By: Ardi Wirdana
Banks in Indonesia have always faced an enormous challenge of reaching out to the unbanked. Being in an archipelagic country that is geographically fragmented, banks have been finding it difficult to expand their presence to the countless remote rural areas in the country, accounting for hundreds of millions of people.
In fact, the unbanked are the majority in Southeast Asia’s largest economy. Only around 20 percent of Indonesia’s 250 million-population have bank accounts.
Without any access to financial services, the bankable unbanked have stuck with old fashioned practices in managing their finance.
Many still keep their cash safe at home as a method of saving and resort to arisan, interest-free financing provided during social gatherings, to obtain loans. To pay monthly bills the unbanked travel to the nearest Perusahaan Listrik Negara (PLN) and Perusahaan Daerah Air Minum (PDAM) branches rather than through the networks of financial institutions.
The unbanked market, with its sheer size, holds great promise for anyone willing to delve into that market. However, banks’ the focus and reliance on physical, ‘brick and mortar’ business models have made it difficult for them to reach out to the unbanked.
The surge of mobile use in Indonesia in recent years, however, has started to change that.
Mobile the only way to go
According to Ericsson Mobility Report, Indonesia’s mobile subscribers already reached 330 million in 2013. With the number of mobile phone owners far surpassing the number of bank account holders, many are starting to realize that the future of financial inclusion in the country will be on mobile devices.
Within the last 10 years, banks in Indonesia have started to expand to mobile-related services for their customers by developing services like SMS, internet and mobile banking. While these initiatives were very well received, they were merely an alternative channel which only served those that are already banked.
To be able to bank the unbanked, banks needed to think outside the box and explore a different business model to extend their products and services to those that have little or no access to financial services.
The first bank in Indonesia to think and act along this line was CIMB. The Malaysian-owned bank came out with a service called Rekening Ponsel, a cellular phone-based bank account through which customers can make banking transactions on their phones — the first in Southeast Asia.
What us interesting about this service is that it is not bank-based, which enables non-customers to activate their mobile numbers and effectively turn their phones into e-wallets, allowing them to carry out transfers, payments and withdrawals without having an ATM card or even a bank account.
Other banks soon followed suit by launching similar services such as Bank Mandiri with its E-Cash and BRI with its T-Bank service. CIMB, however, has made itself a pioneer in digital banking and looks to maintain its reputation.
Last year CIMB Group chief executive Dato’ Sri Nazir Razak claimed that CIMB was “structurally” disadvantaged compared to its competitors in Indonesia, but is determined to overcome this by becoming the leader in digital banking, which will revolve around mobile phones.
“Culturally, Indonesians are very comfortable with ATMs, so I’m going to break them out of their comfort zone. I’m going to make them comfortable with the phone,” Razak told reporters.
CIMB’s endeavour typifies the efforts and initiatives carried out by the private sector in trying to cover the unbanked market using digital technology. The work by the public sector in that front has not been as impressive.
The central bank (Bank Indonesia) has mapped out the need for branchless banking in the future but has not followed up with a concrete plan for digital banking.
In 2013 Bank Indonesia launched a Digital Financial Services (LKD) campaign, which looks to provide financial service facilities for the unbanked, through the help of technology or agents. However, three years since the campaign was started, the focus seems to still revolve around the idea of using agents to reach the unbanked.
The only program launched as a follow up of the LKD campaign is the Laku Pandai program, which promotes banking and financial services for all through the help of other parties, such as individual and institutional agents. Though technology in the form of mobile phone and IT facilities is used in the program, it is considered only a supporting element, with the main emphasis being on the work agents.
The Laku Pandai program, which was officially launched by the financial services authority (OJK) in January this year, has been participated by four of the country’s largest banks. The four banks involved in the program will recruit 128,039 agents this year. The number would soar to 350,000, covering 75 percent of Indonesia’s regions, if 13 other banks looking to join the program were approved by the OJK.
The OJK expects that all of the country’s regions to be covered by banking agents in the space of three years.
Challenge for Banks
While the use of half a million agents does serve the purpose of reaching out to the unbanked, it will prove to be a strain for banks in the long haul as it is not only inefficient but also highly vulnerable to security risks. The long-term solution is to go digital.
However, according to Meliza Rusli and Dianne Rajaratnam from Accenture Indonesia, a combination of reasons have hindered the development of digital banking in Indonesia.
“Factors such as complex regulations, as well as the cost of investment (in money and time) constrain many players. Feelings of apprehension about changing existing organizational and operating models, as well as business and revenue models, also delay decisions to focus more on digital banking,” they wrote in an opinion piece published by The Jakarta Post recently.
A lot of banks, they argue, are unsure and not fully committed in making the shift towards digital. The change should be driven by both the bank’s executives as well as its technology team in order to make it successful.
“And it requires a willingness to change operating models to be more agile and adaptive to multi-speed changes that provide truly digitalised service to customers, as well as cutting-edge back-end processes that make it all real,” they said.
Private and Public Support
A 2014 study titled ‘Digital Financial Services (DFS) in Indonesia’ by professional services firm Deloitte highlights the benefits of providing financial services to the unbanked. It estimates that a 20% increase in financial inclusion would help create 1.7 million additional jobs in the country.
“Benefits of the economic growth stimulated by DFS will increase tax revenue from growing profits of new businesses created, alongside with increased personal income tax paid as a result of employment and job growth.
“With a tax-to Gross Domestic Product ratio of 12%7, DFS adoption could add up to USD 700 million to the Indonesian government’s revenue by 2018,” the study says.
Kenya currently boasts arguably the most successful DFS model with the M-Pesa service by communication firm Safaricom which has more than 14 million users and providing services to over 70% of Kenya’s adult population. Indonesia has the potential to be just as successful, but it would need both the public and private sector to do their bit.
The private sector, the report states, need to play a leading role. Improved coordination between stakeholders from different industries will be vital in driving digital financial services. Partnerships between telecommunications and financial services firms, for instance, need to be strengthened further.
The government’s task, meanwhile, is to increase the awareness of DFS and establish an eco-system that would support DFS products and services through initiatives like pilot programs for selected national government employees who are unbanked.
“The central government’s efforts can also inspire DFS adoption at the provincial government level, as well as local jurisdictions led by bupatis, or local leaders, who seek to model their payments approach after the provincial and central governments,” the study says.