Indonesia has made significant progress in financial inclusion over the last 5 years. In 2017, the World Bank reported Indonesia had the biggest account ownership increase in the East and Asia Pacific Region between 2014 and 2017, up from 36 percent to 49 percent. Additionally, the second National Survey on Financial Literacy and Inclusion (SNLIK) that was conducted by the Financial Services Authority (OJK) in 2016 revealed that the financial inclusion indices stood at 67.82 percent. That is about 8 percentage points higher than in 2013.
However, the majority of Indonesian people are still having no access to financial services. It means no bank account and a lack of opportunity to engage in broader economic activities. According to World Bank Global Findex in 2017, the unbanked population was about 50 percent. Therefore, there is still much to do.
Last month the National Council for Financial Inclusion hosted the Indonesia Financial Inclusion Forum 2019 (IFIF 2019) in order to review the financial inclusion progress and take progressive action. The diverse speakers– government representatives, international experts, industry players – discussed a wide-range of policy options for financial inclusion, highlighting the needs to be met, and analyzing the unique opportunities and challenges.
In his opening remarks in the forum, Mr. Susiwijono, a Secretary of the Coordinating Ministry for Economic Affairs (CMEA), mentioned the importance of technology in financial inclusion because of its role to reach the unbanked population at a low cost. Technology became a common thread to the entire program of keynote sessions, including the financial inclusion trend, the role of government, information communication technology (ICT) infrastructure, and consumer protection.
All the keynote sessions were inspiring. All of the speakers were actively involved in financial inclusion issues and were thus able to provide the audience with key insights and experience. I learned a lot from this great opportunity! Here are my key three takeaways from the forum. These fronts may determine if the technology can deliver on its potential to serve the unbanked segment.
Firstly, promoting regulation to create a level playing field for bank and non-bank. Financial-technology (fintech) has been growing in recent years. The number of members of Indonesia’s fintech association has increased from 6 to more than 250 members in the last 3 years. The association also reported currently there are more than 30 million fintech electronic money users and more than 6.9 million digital credit borrowers in 2019. Fintech holds particular promise to accelerate financial inclusion, but we need to promote a more inclusive regulatory environment.
For instance, non-bank financial institutions like LKD (Lembaga Keuangan Digital) and other e-money providers – such as LinkAja, Go-pay, and OVO – are at a disadvantage in providing electronic money as they are unable to use individual agents or non-registered business as agents, unlike banks. Promoting the non-cash transaction means that there is a need to have a platform to convert from cash to digital. The agents play important roles to facilitate the customers in order to digitize part of their income. They also need to provide cash-out services so they can make cash transactions when there is no digital use case. If the regulation allows the fintech companies to hire those individual agents, the number of agents will increase and potentially lead to more customer adoption.
However, creating regulatory tools to keep up with the rapid innovation is extremely challenging. The same set of rules for the banks may not apply to the fintech companies. Regulators may find it difficult to assess the risk of fintech companies and if these risks are left unaddressed, they can harm customers and threaten stability. Without an appropriate regulatory environment, financial innovation may be stifled and financial inclusion strangled.
Secondly, creating a digital identity infrastructure. Digital infrastructure is the foundation of a strategy for digital financial inclusion. Digital infrastructure – such as demographic and biometric data – can be used to give access to financial services in a more effective and efficient way. It allows a person to open an account without having to present themselves in person. The government can provide this digital identity infrastructure as public infrastructure, offering opportunities to leapfrog to financial inclusion, as witnessed by India’s Aadhar.
India’s Aadhaar has proven extremely beneficial for financial inclusion. Reserve Bank of India (RBI) has allowed Aadhaar to be used as both a proof of identity and address for the know-your-customer (KYC) process since 2013. In early 2015, the government of India showed that over 125 million accounts had been opened: 75 million in rural areas, and over 50 million in urban areas. However, despite the obvious success of the Aadhar in financial inclusion, significant challenges to banking last-mile consumers remain, especially around privacy and data protection.
Since 2011, Indonesia has developed a digital public infrastructure known as ‘Sistem Informasi Administrasi Kependudukan (SIAK)’ or population administration information system. SIAK contains demographic and unique biometric data for almost all Indonesian-resident adults. Indonesian residents are also issued with an identity card (e-KTP card) with contactless technology and a microchip.
SIAK has become recognized as a promising tool to promote financial inclusion. In 2019 more than 1.200 financial institutions have already accessed the demographic data for the KYC requirement. The national identity number and demographic data act as proof of identity for financial institutions to verify their customers. However, the use of biometric data in SIAK is still limited to law enforcement purposes by police. The Government of Indonesia should harness the potential of biometric data to provide a solid foundation for digital financial inclusion.
Finally, empowering financial education. Broadly speaking, the aim of financial education is to encourage broader use of relevant financial products and services for the benefit of individuals. Financial education can improve levels of financial literacy which helps individuals to make well-informed financial decisions.
Digital financial services bring various new challenges for governments and consumers. For government, developing and implementing financial education policies in more complex products. For consumers, difficulties in accessing digital financial products and services may result from their lack of familiarity with these new tools, and/or their low financial and digital literacy.
In Indonesia, the recent cases of digital lending have shown that an individual with a low level of financial literacy is vulnerable to fall into the problem of over-indebtedness. Now they are only a click away from getting a credit from the digital lender. Borrowers may have multiple ‘clicks’ and get multiple loans but they have an inadequate understanding of the real cost of repaying these loans. This, along with the new features of the digital market, may expose borrowers to newer risks and threats, such as the risk of fraud, misuse of personal financial data, and cybercrime.
Financial education policy responses are still needed to address these challenges effectively. However, the policy is in dire need of further innovation. Technological innovations hold some promise but need further evaluation. Technological solutions that manage to adapt individual knowledge to specific needs will have a much better promise for impact at scale than any one-size-fits-all approach.
Though some progress has been made on all three fronts to accelerate financial inclusion, they need to be thoroughly evaluated. The regulatory agencies will play an important role in ensuring the balance between promoting technological innovations and controlling risk, especially for vulnerable groups in financial services.
Support from the industry will need to expand and augment these efforts if it is to provide more products and services to consumers. Only with collaborative action, can policymakers ensure that Indonesia continues to lead the way toward universal access to financial services
The shortened version of this article appeared on The Jakarta Post under the title of “Trail blazing for digital financial inclusion” on Nov 28, 2019.
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