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Jakarta Post

Fintech could be a new source of financial exclusion

Low financial literacy may be behind the hike in the number of financial service complaints to the OJK during the pandemic.

Ariza Ayu Ramadhani (The Jakarta Post)
Jakarta
Tue, November 23, 2021

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Fintech could be a new source of financial exclusion Money savvy: Financial education is needed as more financial activities take place online. (JP/Hengky Wijaya)

D

igitalization has challenged traditional businesses in many industries, especially in the telecommunication, entertainment, media and financial industry. Similar to these industries, digitalization in the financial sector has been claimed to democratize financial services as it reduces inequality in who can access financial products or services.

However, that statement might not be necessarily true. People from the lowest income brackets may face more obstacles, hampering their access to digital financial services. Hence, digitalization could become a new source of financial exclusion. One of the obstacles is the low level of digital and financial literacy, especially among vulnerable groups, including women, micro and small enterprises (MSMEs), migrant workers and those who live in rural areas. 

Indonesia’s internet users have surged over the past few years. According to 2020 data from Statistics Indonesia (BPS) 43.5 percent of the 270 million people in Indonesia had access to the internet by 2019. Moreover, during the pandemic, digital activities have broadened and multiplied as many people have shifted to online activities. For instance, new e-commerce consumers in Indonesia increased by as much as 37 percent during the pandemic in 2020.

The Economist Intelligence Unit in 2021 however, discovered that out of 120 countries, Indonesia only ranked 66th in its inclusive internet index. In the criteria, Indonesia’s performance was in the top half of the list for availability and relevance of internet, but performed within the bottom half of countries in affordability and readiness, with specific deficiencies in literacy rates and competitive circumstances. The data illustrate an urgency to boost digital literacy to catch up with the internet users’ needs and usage.

Indonesia’s low rate of financial literacy was similarly identified in a 2019 survey by the Financial Services Authority (OJK). The review showed that only 38 percent of respondents were financially literate. Another survey by the Organisation for Economic Cooperation and Development reported that Indonesian respondents had a positive outlook toward financial products and services but had relatively little knowledge even on the basics of finance.

The low financial literacy rate may be behind the hike in the number of financial service complaints to the OJK during the pandemic. During the unfortunate time, the OJK filed on average 345,000 complaints per month. The figure rocketed from only 2,.000 to 3.000 cases per month before the pandemic. Likewise, the Consumer Protection Foundation (YLKI) reported a rise in consumer complaints, especially in financial services and e-commerce, in 2020.

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The OJK and Bank of Indonesia’s data also showed that most complaints were about debt collectors from pinjol (online lending) and bank credit cards. Not only did people complain about the debt collectors’ rough attitudes, but they also opposed data protection issues. Again, there is a concern over the public’s basic financial literacy to understand the risks and rewards of financial products. This situation also revealed the unfortunate role of illegal pinjol in targeting financially illiterate people as their potential consumers without sufficient efforts to educate them.

Indeed, internet users in Indonesia will increase in the years ahead as the country develops, yet digital assets might not be optimally utilized to conduct digital financial transactions. The latest Financial Inclusion Insight 2020 survey conducted by the Financial Inclusive National Council (DNKI) shows that only 21.6 respondents had a moderate or optimal ability to conduct financial transactions via smartphones. The rest, about 78.4 percent of respondents, admitted that they had little or no ability to perform digital financial transactions.

Digital financial services may appear as an opportunity, or even a solution, in our lives. However, they also come with challenges that can turn into drawbacks, especially for vulnerable groups affected the most by the pandemic. Thus, joint efforts from the government, industries and communities are crucial to meet the challenges.

For that reason, education is always the key. An escalation in financial literacy is required on many levels, not only textbook-based education but also in boosting people’s confidence to spend time on financial decisions. Clear-cut and customized initiatives should be undertaken for the most vulnerable. The government must also play a pivotal role in providing digital infrastructure and ensuring digital literacy for all people.  

Financial firms must play a major role in digital and financial literacy as they should be held accountable for their services. Moreover, communities, such as NGOs, universities, schools and youth groups are also pivotal in promoting financial and digital literacy because they can focus on their more specific audiences.

Finally, the government plays a crucial role as a balancer, in regulating the financial industry. Consumer protection, including personal data protection and cybercrime prevention, is essential and achievable through innovative supervisory and regulatory approaches like supervisory technology (SupTech) and regulatory technology (RegTech).

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The writer is a researcher at the Center for Financial Sector Policy, Fiscal Policy Agency, the Finance Ministry. The views expressed are her own.

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