Bringing digital finance agents to the last mile in Indonesia

At first glance, Indonesians appear to have excellent access to banking agents and cash-in/cash-out (CICO) services. There are over 500,000 bank agents across the country helping customers open accounts and deposit or withdraw their money. Yet over 50 percent of adults in Indonesia do not own a financial account, and one-third cite the distance they have to travel to a bank branch as the reason they are unbanked. Additionally, Indonesians who do own accounts use them infrequently for a very limited number of use cases, mostly to receive government payments and send remittances.

Clearly, there is a need to expand both the quality and reach of CICO agent networks that offer valuable financial services to deepen financial inclusion. But how?


As is the case in many countries, Indonesia’s agent network challenge is concentrated in rural areas, where high operational costs coupled with low transaction volumes can be problematic for digital financial services providers and their agents. According to a sample of agents assessed by MicroSave, 26 percent of Indonesia’s agents operate in such areas. Alarmingly, the same report shows that 26 percent of agents nationwide manage to only break even or operate at a loss.


Global evidence gathered by CGAP and the Bill & Melinda Gates Foundation shows that a variety of emerging CICO agent models are improving the economics of last-mile agents. Our research shows that the financial services providers, policy makers and regulators leading emerging CICO models have generally followed six principles and tailored them to their local contexts.


Below, we offer some reflections on where Indonesia stands against these principles.


Principle 1: Enable rural CICO agents to generate more revenue streams


In many countries, bank- and telecom-led agent network models have struggled with profitability in rural areas due to their costly business practices and heavy reliance on revenue from CICO transactions. Meanwhile, e-commerce companies in countries like China are reaching deeper into rural areas because they enable an array of revenue streams for agents. For example, Alibaba established its Rural Taobao network serving 30,000 villages in just three years, surpassing the rural banking agent reach of some of China’s biggest banks.


Similarly, Indonesia’s largest fintech industry association, Asosiasi FinTech Indonesia (AFTECH), has documented how some e-commerce companies are coming up with their own approaches to service aggregation. AFTECH estimates that there are a whopping 5 million e-commerce or fintech agents in the country who are already facilitating digital financial services. This e-commerce ecosystem is showing greater potential than established agent networks to viably serve rural areas. Specifically, unlike banking agents, e-commerce agents are associating CICO transactions with an ever-growing number of use cases, which can provide more value to customers and generate greater fee revenue for agents.

Photo: Vered Konijnendijk, CGAP

This agent in rural Indonesia uses the same e-commerce platform and e-float to stock her shelves that she uses to sell airtime, conduct bill payments and facilitate money transfers. E-commerce companies are coming up with some of the most innovative approaches to building viable agent networks in remote areas.


However, current regulations prevent e-commerce agents from offering a full suite of financial services. These agents are not allowed to provide cash-out services. This limits the ability of e-commerce agent networks to support use cases that require a cash out, such as remittances.


Additionally, current regulations limit the revenue streams of banking agents who are currently authorized to do CICO by prohibiting them from partnering with multiple financial services providers. Especially in rural areas, this restricts agents’ ability to aggregate revenue-generating transactions from different providers.


Principle 2: Make CICO agents more accessible to rural customers


When customers live close to their CICO agents and personally know them, they are more likely to sign up for and trust digital financial services. In Indonesia, banking agents tend to cluster around bank branches. Agent Network Accelerator’s interviews with dozens of agents across the country in 2017 revealed that almost all operated within 15 minutes of the nearest branch. One of the reasons for this is that being a short walk from a bank branch makes it easier for agents to manage liquidity.

The emerging CICO agent models in e-commerce make it easier to manage liquidity over greater distances by enabling DFS providers to partner with third-party agent or merchant networks that offer a wider range of services. This diversity of services offered can help agents better balance CICO requests.


Principle 3: Expand the range of people who can serve as CICO agents


Most countries require agents to be registered businesses and have a physical address, but few businesses in rural areas can provide this paperwork. This is especially true of female-run businesses, which are often informal. Until 2014, Indonesia required banks and nonbanks alike to use institutional agents and barred them from recruiting individuals. Today, nonbank e-money issuers like e-commerce companies are still required to use institutional agents. As a result, CICO points are limited to bank agent networks and to national convenience stores, such as Alfamart and Indomaret.

To foster opportunities for rural agents, it would be worth exploring new ways to allow individual agents while ensuring DFS providers can effectively monitor them and manage potential risks.


Principle 4: Identify and manage consumer protection and other risks posed by rural agents without stopping innovation


Rural customers are often more vulnerable to agent abuse than other customers. The most common reason Indonesian customers visit banking agents is to receive government payments. This involves a single cash-out transaction facilitated by the agent. According to MicroSave research, customers experience issues related to arbitrary charges levied by agents and agents managing customers’ PINs or passwords. There is evidence that customers have limited awareness about the digital products they are using and their use cases. All of this indicates that more work is needed to enforce consumer protection standards in current banking agent networks and in emerging e-commerce agent networks.


Principle 5: Develop a data-driven strategy to close the gender gap in CICO access and use


Women face different constraints to financial inclusion in different countries. In Indonesia, the gender gap in account ownership is less than 10 percent, which is marginally higher than the global average of 9 percent in developing economies. However, a significant number of women serve as agents in Indonesia. A 2017 Agent Network Accelerator survey of Indonesia’s agent population revealed that 59 percent of digital financial services outlets are managed by women. To further close the gender gap, digital services must be better designed to meet the needs of different segments of women. Some providers are moving in this direction. For example, Mapan has geared its entire business toward targeting women in rural savings-and-loans groups with financing for household appliances. Collecting gender-disaggregated data can shed light on what works better for women.


Principle 6: Expand public and private partnerships that share a CICO network


Building rural agent networks at the scale required to add real value for most customers cannot be done by just one provider or government entity. Providers, policy makers and regulators need to work together. In Indonesia, the public banking sector’s comparative advantages in reliability, financial capacity, oversight and drive for social development could be complemented by the customer value propositions and convenience being offered by local fintechs and their growing agent networks. There is an opportunity to explore new collaborations between the two sectors that could bring unparalleled gains in financial inclusion.


Written By Christopher Blackburn, a CGAP consultant and an expert in mobile telecommunications and financial services in emerging markets.


This article was originally published on CGAP.

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