00074918.2013.850633
Bulletin of Indonesian Economic Studies
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Unlocking the transformative potential of
branchless banking in Indonesia
Tim Stapleton
To cite this article: Tim Stapleton (2013) Unlocking the transformative potential of branchless
banking in Indonesia, Bulletin of Indonesian Economic Studies, 49:3, 355-380, DOI:
10.1080/00074918.2013.850633
To link to this article: http://dx.doi.org/10.1080/00074918.2013.850633
Published online: 05 Dec 2013.
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Date: 17 January 2016, At: 23:49
Bulletin of Indonesian Economic Studies, Vol. 49, No. 3, 2013: 355–80
UNLOCKING THE TRANSFORMATIVE POTENTIAL OF
BRANCHLESS BANKING IN INDONESIA
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Tim Stapleton*
Branchless banking has the potential to signiicantly enhance inancial inclusion
among Indonesia’s large and geographically disparate unbanked population and
to connect Indonesia’s micro, small and medium enterprises to the global economy.
Why has the branchless-banking revolution not yet materialised? Constrained by
regulation, deployments have failed to attract a critical mass of users. Indonesia’s
fragmented telecommunications sector has made it dificult for providers to emulate the success stories in other countries, in which dominant providers are competing for the market with a proprietary platform. In Indonesia, it is likely that a
considerable degree of interoperability will be required for providers to unleash
network effects and attract users. Indonesia’s providers are experimenting in this
space. Recognising branchless banking’s potential to accelerate inancial inclusion,
Bank Indonesia appears committed to improving the regulatory framework. This
article identiies the components of an enabling regulatory environment. Success in
Indonesia would provide a model for a more widespread uptake of transformative
branchless banking.
Keywords: inancial inclusion, branchless banking, mobile money, network effects
INTRODUCTION
In Indonesia and other emerging economies, a large proportion of poor households and micro, small and medium enterprises (MSMEs) are excluded from
formal banking and lending services. Requiring small and infrequent inancial
transactions, the poor are not proitable customers for the branch-led models of
inancial service provision that predominate. By eliminating the need for costly
branch infrastructure, branchless banking can make serving poor, unbanked
households and MSMEs proitable. Branchless banking has the potential to revolutionise payment systems in emerging markets, to extend formal inancial services to the unbanked and to provide a platform to connect MSMEs to the global
economy.
Yet despite a proliferation of providers in recent years, branchless-banking
deployments that are set to deliver this potential are the exception rather than the
rule. Indonesia is a case in point. As a review of the branchless-banking landscape
in the subsequent section highlights, Indonesia’s deployments have not achieved
* Tim Stapleton is an Asian Century Graduate Fellow at the Crawford School of Public
Policy, The Australian National University. An earlier version of this article was submitted to the Institute of Public Affairs, London School of Economics and Political Science, in
fulillment of the requirements of the master of public administration.
ISSN 0007-4918 print/ISSN 1472-7234 online/13/030355-26
http://dx.doi.org/10.1080/00074918.2013.850633
© 2013 Indonesia Project ANU
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Tim Stapleton
critical mass. Yet branchless banking should ind a natural home in Indonesia,
whose citizens are enthusiastic adopters of new technologies and platforms:
Indonesia boasts the fourth highest number of Facebook subscribers (Internet
World Stats 2013), and in terms of the number of tweets Jakarta is the world’s
most active city on Twitter, with Bandung also in the top 10 (Semiocast 2012).
Indonesia faces similar inancial-inclusion problems as countries where deployments have lourished, such as the Philippines and Kenya. Indonesia’s unbanked
are concentrated in rural areas across the archipelago, often beyond the reach of
banks’ limited branch networks or simply not a proitable proposition (or both).
An estimated 100 million Indonesians do not have access to any inancial services
(CGAP 2013).
The Consultative Group to Assist the Poor (CGAP) coined the term branchless
banking to encompass the range of ‘new distribution channels that allow inancial institutions and other commercial actors to offer inancial services outside
traditional bank premises’ (Lyman, Gautam and Staschen 2006). Porteous (2006)
distinguished between transformative branchless-banking models, through
which providers seek to extend inancial services to unbanked and underbanked
individuals and MSMEs, and additive deployments, which merely provide an
additional channel for banked customers or existing mobile-account holders to
transact.
This article analyses existing barriers to – and the potential for – the rapid
uptake of transformative branchless banking in Indonesia. Mas (2012: 292) identiied four criteria for branchless banking to be transformative: in essence, these are
security, need, access and choice. The security criterion – that the funds of individuals and businesses must be held securely – applies to deposit-taking entities
worldwide, and branchless-banking providers and regulators in other markets
have established mechanisms to meet this. Any attempt to meet the remaining
criteria should consider the characteristics of the Indonesian market.
The need criterion – whether branchless-banking schemes can provide a range
of hitherto unavailable inancial services to meet the inancial needs of unbanked
individuals and MSMEs – can be thought of as the demand side of the equation.
The third section of this article considers whether a lack of demand for branchless
banking in Indonesia has hindered its uptake, and identiies potential sources
of demand. The access and choice criteria relate to the supply side of branchless banking. The access criterion requires that the infrastructure exists, or can be
developed, to make affordable branchless-banking services available near where
unbanked individuals live and MSMEs operate. Choice requires that there be a
fair and contestable market that both maximises network effects for consumers
and protects against abuses of potential dominant market positions. The fourth
section considers whether supply-side barriers have discouraged – and will preclude – the widespread uptake of transformational branchless banking in Indonesia.
As a platform-mediated, two-sided market subject to strong network effects
(Anderson 2010), in which banking, telecommunications or other entities (or a
combination thereof) provide a platform for the provision of inancial services
to the poor, transformative branchless banking straddles several sectors that are
typically highly regulated. Branchless-banking deployments, be they transformative or additive, have tended to achieve critical mass in environments in which
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Unlocking the transformative potential of branchless banking in Indonesia
357
regulation is either (a) effectively absent or (b) incremental and proportional, and
underpinned by an active and ongoing dialogue between industry and regulators.
In other regulatory environments, deployments have struggled to achieve scale.
In the Indonesian context, Hidayati (2011) argued, regulations prohibiting banks
and mobile operators from building cash-merchant networks have precluded
deployments from achieving critical mass.
The regulator, Bank Indonesia (BI), is attuned to the potential of branchless banking to accelerate inancial inclusion. BI’s pilot of branchless banking in selected
provinces in Java, Sumatra, Kalimantan and Sulawesi from May to November
2013 is a precursor to a branchless-banking regulation. It is therefore timely to
examine the extent to which Indonesia’s regulatory settings have frustrated the
widespread uptake of branchless banking, and to identify the components of an
enabling regulatory environment – drawing on the regulatory approaches used in
more established markets. This is the focus of the ifth section.
Why has transformative branchless banking lourished in the Philippines yet
loundered in Indonesia? This article inds that a range of restrictions in Indonesia’s regulatory environment have, until recently, precluded branchless-banking
providers from serving the considerable unmet demand for inancial services
among Indonesia’s unbanked households and MSMEs. And while there is no
shortage of potential delivery partners and channels, the path to building a proitable branchless-banking deployment appears more dificult in Indonesia than in
established markets such as the Philippines and Kenya, where one or two large
mobile-network operators (MNOs) have used their dominant positions in mobile
telephony to attract a critical mass of users to their incompatible, proprietary
branchless-banking platforms. In Indonesia, the commercial banking sector’s
narrow focus on corporate lending, the relatively fragmented and competitive
telecommunications market, the limited reach of alternative networks, and the
potential signiicance of inward international remittances, government cash transfers and m-commerce in early market-building mean that the platforms of providers will need to be interconnected to generate network beneits and attract users.
If Indonesia’s regulatory and policy settings were to become more conducive
to the widespread uptake of transformative branchless banking – and if providers
could generate network beneits through interoperability, as the country’s three
largest MNOs are attempting to do – Indonesia could yet become an exemplar for
emerging economies.
BRANCHLESS-BANKING MODELS AND THE INDONESIAN LANDSCAPE
Notwithstanding its promise to enhance inancial inclusion, transformative
branchless banking remains a nascent industry. As of February 2013, of the 150
live deployments around the globe (identiied by the GSM Association’s Mobile
Money for the Unbanked program) only six had more than 1 million active customers and only 14 had achieved rapid growth (Pénicaud 2013). Most, including
those in Indonesia, remain in a subscale position.
Branchless-banking deployments are typically led by MNOs, banks or, increasingly, third-party providers – or a combination of these entities. Often referred to
as ‘mobile money’ or ‘mobile banking’, MNO-led deployments rely on mobiletelephony infrastructure as the channel and mobile phones as the interface to
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Tim Stapleton
enable transfers of e-money, an electronic store of value. Measured by the number of registered users, MNO-led deployments predominate in Indonesia. As
of May 2013, Indonesia’s MNO-led mobile-money services had 12 million registered users – approximately 4.3% of mobile subscriptions – and two million
agents,1 with Telkomsel accounting for the most users.2 Yet only a small minority
of users are thought to be active, and the services are primarily used for airtime
top-ups (Jakarta Post, 27/2/2012). At present, Indonesia’s MNO-led deployments
are primarily additive, extending a convenience to existing users in a bid to retain
customers.
In MNO-led deployments, users’ e-money wallets may or may not be linked to
individual bank accounts. Like Philippine provider Globe’s GCASH and Kenyan
operator Safaricom’s M-PESA service, the e-money deployments of Indonesia’s
three largest MNOs – Telkomsel’s T-Cash, Indosat’s Dompektu and XL’s Tunai
(table 1) – do not offer users individual bank accounts. In contrast, the pioneering branchless-banking deployment – Philippine provider Smart Communications’ SMART Money – links customers’ e-money wallets to individual bank
accounts. In Indonesia and in most other markets, branchless-banking providers
are required by regulation to maintain a pooled bank account with a cash balance
equivalent to the aggregate value of e-money on issue.
Regulators in several of Asia’s new high-growth branchless-banking markets,
such as Pakistan and Bangladesh, require branchless-banking deployments to
be bank-led or bank-centric. BI prefers – but does not mandate – bank-centric
deployments, on the grounds that extending individual bank accounts to the
unbanked will be more inancially inclusive (enabling the poor to develop inancial histories), underpin stronger economic growth (by stimulating lending) and
afford greater consumer protections (by virtue of a robust regulatory environment for banks and deposit insurance)3. BI’s Real Time Gross Settlement system
for transactions affords bank-centric models greater utility than in countries in
which interbank transactions are still processed manually. Several commercial
and regional Indonesian banks have launched transformative branchless-banking
deployments, relying on mobile bank staff equipped with electronic-data-capture
(EDC) machines (table 1). Yet such deployments are signiicantly smaller in scale
than those of Indonesia’s MNOs: in conjunction with MNO Axis, Bank Mandiri
subsidiary Bank Sinar Harapan Bali extended accounts to 2,500 unbanked customers by the end of 2012 under its Sinar Sip trial of branchless banking in Bali,
Sinar Sip (Bank Mandiri 2013).
Proponents of branchless banking see it enabling a cashless society. While
e-money is increasingly being accepted as a payment method in Indonesia, for
the foreseeable future branchless-banking deployments will require a supporting
1 Correspondence with BI oficials, May 2013. There were more than 278 million mobile
subscriptions in Indonesia at the end of 2012 (GSMA 2013).
2 According to a Telkomsel spokesperson, T-Cash and the Tap-Izy payments facility had 8
million customers combined as of February 2012 and were targeting 10 million by the end
of that year (Jakarta Post, 27/2/2012).
3 Discussions with BI oficials, May 2013.
Unlocking the transformative potential of branchless banking in Indonesia
359
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TABLE 1 Branchless-Banking Services in Indonesia
MNO-Led
Bank-Led
T-Cash (Telkomsel)
Dompektu (Indosat)
Tunai (XL)
Beli Pakai Pulsa (Axis)
De Lima (Telkom)
Commercial
Andaralink
(Bank Andara)
BRI*
Danamon
Permata
Bank Mandiri*
Rural
BPR-KS
Sharia
Bank Muamalat
UUS BTPN
Hybrid
Sinar Sip
(Bank Sinar Harapan Bali,
with Axis)*
Smart Dompet
(Bank Sinarmas,
with Smartfren Telecom)
BTPN Wow!
Bank Tabungan Pensiunan
Nasional, with XL and
Indosat)*
Rekening Ponsel
(CIMB Niaga)*
Sources: Satria (2013); providers’ websites; Jakarta Post (4/9/2013, 5/10/2013)
Note: MNO = mobile-network operator.
* Bank participating in Bank Indonesia’s branchless-banking pilot.
network of cash merchants4 to exchange cash to and from e-money. Regulations permitting, cash merchants can be individuals or entities with a presence
in unbanked communities and may serve unregistered customers, obviating the
need for customers to have a mobile phone or a bank account. Leading deployments in the Philippines (Globe GCASH and Smart Money), Cambodia (WING)
and Pakistan (Easy Paisa) have recorded strong growth by offering, through their
cash merchants, over-the-counter (OTC) transactions to unregistered customers
for person-to-person transfers (P2P), bill payments (P2B) and government payments (G2P) (Owens 2013). The term ‘branchless banking’ is something of a misnomer: cash merchants operate ‘beyond-bank branches’, which are still required
to support the liquidity of the cash-in, cash-out network (Alexandre, Mas and
Radcliffe 2011).
Branchless-banking providers tend to use per-transaction pricing, charging
both sender and receiver for transfers and for cash in or out (often for the cost
of a text message or for a portion of the amount transferred). Yet in platformmediated, two-sided markets such as branchless banking, providers can generate
income from either or both sides of the network, allowing for an array of pricing
strategies, including subsidising one group of users to attract another. To promote
branchless banking and to allow MNOs to scale beyond the domestic transfer market, CGAP advocates for providers to adopt a ’freemium’ model, which captures
revenues from major customers and businesses who use premium services, such
4 Cash-in, cash-out agent is the more established term in the literature. Yet the relation is
more akin to reselling than agency, since cash-in, cash-out transactions are typically funded
from cash merchants’ own accounts, (Alexandre, Mas and Radcliffe 2011; Dermish et al.
2012).
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Tim Stapleton
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as bulk payments, and allows individuals and MSMEs to transact for free below
established limits (Kumar and Mino 2011). A ‘freemium’ provider in Somaliland,
for example, has generated large transaction volumes: 8.3 million transactions
from 250,000 customers in June 2012.5 ‘Freemium’ is an example of a new, proitable pricing strategy that would be attractive to poor households, which transact
less frequently and with lower amounts.
IS BRANCHLESS BANKING INHIBITED BY A LACK OF DEMAND?
Branchless-banking deployments aim to generate high transaction volumes to
achieve proitability. Is it conceivable that a lack of demand for formal inancial
services among Indonesia’s unbanked and underbanked populations has precluded branchless-banking deployments from achieving scale? With an estimated
100 million Indonesians lacking access to inancial services of any kind and only
19.6% of Indonesia’s 247 million citizens holding an account at a formal inancial institution (World Bank Financial Index 2011), this seems unlikely. Having
conducted focus-group discussions in various regions of the archipelago, the
IFC (2010) identiied strong demand for branchless P2B and P2P transactions.
Branchless-banking deployments in other countries have generated proitable
transaction volumes by providing these services.
Branchless-banking deployments often initially bypass the poorest segments
of the population. Network effects in branchless banking dictate that providers
compete iercely to win over pivotal ‘early adopters’ (Farrell 2008: 3), who – with
greater inancial resources – will transact more regularly and, in bank-led or bankcentric deployments, maintain higher deposits than the poorest unbanked. They
will also attract subsequent adopters, who are more likely to join the network
with the most users.
Following interviews with new and potential providers of branchless-banking
services in Indonesia, the IFC (2010) concluded that such providers would initially
target Indonesia’s large middle layer of ‘relatively underbanked’ households –
income-earning households that are not wealthy but have spendable income – as
well as the borderline underbanked and banked segments above and below those
households. While still important, the inancial needs of early adopters are likely
to be less pressing than those from the poorest segments of the population.
Unlocking additional transaction volumes
Beyond P2B and P2P, this article identiies three potential sources of demand for
branchless banking in Indonesia: G2P, MSME transactions and inward international remittances. With the appropriate policy and regulatory framework in place,
these sources could yet unlock substantial transaction volumes in branchless banking and encourage providers to extend services to Indonesia’s poorest unbanked.
Government payments
In 2011–12, the Philippine government used Globe’s GCASH service to transfer
more than $100 million in conditional cash transfers to recipients who did not
own mobile phones (Owen 2013). In contrast, the Indonesian government relies
5 Discussions with Kabir Kumar, CGAP, 24 April 2013.
Unlocking the transformative potential of branchless banking in Indonesia
361
TABLE 2 Temporary and Ongoing Indonesian Government Cash-Transfer Programs
Program
BLSM
PKH
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JSLU
JSPACA
BLT
Description
Temporary unconditional
transfer to compensate for
fuel-price rises
Transfer conditional on
providing for children’s
health and education
Social welfare for the
elderly
Social welfare for the
disabled
Temporary, unconditional
transfer to absorb economic
shocks
Beneiciaries
Amount
Frequency
15.5 million poor
households (2013)
$30
Every two
months
$30–$73a
Every four
months
1.1 million women
from chronically poor
households (2011)
13,250 (2011)
$30
Monthly
17,000 (2010)
$30
Monthly
19.1 million poor
households (2008–9)
$30
Quarterly
Sources: Febriany et al. (2012: 3–4); Kharisma (2008: 6–7); World Bank (2012)
Note: BLSM = Bantuan Langsung Sementara Masyarakat. PKH = Program Keluarga Harapan.
JSLU = Jaminan Sosial Lanjut Usia. JSPACA = Jaminan Sosial Penyandang Cacat. BLT = Bantuan
Langsung Tunai.
a Figures
from 2007. The amount depends on household characteristics.
on PT Pos’s extensive agent network to distribute cash transfers to poor households (table 2).
Administrative costs for two of the largest schemes – BLT and PKH – were
approximately 8% and 18% of the program budgets (Febriany and Suryahadi
2012). As a recent TNP2K (2012) report identiied, branchless-banking schemes
have the potential both to lower the cost and to increase the speed, security, frequency and convenience of these G2P transfers. Some of the resulting savings
could be used for smaller, more frequent transfers to poor households, thereby
aiding households’ budgeting. There may also be scope for a more wholesale
government adoption of branchless banking as a distribution and revenue collection channel for unbanked segments of the population. With providers likely to
focus on securing transaction volumes (section 3), government ministries’ early
adoption of branchless banking would accelerate deployments in areas where the
unbanked are concentrated.
Branchless-banking deployments have been used to expedite the delivery of
cash assistance in the aftermath of humanitarian crises, including in Haiti, Kenya
and Nepal. This potential could be factored into emergency response planning in
Indonesia. If vendors in areas affected by natural disasters do not widely accept
e-money as a payment method, arrangements to deploy additional cash merchants and replenish the liquidity of cash merchants on the ground would be
required.
Platform for MSMEs
MSMEs are a vital component of Indonesia’s economy: in 2009, they contributed
56.5% of Indonesia’s GDP and accounted for 97% of employment – much higher
than in neighbouring countries (Shinozaki 2012: 2). Yet access to formal inance is
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362
Tim Stapleton
acutely limited: 2010 survey data suggest that just over half obtain inance from
banks, while more than a quarter rely on funding from relatives and friends (Shinozaki 2012: 12–14). The outstanding value of loans to SMEs accounted for just
0.7% of GDP in 2010, compared with 17.4% in Malaysia and 30.7% in Thailand
(CGAP 2010a). Though total credit has been growing at an annual rate of nearly
20%, the loan portfolios of Indonesia’s largest banks have been dominated by
loans to large corporates and the bulk of credit reported as micro, small and
medium loans is for consumption, rather than for supporting the operations of
MSMEs (Prasetyantoko and Rosengard 2011: 281–2). Branchless banking affords
Indonesia’s banks an opportunity to meet the lending targets for governmentguaranteed micro loans to MSMEs, and thereby to reduce the large MSME inancing gap.
Branchless banking could serve as a platform on which this large sector could
transact and innovate. Nairobi, for example, has emerged as a technology hub,
with entrepreneurial Kenyan start-ups developing mobile applications built on
Safaricom’s dominant M-PESA platform, such as electronic versions of informal
savings groups and M-Farm, which provides agricultural-market prices and
allows farmers to group together to buy and sell products (Economist, 25/8/2012).
Delivering inancial and other services via large-scale branchless-banking
deployments can broaden uptake and increase transaction volumes, owing to
their cost-effectiveness and their having a wider footprint than traditional delivery models. In the absence of a dominant branchless-banking deployment, capturing these indirect network beneits in Indonesia would require interoperability
between providers, which is a focus of section 4.
Inward international remittances
By driving down the costs of, and increasing the competition for, inward international remittances of Indonesia’s estimated 6.8 million migrant workers
(World Bank 2008: xiii, 2013), innovative branchless-banking deployments could
yield signiicant gains for development in Indonesia. Yang (2008) showed that
remittance-receiving migrant households in the Philippines invested increased
remittance income in child education and new enterprises.
Indonesia’s GDP is less dependent than that of other emerging economies
on remittances from documented migrant workers through formal channels.
According to the latest World Bank calculations, remittances contribute approximately 1% of Indonesia’s GDP, roughly comparable to their share in China but
lower than that in India (3%), the Philippines (10%), Bangladesh (11%) and several South Paciic nations (table 3). Remittances to Indonesia are concentrated in
a few rural provinces, where the families of the majority of Indonesia’s migrant
workers reside. These provinces are among the poorest in Indonesia (World Bank
2008: 8–9). Formal remittance inlows far exceed regional government budgets
in several of these, including East Java, East Flores (Hugo 2007) and West Nusa
Tenggara (World Bank 2008). In the East Javanese regencies of Malang, Tulungagung and Blitar, inward remittances accounted for 42%, 23% and 13% of local
economic output in 2004 (Barnes 2007: 61), suggesting that within these provinces
branchless-banking providers may be able to direct initial deployments to areas
with the highest potential transaction volumes. The actual amount remitted is
estimated to be three times greater than is formally recorded (World Bank 2008:
Unlocking the transformative potential of branchless banking in Indonesia
363
TABLE 3 International Remittances in Selected South Paciic Countries and
Indonesian Provinces
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South Paciic Countries, 2012
Indonesian Provinces, 2010
Country
% of GDP
Province
% of GRDP
Samoa
Tonga
Fiji
21
16
4
West Nusa Tenggara
West Java
East Nusa Tenggara
13
3
3
Sources: BNP2TKI (2011) for remittance data for Indonesian provinces; World Bank (2013) for South
Paciic countries.
Note: GRDP = gross regional domestic product.
11), because large amounts are sent informally through returnees (Hugo 2007;
IFC 2010:10) and an estimated 4.3 million Indonesian workers are undocumented
(World Bank 2008: xiii).
The contribution of remittances to gross regional domestic product (GRDP)
in the provinces in which the families of Indonesia’s migrant workers reside is
on a scale comparable to that of South Paciic nations (table 3). The innovative
branchless-banking deployments of Digicel Mobile Money and KlickEx (and
subsequently Vodafone M-PAISA) on the Australasia–Paciic Islands remittance
corridor6 have increased competition and reduced international remittance costs
(table 4; Dalberg 2012: 34, 47). These deployments take advantage of KlickEx’s
innovative, low-cost P2P service, which minimises foreign-exchange costs by
matching individual senders of funds. Other innovations – including the development of hubs that promote interoperability between partners on the sending
and receiving sides (such as that of BICS Home Send) – offer the potential to lower
the cost and time-to-market of branchless-banking deployments on international
remittance corridors, relative to the traditional approaches of negotiating bilateral
partnership agreements with individual MNOs (as Globe did for GCASH) or relying on Western Union in the sending countries (as Safaricom does for M-PESA).
Indonesia’s migrant workers are concentrated in relatively few markets elsewhere in Asia and in the Middle East: more than half are in Malaysia and Saudi
Arabia (Asia News Network, 30/4/2013; Hugo 2007). Recognising the potential for
international remittances to unlock transaction volumes on signiicant remittance
corridors (Davidson and Leishmann 2012: 22), Indonesian MNOs XL and Telkom
have enabled inward remittances from Malaysia and Hong Kong, respectively,
6 Digicel launched Digicel Mobile Money in Fiji, Samoa and Tonga to facilitate inward
remittances from Australia and New Zealand. The funds can be used for onward transfers,
purchases, bill payments and airtime top-ups. Digicel partnered with KlickEx to offer a
much cheaper service than their competitors. Following Digicel’s entry, ANZ lowered its
transfer fee from A$32 to A$8, and Western Union offered discounts on transfer fees. Vodafone M-PAISA’s subsequent entry into the Fijian market has added to ierce competition
(Dalberg 2012).
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Tim Stapleton
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TABLE 4 Cost of Remitting A$500 from Australia to Tonga, Selected Operators
(10 September 2013)
Operator
Method
Cost
(A$)
Cost
(%)
Speed
KlickEx
Xpress Money
Digicel Mobile Money
Western Union
ANZ Paciic Money Transfer Card
Online
Cash
Online
Cash
Account
1.21
20.21
32.68
53.39
54.78
0.2
4.0
6.5
10.7
11.0
3–5 days
< 1 hour
< 1 hour
< 1 hour
3–5 days
Source: Sendmoneypaciic.org
through their mobile-money networks.7 The breakdown of foreign ownership
in Indonesia’s three largest MNOs should encourage further deployments in
Indonesia’s major inward remittance corridors: Telkomsel is part-owned by
Singapore’s Singtel, XL is a member of Malaysia’s Axiata group, and IndoSat is
majority owned by Qatar’s Qtel, which operates across much of the Middle East,
including Saudi Arabia.
Studies of the potential for international remittances through branchless
banking have concluded that providers should focus on developing domestic
ecosystems – such as widespread cash-merchant networks that support the use
of mobile wallets for domestic bill payments and transfers – before deploying
international remittance programs. Recipients value being able to undertake these
downstream transactions (Dalberg 2012: 4; Bangladesh Bank 2012: 11), which
inluences a remitter’s choice of platform. However, the above factors suggest that
international remittances may be a considerable source of demand for branchless
banking and an effective early market-building strategy in Indonesia.
SUPPLY-SIDE CONSTRAINTS?
In Kenya and the Philippines, which are at the vanguard of transformative
branchless banking, MNOs have used their dominant positions and sizeable market shares in mobile telephony to deploy sizeable cash-merchant networks and
thereby attract many new customers to their proprietary branchless-banking platforms. Vodafone’s Safaricom is the dominant MNO in Kenya, holding an 88%
share of the mobile-telephony market in 2011. In branchless banking, users value
compatibility: the more transacting parties on a network, the greater its value to
existing and prospective users. These strong network effects draw users to the
platform that offers – or is expected to offer – the greatest network beneits. Safaricom’s large number of mobile-telephony customers gave it a particular advantage
7 XL Tunai subscribers can receive remittances from Malaysia through Celcom AirCash.
In October 2011, Telkom Indonesia subsidiary Telekomunikasi Indonesia (Telin) International (Hong Kong) Limited launched a prepaid SIM card designed for Indonesian migrant
workers that enables remittances to family and friends on the Telkomsel, Flexi, Indosat
and XL networks (Telin 2011). Telkomsel offers a two-in-one prepaid SIM card (with both a
Hong Kong and an Indonesian number) that supports international remittances to Indonesian mobile-money or bank accounts (Telkomsel 2013).
Unlocking the transformative potential of branchless banking in Indonesia
365
TABLE 5 Market Share and Growth of Indonesia’s GSM and CDMA Mobile Operators
(by number of connections, Q1 2011)
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Network
Telkomsel
Indosat
XL Axiata
3 (Hutchison Telecom)
Axis
Smartfrena
Ceria
Technology
Market share
(%)
Annual growth
(%)
GSM
GSM
GSM
GSM
GSM
CDMA
CDMA
45.82
21.09
18.11
6.92
4.91
3.14
0.01
21
21
21
58
57
130
34
Source: Wireless Intelligence (2011).
Note: Excludes CDMA ixed-wireless and WiMAX operators. CDMA ixed-wireless players TelkomFlexi and Bakrie Telecom had approximately 25 million connections between them as of Q1 2011
(Wireless Intelligence 2011).
a Merger
of Smart Telecom and Mobile-8 (Wireless Intelligence 2011).
in attracting a critical mass of users to its branchless banking platform.8 Relecting on the Kenyan experience, Klein and Mayer (2011) argued that branchlessbanking networks are, to some degree, natural monopolies.
Indonesia’s telecommunications market is more fragmented than Kenya’s.
While Telkomsel is the clear market leader (table 5), it has ceded considerable
market share since its parent, Telkom Indonesia, lost its monopoly during
deregulation in 1999. And though the three largest GSM-based networks account
for 85% of mobile connections, there is stiff price competition to attract users, and
the smaller MNOs are recording the strongest growth (table 5).
Nor can any inancial institution claim a dominant market position in Indonesia’s banking sector: no single bank has a market share greater than 15%,
and only three banks have a market share greater than 10% (Prasetyantoko and
Rosengard 2011: 286). Yet in contrast to deregulation and price competition in the
telecommunications sector, the Arsitektur Perbankan Indonesia (Indonesia Banking Architecture, API) program, which BI instituted to prevent a repeat of the
1997 Krismon banking meltdown, has helped to consolidate Indonesia’s banking
sector: the ive largest banks hold approximately half of the system’s total assets,
credit outstanding and third-party funds.
Has the competitive structure of the telecommunications and banking sectors
precluded branchless banking from achieving critical mass in Indonesia? Is developing the transaction infrastructure and distribution channels that are essential
for the viability of branchless-banking deployments an insurmountable task?
8 Klein and Mayer (2011) questioned whether Safaricom would have entered the
branchless-banking market and developed its M-PESA platform without the prospect of
recouping substantial investments by securing market dominance with an incompatible,
proprietary platform.
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Tim Stapleton
Competitive structure and network effects
BI’s approach to regulatory and monetary policy since Krismon appears to have
fostered a banking sector that has largely ignored Indonesia’s unbanked population and MSMEs. The genesis of the API program was BI’s belief that a small,
administratively determined number of large, full-service commercial banks
would be safer than a broader and more diverse banking sector generated by market forces. API unintentionally created barriers to entry and exit in the sector: for
one, it is virtually impossible to establish a new bank in Indonesia without buying
an existing bank’s licence (Prasetyantoko and Rosengard 2011: 288–9). Foreignownership restrictions introduced in 2012 are likely to have further entrenched
existing players. Johnston et al. (2007) argued that the treatment of Indonesia’s
microinance institutions as small commercial banks under API – including subjecting them to the same high minimum-capital requirements – has discouraged
innovation and outreach at the micro-banking level. Partly in response to BI’s reliance on reserve requirements and the issuance of short-term promissory notes to
control inlation, the commercial banking sector now generates most of its income
from interest on loans to large corporates and on investments in central bank and
government securities (Prasetyantoko and Rosengard 2011: 281–2).
Prasetyantoko and Rosengard (2011) argued that these policies have fostered
a highly liquid, solvent and proitable yet ineficient and narrowly focused rentseeking oligopoly. Until recently, the sector has generated extremely high priceto-earnings ratios, average operating ratios and net interest margins (the margin
between lending and deposit rates), yet MSMEs have been unable to obtain credit.
Given these constraints, the willingness of several Indonesian banks to participate
in BI’s branchless-banking pilot is encouraging. With Indonesia’s current economic
wobbles expected to increase the number of non-performing loans and undermine
returns in the sector (Economist, 14/9/2013), low-cost branchless-banking deployments give banks the opportunity to develop proitable new revenue streams.
The economics of network effects, in theory, at least, does not preclude
branchless-banking deployments from achieving critical mass in more fragmented
and competitive telecommunications and banking markets. In the absence of
regulation mandating interoperability, branchless-banking providers are free to
maximise their long-term proits from network beneits (Bellis and Houpis 2007:
37) in one of two ways: (a) by competing for the market, with an incompatible,
proprietary platform, thereby monopolising the network beneits; or (b) by competing in the market, with compatible deployments, thereby sharing a larger pool
of network beneits (Economides 2006; Farrell and Klemperer 2007).
A provider will probably be conident that it can dominate a scheme of domestic branchless-banking transfers and payments scheme if it has, among other
things, a large installed or expected user base; a dominant actual or expected position in a complementary market (whether in mobile telephony, banking or retail
distribution); superior product or reputation; irst-mover advantage; or a cost
advantage over its rivals (Bellis and Houpis 2007: 38; CGAP 2011). Such providers
typically invest heavily in platform development, penetration pricing, marketing
and a critical scale of cash-merchant networks (Klein and Mayer 2011), in order to
secure ex-post dominance and monopoly rents (Farrell and Klemperer 2007). Each
of the major branchless-banking deployments that have achieved critical mass to
date has pursued a similar strategy: most deployments eschew interoperability,
Unlocking the transformative potential of branchless banking in Indonesia
367
TABLE 6 Branchless-Banking Transactions
Transaction
Parties
Parallel to Mobile Telephony
On-network
Between registered customers
on the same network
Between registered and
unregistered customers, who
cash-in or cash-out at cash
merchants (includes OTC
transactions)
Between registered customers
of different networks
A Telkomsel customer sending an
SMS to another Telkomsel customer
A Telkomsel customer sending an
SMS with a message intended for a
relative that does not own a mobile
phone to another relative connected
to the Telkomsel network
A Telkomsel customer sending an
SMS to an Indosat customer
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Off-network
Cross-network
Note: SMS = Short Message Service. OTC = over the counter.
permitting only on-network transfers; others permit limited forms of interconnection through off-network transfers (table 6).
Though not yet prevalent in branchless banking, interoperability should enable
providers to overcome frictions and capture higher levels of network beneits if:
• complementary markets (such as mobile telephony) are more competitive and
fragmented;
• their deployments are at a similar stage, with none expected to achieve
dominance;
• indirect network effects arise in related markets (Klemperer 2008);
• it allows irms to overcome stagnant growth or enter new markets (CGAP
2011);
• it catalyses growth in markets that use branchless banking as a platform,
unlocking signiicant additional transaction volumes; or
• the providers are smaller players seeking to compete with a larger proprietary
platform.
Dominance of the telecommunications and banking sectors by one or two providers is therefore not a prerequisite for branchless-banking deployments to offer the
network beneits and thereby attract the critical mass of users necessary for proitability. Yet nor is there a clear path to a viable, interoperable branchless-banking
market – for at least two reasons. First, despite there being various levels at which
branchless-banking services could interoperate or interconnect (table 7), interoperability success stories are rare. Providers in fragmented markets therefore lack
models to emulate. Second, banks and MNOs have found it dificult to develop
mutually proitable models in Bangladesh and in other markets where regulators
prefer bank-led models (Bangladesh Bank 2012: 14). MNOs and banks pursue different business models: telecommunications is transaction-based while banking is
loat-based (Donovan 2012: 65). Bangladesh Bank adopted an ‘honest broker’ role
to bridge differences between BRAC Bank and Dutch-Bangla and Bangladeshi
MNOs, thereby enabling the rapid growth of Bangladesh’s two largest deployments (Bangladesh Bank 2012). Overall, however, these two reasons are likely to
have hindered branchless-banking deployments from achieving critical mass in
Indonesia and elsewhere.
368
Tim Stapleton
TABLE 7 Possibilities for Interconnection in Branchless Banking
Platform interoperability
Cash-merchant interoperability
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Customer-level interoperability
Interconnection to third-party
platforms
Provision of a common
third-party interface
Branchless-banking providers interconnect their
platforms directly or indirectly through a thirdparty interface to enable cross-network transfers
between their users at the domestic or international
level.
Cash merchants enable transfers between users of
competing branchless-banking networks.
Customers are not tied to a particular technology or
network to access their e-money wallet
Providers connect their platforms to those of inancial institutions or other payment networks to enable transfers between customers’ e-money wallets
and their bank (or other payment) accounts.
Proprietary branchless-banking services offer a
single interface to third parties to simplify bulk and
merchant payments.
Sources: Adapted from CGAP (2011); Davidson and Leishman (2012: 15–16); Kumar and Tarazi (2012a).
Indonesia is a potential bellwether of branchless-banking interoperability; on
15 May 2013, Indonesia’s three largest MNOs interconnected their mobile-money
platforms for funds transfers. Interoperability should remove frictions in Indonesia’s telecommunications market, allowing MNOs to realise greater network
beneits. Indonesia’s payments system also provides interoperability between
bank-centric branchless-banking models.
By extending the availability and convenience of branchless-banking services
in Indonesia, interoperability and interconnection have the potential to lower
costs and increase transaction volumes for inward international remittances,
for G2P payments to households in remote areas that are not served by more
than one provider, for MSMEs transacting over branchless-banking networks,
and for inancial services and m-commerce applications. Full interoperability
between branchless-banking deployments could provide a common platform
for m-commerce to lourish in Indonesia, just as Safaricom’s dominant M-PESA
platform in Kenya and the Internet worldwide have kindled innovation without
requiring complex negotiations or agreements with multiple platform sponsors
(Economides 2006; Economist, 25/8/2012). An interoperable branchless-banking
ecosystem would allow Indonesian developers and service providers to offer
products that are better matched to customers’ needs.
Branchless infrastructure and channels in Indonesia
To succeed, branchless-banking deployments need transaction infrastructure
(such as a mobile network); an interface (such as a mobile phone or an EDC
machine) and distribution channels, including a network of cash-in, cash-out
merchants (or mobile-bank staff); and supporting arrangements to replenish the
liquidity of that network, through bank branches or similar. Indonesia’s banking sector has limited reach. As of early 2013, commercial banks had just 14,820
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Unlocking the transformative potential of branchless banking in Indonesia
369
ofices concentrated in urban areas (Satria 2013), although this number has risen
steadily over time (Prasetyantoko and Rosengard 2011: 275). While the regional
operations of Indonesia’s People’s Credit Banks (Bank Perkreditan Rakyat, BPRs)
should help them to enhance inancial inclusion among Indonesia’s rural poor,
in practice BPRs have limited access to Indonesia’s payments system and their
operational remit is restricted to single provinces. With a limited branch footprint,
banks will need to rely on the distribution channels of MNOs or third parties to
achieve rapid uptake.
Mobile-network infrastructure reaches considerably further than banks into
rural areas. Indonesia’s three largest MNOs have followed increased mobiletelephony trafic to outlying rural areas, extending the capacity and reach of
their networks; and MNOs have been collaborating to expand their networks
beyond Java, signing a series of infrastructure-sharing deals to recoup the costs
of extending their coverage (IFC 2010: 8). Since the telecommunications sector
was deregulated in 1999, Indonesia’s mobile-telephony market has grown to be
the fourth largest in the world, by network connections. The number of mobile
subscribers in Indonesia dwarfs the number of bank accounts: there were over
278 million mobile connections and 90.3 million unique mobile-phone subscribers
as of the beginning of 2013 – a market penetration of 37% (Wireless Intelligence
in GSMA/IFC 2013: 8–9). This suggests that approximately 40 million unbanked
Indonesians own a mobile phone.
Yet branchless banking could bring inancial services to a much larger proportion of the unbanked population if, as in other markets, a network of cash
merchants is permitted to conduct OTC transactions on behalf of unregistered
users. Among the many candidates for cash-merchant networks, the state-owned
post ofice, PT Pos, is noteworthy. Its network of 4,000 ofices, 1,000 mobile pointof-service ‘stations’, 7,000 postal workers and 17,000 agencies (2010 igures)
reaches across the archipelago, and makes it a potentially attractive partner for
branchless-banking deployments (IFC 2010:13). Bank Mandiri has signed a cooperation agreement with PT Pos to assist in the delivery of its branchless-banking program. The approximately 190,000 cooperatives and 600,000 microinance
institutions (Satria 2013) in Indonesia also have considerable potential.
Although it is dificult for any branchless-banking provider to develop the requisite platform, transaction and distribution infrastructure, the obstacles do not
appear to be considerably greater in Indonesia than in other markets in which
branchless banking has lourished. The absence of a dominant player in Indonesia’s telecommunications and banking sectors hampers – but does not preclude
– the ability of providers to capture network beneits with proprietary platforms.
This analysis suggests that interoperability in Indonesia may be a more viable
proposition than in Kenya and the Philippines for providers seeking to make the
most of network beneits. Competition in the market may prevail over competition for the market. Should transformative branchless-banking deployments
interoperate and achieve scale, Indonesia could be a model for other emerging
economies in the Asia-Paciic region seeking to harness network beneits for inancial inclusion – even in the absence of a dominant player in telecommunications
or banking.
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Tim Stapleton
THE REGULATORY ENVIRONMENT: ENABLING OR CONSTRAINING?
The preceding sections have identiied sources of demand for branchless banking
in Indonesia and established that the supply-side challenges are not insurmountable. To what extent, then, have Indonesia’s regulatory settings frustrated the
widespread adoption of branchless banking? In comparison to more established
branchless-banking markets, what elements of an enabling regulatory environment are missing in Indonesia?
Prominent among the objectives of central banks, which typically regulat
ISSN: 0007-4918 (Print) 1472-7234 (Online) Journal homepage: http://www.tandfonline.com/loi/cbie20
Unlocking the transformative potential of
branchless banking in Indonesia
Tim Stapleton
To cite this article: Tim Stapleton (2013) Unlocking the transformative potential of branchless
banking in Indonesia, Bulletin of Indonesian Economic Studies, 49:3, 355-380, DOI:
10.1080/00074918.2013.850633
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Bulletin of Indonesian Economic Studies, Vol. 49, No. 3, 2013: 355–80
UNLOCKING THE TRANSFORMATIVE POTENTIAL OF
BRANCHLESS BANKING IN INDONESIA
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Tim Stapleton*
Branchless banking has the potential to signiicantly enhance inancial inclusion
among Indonesia’s large and geographically disparate unbanked population and
to connect Indonesia’s micro, small and medium enterprises to the global economy.
Why has the branchless-banking revolution not yet materialised? Constrained by
regulation, deployments have failed to attract a critical mass of users. Indonesia’s
fragmented telecommunications sector has made it dificult for providers to emulate the success stories in other countries, in which dominant providers are competing for the market with a proprietary platform. In Indonesia, it is likely that a
considerable degree of interoperability will be required for providers to unleash
network effects and attract users. Indonesia’s providers are experimenting in this
space. Recognising branchless banking’s potential to accelerate inancial inclusion,
Bank Indonesia appears committed to improving the regulatory framework. This
article identiies the components of an enabling regulatory environment. Success in
Indonesia would provide a model for a more widespread uptake of transformative
branchless banking.
Keywords: inancial inclusion, branchless banking, mobile money, network effects
INTRODUCTION
In Indonesia and other emerging economies, a large proportion of poor households and micro, small and medium enterprises (MSMEs) are excluded from
formal banking and lending services. Requiring small and infrequent inancial
transactions, the poor are not proitable customers for the branch-led models of
inancial service provision that predominate. By eliminating the need for costly
branch infrastructure, branchless banking can make serving poor, unbanked
households and MSMEs proitable. Branchless banking has the potential to revolutionise payment systems in emerging markets, to extend formal inancial services to the unbanked and to provide a platform to connect MSMEs to the global
economy.
Yet despite a proliferation of providers in recent years, branchless-banking
deployments that are set to deliver this potential are the exception rather than the
rule. Indonesia is a case in point. As a review of the branchless-banking landscape
in the subsequent section highlights, Indonesia’s deployments have not achieved
* Tim Stapleton is an Asian Century Graduate Fellow at the Crawford School of Public
Policy, The Australian National University. An earlier version of this article was submitted to the Institute of Public Affairs, London School of Economics and Political Science, in
fulillment of the requirements of the master of public administration.
ISSN 0007-4918 print/ISSN 1472-7234 online/13/030355-26
http://dx.doi.org/10.1080/00074918.2013.850633
© 2013 Indonesia Project ANU
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Tim Stapleton
critical mass. Yet branchless banking should ind a natural home in Indonesia,
whose citizens are enthusiastic adopters of new technologies and platforms:
Indonesia boasts the fourth highest number of Facebook subscribers (Internet
World Stats 2013), and in terms of the number of tweets Jakarta is the world’s
most active city on Twitter, with Bandung also in the top 10 (Semiocast 2012).
Indonesia faces similar inancial-inclusion problems as countries where deployments have lourished, such as the Philippines and Kenya. Indonesia’s unbanked
are concentrated in rural areas across the archipelago, often beyond the reach of
banks’ limited branch networks or simply not a proitable proposition (or both).
An estimated 100 million Indonesians do not have access to any inancial services
(CGAP 2013).
The Consultative Group to Assist the Poor (CGAP) coined the term branchless
banking to encompass the range of ‘new distribution channels that allow inancial institutions and other commercial actors to offer inancial services outside
traditional bank premises’ (Lyman, Gautam and Staschen 2006). Porteous (2006)
distinguished between transformative branchless-banking models, through
which providers seek to extend inancial services to unbanked and underbanked
individuals and MSMEs, and additive deployments, which merely provide an
additional channel for banked customers or existing mobile-account holders to
transact.
This article analyses existing barriers to – and the potential for – the rapid
uptake of transformative branchless banking in Indonesia. Mas (2012: 292) identiied four criteria for branchless banking to be transformative: in essence, these are
security, need, access and choice. The security criterion – that the funds of individuals and businesses must be held securely – applies to deposit-taking entities
worldwide, and branchless-banking providers and regulators in other markets
have established mechanisms to meet this. Any attempt to meet the remaining
criteria should consider the characteristics of the Indonesian market.
The need criterion – whether branchless-banking schemes can provide a range
of hitherto unavailable inancial services to meet the inancial needs of unbanked
individuals and MSMEs – can be thought of as the demand side of the equation.
The third section of this article considers whether a lack of demand for branchless
banking in Indonesia has hindered its uptake, and identiies potential sources
of demand. The access and choice criteria relate to the supply side of branchless banking. The access criterion requires that the infrastructure exists, or can be
developed, to make affordable branchless-banking services available near where
unbanked individuals live and MSMEs operate. Choice requires that there be a
fair and contestable market that both maximises network effects for consumers
and protects against abuses of potential dominant market positions. The fourth
section considers whether supply-side barriers have discouraged – and will preclude – the widespread uptake of transformational branchless banking in Indonesia.
As a platform-mediated, two-sided market subject to strong network effects
(Anderson 2010), in which banking, telecommunications or other entities (or a
combination thereof) provide a platform for the provision of inancial services
to the poor, transformative branchless banking straddles several sectors that are
typically highly regulated. Branchless-banking deployments, be they transformative or additive, have tended to achieve critical mass in environments in which
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Unlocking the transformative potential of branchless banking in Indonesia
357
regulation is either (a) effectively absent or (b) incremental and proportional, and
underpinned by an active and ongoing dialogue between industry and regulators.
In other regulatory environments, deployments have struggled to achieve scale.
In the Indonesian context, Hidayati (2011) argued, regulations prohibiting banks
and mobile operators from building cash-merchant networks have precluded
deployments from achieving critical mass.
The regulator, Bank Indonesia (BI), is attuned to the potential of branchless banking to accelerate inancial inclusion. BI’s pilot of branchless banking in selected
provinces in Java, Sumatra, Kalimantan and Sulawesi from May to November
2013 is a precursor to a branchless-banking regulation. It is therefore timely to
examine the extent to which Indonesia’s regulatory settings have frustrated the
widespread uptake of branchless banking, and to identify the components of an
enabling regulatory environment – drawing on the regulatory approaches used in
more established markets. This is the focus of the ifth section.
Why has transformative branchless banking lourished in the Philippines yet
loundered in Indonesia? This article inds that a range of restrictions in Indonesia’s regulatory environment have, until recently, precluded branchless-banking
providers from serving the considerable unmet demand for inancial services
among Indonesia’s unbanked households and MSMEs. And while there is no
shortage of potential delivery partners and channels, the path to building a proitable branchless-banking deployment appears more dificult in Indonesia than in
established markets such as the Philippines and Kenya, where one or two large
mobile-network operators (MNOs) have used their dominant positions in mobile
telephony to attract a critical mass of users to their incompatible, proprietary
branchless-banking platforms. In Indonesia, the commercial banking sector’s
narrow focus on corporate lending, the relatively fragmented and competitive
telecommunications market, the limited reach of alternative networks, and the
potential signiicance of inward international remittances, government cash transfers and m-commerce in early market-building mean that the platforms of providers will need to be interconnected to generate network beneits and attract users.
If Indonesia’s regulatory and policy settings were to become more conducive
to the widespread uptake of transformative branchless banking – and if providers
could generate network beneits through interoperability, as the country’s three
largest MNOs are attempting to do – Indonesia could yet become an exemplar for
emerging economies.
BRANCHLESS-BANKING MODELS AND THE INDONESIAN LANDSCAPE
Notwithstanding its promise to enhance inancial inclusion, transformative
branchless banking remains a nascent industry. As of February 2013, of the 150
live deployments around the globe (identiied by the GSM Association’s Mobile
Money for the Unbanked program) only six had more than 1 million active customers and only 14 had achieved rapid growth (Pénicaud 2013). Most, including
those in Indonesia, remain in a subscale position.
Branchless-banking deployments are typically led by MNOs, banks or, increasingly, third-party providers – or a combination of these entities. Often referred to
as ‘mobile money’ or ‘mobile banking’, MNO-led deployments rely on mobiletelephony infrastructure as the channel and mobile phones as the interface to
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Tim Stapleton
enable transfers of e-money, an electronic store of value. Measured by the number of registered users, MNO-led deployments predominate in Indonesia. As
of May 2013, Indonesia’s MNO-led mobile-money services had 12 million registered users – approximately 4.3% of mobile subscriptions – and two million
agents,1 with Telkomsel accounting for the most users.2 Yet only a small minority
of users are thought to be active, and the services are primarily used for airtime
top-ups (Jakarta Post, 27/2/2012). At present, Indonesia’s MNO-led deployments
are primarily additive, extending a convenience to existing users in a bid to retain
customers.
In MNO-led deployments, users’ e-money wallets may or may not be linked to
individual bank accounts. Like Philippine provider Globe’s GCASH and Kenyan
operator Safaricom’s M-PESA service, the e-money deployments of Indonesia’s
three largest MNOs – Telkomsel’s T-Cash, Indosat’s Dompektu and XL’s Tunai
(table 1) – do not offer users individual bank accounts. In contrast, the pioneering branchless-banking deployment – Philippine provider Smart Communications’ SMART Money – links customers’ e-money wallets to individual bank
accounts. In Indonesia and in most other markets, branchless-banking providers
are required by regulation to maintain a pooled bank account with a cash balance
equivalent to the aggregate value of e-money on issue.
Regulators in several of Asia’s new high-growth branchless-banking markets,
such as Pakistan and Bangladesh, require branchless-banking deployments to
be bank-led or bank-centric. BI prefers – but does not mandate – bank-centric
deployments, on the grounds that extending individual bank accounts to the
unbanked will be more inancially inclusive (enabling the poor to develop inancial histories), underpin stronger economic growth (by stimulating lending) and
afford greater consumer protections (by virtue of a robust regulatory environment for banks and deposit insurance)3. BI’s Real Time Gross Settlement system
for transactions affords bank-centric models greater utility than in countries in
which interbank transactions are still processed manually. Several commercial
and regional Indonesian banks have launched transformative branchless-banking
deployments, relying on mobile bank staff equipped with electronic-data-capture
(EDC) machines (table 1). Yet such deployments are signiicantly smaller in scale
than those of Indonesia’s MNOs: in conjunction with MNO Axis, Bank Mandiri
subsidiary Bank Sinar Harapan Bali extended accounts to 2,500 unbanked customers by the end of 2012 under its Sinar Sip trial of branchless banking in Bali,
Sinar Sip (Bank Mandiri 2013).
Proponents of branchless banking see it enabling a cashless society. While
e-money is increasingly being accepted as a payment method in Indonesia, for
the foreseeable future branchless-banking deployments will require a supporting
1 Correspondence with BI oficials, May 2013. There were more than 278 million mobile
subscriptions in Indonesia at the end of 2012 (GSMA 2013).
2 According to a Telkomsel spokesperson, T-Cash and the Tap-Izy payments facility had 8
million customers combined as of February 2012 and were targeting 10 million by the end
of that year (Jakarta Post, 27/2/2012).
3 Discussions with BI oficials, May 2013.
Unlocking the transformative potential of branchless banking in Indonesia
359
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TABLE 1 Branchless-Banking Services in Indonesia
MNO-Led
Bank-Led
T-Cash (Telkomsel)
Dompektu (Indosat)
Tunai (XL)
Beli Pakai Pulsa (Axis)
De Lima (Telkom)
Commercial
Andaralink
(Bank Andara)
BRI*
Danamon
Permata
Bank Mandiri*
Rural
BPR-KS
Sharia
Bank Muamalat
UUS BTPN
Hybrid
Sinar Sip
(Bank Sinar Harapan Bali,
with Axis)*
Smart Dompet
(Bank Sinarmas,
with Smartfren Telecom)
BTPN Wow!
Bank Tabungan Pensiunan
Nasional, with XL and
Indosat)*
Rekening Ponsel
(CIMB Niaga)*
Sources: Satria (2013); providers’ websites; Jakarta Post (4/9/2013, 5/10/2013)
Note: MNO = mobile-network operator.
* Bank participating in Bank Indonesia’s branchless-banking pilot.
network of cash merchants4 to exchange cash to and from e-money. Regulations permitting, cash merchants can be individuals or entities with a presence
in unbanked communities and may serve unregistered customers, obviating the
need for customers to have a mobile phone or a bank account. Leading deployments in the Philippines (Globe GCASH and Smart Money), Cambodia (WING)
and Pakistan (Easy Paisa) have recorded strong growth by offering, through their
cash merchants, over-the-counter (OTC) transactions to unregistered customers
for person-to-person transfers (P2P), bill payments (P2B) and government payments (G2P) (Owens 2013). The term ‘branchless banking’ is something of a misnomer: cash merchants operate ‘beyond-bank branches’, which are still required
to support the liquidity of the cash-in, cash-out network (Alexandre, Mas and
Radcliffe 2011).
Branchless-banking providers tend to use per-transaction pricing, charging
both sender and receiver for transfers and for cash in or out (often for the cost
of a text message or for a portion of the amount transferred). Yet in platformmediated, two-sided markets such as branchless banking, providers can generate
income from either or both sides of the network, allowing for an array of pricing
strategies, including subsidising one group of users to attract another. To promote
branchless banking and to allow MNOs to scale beyond the domestic transfer market, CGAP advocates for providers to adopt a ’freemium’ model, which captures
revenues from major customers and businesses who use premium services, such
4 Cash-in, cash-out agent is the more established term in the literature. Yet the relation is
more akin to reselling than agency, since cash-in, cash-out transactions are typically funded
from cash merchants’ own accounts, (Alexandre, Mas and Radcliffe 2011; Dermish et al.
2012).
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Tim Stapleton
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as bulk payments, and allows individuals and MSMEs to transact for free below
established limits (Kumar and Mino 2011). A ‘freemium’ provider in Somaliland,
for example, has generated large transaction volumes: 8.3 million transactions
from 250,000 customers in June 2012.5 ‘Freemium’ is an example of a new, proitable pricing strategy that would be attractive to poor households, which transact
less frequently and with lower amounts.
IS BRANCHLESS BANKING INHIBITED BY A LACK OF DEMAND?
Branchless-banking deployments aim to generate high transaction volumes to
achieve proitability. Is it conceivable that a lack of demand for formal inancial
services among Indonesia’s unbanked and underbanked populations has precluded branchless-banking deployments from achieving scale? With an estimated
100 million Indonesians lacking access to inancial services of any kind and only
19.6% of Indonesia’s 247 million citizens holding an account at a formal inancial institution (World Bank Financial Index 2011), this seems unlikely. Having
conducted focus-group discussions in various regions of the archipelago, the
IFC (2010) identiied strong demand for branchless P2B and P2P transactions.
Branchless-banking deployments in other countries have generated proitable
transaction volumes by providing these services.
Branchless-banking deployments often initially bypass the poorest segments
of the population. Network effects in branchless banking dictate that providers
compete iercely to win over pivotal ‘early adopters’ (Farrell 2008: 3), who – with
greater inancial resources – will transact more regularly and, in bank-led or bankcentric deployments, maintain higher deposits than the poorest unbanked. They
will also attract subsequent adopters, who are more likely to join the network
with the most users.
Following interviews with new and potential providers of branchless-banking
services in Indonesia, the IFC (2010) concluded that such providers would initially
target Indonesia’s large middle layer of ‘relatively underbanked’ households –
income-earning households that are not wealthy but have spendable income – as
well as the borderline underbanked and banked segments above and below those
households. While still important, the inancial needs of early adopters are likely
to be less pressing than those from the poorest segments of the population.
Unlocking additional transaction volumes
Beyond P2B and P2P, this article identiies three potential sources of demand for
branchless banking in Indonesia: G2P, MSME transactions and inward international remittances. With the appropriate policy and regulatory framework in place,
these sources could yet unlock substantial transaction volumes in branchless banking and encourage providers to extend services to Indonesia’s poorest unbanked.
Government payments
In 2011–12, the Philippine government used Globe’s GCASH service to transfer
more than $100 million in conditional cash transfers to recipients who did not
own mobile phones (Owen 2013). In contrast, the Indonesian government relies
5 Discussions with Kabir Kumar, CGAP, 24 April 2013.
Unlocking the transformative potential of branchless banking in Indonesia
361
TABLE 2 Temporary and Ongoing Indonesian Government Cash-Transfer Programs
Program
BLSM
PKH
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JSLU
JSPACA
BLT
Description
Temporary unconditional
transfer to compensate for
fuel-price rises
Transfer conditional on
providing for children’s
health and education
Social welfare for the
elderly
Social welfare for the
disabled
Temporary, unconditional
transfer to absorb economic
shocks
Beneiciaries
Amount
Frequency
15.5 million poor
households (2013)
$30
Every two
months
$30–$73a
Every four
months
1.1 million women
from chronically poor
households (2011)
13,250 (2011)
$30
Monthly
17,000 (2010)
$30
Monthly
19.1 million poor
households (2008–9)
$30
Quarterly
Sources: Febriany et al. (2012: 3–4); Kharisma (2008: 6–7); World Bank (2012)
Note: BLSM = Bantuan Langsung Sementara Masyarakat. PKH = Program Keluarga Harapan.
JSLU = Jaminan Sosial Lanjut Usia. JSPACA = Jaminan Sosial Penyandang Cacat. BLT = Bantuan
Langsung Tunai.
a Figures
from 2007. The amount depends on household characteristics.
on PT Pos’s extensive agent network to distribute cash transfers to poor households (table 2).
Administrative costs for two of the largest schemes – BLT and PKH – were
approximately 8% and 18% of the program budgets (Febriany and Suryahadi
2012). As a recent TNP2K (2012) report identiied, branchless-banking schemes
have the potential both to lower the cost and to increase the speed, security, frequency and convenience of these G2P transfers. Some of the resulting savings
could be used for smaller, more frequent transfers to poor households, thereby
aiding households’ budgeting. There may also be scope for a more wholesale
government adoption of branchless banking as a distribution and revenue collection channel for unbanked segments of the population. With providers likely to
focus on securing transaction volumes (section 3), government ministries’ early
adoption of branchless banking would accelerate deployments in areas where the
unbanked are concentrated.
Branchless-banking deployments have been used to expedite the delivery of
cash assistance in the aftermath of humanitarian crises, including in Haiti, Kenya
and Nepal. This potential could be factored into emergency response planning in
Indonesia. If vendors in areas affected by natural disasters do not widely accept
e-money as a payment method, arrangements to deploy additional cash merchants and replenish the liquidity of cash merchants on the ground would be
required.
Platform for MSMEs
MSMEs are a vital component of Indonesia’s economy: in 2009, they contributed
56.5% of Indonesia’s GDP and accounted for 97% of employment – much higher
than in neighbouring countries (Shinozaki 2012: 2). Yet access to formal inance is
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362
Tim Stapleton
acutely limited: 2010 survey data suggest that just over half obtain inance from
banks, while more than a quarter rely on funding from relatives and friends (Shinozaki 2012: 12–14). The outstanding value of loans to SMEs accounted for just
0.7% of GDP in 2010, compared with 17.4% in Malaysia and 30.7% in Thailand
(CGAP 2010a). Though total credit has been growing at an annual rate of nearly
20%, the loan portfolios of Indonesia’s largest banks have been dominated by
loans to large corporates and the bulk of credit reported as micro, small and
medium loans is for consumption, rather than for supporting the operations of
MSMEs (Prasetyantoko and Rosengard 2011: 281–2). Branchless banking affords
Indonesia’s banks an opportunity to meet the lending targets for governmentguaranteed micro loans to MSMEs, and thereby to reduce the large MSME inancing gap.
Branchless banking could serve as a platform on which this large sector could
transact and innovate. Nairobi, for example, has emerged as a technology hub,
with entrepreneurial Kenyan start-ups developing mobile applications built on
Safaricom’s dominant M-PESA platform, such as electronic versions of informal
savings groups and M-Farm, which provides agricultural-market prices and
allows farmers to group together to buy and sell products (Economist, 25/8/2012).
Delivering inancial and other services via large-scale branchless-banking
deployments can broaden uptake and increase transaction volumes, owing to
their cost-effectiveness and their having a wider footprint than traditional delivery models. In the absence of a dominant branchless-banking deployment, capturing these indirect network beneits in Indonesia would require interoperability
between providers, which is a focus of section 4.
Inward international remittances
By driving down the costs of, and increasing the competition for, inward international remittances of Indonesia’s estimated 6.8 million migrant workers
(World Bank 2008: xiii, 2013), innovative branchless-banking deployments could
yield signiicant gains for development in Indonesia. Yang (2008) showed that
remittance-receiving migrant households in the Philippines invested increased
remittance income in child education and new enterprises.
Indonesia’s GDP is less dependent than that of other emerging economies
on remittances from documented migrant workers through formal channels.
According to the latest World Bank calculations, remittances contribute approximately 1% of Indonesia’s GDP, roughly comparable to their share in China but
lower than that in India (3%), the Philippines (10%), Bangladesh (11%) and several South Paciic nations (table 3). Remittances to Indonesia are concentrated in
a few rural provinces, where the families of the majority of Indonesia’s migrant
workers reside. These provinces are among the poorest in Indonesia (World Bank
2008: 8–9). Formal remittance inlows far exceed regional government budgets
in several of these, including East Java, East Flores (Hugo 2007) and West Nusa
Tenggara (World Bank 2008). In the East Javanese regencies of Malang, Tulungagung and Blitar, inward remittances accounted for 42%, 23% and 13% of local
economic output in 2004 (Barnes 2007: 61), suggesting that within these provinces
branchless-banking providers may be able to direct initial deployments to areas
with the highest potential transaction volumes. The actual amount remitted is
estimated to be three times greater than is formally recorded (World Bank 2008:
Unlocking the transformative potential of branchless banking in Indonesia
363
TABLE 3 International Remittances in Selected South Paciic Countries and
Indonesian Provinces
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South Paciic Countries, 2012
Indonesian Provinces, 2010
Country
% of GDP
Province
% of GRDP
Samoa
Tonga
Fiji
21
16
4
West Nusa Tenggara
West Java
East Nusa Tenggara
13
3
3
Sources: BNP2TKI (2011) for remittance data for Indonesian provinces; World Bank (2013) for South
Paciic countries.
Note: GRDP = gross regional domestic product.
11), because large amounts are sent informally through returnees (Hugo 2007;
IFC 2010:10) and an estimated 4.3 million Indonesian workers are undocumented
(World Bank 2008: xiii).
The contribution of remittances to gross regional domestic product (GRDP)
in the provinces in which the families of Indonesia’s migrant workers reside is
on a scale comparable to that of South Paciic nations (table 3). The innovative
branchless-banking deployments of Digicel Mobile Money and KlickEx (and
subsequently Vodafone M-PAISA) on the Australasia–Paciic Islands remittance
corridor6 have increased competition and reduced international remittance costs
(table 4; Dalberg 2012: 34, 47). These deployments take advantage of KlickEx’s
innovative, low-cost P2P service, which minimises foreign-exchange costs by
matching individual senders of funds. Other innovations – including the development of hubs that promote interoperability between partners on the sending
and receiving sides (such as that of BICS Home Send) – offer the potential to lower
the cost and time-to-market of branchless-banking deployments on international
remittance corridors, relative to the traditional approaches of negotiating bilateral
partnership agreements with individual MNOs (as Globe did for GCASH) or relying on Western Union in the sending countries (as Safaricom does for M-PESA).
Indonesia’s migrant workers are concentrated in relatively few markets elsewhere in Asia and in the Middle East: more than half are in Malaysia and Saudi
Arabia (Asia News Network, 30/4/2013; Hugo 2007). Recognising the potential for
international remittances to unlock transaction volumes on signiicant remittance
corridors (Davidson and Leishmann 2012: 22), Indonesian MNOs XL and Telkom
have enabled inward remittances from Malaysia and Hong Kong, respectively,
6 Digicel launched Digicel Mobile Money in Fiji, Samoa and Tonga to facilitate inward
remittances from Australia and New Zealand. The funds can be used for onward transfers,
purchases, bill payments and airtime top-ups. Digicel partnered with KlickEx to offer a
much cheaper service than their competitors. Following Digicel’s entry, ANZ lowered its
transfer fee from A$32 to A$8, and Western Union offered discounts on transfer fees. Vodafone M-PAISA’s subsequent entry into the Fijian market has added to ierce competition
(Dalberg 2012).
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Tim Stapleton
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TABLE 4 Cost of Remitting A$500 from Australia to Tonga, Selected Operators
(10 September 2013)
Operator
Method
Cost
(A$)
Cost
(%)
Speed
KlickEx
Xpress Money
Digicel Mobile Money
Western Union
ANZ Paciic Money Transfer Card
Online
Cash
Online
Cash
Account
1.21
20.21
32.68
53.39
54.78
0.2
4.0
6.5
10.7
11.0
3–5 days
< 1 hour
< 1 hour
< 1 hour
3–5 days
Source: Sendmoneypaciic.org
through their mobile-money networks.7 The breakdown of foreign ownership
in Indonesia’s three largest MNOs should encourage further deployments in
Indonesia’s major inward remittance corridors: Telkomsel is part-owned by
Singapore’s Singtel, XL is a member of Malaysia’s Axiata group, and IndoSat is
majority owned by Qatar’s Qtel, which operates across much of the Middle East,
including Saudi Arabia.
Studies of the potential for international remittances through branchless
banking have concluded that providers should focus on developing domestic
ecosystems – such as widespread cash-merchant networks that support the use
of mobile wallets for domestic bill payments and transfers – before deploying
international remittance programs. Recipients value being able to undertake these
downstream transactions (Dalberg 2012: 4; Bangladesh Bank 2012: 11), which
inluences a remitter’s choice of platform. However, the above factors suggest that
international remittances may be a considerable source of demand for branchless
banking and an effective early market-building strategy in Indonesia.
SUPPLY-SIDE CONSTRAINTS?
In Kenya and the Philippines, which are at the vanguard of transformative
branchless banking, MNOs have used their dominant positions and sizeable market shares in mobile telephony to deploy sizeable cash-merchant networks and
thereby attract many new customers to their proprietary branchless-banking platforms. Vodafone’s Safaricom is the dominant MNO in Kenya, holding an 88%
share of the mobile-telephony market in 2011. In branchless banking, users value
compatibility: the more transacting parties on a network, the greater its value to
existing and prospective users. These strong network effects draw users to the
platform that offers – or is expected to offer – the greatest network beneits. Safaricom’s large number of mobile-telephony customers gave it a particular advantage
7 XL Tunai subscribers can receive remittances from Malaysia through Celcom AirCash.
In October 2011, Telkom Indonesia subsidiary Telekomunikasi Indonesia (Telin) International (Hong Kong) Limited launched a prepaid SIM card designed for Indonesian migrant
workers that enables remittances to family and friends on the Telkomsel, Flexi, Indosat
and XL networks (Telin 2011). Telkomsel offers a two-in-one prepaid SIM card (with both a
Hong Kong and an Indonesian number) that supports international remittances to Indonesian mobile-money or bank accounts (Telkomsel 2013).
Unlocking the transformative potential of branchless banking in Indonesia
365
TABLE 5 Market Share and Growth of Indonesia’s GSM and CDMA Mobile Operators
(by number of connections, Q1 2011)
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Network
Telkomsel
Indosat
XL Axiata
3 (Hutchison Telecom)
Axis
Smartfrena
Ceria
Technology
Market share
(%)
Annual growth
(%)
GSM
GSM
GSM
GSM
GSM
CDMA
CDMA
45.82
21.09
18.11
6.92
4.91
3.14
0.01
21
21
21
58
57
130
34
Source: Wireless Intelligence (2011).
Note: Excludes CDMA ixed-wireless and WiMAX operators. CDMA ixed-wireless players TelkomFlexi and Bakrie Telecom had approximately 25 million connections between them as of Q1 2011
(Wireless Intelligence 2011).
a Merger
of Smart Telecom and Mobile-8 (Wireless Intelligence 2011).
in attracting a critical mass of users to its branchless banking platform.8 Relecting on the Kenyan experience, Klein and Mayer (2011) argued that branchlessbanking networks are, to some degree, natural monopolies.
Indonesia’s telecommunications market is more fragmented than Kenya’s.
While Telkomsel is the clear market leader (table 5), it has ceded considerable
market share since its parent, Telkom Indonesia, lost its monopoly during
deregulation in 1999. And though the three largest GSM-based networks account
for 85% of mobile connections, there is stiff price competition to attract users, and
the smaller MNOs are recording the strongest growth (table 5).
Nor can any inancial institution claim a dominant market position in Indonesia’s banking sector: no single bank has a market share greater than 15%,
and only three banks have a market share greater than 10% (Prasetyantoko and
Rosengard 2011: 286). Yet in contrast to deregulation and price competition in the
telecommunications sector, the Arsitektur Perbankan Indonesia (Indonesia Banking Architecture, API) program, which BI instituted to prevent a repeat of the
1997 Krismon banking meltdown, has helped to consolidate Indonesia’s banking
sector: the ive largest banks hold approximately half of the system’s total assets,
credit outstanding and third-party funds.
Has the competitive structure of the telecommunications and banking sectors
precluded branchless banking from achieving critical mass in Indonesia? Is developing the transaction infrastructure and distribution channels that are essential
for the viability of branchless-banking deployments an insurmountable task?
8 Klein and Mayer (2011) questioned whether Safaricom would have entered the
branchless-banking market and developed its M-PESA platform without the prospect of
recouping substantial investments by securing market dominance with an incompatible,
proprietary platform.
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Tim Stapleton
Competitive structure and network effects
BI’s approach to regulatory and monetary policy since Krismon appears to have
fostered a banking sector that has largely ignored Indonesia’s unbanked population and MSMEs. The genesis of the API program was BI’s belief that a small,
administratively determined number of large, full-service commercial banks
would be safer than a broader and more diverse banking sector generated by market forces. API unintentionally created barriers to entry and exit in the sector: for
one, it is virtually impossible to establish a new bank in Indonesia without buying
an existing bank’s licence (Prasetyantoko and Rosengard 2011: 288–9). Foreignownership restrictions introduced in 2012 are likely to have further entrenched
existing players. Johnston et al. (2007) argued that the treatment of Indonesia’s
microinance institutions as small commercial banks under API – including subjecting them to the same high minimum-capital requirements – has discouraged
innovation and outreach at the micro-banking level. Partly in response to BI’s reliance on reserve requirements and the issuance of short-term promissory notes to
control inlation, the commercial banking sector now generates most of its income
from interest on loans to large corporates and on investments in central bank and
government securities (Prasetyantoko and Rosengard 2011: 281–2).
Prasetyantoko and Rosengard (2011) argued that these policies have fostered
a highly liquid, solvent and proitable yet ineficient and narrowly focused rentseeking oligopoly. Until recently, the sector has generated extremely high priceto-earnings ratios, average operating ratios and net interest margins (the margin
between lending and deposit rates), yet MSMEs have been unable to obtain credit.
Given these constraints, the willingness of several Indonesian banks to participate
in BI’s branchless-banking pilot is encouraging. With Indonesia’s current economic
wobbles expected to increase the number of non-performing loans and undermine
returns in the sector (Economist, 14/9/2013), low-cost branchless-banking deployments give banks the opportunity to develop proitable new revenue streams.
The economics of network effects, in theory, at least, does not preclude
branchless-banking deployments from achieving critical mass in more fragmented
and competitive telecommunications and banking markets. In the absence of
regulation mandating interoperability, branchless-banking providers are free to
maximise their long-term proits from network beneits (Bellis and Houpis 2007:
37) in one of two ways: (a) by competing for the market, with an incompatible,
proprietary platform, thereby monopolising the network beneits; or (b) by competing in the market, with compatible deployments, thereby sharing a larger pool
of network beneits (Economides 2006; Farrell and Klemperer 2007).
A provider will probably be conident that it can dominate a scheme of domestic branchless-banking transfers and payments scheme if it has, among other
things, a large installed or expected user base; a dominant actual or expected position in a complementary market (whether in mobile telephony, banking or retail
distribution); superior product or reputation; irst-mover advantage; or a cost
advantage over its rivals (Bellis and Houpis 2007: 38; CGAP 2011). Such providers
typically invest heavily in platform development, penetration pricing, marketing
and a critical scale of cash-merchant networks (Klein and Mayer 2011), in order to
secure ex-post dominance and monopoly rents (Farrell and Klemperer 2007). Each
of the major branchless-banking deployments that have achieved critical mass to
date has pursued a similar strategy: most deployments eschew interoperability,
Unlocking the transformative potential of branchless banking in Indonesia
367
TABLE 6 Branchless-Banking Transactions
Transaction
Parties
Parallel to Mobile Telephony
On-network
Between registered customers
on the same network
Between registered and
unregistered customers, who
cash-in or cash-out at cash
merchants (includes OTC
transactions)
Between registered customers
of different networks
A Telkomsel customer sending an
SMS to another Telkomsel customer
A Telkomsel customer sending an
SMS with a message intended for a
relative that does not own a mobile
phone to another relative connected
to the Telkomsel network
A Telkomsel customer sending an
SMS to an Indosat customer
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Off-network
Cross-network
Note: SMS = Short Message Service. OTC = over the counter.
permitting only on-network transfers; others permit limited forms of interconnection through off-network transfers (table 6).
Though not yet prevalent in branchless banking, interoperability should enable
providers to overcome frictions and capture higher levels of network beneits if:
• complementary markets (such as mobile telephony) are more competitive and
fragmented;
• their deployments are at a similar stage, with none expected to achieve
dominance;
• indirect network effects arise in related markets (Klemperer 2008);
• it allows irms to overcome stagnant growth or enter new markets (CGAP
2011);
• it catalyses growth in markets that use branchless banking as a platform,
unlocking signiicant additional transaction volumes; or
• the providers are smaller players seeking to compete with a larger proprietary
platform.
Dominance of the telecommunications and banking sectors by one or two providers is therefore not a prerequisite for branchless-banking deployments to offer the
network beneits and thereby attract the critical mass of users necessary for proitability. Yet nor is there a clear path to a viable, interoperable branchless-banking
market – for at least two reasons. First, despite there being various levels at which
branchless-banking services could interoperate or interconnect (table 7), interoperability success stories are rare. Providers in fragmented markets therefore lack
models to emulate. Second, banks and MNOs have found it dificult to develop
mutually proitable models in Bangladesh and in other markets where regulators
prefer bank-led models (Bangladesh Bank 2012: 14). MNOs and banks pursue different business models: telecommunications is transaction-based while banking is
loat-based (Donovan 2012: 65). Bangladesh Bank adopted an ‘honest broker’ role
to bridge differences between BRAC Bank and Dutch-Bangla and Bangladeshi
MNOs, thereby enabling the rapid growth of Bangladesh’s two largest deployments (Bangladesh Bank 2012). Overall, however, these two reasons are likely to
have hindered branchless-banking deployments from achieving critical mass in
Indonesia and elsewhere.
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Tim Stapleton
TABLE 7 Possibilities for Interconnection in Branchless Banking
Platform interoperability
Cash-merchant interoperability
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Customer-level interoperability
Interconnection to third-party
platforms
Provision of a common
third-party interface
Branchless-banking providers interconnect their
platforms directly or indirectly through a thirdparty interface to enable cross-network transfers
between their users at the domestic or international
level.
Cash merchants enable transfers between users of
competing branchless-banking networks.
Customers are not tied to a particular technology or
network to access their e-money wallet
Providers connect their platforms to those of inancial institutions or other payment networks to enable transfers between customers’ e-money wallets
and their bank (or other payment) accounts.
Proprietary branchless-banking services offer a
single interface to third parties to simplify bulk and
merchant payments.
Sources: Adapted from CGAP (2011); Davidson and Leishman (2012: 15–16); Kumar and Tarazi (2012a).
Indonesia is a potential bellwether of branchless-banking interoperability; on
15 May 2013, Indonesia’s three largest MNOs interconnected their mobile-money
platforms for funds transfers. Interoperability should remove frictions in Indonesia’s telecommunications market, allowing MNOs to realise greater network
beneits. Indonesia’s payments system also provides interoperability between
bank-centric branchless-banking models.
By extending the availability and convenience of branchless-banking services
in Indonesia, interoperability and interconnection have the potential to lower
costs and increase transaction volumes for inward international remittances,
for G2P payments to households in remote areas that are not served by more
than one provider, for MSMEs transacting over branchless-banking networks,
and for inancial services and m-commerce applications. Full interoperability
between branchless-banking deployments could provide a common platform
for m-commerce to lourish in Indonesia, just as Safaricom’s dominant M-PESA
platform in Kenya and the Internet worldwide have kindled innovation without
requiring complex negotiations or agreements with multiple platform sponsors
(Economides 2006; Economist, 25/8/2012). An interoperable branchless-banking
ecosystem would allow Indonesian developers and service providers to offer
products that are better matched to customers’ needs.
Branchless infrastructure and channels in Indonesia
To succeed, branchless-banking deployments need transaction infrastructure
(such as a mobile network); an interface (such as a mobile phone or an EDC
machine) and distribution channels, including a network of cash-in, cash-out
merchants (or mobile-bank staff); and supporting arrangements to replenish the
liquidity of that network, through bank branches or similar. Indonesia’s banking sector has limited reach. As of early 2013, commercial banks had just 14,820
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Unlocking the transformative potential of branchless banking in Indonesia
369
ofices concentrated in urban areas (Satria 2013), although this number has risen
steadily over time (Prasetyantoko and Rosengard 2011: 275). While the regional
operations of Indonesia’s People’s Credit Banks (Bank Perkreditan Rakyat, BPRs)
should help them to enhance inancial inclusion among Indonesia’s rural poor,
in practice BPRs have limited access to Indonesia’s payments system and their
operational remit is restricted to single provinces. With a limited branch footprint,
banks will need to rely on the distribution channels of MNOs or third parties to
achieve rapid uptake.
Mobile-network infrastructure reaches considerably further than banks into
rural areas. Indonesia’s three largest MNOs have followed increased mobiletelephony trafic to outlying rural areas, extending the capacity and reach of
their networks; and MNOs have been collaborating to expand their networks
beyond Java, signing a series of infrastructure-sharing deals to recoup the costs
of extending their coverage (IFC 2010: 8). Since the telecommunications sector
was deregulated in 1999, Indonesia’s mobile-telephony market has grown to be
the fourth largest in the world, by network connections. The number of mobile
subscribers in Indonesia dwarfs the number of bank accounts: there were over
278 million mobile connections and 90.3 million unique mobile-phone subscribers
as of the beginning of 2013 – a market penetration of 37% (Wireless Intelligence
in GSMA/IFC 2013: 8–9). This suggests that approximately 40 million unbanked
Indonesians own a mobile phone.
Yet branchless banking could bring inancial services to a much larger proportion of the unbanked population if, as in other markets, a network of cash
merchants is permitted to conduct OTC transactions on behalf of unregistered
users. Among the many candidates for cash-merchant networks, the state-owned
post ofice, PT Pos, is noteworthy. Its network of 4,000 ofices, 1,000 mobile pointof-service ‘stations’, 7,000 postal workers and 17,000 agencies (2010 igures)
reaches across the archipelago, and makes it a potentially attractive partner for
branchless-banking deployments (IFC 2010:13). Bank Mandiri has signed a cooperation agreement with PT Pos to assist in the delivery of its branchless-banking program. The approximately 190,000 cooperatives and 600,000 microinance
institutions (Satria 2013) in Indonesia also have considerable potential.
Although it is dificult for any branchless-banking provider to develop the requisite platform, transaction and distribution infrastructure, the obstacles do not
appear to be considerably greater in Indonesia than in other markets in which
branchless banking has lourished. The absence of a dominant player in Indonesia’s telecommunications and banking sectors hampers – but does not preclude
– the ability of providers to capture network beneits with proprietary platforms.
This analysis suggests that interoperability in Indonesia may be a more viable
proposition than in Kenya and the Philippines for providers seeking to make the
most of network beneits. Competition in the market may prevail over competition for the market. Should transformative branchless-banking deployments
interoperate and achieve scale, Indonesia could be a model for other emerging
economies in the Asia-Paciic region seeking to harness network beneits for inancial inclusion – even in the absence of a dominant player in telecommunications
or banking.
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Tim Stapleton
THE REGULATORY ENVIRONMENT: ENABLING OR CONSTRAINING?
The preceding sections have identiied sources of demand for branchless banking
in Indonesia and established that the supply-side challenges are not insurmountable. To what extent, then, have Indonesia’s regulatory settings frustrated the
widespread adoption of branchless banking? In comparison to more established
branchless-banking markets, what elements of an enabling regulatory environment are missing in Indonesia?
Prominent among the objectives of central banks, which typically regulat