Hans Peter Naumann, 48, had flown from Bangkok to Bali on an Air Asia flight before he was caught around midday Friday, officials said.
He could be charged with drug trafficking, for which the maximum penalty is a death sentence and 10 billion rupiah ($832,000) fine, Bali customs official Djarot Utomo said.
"He admitted that he was only a courier," and would get $5,000 as payment, Utomo said.
Airport authorities spotted Naumann looking pale and acting suspiciously upon his arrival so decided to conduct a body search.
They found 11 capsules containing 201 grams (7 ounces) of cocaine in his underwear as well as six capsules weighing 38 grams of the drugs he had swallowed, Utomo said.
The German embassy in Jakarta could not immediately be reached for comment.
Foreigners are regularly caught with drugs on Bali and a death sentence can be imposed on those found trying to smuggle drugs weighing more than five grams onto the popular holiday island.
British grandmother Lindsay Sandiford was sentenced to death in January last year after cocaine with an estimated street value of $2.4 million was found in her suitcase as she arrived on a flight from Bangkok.