay for parking in Lippo-owned properties.

Making the investment worth it

These developments could explain the Riadys’ remarks about Lippo's stake in OVO. After rushing to compete with GoPay and other e-wallet services that emerged around 2017, OVO managed to gain a strong foothold, but that came at too high a cost for Lippo. 

By diluting its stake in OVO and welcoming more investors, Lippo can avoid expensive cash burning as it shares the burden with the other backers. It will also enable OVO's internet-business investors, namely Grab and Tokopedia, the “natural owners” who better understand OVO’s “use cases” – in John Riady’s own words – to have a greater say in the company's key decisions. 

A merger of OVO with DANA is not out of the question, especially if Lippo is looking for a rewarding exit. DANA was established only in 2018, but it has been quickly adopted by retailers and businesses. By some estimates, it ranks third in the e-wallet business by market share, just behind OVO. DANA clearly has ambitions to compete against GoPay, the number one. An OVO-DANA merger would create a much-stronger entity capable of dethroning GoPay from the top spot. 

Regardless of the outcome, the questions about OVO’s future ultimately underline the challenges of building e-wallet services in Indonesia, where cash is still king. It's a given that companies will have to spend much of their resources to boost the adoption of e-wallets, but it’s easy to underestimate just how much they have to spend, especially when everyone is burning cash to do the same. Discounts, giving cashback and vouchers can attract new users, but companies will have to think about what comes after. Having a strong network of complementary offline businesses and wider acceptance from retailers have helped, but still not enough to dissuade customers from switching to another e-wallet that offers more discounts.

Any further scaling up could involve introducing financial services and products, such insurance and investment, which can make it less attractive for users to change e-wallets. It also remains to be seen which digital payments player can effectively integrate such services into its platform, as all current companies seem to be focused on marketing and maximizing their network advantages. 

If OVO can find the partners it needs to integrate more financial services into its platform and rein in their cash-burning, that might be just enough to make Lippo’s e-wallet bet pay off.

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Edited by Bernice Tang


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