Fintech Talk: Fintech in Indonesia: Between fragmentation and financial inclusion
Imagine yourself ordering a bowl of instant noodles from a small food stall in a remote village. When it’s time to pay, the stall owner presents you with their low-end smart-phone, on which you would place your finger to confirm payment. In a blink of an eye, a sum of money has just been transferred from your account to the owners’ to pay for the noodles.
This is what financial technology (fintech) is all about. A feature of fintech that must not be ignored is that it is not just a simple matter of technological marvels; it is also about financial inclusivity. What was illustrated above has become a reality in India.
As of December 2016, the Indian government, through the ambitious Aadhaar project, managed to register 1.09 billion people, or 85 percent of the country’s population, into its system.
Aadhaar utilizes a single identity number that contains the biometric and demographic data of its users stored in a centralized and online database. Aadhaar and its database are connected to various stakeholders, including government and private institutions, to allow various transactions to be carried out easily, quickly and securely with a fingerprint scan.
What is it like in Indonesia in comparison? According to DailySocial and the Indonesian FinTech Association, there were around 140 fintech companies in the country as of last year. This figure had increased by 78 percent compared to a year earlier.
However, their existence often creates financial fragmentation instead of financial inclusion. For example, a line of EDC machines at a payment counter potentially creates confusion for both cashiers and their customers. Additionally, banks and companies are now saturating the market with electronic wallet (e-wallet) products, leaving consumers with too many similar choices.
In an effort to promote quick and secure transactions, the Indonesian government issued Law No. 11/2008 on electronic information and transactions (ITE) and Government Regulation No. 82/2012 on management of electronic systems and transactions, which regulate the introduction of identity verification using digital signature methods. The implementation of digital signatures is expected to take place in the second quarter of 2017.
The program implementation, however, could take longer than expected with the lack of readiness in the institutions that will validate the digital signatures, referred to as certificate authority (CA).
Currently, the only possible entities who can take the role of a CA are banks, as they have implemented the Know Your Customer (KYC) principle and possess the supporting infrastructure to take on the role.
Unfortunately, cooperation between the Communications and Information Ministry and the Financial Services Authority (FSA) regarding the introduction of digital signatures was only officiated in September 2016. The long path to regulation implementation indicates a lack of synergy among government institutions.
The government has actually shown a positive attitude toward fintech development. In December 2016, the FSA issued a regulation on online peer-to-peer (P2P) lending, only one month after Bank Indonesia launched the operation of a special office for fintech. Such efforts, however, need to move beyond formal regulatory levels.
As an example, the World Bank reported that small and medium enterprises (SMEs) contributed the most to the country’s gross domestic product (GDP) and created more than 100 million jobs. However, only 20 percent of the SMEs had access to banking services.
Many financial institutions have spent a huge amount on debt restructuring due to non-performing SMEs. Meanwhile, data on non-performing debtors in the Debtor Information System (SID) is currently not accessible to most non-bank financial institutions.
The high level of difficulty in identifying non-performing debtors has caused overly stringent measures for financing selection, causing several fintech companies to merely attain an average 3 percent approval from total loan applications. Therefore, fintech has yet reached its potential to stimulate financial inclusiveness in Indonesia.
Synergy among regulators is compulsory to improve the role of fintech in promoting financial inclusion. The development of the Financial Information Service System (SLIK) by the FSA to replace the SID might become promising momentum.
However, the prerequisite of having to fill in the entire information for every customer in SLIK will be a great challenge, especially for fintech startups that cater to a wide array of users. Thus, the regulatory environment needs to ensure inclusiveness for non-bank fintech service providers too.
As a possible solution, fintech companies may be offered a relaxed regime to integrate into SLIK, with a grace period to complete user data after becoming a member of SLIK. Additionally, SLIK integration accessibility should also be offered to private credit information bureaus and the Credit Information Management Institution (LPIP) to gain more comprehensive credit data. This would allow for better synergy between the FSA and Bank Indonesia (BI), considering LPIP is regulated by BI. The role of LPIP needs to be supported as it will contribute to the World Bank’s credit access indicator, helping Indonesia’s rating internationally.
Hence, financial inclusion and fintech contribution to it will rely greatly on the role of the government, not only in the regulatory sector but also through synergy to create a supportive ecosystem to promote financial inclusion. 
New business model of fintech-banks set to boost digital economy
The 2015 World Economic Forum Report predicts that by 2020 Indonesia will become one of the biggest digital markets in Southeast Asia. This highlights wider opportunities for digital finance. The fact that only 36 percent of adults in Indonesia have bank accounts, while the remaining 120 million adults are still unbanked, also further underlines enormous room for it to grow.
In contrast to the vast number of the unbanked population, 132.7 million people are now already connected to the internet as a result of infrastructure development and easy access to smartphones or mobile devices, according to data from the Indonesian Internet Service Providers Association (APJII). This figure has rapidly surged from only 88 million active internet users in 2014.
The banking industry sees the gap and is moving forward by collaborating to improve the system, strategies and functions in order to convince the public that carrying out technology-based transactions is easy. Each business players play their own role based on their capacity to share knowledge and expertise to provide the latest services that can strengthen customer transaction behavior.
Acknowledging such a huge gap between existing services and potential allowed by technology utilization ahead, the banking industry is developing mobile and internet banking services that so far have succeeded in expanding reachability of services and overcoming geographic challenges.
Such innovation has also managed to enhance efficiency as well as offering more varied options of banking products and services in line with the rising preference for online marketing strategies. By optimizing handheld devices, customers can conduct payments, fund transfers, or even cash withdrawals at the tip of their fingers.
The Financial Services Authority (OJK) reports that the number of e-banking customers skyrocketed by 270 percent from 13.6 million in 2012 to 50.4 million in 2016. In addition, the figure for transactions also climbed strongly by 169 percent from 150.8 million to 405.4 million during the period.
Riding on the wave of technological development, fintech services have seen very positive growth in Indonesia in the past few years. Data from Statista ( 2017 ) reveal that the value of fintech transactions in the country has reached US$ 15 billion.
The widespread use of digital technology in the country has prompted the government to make the digital economy one of its most important priorities. Indonesia is expected to arise as the biggest digital economic giant in the region with potential transactions hitting Rp 1.69 quadrillion ($128.7 billion) by 2020.
Through its service innovations and products, fintech is believed to be able to push the digital economy by opening access for people from all social classes to financial services. Due to its mobile and efficient nature, it is expected to overcome some challenges that cannot be addressed by traditional financial services.
The emergence of fintech is inevitable and its expansion is unstoppable. Both banks and fintech try to offer best experiences for customers and therefore are complementary to each other. The bank-fintech synergy will ensure fewer blind spots in both services as a result of combining their strengths.
To advance bank-fintech collaboration, it is necessary to assess the business model to be adopted. An agile, flexible and customizable business model is an ideal prerequisite. At the same time, the banking industry’s Secure, Swift and Simple ( 3S ) business principles must be maintained.
In terms of human resources, fintech is powered by young talent, which is innovative, creative, dynamic and responsive in catering to customers’ needs. In contrast, the banking industry with its more mature business model, is largely driven by professionals with deep knowledge of the financial industry and a wide customer database.
Currently, there are a number of banking products and services supported by fintech, such as virtual accounts that allow payments or financial transactions without a bank account. Accessing a virtual account is as easy as using a smartphone. Customers can receive or expend funds through a mobile application. Fund disbursement can also run more efficiently with the aid of fintech. Furthermore, the banking industry can enjoy larger benefits of fintech, especially in the areas of payment and peer-to-peer (P2P) lending.
At the end, the alignment between the mission and commitment of banks and fintech providers, will bring access to quality financial services for Indonesians at large, including those who are still unbanked, and will contribute to the establishment of the digital economy as aspired to. 
This Article Curated by Benang Merah Komunikasi’s Editorial team.
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 Taken from Fintech Talk: Fintech in Indonesia: Between fragmentation and financial inclusion written by Pandu Aditya Kristy for Jakarta Post.
 Taken from New business model of fintech-banks set to boost digital economy written by R. Andi Kartiko Utomo for Jakarta Post.