One of the biggest challenges for the Asia Pacific financial industry is financial inclusion. While in countries like Singapore and Australia, more than 90% of the population is banked, in others, including Indonesia, the number is closer to 50%.
However, challenges bring opportunities, and real-time payments platforms like India’s Unified Payments Interface (UPI) have shown that having a robust digital finance infrastructure can dramatically impact financial inclusion.
Since 2014, India has brought an additional 40% of its population into the financial system, with 75% of the population now having access to a bank account1. Indonesia, like many other jurisdictions across Asia, has seen the opportunity for payments to impact financial inclusion and has made payment system modernisation a key part of its domestic strategy.
Launched in 2019, the Indonesia Payment System Blueprint (BSPI) aims to bring Indonesia’s unbanked population consisting of 91.3 million individuals and 62.9 million MSMEs (known locally as warungs) into the formal economy.
Within the BSPI, the Retail Payment Systems initiative seeks to modernise the current national retail payment systems by creating an infrastructure that accommodates different payment types, operates around the clock, and is financially affordable. This push comes at a time when digital payments in Indonesia are growing rapidly. From 2019 to 2021, POS cash transactions have fallen from 77% to 51%, while e-wallet transactions have risen from 6% to 19%.
Aligning with this shift, the introduction of the BI-FAST real-time payment infrastructure aims to support digital payment services by consolidating Indonesia’s somewhat fragmented payment and banking system2.
The domestic payment infrastructure is just the first step as BI also has plans to connect its payment systems to four other central banks in the region to support cross-border payments, beginning with its collaboration with Thailand’s PromptPay3.
As of August 2022, 77 banks have joined the BI-FAST scheme, handling together around 85% of national retail payment flow.
Providing a real-time payments platform is a strong first step but accessing it can be another challenge altogether. The country is an archipelago of islands, not all of which have reliable Internet access, which can hinder access to digital payments4. It is estimated that 12,500 of Indonesia’s villages and subdistricts do not have reliable access to the Internet, and 87% of the country’s MSMEs (micro-small medium enterprises) have yet to join the digital financial ecosystem.
The prevalence of Indonesia’s digital divide directly hinders the adoption levels of BI’s initiatives. This is evident from the example of Quick Response Code Indonesia Standard (QRIS), a standardised QR code format launched by BI to facilitate e-money transactions.
As the backbone of Indonesia’s retail payment services, the introduction of BI-FAST will certainly help improve digital payment adoption and help close the gap, but to drive adoption, the country needs to focus on raising awareness and incentivising usage among MSMEs.
Education is key to increasing adoption levels for those with access to digital payments but lacking digital literacy. More support should be provided for MSMEs to not only register for QRIS, but also be equipped with sufficient knowledge to effectively use the system. This can be done through campaigns and training efforts by the government or financial service providers. MSMEs could subsequently act as ambassadors that help convey the benefits of digital payment methods to consumers, consequently increasing adoption levels.
To incentivise usage, BI could reduce MDR charges, especially for MSMEs operating in the peri-urban and rural areas. Currently, MDR for regular QRIS transactions is capped at 0.7%. While this percentage is lower than what other Southeast Asian e-wallet providers are charging, it may still discourage the use of QRIS for businesses with low margins that are sensitive to transaction charges.
Hence, lowering MDR could potentially drive adoption rates. The Indonesian government could also consider subsidising MDR charges for a period of time after onboarding, so as to encourage more merchants and consumers to try out the service.
Beyond the work that BI and the Indonesian government is doing, the country’s private sector is also pushing ahead with financial inclusion initiatives. Mitra Bukalapak, the online-to-offline arm of Indonesian ecommerce platform Bukalapak, is one of the earliest players in the digitalisation of local mom-and-pop shops in Indonesia. Mitra works with offline micro retailers to digitalise their offerings and operations (payment, accounting, procurement, inventory management). With eight million MSMEs on its platform, the number is set to grow even further in the coming years.
The company’s vision ties in with Indonesia’s broader goal of achieving 90% financial inclusion by 2024, with MSMEs being the area of focus.
In essence, it is likely that Indonesia’s digital payments market will continue to grow as payment infrastructure improves and private enterprises push ahead, but only with the proper systems of education and incentives in place.
Zennon Kapron is Director at Kapronasia and has been involved in financial technology for over 20 years. Before Kapronasia, Zennon was the Global Banking Industry Manager for Intel and the CIO for Citigroup Portugal. He holds a B.S. in Computer Science from Syracuse University and an MBA from INSEAD.
Kapronasia is a leading independent research and consulting company focused on the Asian financial services industry. We help financial institutions, technology vendors, consultancies, and private equity companies understand the impact of business, technology, and regulatory issues in banking, payments, insurance, and capital markets.
Worldbank Findex
India’s UPI, Malaysia’s DuitNow, Thailand’s PromptPay, Philippines’ InstaPay and Singapore’s PayNow
Thailand, Malaysia, Singapore and the Philippines
Economist Intelligence Unit (EIU), Inclusive Internet Index Study, 2020
Figure updated as of July 2022
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