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Trail blazing for digital financial inclusion

JP/R

M. Irwan Setyawan (The Jakarta Post)
Jakarta
Thu, November 28, 2019

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Trail blazing for digital financial inclusion

JP/R. Berto Wedhatama

Indonesia has made significant progress in financial inclusion over the last five 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 to 49 percent. Additionally, the second national survey on financial literacy and inclusion conducted by the Financial Services Authority (OJK) in 2016 revealed that the financial inclusion indexes stood at 67.82 percent. That is about 8 percent higher than in 2013.

However, most Indonesians still lack access to financial services, meaning that they do not have bank accounts and lack opportunity to engage in broader economic activities. According to the 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 to review progress in financial inclusion and to take progressive action. Government representatives, international experts and 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.

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 inspiring forum. These fronts may determine if the technology can deliver on its potential to serve the unbanked segment.

First, promoting regulation to create a level playing field for banks and nonbank financial institutions. Financial technology (fintech) has grown in recent years. The number of members in Indonesia’s fintech association has increased from six to over 250 members in the last three years.

The association also reported that were more than 30 million fintech electronic money users and over 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, nonbank financial institutions like digital finance services and other e-money providers — such as LinkAja, Gopay 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 noncash transactions means the need to have a platform to convert from cash to digital. The agents play an important role in facilitating customers 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 regulation allowed fintech companies to hire those individual agents, the number of agents would increase and potentially lead to higher customer adoption.

However, creating regulatory tools to keep up with the rapid innovation is extremely challenging. The same set of rules for banks may not apply to fintech companies. Regulators may find it difficult to assess the risk of fintech companies and if these risks are left unaddressed, they could harm customers and threaten stability. Without an appropriate regulatory environment, financial innovation may be stifled and financial inclusion strangled.

Second, creating digital identity infrastructure. Digital infrastructure is the foundation of 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 an individual to open an account without having to show up 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 has allowed Aadhaar to be used as both proof of identity and address for the know-your-customer process since 2013.

In early 2015, the Indian showed that over 125 million accounts had been opened: 75 million in rural areas and more than 50 million in urban areas. However, despite the obvious success of Aadhar in financial inclusion, significant challenges to banking last-mile consumers remain, especially pertaining to privacy and data protection.

Indonesia has been developing a demographic information system (SIAK) since 2011. The system contains demographic and unique biometric data for almost all Indonesian adults. Indonesians are also issued an identity card with contactless technology and a microchip.

SIAK has been recognized as a promising tool to promote financial inclusion. In 2019, more than 1,200 financial institutions have obtained access to demographic data to verify customers. However, the use of biometric data in SIAK is still limited to law enforcement purposes. The government 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 the broader use of relevant financial products and services for the benefit of individuals.

Digital financial services bring various challenges for governments and consumers. For governments, the challenges are 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, given low financial and digital literacy.

In Indonesia, the recent cases of digital lending have shown that individuals with low financial literacy are vulnerable to falling into overindebtedness. Now people are only a click away from obtaining credit from a digital lender. Borrowers may obtain multiple loans but they have 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 risk of fraud, misuse of personal financial data and cybercrime.

Despite some progress 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. Only with collaborative action, can policymakers ensure that Indonesia continues to lead the way toward universal access to financial services.

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Program manager at the National Committee for Financial Inclusion (DNKI). The views expressed are his own.

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