Is a Lack of Consumer Information Keeping Indonesians Financially Excluded?

The need to expand the pool of demand-side data on Indonesians’ financial behaviors, and the potential for that data to inform current discussions about financial inclusion, is generating a good deal of interest within the country. This is based on my discussions with people on a recent trip there to launch InterMedia’s Financial Inclusion Insights (FII) research program. Our work features a nationally representative survey with 6,000 Indonesians focusing on individuals’ financial behaviors and access to/use of financial services, complemented by additional targeted qualitative studies which focus on more specific issues.

While there, my colleagues (Nat Kretchun and Caroline Mangowal) and I were able to observe several pilot interviews for the survey and meet with members of government, NGOs, and other stakeholders engaged in advancing financial inclusion in Indonesia.

In 2009, the World Bank found that approximately 20 percent of Indonesians exclusively saved money through informal mechanisms and nearly 50 percent borrowed money informally.[1] From what the aforementioned stakeholders told us, use of informal financial services is still common today. This information suggests that a large number of Indonesians might be easily moved into the formal financial sector given that they already use the services through informal channels. So what is preventing them?

As we discussed the challenges faced by those working to promote financial inclusion, a common theme emerged from our interactions: information asymmetry as a barrier to greater inclusion.

Information asymmetry what is it and how is it preventing greater inclusion?

Information asymmetry occurs when one party has more, and better, information than the other. The example that kept reemerging in my conversations while in Indonesia was when one party in a transaction (such as opening an account with a financial services provider) has information critical to the transaction that the other party does not have. [2] According to those I spoke with, it is most evident in the engagement between the providers of traditional and digital financial services (DFS) – mainly banks and mobile network operators (MNOs) – and the consumers or potential consumers of these services. In this case, providers are not imparting enough consumer information about their services. If this asymmetry is broad-based, it becomes easy to understand how this can become a barrier to DFS uptake.

Based on pilot interviews with Indonesian adults, many consumers lacked awareness of available low-cost financial services options and a major reason for this, according to stakeholders, is providers don’t do much to promote or publicize their existence. Going back to 2007, Telkomsel – one of the country’s major mobile network operators (MNOs) – launched T-Cash, a mobile wallet service. T-Cash enabled person-to-person transfers, bill and merchant payments, and airtime top ups, all of which can be transacted using a mobile phone. This held the same promise as M-Pesa in Kenya, which was launched the same year, and has since become a major catalyst for financial inclusion. The difference was T-Cash services were not aggressively promoted, but little was done to raise awareness about T-Cash or its potential uses. As recently as July 2014, seven years after the product’s launch, a T-Cash official acknowledged that actions need to be taken to build awareness of the products, how to use them and their advantages over cash.[3]

But T-Cash and other mobile money services like it are not the only entities offering under-publicized, low-cost financial services. Bank Indonesia – the country’s central bank – launched a program in 2010 that requires banks to offer low-cost TabunganKu accounts,[4] which have lower registration costs than regular savings accounts, as well as no monthly fees and lower minimum balance requirements. As we were told by people working on the supply side of the financial service industry, these accounts are not widely promoted by providers and may not even be offered to potential customers unless customers specifically know to ask.

During a pilot interview for the FII survey in a peri-urban area outside Jakarta, I saw this problem in action. The interview was with Siska (a pseudonym), a cheerful middle-aged housewife whose husband and son worked in the city. Siska’s husband was previously employed by a company that opened a bank account for him to facilitate paying his wages. When he changed jobs, however, the account was closed. Despite having made use of their bank account before, and now having no account with a formal financial institution, they didn’t open a new one of their own. The reason, according to Siska, is because they believe the fees associated with maintaining one on their own, would be too high. They concluded that managing their money through informal means would be cheaper. Clearly she had a demand for such a service, and had she known about lower-cost options such as the TabunganKu account, she might have opened her own account to continue having access to formal financial services.

Why aren’t financial institutions promoting low-cost financial service accounts?

The lack of promotion is attributed, in part, to the inability of low-cost accounts to generate the revenue that accounts with higher monthly administrative and registration fees, and minimum balance requirements, would. [5] Beyond account profitability, banks also reportedly have had reservations about promoting the products due to the fluid regulatory situation around traditional and digital financial services in Indonesia. In mid-2014, Bank Indonesia and the recently created OJK[6] – the regulatory authorities over mobile money and other digital financial services – released new regulations for digital financial services (Layanan Keuangan Digital). They gave just five formal financial institutions, out of more than a 100 operating in the country, permission to operate mobile banking and agent networks. Any institution outside of those five offering their own brand of the service would, technically, need to discontinue its service and any advertising campaigns around it. This was not the first time[7] the central bank put forth regulations related to traditional and digital financial services, nor is it expected to be the last. With this kind of regulatory instability, providers, understandably, may be reluctant to advertise for fear they are wasting resources on promoting their services, only to lose official permission to continue to operate.

Despite all of this, the stakeholders we met with have a clear interest in financial inclusion and also recognize that without change there can be no progress. Providers appear to be increasingly aware, and, willing to publicly acknowledge, their promotion of low-cost financial services has been inadequate, and regulators are trying to bring more structure to the industry.

InterMedia’s FII research will contribute to a growing body of evidence-based, demand side data that should help DFS providers and other financial inclusion stakeholders as they weigh strategies to advance Indonesia’s financial inclusion goals. Regulators will be better able to identify challenges faced by consumers and shape policies to help overcome these obstacles, while providers will have more information about Indonesians’ financial behavior that might highlight the value in developing and promoting low-cost services to bring more Indonesians into the formal financial services sector.