Indonesia's Digital Financial Inclusion Rate and Its Drivers
21 July 2022
Author by Finantier

Indonesia's Digital Financial Inclusion Rate and Its Drivers

The Indonesian fintech industry has been gaining tremendous growth momentum in recent years. Since 2020 has accelerated the adoption of various fintech platforms, thus impacting financial inclusion growth in Indonesia.

According to research by Google, Bain, and Temasek, digital payment services will grow to $351 billion by 2025. While lending platforms will reach $35 billion, investment applications estimated AUM (Asset Under Management) to reach up to $28 billion. Business-wise, this is an enormous market size to reach.

Digital financial inclusion

Financial inclusion refers to the access to financial products and services tailored to the community's needs and abilities to increase welfare. Meanwhile, digital financial inclusion (digital financial inclusion) is the availability of access to digital financial products and services (fintech) following the community's needs.

In Indonesia, the mission of financial inclusion is stated in OJK Regulation No. 76/POJK.07/2016 2016. The financial inclusion level in Indonesia reached 83.6% in 2021 from 81.4% in 2020.

One of the goals is to reduce the number of the underserved (people with limited access to financial products), such as by providing access to basic banking (savings and loans). In addition, it is hoped that the public will also have access to other financial products, such as insurance, financing, pension programs, and investments to improve their standard of living.

Interestingly, most financial products are also available on digital platforms. The main goal of digital innovators is to simplify processes that previously existed in conventional services. Take, for example, banking services — with digital banking applications; people can now create an account via their mobile phone from their home. The same goes for other services such as Insurtech and fintech lending.

Industrial growth

The trend in digital financial inclusion in Indonesia is directly proportional to the growth of the industry players. Over the years, looking at IDX records, at least 4-5 companies with the largest market capitalization in Indonesia are in the banking sector. On the other hand, fintech startups continue to gain momentum, with 3 out of 4 new unicorns coming from the fintech sector.

Startup Report 2021 data also shows that fintech is the industry investors most sought after.

It seems that the market growth opportunity is still tremendous, with many options to be explored. For instance, out of 103 Peer-to-peer lending players registered with the OJK, only around 26 million borrowers are served and have disbursed $20.4 billion in funds. This ratio is still tiny compared to the total population.

Even for business loans, Indonesia has 63 million MSMEs that support more than 60% of the national GDP. However, financial services have only accommodated around 19% of them, resulting in a gap in loan capital requirements of up to $80 billion.

Thanks to the popularity of wealth-tech in the last two years, the number of retail investors has multiplied. BAPPEBTI said, as of February 2022, the number of crypto asset investors in Indonesia reached 12.4 million, an increase of 532,102 from the previous year. Meanwhile, from KSEI data, the number of capital market investors reached 8.1 million people as of February 2022. Yet, compared to the total population, these numbers still look very small.

Embedded finance as a solution

Many fintech industry players need a relatively long time to accommodate the wider community and bring the level of digital financial inclusion in Indonesia to an optimal stage. For this reason, various innovations are needed to make financial services more accessible and affordable. One of the innovations that emerged is embedded finance.

Embedded finance is a mechanism where fintech services can be embedded natively into a consumer application. For example, in a shopping application, the developer provides a payment or credit feature like the emerging buy now pay later (BNPL) as one of the payment options.

To realize embedded finance, developers must develop the necessary architecture to support their applications. Therefore, an Open Finance startup's presence can simplify these processes to eliminate various frictions in the development process.

Open Finance products provide the necessary infrastructure to get relevant financial data and connections to financial institutions through the Open API mechanism. Fintech companies can instantly fetch the data & information needed to develop relevant features for their users or even to streamline their business processes.

For example, Fintech Lending Platforms can simplify the underwriting process by instantly verifying applicants' identity and income using our Verification solutions, getting applicants' credit scores immediately using our Credit Scoring solution, and facilitating Buy Now Pay Later (BNPL) services to retail industries or e-commerce.

Or a Personal fintech app that wants to build a dashboard to provide financial insights to its users can use our Account Aggregation solution to aggregate multiple bank statements.

Embedded finance is also increasingly relevant when people depend more on application-based services to meet their needs. In the end, using embedded financial services indirectly leads the public to access financial services that suit their needs. It also signals that OJK's financial inclusion mission can be achieved in tandem with the national digital economy.