Emerging Opportunities for Digital Finance in Indonesia

The recent visit to Indonesia by the UN Secretary-General’s Special Advocate for Inclusive Finance for Development (UNSGSA) – H.M. Queen Máxima of the Netherlands – provided a unique opportunity to better understand key accomplishments, challenges and opportunities for financial inclusion in the country. As the director or her office I accompanied the UNSGSA, and had the opportunity to gain a better understanding of what is often seen as a complex financial inclusion landscape given the large number and diversity of actors.

With more than 100 million unbanked adults, Indonesia is the third largest unbanked market in the world after India and China. Yet there are signs that the time is right for that to change.

Poverty has declined significantly over the past few years, and close to 11 percent of adults live under the poverty line. Mobile phone technology is now widespread, with more phones than people in the country. And the number of Indonesia smartphone users is expected to grow to 92 million by 2019. With mobile expansion also comes a great number of airtime resellers, estimated at more than 400,000. While the financial inclusion landscape has been largely dominated by profitable state-owned banks in the past few years, many new private-sector players, including FinTech companies, are entering the market.

On the policy front, President Joko Widodo shows a keen interest in financial inclusion. For example, his Nawa Cita (nine priorities) as president include financial inclusion targets. In a much awaited moment, he signed a decree that formalizes the new National Financial Inclusion Strategy, one day before meeting with Queen Máxima. Regulators such as Bank Indonesia (BI) and Otoritas Jasa Keuangan (OJK) have also issued key regulations for mobile money and agent banking.

There could be somewhere between 100,000 and 150,000 agents providing technology-enabled financial services, using cards and phones. The World Bank Findex survey highlights that financial inclusion has almost doubled between 2011 and 2014, reaching 36% of adults, and that women are even better included than men. Although these figures need to be prudently interpreted, they seem promising.

It is too early to claim victory, however. In spite of economic improvement, a large number of people remain vulnerable, with 40% of the population clustered around the national poverty line, according to the World Bank, and growing economic inequality. Unemployment among the young is also a growing issue.

While LKD e-money services, regulated by BI, and Laku Pandai branchless banking financial services, regulated by OJK, have expanded rapidly, our visit and discussions with some of the banks make us believe that a large proportion of agents are inactive or do not make enough transactions. Some level of disconnect between the two regulations does not help, nor does the fact that agent network managers and super agents are not yet authorized to operate. Mobile network operators (MNOs) are also at a disadvantage in providing e-wallets, as they cannot use nonregistered businesses as agents, unlike large banks. In addition, customer adoption is low.

A 2015 Intermedia survey showed that only 8% of people in Indonesia are aware of a mobile money provider and only 0.4% use mobile money. This is partly due to the fact that the industry has not fully tried to understand the demand. As a leading MNO manager mentioned during our visit, “There is a large spectrum of clients and we have failed to understand their needs. We have assumed their needs and we don’t know what drives them…there is no one size fits all.”

As highlighted in the UNSGSA speech delivered in Jakarta at the Indonesia FinTech Festival and Conference, there is “low hanging fruit” that could enable Indonesia to reach its objective of 75% of adults being financially included by 2019. The national strategy just signed by the president could serve as a basis for regulators and policy makers to coordinate their policies; for example, it could help harmonize the Laku Pandai and LKD regulations. Such reform could lead to a larger number of agents and a more commercially sustainable and customer-friendly agent model. More low-hanging fruit is the digitization of social government payments, which is also a key priority for the president and his government. If the 15 million households that receive social transfers could use these funds to save, transfer or gain access to credit on a formal account, this could also significantly foster financial inclusion.

For these easier wins to materialize, the UNSGSA highlighted the need for Indonesia to build a solid interoperable payment ecosystem, to set up a level-playing field and to promote customer centricity. Together with her key partners, the UNSGSA will support Indonesia to harvest these low hanging fruit and reach its ambitious goals.