Extending Financial Services to Micro Enterprises: Lessons from Our FinTech Challenge Fund Winners

Pulse Lab Jakarta
Nov 27 · 9 min read
Savings transaction between an agent and customer using digital banking

Six Indonesian FinTech companies were awarded seed grants towards the end of last year as part of the Microenterprise Fintech Innovation Challenge Fund which Pulse Lab Jakarta implemented together with the United Nations Capital Development Fund — Shaping Inclusive Finance Transformations (UNCDF SHIFT) programme. Taking on insights from the Lab’s Banking on FinTech: Financial Inclusion for Micro Enterprises in Indonesia research, the winners tested a variety of ideas related to the value of human intermediaries (agents), alternative credit scoring, financial literacy and cash light practices. Now that the challenge fund has concluded, this blog aims to summarise some of the lessons learned on the realities of attempting to expand fintech services to reach microenterprises. We are grateful for the close and continuous support from the Australian Government Department of Foreign Affairs and Trade (DFAT), Asosiasi FinTech Indonesia (AFTECH) and the Indonesian Financial Services Authority (OJK) during the programme, as well as VISA, Oracle, and Deloitte for their mentorship support for the winners in undertaking their experiments.

Below are the ideas which the six winners trialled during the 6-month pilot programme:

  • AwanTunai, Gandengtangan, and Modalku explored aspects related to employing human intermediaries (agents) into their business models to address issues associated with acquisition and retention of agents.
  • Julo tested an alternative credit scoring solution aimed at broadening their customer base and including more women-owned micro-enterprises that were deemed ineligible for credit based on the company’s previous credit scoring model.
  • Amartha rolled out a set of financial literacy learning modules within the communities they’re currently providing services.
  • Duithape experimented with a cashless payment system to facilitate transactions between distributors and micro merchants.

Throughout the process, the winners spent time refining their ideas based on feedback gathered, as well as contextual challenges they were facing. While some ideas showed future potential to help accelerate the adoption of fintech services among microenterprises, others provided useful lessons about what may not work for micro-enterprises in Indonesia. For example, one winner wanted to experiment with a cashless payment service for distributors, however found that despite interest in the service, the fear of losing business from micro merchants who still prefer cash was daunting.

The Value of Human Intermediaries (Agents)

In our Banking on Fintech report, human intermediaries (agents) who play the connecting role between fintech services and their users were highlighted as one of the enabling factors that facilitate fintech adoption among microenterprises. In the attempt to reach the underbanked population, traditionally financial service providers have used the agent-banking approach, whereby individuals (agents) are employed to directly provide financial services on their behalf. This model has been common practice for reaching the micro-enterprise segment, but can be costly and demanding of human resources.

The challenge fund winners experimented with two aspects of human intermediaries in their business models. First, employing distributors or suppliers as human intermediaries instead of using agents, and second, managing the quality of sales agents. The challenges that the fintech winners attempted to address revolved around recruitment practices and incentives, as well as maintaining active human intermediaries after recruitment.

Streamlining tasks and reducing barriers to entry

In addition to running the day-to-day business operations, by taking on the role of a human intermediary on behalf of a financial service provider, distributors or business owners thus take on additional tasks such as collecting cash payments, facilitating cash deposits/withdrawals and small loan disbursements, among others. Part of recruiting agents or distributors as human intermediaries entails presenting a value proposition to prospective persons, and ensuring that becoming a human intermediary does not overburden their workload. Ideally, the aim is to make the experience as seamless as possible.

In cases where distributors act as the human intermediaries between fintech services and micro merchants, distributors are able to increase their sales when micro merchants are able to utilise loans or credits for their business. Distributors also do not have to take on the additional tasks of acting as guarantors or collecting cash payments. Streamlining tasks creates a mutually beneficial relationship that makes it attractive for acquiring distributors as partners. By enlisting distributors as human intermediaries, fintech companies have the advantage of tapping into a network that has trust built with an established set of micro-merchants. One of the winners began to offer a new online delivery/order system for distributors, after the distributors they’re partnering with expressed a need for such a system to keep up with the increased demand from merchants.

Recruiting and retaining quality agents

Because the recruitment of agents is resource intensive, one solution is to outsource the acquisition of agents to a third party agency. This reduces the costs that companies would incur for carrying out recruitment themselves. Notwithstanding, such an approach bears the risk of the quality of the agents that might be recruited. In an attempt to mitigate this risk, an added intermediary layer of internal quality assurance to vet the outsourced agents was used by one of the challenge fund winners.

Both retention and acquisition of agents are dependent on an effective incentive structure. One incentive structure tested by one of the winners includes both a fixed salary, in addition to a bonus system. This two-layered incentive structure aligns with an insight from the Banking on Fintech report regarding active agents versus less active agents. Active agents are generally interested in their accumulated incentives, which could translate into additional income or opportunities rather than only the immediate reward. A bonus structure built into the incentive system encourages agents to be both active and consistent.

Alternative Credit Scoring and Loan Assessment

Integrating alternative data sources for greater borrower inclusivity

Those without or with very limited credit history from traditional financial institutions or credit bureaus often do not qualify for loans due to traditional credit scoring methods that calculate a credit score based on factors such as history of borrowing, debt repayment and credit age. According to one challenge fund winner that tested alternative credit scoring by using smartphone usage behaviour, data from mobile phone usage has been shown to be a good alternative data source to predict creditworthiness. There are also other well-known business models that determine credit scores based on smartphone data usage by connecting mobile phone habits to behavioural patterns. By using an alternative credit scoring model, the winner was able to re-engage applicants who were previously not approved, such as women micro-entrepreneurs, street-food stall vendors, and other micro-merchants.

Developing an alternative credit scoring model requires a mindset geared towards understanding applicants who are being excluded, identifying why they are excluded, and coming up with innovative outreach measures that are more inclusive. In doing so, it is important to note that using alternative data sources, such as smartphone behaviour data might be sensitive and might pose high risks associated with privacy. An informed consent approach is currently taken by some fintech companies, where they collect data with the knowledge and consent of their user base, and their practices follow regulations established by the Indonesian Financial Services Authority (OJK). User privacy and consent regarding data is an ongoing conversation in the fintech space, and requires the involvement of multiple stakeholders to ensure the responsible collection and usage of data.

Financial Literacy

The current approach to improving financial literacy is often via learning modules, which have been implemented by many organizations, companies and government institutions. One example in Indonesia is OJK’s Sikapi Uangmu application for financial literacy that provides educational modules, financial tips and articles. For many companies though, financial literacy is seen as part of their corporate social responsibility; it is a nice addition to have but not necessarily at the forefront of their business model.

Measuring impact and use-case based learning

One of the winners found that incorporating financial literacy training into their business model is an effective way to distribute knowledge. They’ve integrated the financial literacy curriculum into the lending process that users go through when they use their mobile app. Hence, borrowers go through the financial literacy training modules as part of the process to acquire a loan. To assess the customers’ understanding of the content covered in the modules, the winner also attempted to gather relevant data from a sample of borrowers by conducting a post-lesson assessment. This includes information on borrowers’ spending habits, savings and expense reduction/prioritisation. While this may help with assessing how well recipients are retaining knowledge from the modules, the data may not necessarily indicate whether or how the borrowers will integrate these practices in their day to day financial habits. During our panel session discussion on “Financial Inclusion for Small and Micro Enterprises” at the 2019 Indonesia Fintech Summit, Mapan was another case study that stood for its success of embedding financial literacy training into products. Mapan’s users are able to attach their learnings to a particular use-case through their Arisan inspired business model, which encourages users to practice good savings habits.

Optimising length of modules and use of agents

One winner tested the possibility of leveraging youth agents as intermediaries for financial literacy practices in their communities. The winner’s hypothesis was that by employing digitally-savvy youth as human intermediaries, they would be able to mitigate the challenge related to the lack of digital and financial literacy in communities of non-digitally savvy, sometimes older, female micro entrepreneurs. They developed an 8-module financial literacy curriculum, each lasting 15 minutes (a therefore a total of two hours in length). The company decided the length of the modules after taking into consideration that their target recipients, women micro-entrepreneurs, were typically unable to leave their homes for long periods of time, and had a short attention span and might not be able to dedicate too much time on the materials. Ultimately, the winner learned that being a youth alone was not enough, rather more important was the question of the level of digital literacy of their agents. The effectiveness of digitally-savvy youth agents as human intermediaries for financial literacy in this particular winner’s borrower community remains is yet to be assessed.

Moving Forward

The challenge fund was a catalyst to help these six local fintech companies incorporate microenterprises as an important part of their business models. The 6-month pilot programme nonetheless was only the beginning; our winners plan to take the insights from the pilot and expand and improve their business solutions. There are plans to begin digitising micro merchant receipts, incorporating crowdsourced information for quality assurance via community surveyors, and geographic expansion of their business offerings. The plans for scaling and sustaining the business solutions show that microenterprises are becoming more of an integral part of business for fintech companies.

The piloting phase provided a practical platform for experimentation for the participants who may not have otherwise had the opportunity to pilot initiatives in their organisations. Lessons from this experimentation align with ideas shared in several literature on financial inclusion, along with the insights shared in the Banking on Fintech report. Overall, they show promise for translating research concepts into practical applications in the fintech industry to promote financial inclusion. Several of these lessons were shared by PLJ and some of the challenge fund winners in a panel discussion on financial inclusion for micro and small enterprises during the 2019 Indonesia FinTech Summit. Although these lessons provide a foundation for understanding the opportunities and barriers for using fintech for financial inclusion in Indonesia, we acknowledge that the 6-month pilot programme has only scratched the surface with a limited sample in limited geographic locations.

The United Nations Secretary-General’s Special Advocate for Inclusive Finance For Development (UNSGSA) 2019 Annual Report looks at the road ahead for challenges on the horizon for financial inclusion, including mitigating risks of fraud and data loss, development of regulatory frameworks for the risks associated with financial technology, and ensuring the foundational necessities for unbanked and hard to reach populations are provided to prevent inequalities from being exacerbated. With these limitations and upcoming challenges acknowledged, the financial inclusion ecosystem can begin to decide on next steps for scaling and sustaining financial inclusion initiatives in Indonesia.


Pulse Lab Jakarta and the UNCDF SHIFT are grateful for the generous support from the Government of Australia.

Pulse Lab Jakarta

Harnessing data for development, translating insights for social innovation

Pulse Lab Jakarta

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Harnessing data for development, translating insights for social innovation

Pulse Lab Jakarta

Harnessing data for development, translating insights for social innovation

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