ReachingOuttheIndonesianNon-InclusiveMarket

AQualitativeResearchReportConductedbyCXGOConsulting- 2018

FinancialInclusion:Isittrulyaboutaccess?

EXECUTIVESUMMARY

Accordingtotheregulators,therearetwomainbarrierstofinancialinclusion.Thefirstoneisaboutaccess,wherecurrentIndonesia’sfinancialliteracyrateat29%isnotsufficienttoinitiatepeopletoaccessthefinancialproductsandservices.Thesecondoneisabouttheproduct itself,wheretheavailableproductsandmethodsofferedbybanksdonotfitthelifestyleandneedsofthepeople.Tofurtherincreasefinancialliteracyandreinforcefinancialinclusion,regulatorsarepushingstrategiesthrough3mainfocus:refreshertrainingandsystemonLaku Pandai agents,digitizingKYCprocess,andtailoringtheproducts.

Fromthisstudy,wefoundcommonfinancialbehaviorsamongthefinanciallyexcluded.Onpaymentandtransaction,cashispreferred.astheystillhavetrustissuewheretheyneedtoseethemoney.Savingisnotaprevalentbehaviorastheytendtospendwhattheyearn,withlimitedincome.Familyandrelativesarecurrentlythemainsourceingettingloan.Forinvestmentandinsurance,theyareawareofKIS,BPJS,andotherformofinvestmentsuchaspropertyandin-kindassetsuchasgold,however,investingisirrelevantduetolackofearningsandsavings.

Amongthefinanciallyexcludedindividuals,thereareseveralperceptionthatservesasbarriertowardsbanksavingaccount:trustissues,fees,andtheneedforabehaviorchange.Consumeralsofeltlowrelevanceastheirneedshasnotyetaddressedbybanks.Simplicityandpracticalityofdigitalbankingareexpectedtoovercomethesebarriers.

Specificallyonloan,consumershaveseveralnegativeperceptionsonitsrelevance,tenure,payment,anddebtcollectingsystem.Wefoundthatthemainexpectationistohaveamoreflexibleandadjustableloan(customizableamount,tenureandpaymentssystem,simpleandquickprocess,flexiblecollateral),whilelessconcernoninterest.Loansbasedonoccupationarehighlyexpected.

Tofurtherimprovefinancialinclusion,theutilizationofmobilephoneforaccessingfinancialproductsisverycrucial.Itmayofferthesimplicity,practicality,andtransparencytheylookfor.Banksneedmoreintensivecommunicationtoreducetheperceptionofbeingcomplicated,lessrelevantandexpensive.Whilefintech playersneedtointegrateandpartnerupwithbankstowidentheinclusioncoverageandshouldincludemoreeducationalaspectsinmarketingactivities.

BACKGROUND,OBJECTIVE,METHODOLOGY

BasedontheFinancialLiteracyandInclusionNationalSurveyconductedbyOJKin2016,financialliteracyinIndonesiareached29.6%,whichisanincreasefrom21.8%in2013.Meanwhile,financialinclusionindexreached67.8%whichisanincreasefrom59.7%in2013.Thegovernmentistargetingby2019,financialinclusioncanreach79%.

OJK,asanauthorityboardforIndonesia’sfinancialindustry,hasgoaltoincreasefinancialliteracyandinclusionandalsoprotectiontoconsumersoffinancialproducts.Todothat,OJKhas2focustobepursued:toincreasefinancialliteracythrougheducationandliteracyprograms(whichgoalistoengagesocietyinconductingfinancialplanningandsavingshabit),andtoengagesocietytomatchtherighttypeoffinancialproductand/orcompanythatmatchtheirprofile,behavior,andcharacteristic.

Theobjectiveofthisresearchistogainin-depthinsight,mainlyfromconsumers’pointofviewontheirfinancialbehavior.Thisresearchwillvalidatethefindingsfromregulatorypointofviewwiththeconsumers,thusclosingthegapandseekwaysforfurtherimprovements.

In-depthinterviewtoOJKrepresentative,astheregulator,tounderstandwhatisthegoal,programs,andtheresultoftheprogramssofar.TheinterviewwasconductedtoEko Ariantoro,astheDirectorofFinancialInclusionDevelopmentOJK,onMay,2018

In-depthinterviewtothe‘financiallyexcluded’,tounderstandtheirpointofviewandhowtheystandincomparedtotheprogramsofar.Interviewswereconductedto3respondentswithvariouscharacteristicsandtypeofoccupation:ahousewife,abluecollaremployee,andabluecollarworkerthathaslapsedfrombankaccountownership.

WHATISFINANCIALINCLUSION?

TheWorldBankdefinesfinancialinclusionasthatindividualsandbusinesseshaveaccesstousefulandaffordablefinancialproductsandservicesthatmeettheirneeds– transactions,payments,savings,credit,andinsurance– deliveredinaresponsibleandsustainableway(TheWorldBank).Financiallyincludedindividualsarethosewhohaveanaccountintheirnamewithafull-servicefinancialinstitution.

MeanwhileOJKhasadditionaldefinitionontopofWorldBank’sdefinition:toachieveincreasedwelfareandsimilarrightsamongallcitizenthroughaproperaccessandaproperconsumerprotection.

Howdowedefineafinanciallyincludedindividual?

ApersonhasuptakeANDuseindividualaccountwithinstitutionsthatofferafullfinancialservices–savings,credit,moneytransfers,

insurance,andinvestment.

FinancialServicesandCompaniesthatdonotcount

• Creditonlyinstitutions.• Individualswhohavenopossessionsand

accesstotheindividualaccount.• Individualswhoonlyuseservices,such

asmoneyguards,savingscollectors,anddigitalrechargecardsthatarenotattachedtoabank/fullservice..

FINANCIALINCLUSIONPROGRAMSHAPPENINGNOW

Gerakan IndonesiaMenabung• Banksarereinforcedtocreate

productsthatsuittheneedofthecurrentlyfinancialexcluded.

Layanan Keuangan Digital• BIteamingupwithtelcocompanies

andlocalagentstoestablishbranchlessbanking.Oncetargetedtobroadenaccesstofinancialinstitutions,nowhasevolvedtoincreasedigitaleconomicactivities.

FinancialIdentityNumber(FIN)• IntegratedwithNIKfromeKTP,the

programenablesfinancialinstitutionstoidentifynewcustomers.

InformationSystemforFarmersandFishermen(SIPN)• Targetingfarmersandfishermen

(35%oftotalIndonesiaworkforce),SIPNutilizesownershipofmobilephonetocreateanupdatedmobileagricultureforthem.

DistributionofGovernmenttoPublicFundusingDigitalFinancialService• G2Pfundbeingdistributedtopublic

throughbankaccounts,alongwitheducationsessionsandassistancefromDigitalFinancialServiceagents.Alsoutilizesownershipofmobilephoneasameanstogiveinformationaboutthebankaccount.

Remittance• TargetingIndonesiaworkforce

abroadwhosendmoneyusinginformalchannels,convertingthemtousingbankaccountanddigitalfinancialservice/telcoagents.

LAKUPANDAI(Branchlessbankingthroughagents)• Distributingagentstoruralareas,as

theycanperformsimplefinancialtransactions,suchasopeningaccount,deposit,withdrawal,checkingbalance,etc.,andalsobecomeagentsofinformationandeducation.

Withalltheaboveprogramshappening,theleveloffinancialinclusioninIndonesiaisstillinneedforaboost.

Whatarethebarriers?

THEBARRIERSACCORDINGTOTHEREGULATOR

ACCESS

• Indonesia’sliteracyrate,in29%,isnotsufficienttoinitiatepeopletoaccessthefinancialproductsandservices.Poorknowledgeonthegain,therisk,theprocess,etc.

• TheKnowYourCustomers(KYC)processisnotquickenoughtoverifythedata,resultinginlowappealandpoortrustfromthetargetcustomers.

• Theavailableproductsandmethodsofferedbythebankscurrentlydonotfitwiththelifestyleandtheneedsofthetargetcustomers.

ProductsOffered LoanNeeds

Traits

• Secure,lowrisk,perceivedascomplicated

• Relativelylongtenure• Monthlyrepayment terms

• Fastandsimple• Shorttenure• Adjustable paymentterms.

Advantage/Needs Advantages:gainandinterest Needs:capitaltoperformashorttermbusinessprocess

Example

KURClusterloan,with7%interest,targetingsmallbusinesswithinacollectivescheme.Repaymentismonthly,within1or2years.

• Farmersneedaloantobuyseeds,thatwillharvestin70days.Moneycanberepaidafterharvesting.

• Fishermenwillsailfor2weeks,moneyisneedbeforesailing,canpayafterfishing.10%interestisaccepted.

PRODUCTDIDNOTFIT

ThereisagapbetweentheproductsofferedbyFormalFinancialInstitutionwiththeneedsfromthetargetmarket.

Basedonevaluationoftheongoingprograms,BankIndonesiaandOJKaremakingadjustmentstoimprovetheeffectiveness.Theadjustmentswillprioritizeon3mainaspects.

1 AGENTSLaku Pandai Agentsareseenasabreakthroughmethodinincreasingfinancialinclusionstarting2013.However,thesuccessratedeclinedovertime,andevaluationisrequired.

• Refreshertrainingonproductandsystem.• Evaluationonrecruitmentofagents.Canconsidernewagents

withongoingUMKM,orcommunityleaders.

2 DIGITIZINGKYC• Governmentneedstospeedupe-KTPandmakeitseamless

withfinancialdata.• Anewtechnologyisneededtoachieveafast,mobileand

cheapKYCprocess.AshortertimeinKYCincreasestrustamongnewcustomers;mightinducedtransactions.

3 TAILORINGTHEBANKINGPRODUCTS• Banksneedtobeopentodeveloploansthatsuitsthe

businessprocessofeachprofessions.• Asimplifiedriskassessmentandprocessareexpected.

THENEXTSTEPSACCORDINGTOTHEREGULATORIncreasingliteracyandreinforceinclusionwith3mainfocus.

THEROLE&IMPACTOFFINANCIALTECHNOLOGYCOMPANIES

E-MONEY&DIGITALWALLET

P2PLENDING

• Introducedpeopletotheprocessofnon-cashtransaction,mostlydigital,andincreasingcustomertrust.

• PaymentPointOnlineBanking(PPOB)topurchasephonecreditisoneoftheprocessesthatdriveincreasedinformationonnon-cashtransactions.

• Havepositiveeffectduetosimpleprocessandcoveragetothehigherriskprofilesandsmallbusiness.

• Howeverthepracticeisnot supportingtheinclusionintermsof:

• providingeducationandtrainings.• Encouraginginteractionwithformal

financialinstitutions.• P2Plendingisalsostillmaturing,whichidentified

bytheinvestorsfocusonhighreturnandtemptedtofundamorestable&lowriskbusinesstoreducetheirNPL.

WhileinawayP2PLendingcompaniesaresupportingincreasedwelfareandinclusion,itssmallcoverageandlackofactionsineducationisnotin-linewiththegovernment’sprogramininclusiontowardsformalfinancialinstitutions.

• Lookingfromthefinancialinclusion’sperspective,thenonproductiveloansforthehighriskprofilesaregivingadverseimplications,asintheend,itisnottargetingtoincreasewelfareandaccessibilitytowardsfinancialproductsandservices.

• However,theadjustableandflexibleattributesfromthefintech lendingcompaniesareagreatappealforthistargetmarket.

Increasinguseofe-moneyanddigitalwallettriggeredexpectationsthatfinancialservicesshouldbeeasy,transparentandaccessibledigitally.

NONPRODUCTIVELOANSForthecurrentlyfinancialexcludedindividuals,loansthatcanbeadjustedtotheirflowofincomeareveryinteresting.Butitactsastheoppositeoffull-servicefinancialcompanies.

Thecurrentrisingfinancialtechnologycompanieshasbothpositiveandnegativeimpactonfinancialinclusion.

TALKINGTOTHETARGETMARKET:THEUNBANKEDINDIVIDUALS

Lila,24yearsold,housewifewithasmallbusiness,livesinCiledug,Tangerang.ReceivedRp 40,000dailyfromherhusband.• Lilaneverfelttheneedforabankaccount,orotherfinancial

products.• Sheisawareofseveralnearbybankbranches,butnevervisitany.• FromtheRp40,000thatshereceiveddaily,LilasavesaroundRp 2,000

andkeptinherroom,dedicatedforrainydayswhensheneedstospendmorethanwhatshereceived.

Rofiq,28yearsold,single,securityofficer,livesinEastJakarta.Earnings:Rp 2,100,000/month• Asheliveswithhisbrother,Rofiq reliesonhisbrotherforanybank-

relatedactivities.Hedoesnotfeeltheneedtohavehisownbankaccount.

• Rofiq isawareofthebanknames,products,branchlocationsandtheprocess.Hehasexperiencesinmakingtransfer,manuallyinbranch,asinstructedbytheemployer.

• Rofiq receivedmonthlypayincash,hespendalmostallofitfordailyneedsandtosendtoparents.

Daenuri,25yearsold,single,newlyrecruitedasasecurityofficer,livesinCilebut,WestJava.• Hispreviousemployermadehimabankaccounttoreceivehispayfor

acleaningservicejob.Thejoblastsfor4months,aswellasthebankaccount.Hedoesnotfeelcomfortableusingthebankaccountpersonally,ashecannotseethemoney,andworryaboutthefees.

• Daenuri hasrelativelyhighawarenessofbanknamesandproducts.• Hepreferscashforhiscurrentsalary,andalsopreferscashfor

transactions.Heisthoughtbytheparenttosavebeforemakingpurchases,nevertouseinstallments.

“Cashismuchsimpler,youknowexactlywhenyougotpaidwithoutgoingtobank/ATM."

“EverymonthIonlyhave30– 50thousandextra,whatistosave?”

“WithsmallamountofmoneythatIhave,thebankwilldrainitbythe

fees.”

Peoplethatwemetfeltlowrelevancewithformalfinancialproductandservices,astheyhaveastrongperceptionthattheycannotaffordit.

TARGETMARKET:THEIRCOMMONFINANCIALBEHAVIOR

• Preferscashandmaketransactionsoverthecounter.• Aprintedreceiptfromutilityprovidersassurethemthat

ithasbeenproperlypaid.• Mostlyperformedtransactionintraditionalmerchants,

asidefromphonecredits(PPOB),butalsopaidbycash.• Haveadoptedcard-basedemoney fortransportation

(TransJakarta),top-upusingcash.

“Withcash,youholdthemoneyandknowthatthemoneyisyours.Inbanks,Idon’tknowwhetherthe

moneyisstillthereornot.”

• Earnà Spendà Save(ifanythingleft)• Savecashinthecloset,manuallyandspendwhenthe

amounthasreachedthetarget.• JoinArisan (informalsavinggroup).

• Closerelativeswillbethemainsourceofloan,ifneeded.Interestandrepaymentsystemareasagreedmutually.

• Othersourcewouldbefromemployer,orArisangroup.

• SomeofthefinanciallyexcludedarethetargetmarketforKartu IndonesiaSehat (KIS)whichdonotrequireanypremium.

• ThosewithBPJSmembershipdonotpaythepremium.• Formofinvestmentthattheyknowofispropertyandin-

kindassetsuchasgoldjewelry.

“IappliedforBPJSbeforedeliveringmyfirstbaby,andthenIstoppedpaying…”

“Idon’tthinkIwilleverapplyloanfrombanks.Idon’twantanydebtcollectorscoming

intomyhouse.”

“Mysonwillregistertoschoolnextyear.Topayforthefee,IthinkIwillneedtogetbackto

work(innextyear).”

Beingthecashorientedsegment,transaction,savingandloansaredoneconservatively.

Payment&Transaction

Savings

Loans

Investment&Insurance

Mostfrequentlyused:

Mostfrequentlyused:

Shoppingismadethroughtheapp,andpaymentismadecashinIndomaret counters.

Otherapplicationfrequentlyused:

TARGETMARKET:THEIRCOMMONDIGITALBEHAVIORTheuseofmobilephoneisfocusedmoreoninternet-basedapplicationswhiletheyarefarmoreexposedtodigitalapplicationthanformalfinancialservices.

Thefinanciallyexcludedindividualsarefarmoreexposedtodigitalapplicationthantoformalfinancialservices.Duetothis,theyaremorefamiliarwithactivitiessuchas:• Onlineregistrations.• Signingin,conceptanduseofpassword.• ConceptanduseofOTPanddigitalverificationmethods.

Utilizingthehighownershipofmobile

phoneandapplications

DigitalBankinghasahighchancetoclear

thetrustandtransparencyissues,as

theycanseethemoneyfromtheirmobilephone.

AsimpleandeasytouseUserInterfacein

DigitalBanking.

Perception&UnderstandingonBankSavingAccount

TrustIssues Fees

• Notabletoaccess/see/checkmoneyanytime.

• Concernonnotabletouse/withdrawmoney.

• Bankswillnotacceptsavinginverysmallamount.

• Administrationfeewillsuckupthesaving.

• Thereisminimumamountthatcannotbewithdrawn.

• Alotoftimeandeffortareneededtodotransactions.

• Notusedtodosaving.

Simplifieddigitalbankingmayovercomeseveralbarriersinfinancialinclusion.

NEEDS:

Clearinformationonfeesand

minimumamount

Quickandeasyregistration,inbranch

orbranchless

Affordablefees,evenforsmall

amountofsavings.

Canbecheckedanytime,anywhere

Abletowithdrawevensmallamount

Abletowithdrawanddepositsmallamount,even

belowRp 50k

VALIDATINGTHEPERCEIVEDBARRIER:PRODUCTAccessingabanktocreatesavingaccountisnotthestrongestbarrier.

Changefromconventional

• Loansareperceivedtoberelevantonlyforlarge-scalebusinessoremployeesofabigcompanies;notforbluecollaroragriculturaljobs.

• Requirementsandadministrationarecomplicatedandstressful.

• Notrelevant,asdonothavecollateral.

• Forthosewithirregularearnings,monthlypaymentstermsdonotfit.

• Tenuresoffereddonotfitwiththeneeds.

• Strongperceptionaboutaggressivedebtcollectorbehavior.

Loansadjustingtooccupationishighlyexpected.

• Customizableloans– amount,tenure,paymentsystem.

• Simpleandquickprocess.• Flexiblecollateral(ornocollateral).Warranty

andverificationbasedonsocialacknowledgementandcommunities.

Theexpectationsaresimilartogettingloansfromrelatives/arisan groups.Moreconcernonflexibility,lessconcernoninterest

FinancialServiceprovidersneedtounderstandflowofbusiness/workto

createaloanproductthatfitswell.

Abilitytoadjust

VS.

Interest

Loansperoccupation

UtilizingLaku Pandai agentstohelponverificationandasses

credibility

Perception&UnderstandingonLoans(fromformalfinancialinstitutions)

VALIDATINGTHEPERCEIVEDBARRIER:PRODUCTWiththecurrentlowlevelofliteracy,aproductiveloanwillnotbeseenasrelevantforthem.Inaddition,theproductsofferedarenotsuitablewiththeneeds.

RelevanceIssue TenureandPaymentSystem

DebtCollecting

NEEDS:

Tobeindependentisnotreinforcedbytheculture.• Livingtheirlifecollectivelyisatraditionwhichishardto

break.Eveninageographicallydifferentarea,peopletendtomainintensecommunicationwithrelatives.

• Family,friends,andrelativesareasourceofmoneyintimesofshortage.

• Thisisagoodopportunityforremittancetobedevelopedasoneofthemainproduct.

Inregardstoreligiousviews,majorityofconsumersbeliefthatGodwillgivethesufficientamountofHisblessingforpeopletoliveaccordingly.• Therefore,livingasitisandnotstrivingformorebecomes

alifestyle.• Beliefssuggestingthateachperson’spath(andblessing)is

written,makespeopleacceptthefinancialconditionthattheyarein,andreluctanttotrytomakeachange.

CULTURALASPECTSAFFECTINGFINANCIALBEHAVIORInreachingthecurrentlyfinancialexclusivetargets,thattherearemultiplefactorsaffectingandleadingtheirbehavior.

Forfinanciallyexcludedindividuals,accessmightbeabarrierasitinvolvescost,distanceandhesitancetointeract.However,thesebarriersarenotthemainthinghamperingthemfrominclusion– theunderstandingandliteracyare.

ThelowrateofliteracyamongIndonesiansisclearlyreflectedbythepoorunderstandingofthepurpose andbenefits ofgettingfinanciallyincluded,followedbythenegativeperceptionontransparencyandsecurity.

ThisfindingsisalsoinlinewithresultfromIntermediaIndonesiaFIItrackersurveyinSep-Nov2016whichstatedthatonly8%ofIndonesianadultswithnobankaccountclaimedthattheydonotknowhowtoopenanaccount,while21%claimedthattheydonotneedbankaccount.

Whatisessentialamongthetargetmarketaretheabilitytochecktheirmoneyinstantly,theassuranceontheabilitytouse/cashouttheirmoney,andaclearexplanationonfeesandinterests.

SavingisnotingrainedinIndonesianbehavior.Culturally,Indonesiansaretakingadvantageoflivingcollectively,andtaughttobegratefulandhavehighacceptancetowardslifeconditions,includingfinancially (Thesamesurveyalsosaidthat33%oftheunbanked’s mainreasonfornothavingabankaccountisnothavingsufficientmoney).

Apushtomakeaplanninginlifeandfinanceisneededtoreinforcesavingbehavior.Thistargetmarketurgentlyneededucationonsavingvs.loans,andhowitdiffersintermsofbenefitsandrisks.

CONCLUSION

MOVINGFORWARD

Basedonfindingsfromthisqualitativeresearch,tofurtherimprovefinancialinclusion,thebelowactionsareencouraged:

Furtherutilizingmobilephoneastheaccesstofinancialproducts.Pointstobeconsidered:• TheproductandserviceinmobilephonemustbeSimple&

Practical,adjustingtothefinancialliteracylevelandtheneedforbasicfeatures.

• Itshouldalsobetransparent,tosolvethetrustissues,wherethecustomersneedtoseetheirmoney,andaccessthetransactionhistory,fees,interestsandotherdetails.

Bothbanksandfintech playersinIndonesianeedtoincorporatethetwoaspectsaboveincommunicatingtheirproductsà Simple&Transparent,andintensifytheeducationaspects.

Particularlyforbanks,amoreintensivecommunicationisneededastheformalfinancialinstitutionsarecarryingastrongperceptionofbeingcomplicated,lessrelevantandexpensive.Whilespecificallyforfintech players,inordertofurthersupportfinancialinclusioninIndonesia:• Integrationandpartnershipwithbanksareneededtowidenthe

inclusioncoverage.• Themarketingactivitiesneedtoincludemoreeducationalaspectsto

increaseliteracyandinclusion.

InlinewiththenextstepsfromOJKonrefreshingthefinancialagentsLaku Pandaià banksandfintech companiesneedtoperformassessmentsontherecruitmentandtrainingsystem,andwaystoincreasetransactions.

Findingsonthisreportisbasedonqualitativeresearchwithminimumrespondent.Alargercoverageandvalidationneedtobeperformedusingdifferentresearchmethodologies.

ThankYou

adenia@cxgoconsulting.com0813-1138-7852cxgoconsulting.com