Wednesday, November 6, 2024

Independent Distributor Versus Captive Agent

In 1999, affiliated distribution and independent distribution sold approximately equal amounts of new premium (48% vs 47%). As the number of independent agents grew and surpassed the number of affiliated agents, the distribution of life insurance sales shifted with independent distribution becoming the leading channel.

In 2023, independent distribution market share made up 53% percent of all U.S. life insurance new premium sold, compared to just 38% from affiliated agents.

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In every product line except whole life, independent distribution represents the largest premium market share and this is driving the growth in the industry. Total new premium sold in 1999 was $9.3 billion. The expansion of independent distribution has propelled new premium to top $15.6 billion last year.

As an example, indexed universal life (UL) new premium, which was negligible in 2011, now represents a quarter of new premium sold today. Independent distribution sells more than 90% of IUL premium. Independent channels also sell a majority of fixed UL and variable UL premium. Even for whole life premium — which remains predominantly sold by affiliated agents — market share for independent channels has jumped nine points in the past decade.

In light of these sales trends, it is clear that all life insurers have to develop multi-channel strategies to remain competitive. Part of that strategy involves building strong relationships with intermediaries, which represent thousands of independent agents.

The Role Of The Intermediary
Intermediaries — primarily independent market organizations (IMOs) and brokerage general agencies (BGAs) — play an essential role with independent financial professionals by helping them build and grow their practices, acting as the expert go-between for financial professionals and carriers. Among the services they offer to agents include training and development, marketing and technology support, underwriting support and case management, and a product platform — vetting products and carriers for their network to sell. In other words, their relationship with carriers has a big impact on what independent agents sell to their clients.

Top Intermediary Priorities
Research shows the top three reasons intermediaries place business with a specific carrier are pricing, underwriting/sales support, and compensation. While pricing and compensation are largely proprietary to each carrier, there is a lot of room to build a competitive edge through sales support.

Intermediaries are asked - what types of support carriers could provide to help drive growth. Their responses fell into three main themes: 
a: Faster and easier underwriting processes;
b: Direct contact to home office personnel that can resolve issues immediately – which 
    means build a strong internal and external wholesaling program; and
c: Offering competitive and innovative products that will perform well in the long run.

These themes are echoed in other studies of experienced financial professionals. The top reason experienced financial professionals give for placing business with a carrier is because the carrier offers a strong sales process that provides a positive experience for the sales professional. Carriers that invest in making the process easier may be able to overcome slight pricing and compensation disadvantages.

Where Technology Can Help
The industry has already made significant process expanding digital services such as e-signature, e-delivery, automated underwriting, etc., streamlining the process and lowering costs. As new technologies, particularly artificial intelligence (AI), become more readily available, intermediaries are hopeful it can cut costs and improve productivity.

Research indicated 65% of intermediaries say the cost of distribution is increasing and are looking to technology to mitigate rising costs. Investments in technology span from marketing and sales enablement to data analytics, cybersecurity and compliance. Nearly 4 in 10 intermediaries agree that ChatGPT and AI will become an essential tool for BGAs and IMOs and how they do business.

This push to modernize and use technology will help address the growing U.S. life insurance need gap. Four in 10 American adults say their families would face financial hardship should the primary wage earner die unexpectedly. Making it easier and quicker for independent agents to engage today’s consumer and help them get the coverage they need is a worthy goal.

Developing New Product - Life Insurance

Life and health insurance product development can be extremely rewarding for both insurer and consumer if done right. Handling product development the right way, however, is very challenging. Too often, insurers face obstacles in meeting customer needs over other considerations such as launching a product to outperform the competition or incentivizing distribution via commissions. Coupled with the fact that the shelf life of an insurance product is often short, the typical approach to product development may lower consumer confidence in insurers and the industry.

Since the process is iterative and non-linear, it is possible to return to a preceding principle before completing development. The phases includes:

Empathize with the customer

Define the problem

Ideate

Prototype

Test

Empathize With The Customer
Human beings’ capacity for empathy is one of our most admirable qualities. Product innovators and designers should ensure empathy is kept at the center of design and development. This means putting real customer needs above all.

The key to success for any new product — be it insurance or otherwise — is that it serves the real needs of its target consumers and that they realize the product’s value enough to purchase it.

If product design and benefits are so technical that most laypeople do not understand them, chances are the resulting insurance product will become another push product with a short shelf life.

Feedback from real target consumers through Voice of the Customer (VOC) programs is a great way to identify market needs. When planning VOCs and/or focus group discussions, all elements – from the questions asked to the information sought – need to be thought through. Most importantly, the objective of the exercise should be crystal clear.

Feedback on distribution is equally vital but should be validated from actual target consumers. Influential distribution partners (agents, affinity partners, etc.) often demand a “product” that serves a channel’s interests more than end consumers.

Define The Problem
Empathy leads to understanding and the ability to articulate nuances of target consumers’ real needs in a problem statement. The best way to create this statement is to ask questions, such as:

What are customers’ pain areas?

What are their key drivers for purchasing insurance?

What challenges do they have with existing insurance products?

How likely are they to buy an insurance product should the benefits meet their expectations or needs?

If they were to buy insurance cover for themselves and/or their family – what is the optimal premium price point?

Ideate
With the problem statement defined, it is time to start looking for possible solutions. There could be many solutions to the same problem.

Ideation can happen in various ways – brainstorming, focus group discussions, consultation with experts, etc. The primary objective in this phase should be to explore all possible solutions rather than narrowing down to one right away. Since the design thinking process is iterative/non-linear rather than linear, it is important to validate and reconfirm customer needs with proposed solutions before selecting the best option.

Prototype
After identifying possible solutions, narrow them down to the one or two that best fit the objective. Develop a working product prototype(s) covering possible variants. The prototype(s) should help address all the gaps identified as well as meet end customer needs. Once complete, test within the team or across other teams and departments to gather feedback and fine tune.

Test
Finally, test the prototype with a sample of target consumers through individual feedback or focus group discussions. Every attempt should be made to extract comprehensive feedback on features, design, marketing, price point, and coverage, as well as whether consumers are able to relate to the product.

The keys to success are to experiment, understand the consumer needs clearly, develop appropriate solutions quickly, and be courageous enough to test, fail, adapt, and learn.

By placing the end customer at the center, the resulting paradigm shift in insurance product development could result in rapid business growth and greater insurance penetration.

Below are a few suggestions for consciously keeping the end customer as the central focus – a win-win formula for insurance product development:

1: Ease Of Onboarding
a: End-to-end digital process and infrastructure for seamless sales-to-issuance experience
b: Leveraging data/customer information to pre-populate forms and application materials (subject to applicable data privacy and protection laws)

2: Simpler Underwriting Questions
a: Using behavioral science strategies to design underwriting questions from a layperson’s perspective and factoring in cultural influences to improve customer understanding and facilitate disclosure
b: Asking relevant and reflexive questions by tapping into consumer data across the value chain and using technology to aid in risk segregation

3: Marketing/Sales Pitch
a: Simpler brochures and interactive/gamification on digital applications
b: Guidance for distributors on how to handle objections

4: Claims Handling
Using machine learning techniques for identifying “red flags” or supporting a robust automatic claims approval process

Closing the insurance coverage gap will require abandoning the status quo for new processes and new ways of thinking. In the area of product development, applying design thinking could be a vital step in making that happen.

Disruptions To Life Insurance Industry

Fundamental changes in industry structure have created significant competitive pressure. The emergence of several private capital–backed platforms—which have evolved their primary focus to include new sales as well as the acquisition of legacy blocks of business, has changed the game in new-product development, where such platforms have become leaders in several retail and institutional categories.

Life insurance leaders who take a deliberate, unbundled approach to their business—and double down on their strengths—will outperform in the decade ahead. Making this transition will not be easy, but failing to act will only result in further challenges.

Life insurers also face drastic changes in other parts of the value chain. In general account asset management, a significant spread between top- and bottom-quartile performers has emerged as poorer performers struggle with dynamic asset allocation as well as investment performance within each allocation.

Changing Market Dynamics In Distribution —such as a shift toward independent channels, new technological capabilities, and evolving investor perceptions—also raise new important strategic questions for insurers to consider. Life insurers continue their struggle to modernize operations and technology as further investments fail to reduce net expenses in the system.

These new market dynamics may be daunting, but leading life insurance leaders also see opportunities to pave new paths toward value creation. To compete, insurers should carefully consider each part of the industry value chain and determine where they can and cannot reasonably have competitive advantage.

In this Review, McKinsey share insights and implications across each major component of the life insurance value chain—new-product development, distribution, asset management, and operations and technology—and outline three main life insurer archetypes that will likely emerge: product origination specialists, balance sheet specialists, and integrated insurers

Before insurers can determine in which parts of the value chain they are best positioned to win, they must first gain an understanding of market dynamics and trends, then determine what it will take to be distinctive.

New Life Insurance Product Development And Risk Assessment
New-product development has historically been perceived as an area of distinctiveness for life insurance companies. Shifts within the marketplace, however, have already ignited unbundling of new-product development, with a clear bifurcation in natural ownership among public life insurers, mutual insurers, and private capital–backed insurers.

Analytics covers life and retirement, including the major forces at play in the current life insurance industry, several ways insurers have adapted, and opportunities that life insurers and stakeholders can consider going forward—as well as the fundamental implications for their business models as a result.

Life Insurance Market Dynamics and Trends
Over the past ten years, we have seen the entrance and expansive focus of private capital–backed platforms, from legacy back books to new-business generation.

These platforms now have significant market share in select retail annuity sales categories—specifically fixed and fixed-indexed annuities, where they have 20 and 40% shares of new business, respectively.

Even in variable annuities, where public insurance carriers have maintained their leadership position, those insurers are pulling back by focusing on investment-only variable annuity products and reinsuring or selling back books to private capital–backed platforms,

Beyond the retail annuity segment, these platforms are rapidly expanding their position in institutional categories, such as funding agreements and structured settlements, as well as in pension risk transfer.

In the past decade, market positions on the life insurance side have drastically shifted, as well. US public life insurers were the leading providers of individual life insurance, with 42% of the market. However, US mutual companies have replaced that leadership, now accounting for 56%.

While private capital–backed platforms have not yet targeted the individual life insurance market to the same extent as the annuities market, it may become their next frontier.

In the medium term, however, investors’ return expectations will increase as volatility pushes up nominal risk-free rates and risk premiums, requiring life insurers to deliver a higher ROE to meet shareholder expectations.

Furthermore, higher interest rates could also result in deterioriation of credit, resulting in higher delinquencies and ratings migration, which could directly affect investment portfolios.

Achieving distinction in new-product development will require leading capabilities across customer insight–led product design, risk assessment, pricing, and claims management. In most cases, insurers will likely focus on building these capabilities in a few core product categories consistent with their risk appetite, return expectations, capital efficiency, investor considerations, and ability to develop competitive differentiation.

In product Categories Where They Don’t Have Competitive Advantage, Insurers Will Increasingly Seek To Exit.
This trend is well under way, as the US M&A market continues to build on the $620 billion of life and annuity assets that have already traded to private capital–backed platforms. It is anticipated that there will, indeed, be a “middle ground” where insurance carriers can leverage their own capabilities in certain product lines and partner with others for complementary capabilities.

As a result, models such as white labeling, coinsurance, and flow reinsurance are likely to grow in use, and insurers may increasingly distinguish between product design, distribution, and balance sheet risk retention. Indeed, by 2023 the volume of flow reinsurance across US life insurance increased to $598 billion.

General Account Asset Management
General account asset management has become a critical source of value creation among life insurers—and one with wide disparity between top and bottom performers. This gap will provide further impetus for asset management unbundling.

Investment portfolios are designed for a wide variety of liability profiles, inherently driving differences in asset allocations and yield. Nevertheless, performance variability across general accounts is significant. Among insurers with more than $50 billion in assets, top- and bottom-quartile performers are separated by 135 basis points (bps) of yield.

The prolonged impact of historically low interest rates has forced investment portfolios to reconfigure their strategic asset allocations. Many insurers increased their allocations to high-yielding debt, structured products, private credit, and other alternative asset classes. North American insurance companies allocated $355 billion to alternatives.

As insurers consider shifting toward higher-yielding alternative asset classes, they will have to marry their investment decisions with rigorous risk management, making deliberate choices about their risk tolerance and ensuring their risk management capabilities are commensurate with their risk appetite.

When making such choices, insurers will have to consider capital availability, robust monitoring and stress testing of various types of risks (credit, liquidity, duration), and active reviews based on market conditions. Taken together, we believe more evolved and dynamic strategic asset allocation will continue in the years to come.

Insurers that continue to own asset management will have to meet a high bar. They must have strong asset origination capabilities, industry-leading talent and investment processes, and quantifiable proof points of investment alpha. Further, such insurers will have to optimize the role they play across their investments—acting as an allocator among certain asset classes and an operator in others, such as real estate. Finally, they will need to have leading risk management capabilities commensurate with their placement on the risk/return frontier.

33% of life insurers outsource more than 50% of their assets to unaffiliated managers. Life insurers with less than $10 billion of assets—which represent $267 billion of general account assets —may be prime early candidates on which to grow such businesses and to capture the capital-light, fee-based income they offer.

Insurers unable to meet this bar have several options, ranging from complete outsourcing to outsourcing select capabilities to specialists while building certain capabilities in-house. Those that have distinctive asset management capabilities, however, may create the next frontier of third-party asset management.

Such insurers may launch new outsourced chief investment officer (OCIO) or sub-advisory businesses targeted toward subscale insurers.

Life Insurance Distribution
For many insurance carriers, the distribution function holds a place of pride and significance beyond all other functions. And many insurers are now thinking about earnings streams from distribution in different ways.

Indeed, insurers have witnessed how investors reward the capital-light earnings generation of pure-play distributors—such as brokerages, independent marketing organizations, and field marketing organizations—which have generated 2.6 times the Total Shareholder Return of life insurance companies and currently trade at nearly 2.9 times the P/E multiple of their life insurance counterparts.

Historically, life insurers have invested heavily in their captive distribution, including recruiting and training their own sales forces to ensure that their new products were marketed and sold properly.

Captive distribution, however, is no longer economically viable for most insurers. The increased commoditization of many insurance and annuity products, coupled with the increasing open architecture of insurance distributors, has resulted in the slow and steady shift away from affiliated agents.

In 2000, affiliated agents sold nearly half of all individual life policies in the United States. In 2020, that share had fallen to one-third. The difference in share has been captured almost entirely by independent agents, banks, and broker–dealers.

For insurers that no longer have captive distribution or that can no longer afford to maintain it, the focus will shift to more effectively managing third-party intermediaries. They will also focus on building unique value propositions beyond product features and pricing. Such propositions will have to include more digital and analytics capabilities and technological connectivity—leading to a seamless end-to-end experience from manufacturer to distributor to customer.

Developing such capabilities and creating this seamless experience will be table stakes for insurance carriers that maintain captive distribution as a primary source of competitive differentiation.

The more interesting questions will focus on how to create additional value from distribution. Indeed, some insurers are already looking at their captive distribution as value-creating hubs and sources of fee-based earnings through the sale of wealth management and third-party protection products.

Going forward, we anticipate that public insurers will also report their earnings from distribution as a stand-alone segment, as they seek the higher multiples investors offer on this part of their earnings.

Operations And Technology
Life insurance is one of the very few industries—within and outside financial services—that have seen cost ratios increase over the past 20 years. Yet this headline does not tell the full story.

There is a wide disparity in efficiency across life insurers. According to McKinsey’s Insurance 360° performance benchmark, top-performing North American life and annuity insurers have half the expense ratio of their bottom-quartile peers. Technology and operations-related costs, which have grown faster than other categories, represent a big part of the difference in performance.

Complex legacy-technology systems and platforms are the biggest bugbear for almost all life insurers. They create complexity, increase costs, and hinder insurers’ ability to launch new products and manage existing portfolios.

Many insurers have tried to address their legacy-technology problems by outsourcing to technology providers. In most instances, however, performance falls far short of promise: insurers are beset by issues of delayed transitions, significant cost overruns, and service levels that fail to meet expectations. This often creates a vicious cycle.

One of the greatest challenges insurers face in modernizing their technology pertains to older blocks, where many investments are fundamentally uneconomical. Technology investments on back-book policies (particularly closed blocks) will amortize over a shrinking number of policies— and such investments will not fuel future growth.

While technology investments are uneconomical, current technology platforms are becoming obsolete, with fewer and fewer programmers available to maintain these legacy platforms. The status quo is clearly not viable.

The choice for insurance carriers in addressing operations and technology is not straightforward. Operations is core to the touchpoints along the insurance customer journey, and insurers want to continue to own their client relationships. Companies that want to maintain such ownership and make it a source of competitive differentiation will need to ensure that their technology investments are accretive and tackle the challenges they face head-on.

These insurers will need to develop a new set of robust and distinctive capabilities, including the following:- 
1) Modern cloud-first approaches to managing applications and data
2) AI and advanced analytics to tackle complex issues across data extraction, premium 
    calculations, reserving, and operational tasks
3) The ability to attract and retain a different type of technology talent, including engineers,  
    developers, and data scientists
4) A culture of software engineering and more agile ways of working through tighter ] 
    collaboration between business and technology

For most insurers, building these capabilities on their own will be difficult and require significant bandwidth—taking focus away from their core business. This will create an impetus for the next generation of technology service providers to offer a more modern, customer-centric, integrated, end-to-end solution to serve both open and closed blocks.

Life insurance unbundling is already under way. Insurers are making deliberate choices across the value chain, building new capabilities, and shifting their business models. And while the pace of unbundling may be up for debate, it will continue nevertheless.

Unbundling will also lead to the blurring of boundaries between traditional competitors and more fluid competitive dynamics. Insurers will have to think beyond the “zero sum” approach and welcome new collaborative partnerships with different stakeholders in the spirit of creating greater “shared value.” In fact, insurers competing head to head in one area of business could end up being partners in another area where they have complementary capabilities.
FAQ

Consumer Friendly Distribution Channel

Analysts claimed that most bankers are working on some sort of digital distribution channel for their consumer banking products: online account opening, digital loan application, digital cross-selling, mobile marketing, etc. Nearly every survey you see published shows financial institutions making digital product distribution at least a top-five priority now and for the foreseeable future.

Distribution Disruption - The pandemic exposed the lack of attention to digital distribution channels—except for the megabanks and the digital banks, who were clearly ahead of the curve and have reaped the rewards of having these alternative channels up and running (at the expense of the community Financial Industry (FI) who are losing in terms of both new customer acquisition and being identified as the primary FI.

However, here’s what’s strange about all this focus on distribution: most FIs have done nothing to actually enhance or differentiate the consumer banking products they’re trying to distribute more widely. They’re still offering the same boring products (namely checking and savings accounts) and consumer loans they’ve provided for years with no new features or benefits.

Major Product Innovators - have been the digital banks and fintechs like Chime (“Get Paid Early” and “Fee-Free Overdraft”), SavvyMoney (credit scores and pre-approved loans), Acorns (personal money management and investing), and Affirm (buy now, pay later at the time of purchase).

It’s clear that these businesses have no choice but to distribute their products digitally. Still, it’s also clear that they understand that to be successful, they must offer deposit and loan products that don’t look like the ones you can buy at practically any FI.

And, they’re beating traditional FIs to the punch on this product differentiation and enhancement—especially with younger consumers.

Outdated Product Driven - Granted, one of the challenges companies offering any kind of product is how to drive awareness and visibility for it from marketing and fulfilling it with a great buyer experience. An “if we build it, they will come” philosophy is naïve and isn’t viable for newly offered products. For existing products that are essentially commodities, “if we build another distribution channel, we will sell more” is a likewise fantasy-minded approach.

Product & Distribution - must be emphasized equally for optimal and sustainable success, especially when talking about traditional consumer banking products. Creating a broader, varied way to market and sell these products isn’t enough. If your checking account or consumer lending products don’t offer anything you can’t get at a zillion other places, having a digital way to market, sell, and distribute it will offer (at best) minimal marginal gains, which doesn’t help you in the awkwardness of trying to make your case for an acceptable ROI with your boss.

Why are product distribution & product equally important? There’s a lot of noise competing for our attention, especially for consumer banking products. If you want to cut through the noise and resonate with existing customers or prospects, you have to create awareness and provide easily identifiable (and hopefully different) value that can be marketed, sold, and distributed however the end-user wants to buy it and receive it.

A robust consumer banking product with an average distribution channel is likely to perform better than an average consumer banking product with an average distribution channel. In other words, distribution itself can’t make up for a product that hasn’t been differentiated, upgraded, or enhanced in a consumer-relevant way.

You have to look no further than the digital banks and megabanks to see that they’re winning by focusing on both product and distribution, and not just one or the other. A very successful retail banker summed it up this way, “Product features are more important than ever and so is a consumer-friendly distribution channel for those products.”

Monday, November 4, 2024

Insurance Intermediary Defraud Insurer

An insurance intermediary in Hong Kong has been found guilty of conspiring with two policyholders in a scheme to deceive an insurer into making accident insurance payouts based on falsified injury claims. The conviction, handed down by the Eastern Magistrates’ Courts on Oct. 31, follows an Independent Commission Against Corruption (ICAC) investigation into alleged fraudulent claims.

Life Insurance Fraud - Lalwani Jay Jerome, 35, who was previously affiliated with Asia One Asset Management Limited as a REFERRER , was convicted on 4 counts of conspiracy to defraud, according to Hong Kong Common Law.

Magistrate deferred sentencing to Nov. 19, pending a background report. Bail was granted for Lalwani, who was ordered to pay restitution of approximately HK$52,000 to the insurer.

According to the court proceedings, Lalwani conspired with two policyholders, Tam Kai-chun and Lam In-kwan, to submit claims for injuries they did not sustain. In 2017 and 2018, Tam and Lam had obtained life insurance policies with accident riders from AIA International Limited through Lalwani, who at the time was working as an insurance referrer. These policies covered medical expenses and injury-related compensation, but claims required documentation such as medical receipts and records of sick leave from licensed medical providers.

Investigation Uncovers Falsified Documents - ICAC investigators discovered that the documents submitted by the policyholders and Lalwani, including medical receipts and sick leave notes, were falsified. Tam and Lam did not, in fact, suffer the claimed injuries nor undergo the stated medical treatments.

Based on these fraudulent claims, the insurer was misled into issuing compensation payments totalling over HK$52,000. Both policyholders, Tam, 37, and Lam, 33, were charged separately by the ICAC for their roles in the fraud and had already pleaded guilty. Their cases are set for mention on Nov. 25.

Life Insurance Referrer Model

The Hong Kong Insurance Authority (IA) has issued its latest Conduct - which includes significant updates for the insurance industry, such as new compliance regulations for brokers, the introduction of licensing fees, and refined standards for life insurance brokers, particularly in the context of referral business.

Referral Model - A major highlight in this issue is the IA’s new guidelines for insurance brokers that use referral models, especially those aimed at attracting Mainland China visitors (MCVs).

The IA emphasized that brokers must ensure Unlicensed Referrers do not participate in regulated activities, which includes advising on or selling insurance products. Non-compliance could result in severe consequences, such as suspension or revocation of licenses.

Brokers are now required to implement stringent due diligence processes for referrers, maintain comprehensive records and regularly evaluate compliance with these guidelines. Insurers working with these brokers must also ensure regulatory adherence through well-defined agreements, ongoing training, and regular monitoring. These measures are intended to protect the market’s integrity and ensure fair treatment of consumers.

In tandem with these compliance updates, the IA announced that starting September 23, 2024, fees will be introduced for processing insurance intermediary license applications and related notifications.

This development follows the expiration of a five-year waiver, which began when the regulator took on the regulatory role for insurance intermediaries in 2019. The new fee structure, developed after industry consultation, is designed to cover the costs associated with the IA’s regulatory functions.

Additionally, the fees will fund improvements to the IA’s technology-driven licensing processes and support public education campaigns that aim to help consumers make informed insurance choices.

Other Conduct In Focus Key Topics - The latest issue of Conduct in Focus also covers several other key topics. These include:
- best practices for general insurers when issuing renewal notices;
- the importance of participating in the SMS Sender Registration Scheme to 
  safeguard customers from fraudulent activities; 
- and the advantages of using insurers’ online self-service portals.

Insurance Authority Market Conduct Division Overhaul - In addition, the IA announced the reorganization of its Market Conduct Division into two new divisions: the Conduct Supervision Division and the Enforcement Division, to emphasize both preventive measures and enforcement actions.

As the industry adapts to these new compliance requirements and the introduction of fees, the IA has offered assurances that it will collaborate closely with stakeholders to ensure a smooth transition.

Tik Tok To Tokopedia

A year ago, TikTok’s ecommerce business in Indonesia was thriving. With its viral videos, TikTok had become a worldwide phenomenon, and it was translating its influence into a powerful new revenue stream by letting users buy and sell things while its videos played.

Indonesia was a critical market and the first place where TikTok rolled out this feature. The app, owned by the Chinese tech giant ByteDance, had about 130 million users, nearly as many as it had in the United States. Since its launch here in 2021, TikTok Shop had become one of the most popular places for Indonesians to buy things online.

Regulatory Guideline Change - Then one day, TikTok said it was removing Shop from its app in Indonesia. The government declared that social media platforms would no longer be allowed to process online payments. TikTok was forced to abruptly halt its ecommerce operations.

Some Indonesian officials argued that TikTok was so popular it threatened to monopolise online shopping, while others said it didn’t have the right license. TikTok’s defenders in the industry said the government was acting on behalf of TikTok’s competitors in Indonesia.

The government’s edict did not name TikTok. It didn’t need to. No other app blended social media and ecommerce the way TikTok did.

India Payback - Dealing with official scrutiny is familiar terrain for TikTok. The government in India, once home to the app’s largest audience, banned TikTok in 2020 as payback for a violent border dispute with China. In the United States, TikTok is facing a possible ban that could begin as soon as January after spending years fielding concerns about its influence and security.

But the threat in Indonesia had the potential to deal an especially devastating blow to ByteDance’s ambitions to make a lot of money with ecommerce. ByteDance wanted TikTok to repeat the success of its sister app, Douyin, whose live video shopping business in China topped US$200bil in transaction value in 2022.

Old Wine New Bottle - TikTok executives scrambled for a way to continue to offer ecommerce. Word spread through the Indonesian tech community that TikTok was looking for a local company to team up with. And within weeks, it was ready to buy a stake in Tokopedia, a former startup that had become one of Indonesia’s main ecommerce platforms.

That date had been one of the biggest days for deals on ecommerce platforms in China for years, and the trend had caught on in Indonesia. In recent years, the government promoted it as a day for buying from small businesses.

TikTok Shop restarted as a pilot program under government supervision on Dec 11. As it had before, Shop appeared as a tab within the TikTok app. But now it was decked out with Tokopedia’s logo and signature green branding.

The deeper change was on the back end. When a shopper clicked “Buy”, the checkout process ran on Tokopedia’s system. TikTok Shop was still part of a social media platform. But to satisfy the government, the transaction took place on infrastructure built by an Indonesian ecommerce company.

Tokopedia - was a key player in Indonesia, one half of the Indonesian tech conglomerate GoTo. The companies behind GoTo spent years developing payment and delivery technology that made it possible, in a country of 270 million people and 17,000 islands, to buy things online and receive them in a day or two. The deal integrated these systems with TikTok Shop.

TikTok received majority ownership of Tokopedia, which paid TikTok for the right to operate TikTok Shop in Indonesia. GoTo kept just under a quarter of Tokopedia’s shares, and was promised a cut of profits from future TikTok Shop sales. TikTok paid US$840mil and said it would invest further, up to a total of US$1.5bil, in the combined entity.

Worldwide - where TikTok Shop held nearly 20% of the ecommerce market last year, officials say they are mulling rules for the platform. And the Indonesian government isn’t done regulating the ecommerce industry. This month, Indonesian officials said they had asked Apple and Google to block the Chinese fast-fashion platforms Temu and Shein from app stores in the country.

TikTok Shop is available in eight countries, including the United States and Britain. But the rest are in Southeast Asia, where its transaction value topped US$16bil last year. If the app is banned in the United States, TikTok will depend even more on Southeast Asia to keep its ecommerce ambitions alive.