Bringing banking to Indonesia's small businesses

By Pulse Lab Jakarta

There is great potential for fintech to transform small businesses, which account for 99% of all businesses in Indonesia.

A warung. Image: Rokok Indonesia - CC BY 2.0

Micro and small-to-medium enterprises (MSME) in Indonesia employ more than 107 million people, contributing to more than half of the county’s GDP. In 2016, the Government launched a National Strategy for Financial Inclusion which aims to provide regulatory support for banking institutions as they work to guarantee more Indonesians’ access to financial services.

Following this, the Financial Services Authority (OJK) announced that more progressive financial technology regulations — designed to promote financial inclusion — were also underway.

More than just a buzzword, financial inclusion focuses on ensuring that individuals, regardless of income levels, have access to appropriate financial services. The broader goal is to help improve welfare, by removing barriers to safe and efficient means of conducting financial transactions. For micro enterprises in particular, financial inclusion can contribute to the growth of their businesses with improved access to convenient financial services and products.

With the support of the Department of Foreign Affairs and Trade (DFAT), Australia and in collaboration with the Indonesia Fintech Association (AFTECH), Pulse Lab Jakarta’s research project — called ‘Banking on Fintech: Financial Inclusion for Micro Enterprises in Indonesia’ — aims to contribute to the Government of Indonesia’s financial inclusion goals by uncovering behavioural and data analysis insights on micro enterprises as potential users of financial technology.

A micro enterprise focus

Roughly 99 percent of all businesses in Indonesia are micro enterprises, according to the Ministry of Cooperatives and SMEs. The Government defines micro enterprises as ‘productive businesses owned by an individual and/or group of individuals that have net assets worth a maximum of Rp 50 million (not inclusive of land and buildings where the business is located) or an annual sales revenue that do not exceed Rp. 300 million’.

To narrow our focus, we are initially researching micro enterprises from the food and beverages as well as retail sectors, since enterprises in these sectors have the highest interaction frequency when it comes to supplier-customer exchanges. Our emphasis on behavioural insights stems from the realisation that while financial inclusion efforts should be pioneered by higher-level policymaking, it must also be supported with a clear understanding of the realities of the target users.

Beyond understanding the users’ realities, we expect to translate our insights into opportunities that can act as incentives for the financial service industry, in addition to informing the improvement and creation of effective financial services for the unbanked population.

Doing our homework

Prior to commencing our user research, we reviewed a series of publications and related work to gather informed insights relating to the unbanked population in Indonesia. We uncovered three main findings, which we used to inform our baseline knowledge on the issue.

First, most people who are unbanked are of the opinion that living in a cash-based ecosystem does not pose a significant enough problem that warrants a change in habits. Therefore, services might have to be designed to cater to their current cash-based habits, instead of completely excluding their existing habits and pushing for a complete behavioural change.

Secondly, most people who are ‘financially excluded’ are inclined to use informal financial mechanisms such as cooperatives or lending groups. This social dimension promotes trustworthiness and acts as a sort of active reminder that encourages users to save.

Finally, users interact with financial services according to individual habits and needs at different points in their lives. Services should thus be able to cater to the needs of different business-owners and to the medium- and long-term needs of their businesses.

The early adopters

Recognising that there is extensive research investigating some of the behavioural barriers to getting the unbanked population aboard, we have taken note of a number of key financial service providers in Indonesia that have indeed succeeded at converting the unbanked to banked.

Our main question therefore is: Why, despite the same obstacles and behavioural barriers, have some micro enterprises made the leap and began to use these services?

Today, many financial institutions are adopting initiatives to advance financial inclusion for individuals who are unbanked, notably through digital financial services. As part of our research project, we will engage with a number of these pioneering services to identify the gap between early adopters of financial technology and those that are unbanked.

We aspire to uncover learnings from these early adopters’ stories and translate them into opportunities for the rest of the unbanked population. We are also currently developing partnerships with those who have committed to supporting the financial inclusion agenda and aim to incorporate our findings to create prototypes by mid-2018.

This article was originally published on Medium by Pulse Lab Jakarta.