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Serving the unbanked: Driving financial inclusion in Indonesia’s rural areas (Part 2 of 2)

Written by Khamila Mulia, AJ Cortese Published on   9 mins read

Indonesia has the third-largest unbanked population in the world after China and India, much of which is concentrated in rural communities.

Recap part 1 of this series.

Indonesian startups have only begun to transform the payments sector in the last decade or so, reshaping habits in the world’s second-largest cash economy. Wage payments, savings, utility bills, hospital bills, and tuition payments used to be all paid in cash. Even now, 14% of Indonesia’s e-commerce sales are paid for in cash. 

But a cash economy has logistical constraints. Transactions require in-person interactions. For a long time, large portions of rural Indonesians did not have access to financial products.

Indonesia’s economy has been long driven by cash, but fintech innovation is slowly creating new trends. Source: Bady Abbas on Unsplash.

Fintech, however, is a financial equalizer. It increases financial inclusion by eradicating barriers like geography, while also providing more market alternatives for consumers.

Chinese users in rural areas have experienced this firsthand, as their rate of bank account ownership jumped from 58% in 2011 to 77% in 2014, in tandem with the proliferation of various fintech solutions, per data from the Global Findex 2018.

A similar trend has begun to manifest in Indonesia as the rate of account ownership by Indonesian adults in rural areas increased from 16% in 2011 to 29% in 2014, and higher yet to 47% in 2017.

While rural account ownership still lags behind China largely due to inferior internet infrastructure, this rapid growth in Indonesia bodes well for the future of the nation’s financial inclusion.

Indonesian fintech players are adopting strategies to acquire rural users that were previously used to good effect in China—improving rural internet infrastructure, deploying a vast agent network, and cooperating with popular e-commerce platforms.

One example is fintech lender Amartha, which provides loans to women entrepreneurs in Indonesia’s rural areas. Amartha uses the micro group loan approach, offering small loans to groups of individuals who don’t have material collateral, but can help each other to repay their debt.

Amartha started as a microcredit company in 2010 and pivoted to peer-to-peer (P2P) lending in 2015. It now operates in all the districts and villages in Java. Most of Amartha’s borrowers are unbanked and work in the informal sector, or operate a micro or small business, and hence rely on daily wages. They don’t have access to the formal financial services, and most of them are reluctant to seek services from banks as visits take them away for hours each time, slashing their income. These people usually store their money at home, and have limited long-term financial planning. 

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Read this: Amartha wants to bring prosperity to women entrepreneurs in rural Indonesia

Amartha promotes financial inclusion and literacy by providing regular financial training to borrowers, in particular covering budgeting skills, savings, and debt management. Its field staff visits the borrowers’ villages every week to collect and disburse payments in cash, and discuss their businesses’ status and progress.

According to a recent report published by Amartha and the Center for Digital Society of the University of Gajah Mada (CFDS UGM), borrowers in eight Javan towns have seen an improvement in their livelihoods after gaining access to new capital and adopting structured financial planning. For example, the income of borrowers from rural areas in the Central Javan town of Klaten increased almost three times from IDR 2.1 million (USD 144) to IDR 5.95 million (USD 404) after they joined Amartha’s program, the report said.

Aside from initiatives formulated by private startups, there have also been top-down efforts to foster broader financial inclusion in the country.

Indonesian government support

The Indonesian government has been working to increase financial inclusion, as the OJK launched the national strategy for financial inclusion (NSKI) in September 2016, setting a target to reach 75% financial inclusion by the end of 2019.

Coinciding with the national directive was the formation of the National Council for Financial Inclusion (NSFI), chaired by President Joko Widodo, which launched financial inclusion programs Laku Pandai and Kredit Usaha Rakyat (KUR). Laku Pandai supports a branchless banking model, while KUR focuses on providing business loans to SMEs.

Both Laku Pandai and KUR are organized by four state-owned banks and several major private lenders. These banks also work with tech companies to extend their reach. For instance, Laku Pandai collaborates with fintech firm Payfazz, as well as Bukalapak through its Mitra Bukalapak program, while several tech giants like Gojek, Tokopedia, and Grab partner with the KUR’s banks to offer credit to SMEs.

In November last year, OJK claimed Indonesia exceeded its national target for financial inclusion based on the results of the 2019 national financial literacy survey, which polled 12,773 respondents in 34 provinces and 67 towns or districts.

Compared to OJK’s 2016 survey, the financial inclusion rate in 2019 reached 76.19% from 67.8%, while the national financial literary rate improved to 38.03% from 29.7%. Yet even with improvements on both fronts, the majority of Indonesia’s population still lacks a solid understanding of personal financial management.

Breaking it down further, the financial inclusion rate of urban communities in 2019 was 83.6% and it was at 68.49% in rural communities, the survey said. Indonesia’s fintech industry, which began to develop rapidly in 2015, played an important role in this progress.

Increasing internet connectivity

Despite the progress so far, there is still ample room for improvement. According to a 2019 report by Google, Temasek, and Bain & Company, Indonesia still has around 47 million underbanked and 92 million unbanked adults, translating into a huge opportunity for fintech companies.

The majority of households without access to financial solutions live in rural areas and in provinces outside Java with sparse internet connectivity, as the majority of Indonesia’s over 150 million internet users are heavily concentrated in Jakarta and the country’s secondary cities in Java and Sumatra.

As a result, most fintech companies still only reach the urban and suburban population, while people who live in rural areas still lack easy access to financial services. The government has been making serious efforts to improve internet coverage across the archipelago, evidenced by the Palapa Ring project completed in late 2019.

The massive infrastructure project features 35,000 kilometers of undersea fiber optic cables and 21,000 kilometers of land cables stretching from the westernmost city to the easternmost town in Indonesia. It provides a high-speed internet connection across the country and bridges the geographical divide in digital services.

Improved connectivity is also expected to encourage the adoption of fintech and increase banking penetration in the country’s rural regions.

Read this: Here’s what you need to know before creating your own startup in Indonesia | Government edition

Agent networks to improve financial literacy

Hendra Kwik, co-founder and CEO of Jakarta-based fintech startup PayFazz said the lack of financial literacy in Indonesia poses the biggest challenge for digitizing the rural economy. “They don’t trust banks that much, and despite owning smartphones, they are not familiar with technology and can’t deal with mobile apps that are a bit complicated,” Kwik told KrASIA.

Many people who live in rural areas have already switched from basic phones to low-cost smartphones. However, they don’t see these devices as instruments that are relevant to their work; rather, phones are just tools for sending messages or accessing social media platforms like Facebook.

Consumers’ ability to conveniently access financial services is crucial to driving financial inclusion in rural areas. With that being said, Kwik believes that the agent-banking model is key to introducing fintech services in rural areas.

Bank agents are individuals who are well-trained and equipped with mobile technology to educate rural users on how to use the platform’s services in their villages. This model was effectively applied by China’s major financial players, who cumulatively deployed the world’s largest agent network with almost 1 million representatives. Agent networks are a cost-effective user acquisition strategy, as it allows financial institutions to reach underserved populations in rural and remote areas without setting up physical branches.

“Agents are instrumental for ubiquitous distribution of fintech products, educating financial literacy, establishing trust, as well as acquiring or onboarding rural users and teaching them on how to use the fintech apps.” Kwik argued that the most suitable fintech products for this market revolve around basic financial services such as bill payments, money transfers, cash withdrawals, and basic savings accounts. “Complex financial services won’t work that well in the rural areas because it will be too hard for the market to understand.”

Besides banks and multi finance institutions, various fintech startups are implementing this model, such as PayFazz, Kudo (now GrabKios by Kudo), and Amartha. PayFazz claims to operate the largest agent-driven banking network with more than 250,000 merchants.

Read this: Digitizing Indonesian’s rural towns via a vast network of agents: Startup Stories

PayFazz is one Indonesian fintech player using agent networks to educate users. Image from PayFazz’s blog.

“We work with mom-and-pop stores and telco outlets and turn them into agents to increase demand. On the supply side, we make sure that we can provide various fintech products that are needed by rural areas’ populations, either through internal development or external partnership with third-party providers,” Kwik explained.

As of November 2019, Indonesia was reported to have over 500,000 bank agents promoting fintech products and educating users on how to use the services. However, many of these are concentrated in cities, as rural agents require higher operational costs and produce fewer transactions because the areas where they operate are not as densely populated. New users are more likely to trust products marketed by those they live near and know personally, so the lack of rural agents is another major hurdle to developing financial inclusion in Indonesia’s rural areas.

One potential pitfall of the agent network is that fraud can be difficult to detect. Imposters can claim to have an agent’s credentials to access unwitting users’ bank information. In China, to mitigate this risk, the People’s Bank of China introduced stringent management protocols for agents to ensure their reliability.

E-commerce drives adoption

During China’s fintech revolution, one of the key methods of user acquisition was to embed fintech tools within already popular e-commerce platforms. Alibaba’s strategic inclusion of Alipay as the payment provider for flagship e-commerce platform Taobao in 2004 was a massive step toward widespread user adoption of the e-wallet. Three years on, Alipay had gained over more than 47 million users in China, registering 80,000 new users each day.

Indonesia’s fintech hopefuls have implemented a similar strategy of integrating their solutions within Indonesia’s white-hot e-commerce sector, which swelled to a total market value of USD 19 billion in 2019, a 56% increase from 2018.

Additionally, Indonesian e-commerce firms are also tapping into the “new retail” space, inviting traditional offline retailers to embrace online commerce and thus boosting the digital economy in rural areas.

Traditional kiosks, better known as warungs, are an inseparable part of Indonesian culture and often seen as to be the most practical source to buy small quantities of daily necessities. They are ubiquitous on street corners and in residential areas. However, warungs have manual operations and limited resources, making it difficult to compete with modern convenience stores.

Kudo was the pioneer in empowering traditional retailers with tech innovation. The startup was founded in 2014 with a mission to let anyone participate in the local e-commerce scene, including retailers and consumers who are not tech-savvy. The startup was acquired by Grab in 2017 and changed its name to GrabKios by Kudo last year.

Another startup in this scene is Warung Pintar, which equips kiosks with an assortment of tech devices and services, including smart point of sale (POS) systems, free Wi-Fi, bill payments, smartphone charging stations, and CCTV systems. Founded in 2017, Warung Pintar is backed by East Ventures, Ovo, and Line Ventures, among other investors.

Foto Warung Pintar
Warung Pintar is digitizing swathes of traditional warungs in Indonesia. Courtesy of Warung Pintar.

Indonesian e-commerce unicorns Tokopedia and Bukalapak also have similar programs called Mitra Tokopedia and Mitra Bukalapak. The programs let mitra, or agents, resell various digital products to people who don’t have access to the internet. In an interview with KrASIA earlier this year, Bukalapak CEO Rachmat Kaimuddin said that Bukalapak has five million agents throughout Indonesia, two million of which are located at traditional kiosks.

Meanwhile, Tokopedia has around 350,000 active kiosk agents as of October 2019. The company also has a program called “Digital Village” where it operates Tokopedia Centers in various villages and districts. At these locations, local micro and small business business owners can learn how to be a merchant, how to use the Tokopedia app, make online-to-offline (O2O) transactions, use digital payments and financial services, and more.

With the support of tech companies, these traditional kiosks are now facilitating mobile payments. Per Consultative Group to Assist the Poor (CGAP), a coalition of development organizations around the world, the Indonesian fintech association estimates that there are approximately five million e-commerce or fintech agents in the country that provide digital financial services.

The blending of e-commerce and fintech services in rural Indonesia has been one of the main drivers of the country’s improving rural financial inclusion rate. As internet penetration rises in Indonesia’s less-developed regions and agents propagate greater financial literacy, the country’s fintech revolution will continually spur the growth of Southeast Asia’s largest economy.


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