FINANCIAL INCLUSION: Digital Identity & Financial Inclusion in Indonesia

Have you ever had a golden idea or opportunity? Yet you didn’t try it because you were afraid of losing? Then somebody else does your exact same idea and they make an astonishing profit. You feel regret that you didn’t follow through.

If your answer is yes, then such experience is one of the examples of the ‘predictable irrationality of people’. Last year, Professor Richard Thaler received a Nobel Prize in Economics for his study which proves that decision making is influenced by human irrationality.

This irrationality has unfortunately been systemically entrenched in state policymaking. Some government policies take a “play safe” approach, without being balanced with the exploration of opportunities and significant efforts on the implementation. This has been preventing the people from reaping its full potential.

This article will analyze Indonesian policymaking irrationality by looking into the policies for digital identity and financial inclusion in Indonesia.

Inclusion vs Potential

You may have heard quite often about the low level of financial inclusion in Indonesia (36% according to World Bank’s survey). On how most of the people have not been fully integrated into the formal financial service.

One of the main reasons behind low financial inclusion is the identity issue. The World Bank’s ‘Identification for Development Program’ (ID4D) highlights this issue. Approximately 2.4 billion people do not have a valid national identity. Moreover, identity is not only decisive for people’s ability to access financial services, but also their access to social security and political rights.

Have you ever had a trouble applying for an e-KTP (electronic identification card)? This is only one example of identity problems. Meanwhile, the relationship between financial inclusion and identity is far more crucial than just getting an e-KTP.

On the other hand, technological innovation becomes the key factor in establishing the identity system through a digital identity. A USAID report recommends that digital identity is a crucial step to improving people’s rights and needs. The increasing internet penetration, the growing use of smartphones, and also the development of FinTech are the potentials to develop the digital identity system. Indonesia has these potentials.

Read also: Fintech in Indonesia : Between Formality of Regulation and Financial Inclusion

The number of internet users in Indonesia approximately has reached 133 million, five times faster than annual growth worldwide. Meanwhile, the active mobile phone sim-cards in Indonesia have reached 393 million or equal to 150% of the country’s population. The growth of FinTech industry in Indonesia has also been thriving, where over half of today’s Indonesian FinTech companies were founded in the last two years. However, all these potentials do not reflect the big picture of financial inclusion in Indonesia. There are still disparities between the financial inclusion and the full potential that the society has.

Policy vs Implementation: How Irrationality Occurs

Since 2008, the Law No. 1/2008 on Electronic Information and Transactions (UU ITE) has been enacted. This law covers digital identity, which it describes as an electronic certificate that holds a person’s electronic signature. Unfortunately, digital identity still has not yet been put into use widely. At least, there are two reasons related to this issue:

1. Legal Certainty

Electronic signature, as regulated in the ITE Law, does not have legal certainty. The ITE Law gave the electronic signature its legal recognition if it complies with several requirements. These requirements would be regulated by a Government Regulation (PP). However, it took four years for the regulation to be realized through Government Regulation No. 82/2012 (PP 82).

This is quite contradictory because one of the Government Regulation’s purposes is to speed up the implementation of a law under a clear regulation to guarantee legal certainty. Unfortunately, the story doesn’t end here. PP 82 also states that the electronic certificate can only be released by electronic certificate providers that have gained ministerial accreditation. Meanwhile, further directive related to such ministerial acknowledgment would be regulated later in a Ministerial Decree. And what happens is that a public consultation on “Ministerial Decree Draft on Electronic Certification Management” has only been conducted in January 2018.

This could also have been caused by the tendency of irrationality in decision making where risk reduction efforts are not being balanced by the implementation of opportunity creation. If we look at the structure of the ITE Law, we see that articles on prohibitions, investigations, and sanctions dominate many parts of the law. Meanwhile, the key aspect in the policy implementation still needs to be clarified through its derivative regulations that even 10 years after the ITE Law’s enactment, the regulation on policy implementation remains unclear.

Moreover, there is a discrepancy between the ITE Law’s objectives and the government’s role. The law stipulates the objectives to educate the nation, improve the economy, and create opportunities for the optimum development of electronic information and transactions. This reflects the law’s objective to create opportunities and to optimize the use of electronic information and transactions in the society. However, the government’s role, as stipulated in Article 40 of the law, mostly revolves around protection and security aspects.

Digital identity still can be implemented but in an exclusive manner. As an example, if you have completed face-to-face identity verification at Bank A, you can open a bank account at the bank and conduct transactions through internet banking or other media. This is because you already have your digital identity acknowledged by Bank A. However, this facility is not applicable to services from other financial institutions. You need to do the troublesome identity verification process from the start. Financial institutions will not take the risk of implementing digital identity widely in the absence of legal certainty.

2.Stakeholder Fragmentation

FinTech players are actually can be expected on technology innovation to boost financial inclusion. But, FinTech players are still facing huge challenges, namely KYC and digital signature (as noted in a report by Indonesian FinTech Association). These issues are rooted from the identity problem that cannot be solved only through the issuance of a new regulation.

Digital identity is placed under the purview of the Ministry of Communication and Information (Kominfo). Meanwhile, financial services supervision falls under other institutions such as the Central Bank (BI), the Financial Services Authority (OJK) or the Ministry of Cooperatives and SMEs.  Although these Indonesian regulators have signed a cooperation agreement, the efforts to establish identity system are still very fragmented. The existing regulations also seem to serve to shield the institutions from any criticism should the worst happen to the public. The writer does not intend to disregard the risk mitigation that has been implemented by the policymakers. Instead, risk mitigation is one of the key factors for sustainable development. However, risk mitigation shall not be ensnared in the decision-making irrationality.

Government As a Determining Factor

If we look at the giant project of Aadhar, India’s government not only succeeded in registering more than one billion of its citizens through single identity system but also integrated this identity system with various stakeholders, which includes the government and private institutions. The result is efficient and effective financial services that can serve most of the people.

Another example is the open banking program in the UK, where the government ‘forced’ the nine biggest banks in the UK to open themselves to data and services integration. This program enables the people, especially the small medium enterprises, to create and manage accounts in several financial institutions through one application. Citizens can enjoy convenience, broader coverage, and transparency in financial services.

These two examples demonstrate a success that is rooted from the government’s role in integration. The Indonesian government actually has launched a National Financial Inclusion Strategy (SNKI) as mandated in a Presidential Decree. Nevertheless, the writer has not yet seen any evidence that SKNI has prioritized the identity system.  Also, SNKI’s implementation requires more micro-level monitoring to prevent fragmentations within government institutions, so that SNKI can achieve its objectives. In this matter, the concept of a task force in the Presidential Decree on the Acceleration of Business Services could serve well, in which the task force serves the watchdog for the transformation of business licensing services – from the government as bureaucratic authority to one where the government is at the service of the public.

Finally, the financial inclusion could not be achieved solely through the enactment of regulations, strategies or technological innovations. It will be determined by the government’s ability to bring all stakeholders together under the same priority and collective steps.

Written by Pandu Aditya Kristy (Chief Operating Officer PT Mekar Investama Sampoerna)

This article also published on Bisnis Indonesia