Latest on Branchless Banking from Indonesia

This is the first blog of a two part series on branchless banking in Indonesia.

Indonesia, with its population of over 250 million covering an expanse of 16,000 islands, is increasingly recognized as an important and influential regional, if not global, nation. The only member of the G20 in Southeast Asia, Indonesia’s economy has grown at over 6% per annum for the past three years, with key improvements in business climate and poverty reduction. 

In terms of financial inclusion, Indonesia is renowned for its large scale microfinance sector, led by BRI, a range of commercial banks and over 60,000 MFIs reaching more than 50 million people. Despite this progress, the 2011 Global Financial Inclusion Index still finds only 19.6% of the population have formal accounts. Indonesia has approximately one hundred million people who cannot, or do not, access financial services of any kind across a vast and diverse economy.

Paddy farmers collect rice.

As of 2012, there were 260 million mobile subscribers, still short of what is generally regarded as saturation. The number of unique mobile subscribers (143 million) is more than double the number of bank account holders (62 million). But while mobile wallets have been on offer since 2007, they have met with limited success and market adoption, with total registered accounts (ewallet with a maximum balance of 5 million IDR) at 0.4% and unregistered users (ewallet maximum balance of 1 million IDR) at 8% of the total adult population. 

Official identification requirements are significant barriers to access to finance in Indonesia. Registered ewallets require only one form of official ID rather than the two forms required for a bank account, while unregistered accounts can be established without any ID. Until this year, however, Indonesia’s enabling environment for emoney and branchless banking initiatives has been hampered by regulatory constraints around outsourcing to agents, restrictions on cash out transactions and low ceilings for mobile wallet use, outlined in a 2010 CGAP review.

Regulatory Change

The past six months have finally seen exciting regulatory change in Indonesia which may well break the deadlock around growth in both emoney and branchless banking. In December 2012, new regulation was passed allowing full encashment of person to person (P2P) transfers on electronic wallets at agents. The Regulation on Funds Transfer also allows cash payment points to provide a cash-out service without requiring an individual funds transfer license per agent. While wallet sizes remain relatively constrained, MNOs are now moving aggressively to build agent networks and refocus efforts around their ewallet functionality. 

In early May 2013, Bank Indonesia also released long-awaited guidelines for banks and mobile network operators to outsource some banking operations to agents, known as "UPLK"s (Unit Perantara Layanan Keuangan) or Financial Intermediary Service Units. The guidelines are expected to pave the way for full regulations to be released by December 2013. Five banks and three mobile network operators will engage in pilots, kicking off late May to early July. A wide range of banks are also waiting to see what the final regulations include before launching initiatives of their own. Key provisions of the guidelines include:

1. requirement to implement in rural areas, although some banks may attempt to push back on this in order to promote greater initial uptake;
2. invitations for bank-led, telco-led and hybrid (or jointly implemented) products, although bank-led models appear to dominate. Pre-pilot, 95% of all emoney transactions originate from banks for  transportation and some retail payments through contactless cards;
3. include the ability for outsourced agents to provide cash in and cash out services, but still maintain full KYC requirements related to any related bank account formation;
4. require agents, but not agent network managers, to be agent exclusive to their partner bank/MNO during the pilot;
5. allow the pilots to be conducted in a maximum of two regions, with a maximum of three kecamatan per region;
6. be initiated between May and August 2013, subject to final BI approvals.

The limited nature of the pilots means that banks are not yet committing significant marketing funds or teams.Many banks expected to see loosening of KYC requirements, which were not included. The guidelines are simple and high level, without specific directives in terms of internal controls, etc., designed to provide an opportunity to understand the new channel as a first step to regulation. Only limited attempts at product adaptation have been attempted thus far, given short implementation time lines. More serious work can be expected after the full regulations are released.Hardware innovations will include use of tablets and M-POS units, as well as cardless ATM.

The five banks that will be included in pilots linked to the new guidelines pilot are Bank Mandiri, BRI, BTPN, Bank Sinar and CIMB Niaga, all working in a range of partnership models with leading mobile network operators, including Telkomsel, Indosat, XL Com and Telkom. The pilots will be implemented in close partnership with Bank Indonesia to extract learnings and experience to shape regulation. It is expected that Bank BCA, the market leader in ATM, POS and mobile banking services, and other leading banks, including Permata and BTN will engage when the full regulations are issued. 

With core building blocks for branchless banking still being put in place, other arenas in the ecosystem are also driving the pace for change. The next blog will look at new movement towards interoperability for mobile money and branchless banking.