Indonesia: More Smartphones than Bank Accounts

Fintech has great potential in Indonesia, but growth has been slow to date. That may be changing.

Photo: Fancycrave via Unsplash

Digital technology is advancing financial inclusion around the world, enabling millions of people and businesses to join the global economy for the first time. Access to financial services is critical for global development, as it makes it easier to invest in healthcare, education and business. Digital technologies offer a powerful way to boost financial access.

As the financial technology (Fintech) revolution unfolds, digitally-enabled financial services are dramatically expanding the ways in which people transact beyond traditional banking. They are also changing banking services, as banks are increasingly offering digital platforms.

Indonesia is the fastest-growing country in the Asia-Pacific region in digital financial services, but its penetration remains the lowest in the region. In 2017, the number of bank customers who used internet or mobile banking was 58 percent up from 36 percent in 2014. However, only 5 percent of the population used digitized financial services in 2017. It was the lowest figure recorded amoung 15 Asia-Pacific countries observed by the firm. Myanmar, for example, was at 6 percent and Thailand at 10 percent.

Indonesians’ communal nature played a big part in the slow adoption as people seek a social foundation to use digital services. Indonesians still favor services provided by conventional lenders over financial technology providers, such as peer-to-peer lending and payment systems, despite the fact that peer-to-peer lending is the business with the third highest number of complaints reported to the Indonesian Consumers Foundation. Meanwhile, digital financial services tend to flourish in areas where the physical flow of cash is more difficult. This is the case in Australia and New Zealand, where digital financial service penetration was 17 percent and 54 percent, respectively despite their similar economic profiles.

The slow adoption of digital financial services is also due to the lack of human resources available to improve the industry in Indonesia. There is an urgent need for more talent as the industy develops. Furthermore, the skills gap in the finance industry is continuously widening, and the availability of skilled workers is viewed as a threat to growth. This is driven by the increasing capabilities of digital technologies and the need for skilled data scientists, artificial intelligence (AI) experts and software engineers. Financial institutions have created new IT roles in recent years but many are finding it either “difficult” or “very difficult” to fill them.

Fintech adoption may accelerate this year. For the first time in 2018, Indonesia had more smartphones than bank accounts and the gap between smartphone and bank account ownership may reach 13 million by 2025. This trend parallels with the rise in smartphone ownership to 124 million or 57 percent of the population in 2017, compared with 33 percent in 2014.

A recent report by global consulting firm McKinsey, entitled “Digital Banking in Indonesia: Building Loyalty and Generating Growth,” said 55 percent of non-digital financial service users were likely to use digital banking in the near future. The figure is the second highest in emerging Asian countries after Myanmar. While there is not an estimate for the annual growth of digital financial services, more players will need to get involved. Indonesia, like India, remains a cash-intensive country, so digital financial solutions tend to be cash replacements.

Lastly, there is concern that banks and Fintech firms are competing with each other. This is not the case. Companies on both sides had been collaborating over the past several years. Industry players and policymakers are working hard to overcome the challenges in growing digital financial services. In September 2018, The Financial Services Authority (OJK) issued a regulation on Fintech that was more comprehensive than past regulations which only regulated peer-to-peer lending.

The regulation consists of 45 articles of innovation in digital technologies for the financial sector. It covers issues such as transaction settlements relating to investment, equity crowdfunding, virtual exchanges, smart contract and alternative due diligence. In investment management, the regulation covers advance algorithms, cloud computing, capability sharing, open-source information technologies, automated advice and management, social trading and retail algorithmic trading. For fund collection and distribution, the regulation deals with technology allocation base or peer-to-peer lending, alternative adjudication, virtual technologies, mobile 3.0 and third-party application programming interface.

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Edited by Mia Williams