Home to more than 250 million people and enjoying potential opportunities from a demographic bonus, Indonesia is expected to contribute significantly to the global economy.

Unfortunately, this huge potential cannot yet be fully tapped, due to a lack of financial inclusion. A World Bank survey (2014) shows that only 36 percent of Indonesia’s adult population have accounts at formal financial institutions.

The Global Findex database (2014), quoted by McKinsey and Company, meanwhile, suggests that only 50 percent of the adult population use banks to transfer money, 27 percent to save money and 7 percent to receive wages. The same data set also reveals that that 44 percent prefer to borrow money from family members, friends or informal institutions and only 9 percent use debit cards to make payments.

It turns out that many small and medium enterprises (SMEs) – an estimated 49 million to be more precise - are also still unbanked. Considered by the government as the backbone of Indonesia’s economy, SMEs employ more than 107 million people and contribute at least 60 percent to the country’s GDP. With such huge potential, SMEs can support equitable economic development that allows more people to participate in economic activities.

There are many reasons why millions of Indonesian citizens still have no access to financial services, including the geographical factor, the limited number of bank branches and a low level of financial literacy.

Indonesia’s financial literacy rate, for example, currently stands at 21.8 percent, much lower than that of regional peers, including Singapore (96 percent), Malaysia (81 percent) and Thailand (78 percent).

The digital transformation

Despite issues regarding financial literacy and access to financial services, Indonesia actually tops the list of countries with the fastest growth in internet connectivity. Social Baker (2016) reported that Indonesia was home to around 88 million active internet users, with 74 million active social media users. There are 325 million mobile connections and 64 million active cellular phone users.

The rapid development of digital technology is also indicated by mushrooming technology startups in Indonesia, including those operating in the financial technology (fintech) industry, which offers a broad range of financial services using information technology platforms. A recent survey from the Indonesian FinTech Association maps out at least 120 fintech companies currently operating in Indonesia.

The rapid increase in the number of fintech startups is in line with the number of mobile phone owners, which is much bigger than that of bank account holders. This suggests that the future of Indonesia’s financial inclusion relies heavily on digital transaction facilitated by mobile gadgets.

While traditional financial institutions are intensifying efforts to expand services to unbanked segments of the population, the fintech industry has emerged to offer alternative services with many added benefits. With its mobile, flexible and costumer-oriented character, fintech has contributed to marketing financial service products and pushing for economic development by boosting digital transactions.

The rapid growth of fintech startups will also prompt traditional financial institutions to evaluate their core business model and start utilizing digital innovations.

Financial system chain

Fintech has emerged as a response to market demands for more practical, secure and modern payment, transfer, trading and financing processing. Financial transactions can now be carried out electronically using smartphones, tablets or other mobile devices.

Thus, fintech has actually completed the financial transaction chain. It is strengthening the existing financial ecosystem instead of taking over the roles of traditional financial institutions. Fintech supports the roles of banks and other financial institutions to provide financial services to customers while helping customers make financial decisions.

The technology also helps cut operating costs, minimize risks (including those from bad loans), and expand markets through online marketing, which is increasingly popular among the public. 

Apart from facilitating online transactions, fintech serves many other purposes. A study by the Indonesian FinTech Association shows that 44 percent of Indonesian fintech companies operate in the payment service business, 15 percent in aggregator, 15 percent in financing, 10 percent in personal and individual financial planning, 8 percent in crowdfunding and the rest in miscellaneous businesses.

The rapid growth of fintech has also touched many sectors in the financial industry, including retail, wealth management, SMEs, corporate, investment banking and insurance, thus offering golden opportunities to reach out to Indonesia’s unbanked society.

Collaboration

There are three pillars to make sure that Indonesia achieves financial inclusion through the development of fintech, namely infrastructure development, the introduction of clearer regulations and the creation of a stronger ecosystem for the fintech industry. All can only be achieved through collaboration among stakeholders.  

To assist in the development of the financial industry, members of the Indonesian FinTech Association and regulators meet regularly to discuss and exchange information regarding the development of government policies and priority programs as well as other industry matters.

The Financial Services Authority (OJK), for example, recently invited the association’s executives and business players to discuss a draft regulation on fintech lending. This reflects the regulators’ support for the industry through regulatory reviews to provide greater certainty for business players and strengthen the fintech industry ecosystem in Indonesia.

Another visible act of support from regulators is the opening of Bank Indonesia’s (BI) Fintech Office on Nov. 14, which will serve as a center for study, risk mitigation, evaluating fintech business models, products and services, and initiating research on technology-based financial services. Meanwhile, support from traditional financial institutions can be seen through the increasing frequency of strategic collaboration between them and fintech startups.

Collaboration and synergy among all stakeholders (government, regulators and business players) are key to strengthening the financial ecosystem and the most appropriate formula to achieve financial inclusion within Indonesian society.

We all want to see all segments of society be able to access more financial services and products to improve welfare, eradicate poverty and help boost national economic growth.

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