How Fintech Can Accelerate Financial Inclusion in Indonesia

Indonesian banks are investing in innovative fintech startups to help them to scale up quickly.
Indonesian banks are investing in innovative fintech startups to help them to scale up quickly.

By Arup Kumar Chatterjee, Poornima Jayawardana

For the country to take full advantage of financial technology, 3 significant steps need to be taken.

Financial technology (fintech) is expected to become a major driver of financial inclusion in Indonesia. The country is preparing itself to embrace future disruptions with the government’s 2020 Go Digital Vision to boost overall growth, improve workers’ skills, and create jobs.

Fintech is at the core of plans to meet the target of 75% of Indonesians gaining access to a formal bank account by 2019 set out in the National Strategy for Financial Inclusion. Being less homogeneous than banks, fintech companies can create a more diverse, secure, and stable financial services landscape.

Unburdened by legacy systems, fintech companies have greater scope to reduce costs and improve service quality. For example, by leveraging big data, machine learning and alternative data, fintech firms can develop innovative risk assessment models to generate credit scores for customers with limited credit histories. Shaping a stable and cost-efficient ecosystem for fintech in Indonesia is a significant but manageable challenge.

Realizing that technology and market forces alone cannot be the solution, policymakers and financial sector regulators are developing a comprehensive roadmap to create an enabling and regulatory environment to maximize fintech potential while ensuring consumer safety and financial stability. The roadmap needs to entail taking 3 significant steps.

First, creating a national digital identification system will ensure that every Indonesian has a unique demographic number. This will help address the root of the problem, namely the know-your-customer verification. 

With a digital registry and authentication at the point of service, the government can better allocate budgetary resources and track their impact more effectively to improve access to the social sector.

[tweet="3 steps for #Indonesia to maximize #fintech potential @chatarup @ADBIndonesia" text="3 steps for Indonesia to maximize fintech potential"]

Second, expanding access to financial services. The government’s push for digitization of government-to-person payments is an important initiative.

Technology-enabled direct cash transfers will improve efficiency by removing intermediaries. Transferring entitlements in cash directly to people’s bank accounts, instead of the government purchasing some commodity and transferring subsidies via price controls, is more efficient and saves significant resources for the state.

Three digital cards for social assistance enable the government to directly transfer the entitlements to the saving accounts of target families, linked to their mobile numbers. Banks and mobile phone operators provide the payments infrastructure.

Finally, leveraging the near-universal penetration of mobile phones, which have become the primary medium through which consumers get their information. They also facilitate new types of information including extremely precise, real-time, geo-location information in the form of transactions, inquiries, and SMS.

Collecting and analyzing non-traditional data on mobile phone use such as duration of calls, number of contacts, or types of apps downloaded can help develop a range of alternative payment, lending and savings services to boost financial inclusion.

Fintech offers a veritable gold mine of insights and applications that can transform governance, and support Indonesia’s efforts in planning for a future with smart solutions.

[tweet="ADB experts: #fintech to reshape #Indonesia financial services landscape @chatarup @ADBIndonesia" text="Fintech to reshape Indonesian financial services landscape"]

The Jakarta One Card has set a good example in cashless technology in payment systems by combining social assistance with public transport. It not only contributes to economic efficiency and transparency, but also uses transactional data for policy-making with the overall goal of making residents’ lives easier.

The 3 steps should be complemented with consumer awareness, digital literacy, and consumer protection measures to build trust and confidence in digital systems. This is crucial in a country where only around 30% of the population is financially literate.

Fintech’s future success in Indonesia likewise depends on effective regulation. This means that risks associated with new technology-driven providers and products should be well understood and efficiently managed. Regulation increases transparency, lowers the risk of fraud, data breach and cybercrime, and increases trust that can accelerate fintech adoption.

Effective regulation is important because, by nature, fintech start-ups disrupt. They look for opportunities where regulations do not exist or are vague. Fintech firms seek to do things in a cheaper, more efficient, and transparent way compared traditional financial institutions.

Indonesia’s fintech sector is regulated by Bank Indonesia and the Financial Services Authority (OJK). To support innovation and healthy competition, Indonesia is gearing up to promote agile, proportionate and efficient regulation of financial innovation. Regulatory adjustments, including simplifications, are being envisaged for new technologies and business models.

Bank Indonesia’s new fintech regulations issued in December 2017 are a testament to its willingness to embrace fintech. It has also approved a variety of technological platforms for financial transactions to help provide access to finance to millions of customers based on an analysis of their transaction history.

[tweet="Effective regulation critical to manage #fintech disruption in #Indonesia – ADB experts @chatarup @ADBIndonesia" text="Effective regulation critical to manage fintech disruption"]

Once the National Payment Gateway becomes fully operational later this year, the interconnection of all forms of electronic payments is set to become cheaper and more efficient. This should help accelerate fintech expansion throughout Indonesia.

Another positive development is OJK’s initiative to establish a regulatory sandbox so banks and fintech companies can experiment with various approaches. Sandboxes give limited authorization for fintech startups to test new products and models with a small number of actual users in a simulated environment.

The sandbox approach allows certain flexibility, which is crucial since markets are radically changing with the emergence of new digital platforms. The challenge will be to strike the right balance so that promoting sandbox participants over non-sandbox companies does not inadvertently create quasi monopolies.

Decent telecommunications infrastructure is key, as cloud-based systems can deliver significant efficiency gains if broadband connectivity is good. The installation of the nationwide fiber-network Palapa Ring Project can be an important step toward bridging the digital divide and promoting financial inclusion.

Finally, fintech companies should focus on building partnerships with telcos and other local players to engage potential customers and build on each other’s strengths. A good approach is investment by banks in innovative fintech startups to help them to scale up quickly.

Financial inclusion is about access to tools to gain access to credit to grow a business, buy a home, save for a child’s education, or plan for health and retirement. With innovative and clear-sighted policies, fintech innovation can change the way people conduct business in Indonesia.