Indonesia at digitalisation crossroads

Support from regulators

It is difficult to engage in a discussion about digitalisation in the Indonesian context without getting into the topic of financial inclusion. Indonesia’s central bank (Bank Indonesia) and Financial Services Authority ( Otoritas Jasa Keuangan or OJK) are acutely aware of the importance of technology in the financial services sector, and have issued a number of regulations to promote digitalisation, covering peer-to-peer lending (P2P), digital banking, regulatory sandboxes, and payment gateways to facilitate online payments. They have been particularly supportive of initiatives that give more Indonesians access to financial services.

Access to financial systems and mobile penetration

As at 2016, only about 36% of Indonesia’s population was connected to formal financial institutions, leaving an estimated 110 million “unbanked” citizens (source: PWC and Indonesian Fintech Association).

A more recent study, carried out in 2018-2019, estimated that 49% of the adult Indonesian population was connected to formal financial institutions, comprising 23% “banked” and 26% “underbanked” (Bain & Company, Google and Temasek, “The Future of Southeast Asia’s Digital Financial Services”).

Interestingly, 64.8% of Indonesia’s total population were already connected to the internet in 2018, and a typical Indonesian spent 8 hours 36 minutes online every day in 2019, making leveraging technology to provide Indonesians with better access to financial services a promising proposition.

Digital platforms for lending, payment, and investment

A number of digital offerings have been launched in Indonesia’s financial services sector in the past few years. Indonesians can now obtain loans from their peers through P2P platforms to pay for purchases on e-commerce platforms. They can also apply for electronic money and wallet accounts to make payments at both online and offline stores, as well as to pay toll road tariffs. Investment accounts have also become more accessible now that some digital platforms allow Indonesians to invest in mutual funds and digital gold with minimum investments of less than a dollar. The digital innovations by new market entrants have also encouraged traditional financial institutions such as banks and insurance companies to move to digital processes for client on-boarding and certain other services, benefitting their customers.

Super apps for daily activities

The Covid-19 pandemic has, to a certain extent, highlighted the benefits of having digital platforms that allow us to perform many of our activities remotely. It has enabled us to work and study comfortably and, to a large extent, seamlessly from home. Some of these digital platforms are referred to as “super apps” – platforms with multiple functions that allow users to perform a range of tasks, from ordering a motorbike taxi (ojek) or food and drinks, to purchasing mutual fund units online or at offline stores. Given the large-scale social restrictions and discouragement of cash payments, the meal delivery and cashless payment features of these super apps have seen increased volumes of transactions during the Covid-19 pandemic.

Remote working, studying, and socialising

There are also digital platforms that enable Indonesians to work, study, and socialise from home, such as home-grown edutech platforms Ruangguru and Zenius, and globally recognised platforms such as Zoom, Teams, and Skype. The experience using these platforms to work from home has demonstrated that, with the right digital tools and a reliable internet connection, employees can now work effectively from home. That is not a small feat for a country where face-to-face meetings have traditionally been the norm. If the trend continues during the new normal and beyond, companies will be able to increase productivity by reducing travel time in highly congested Jakarta and by operating with smaller office spaces as employees continue to work remotely. In the longer term, it may even help reduce population density as employees have more flexibility in choosing where they work from.

Adoption of remote working by regulators

The increased adoption of digital tools for remote working is not only a trend in the private sector. Government agencies and regulators have also adapted, issuing regulations that allow certain regulator activities to be carried out virtually. For example, in the financial services sector, OJK can now conduct fit-and-proper tests and consultations remotely, by teleconference or video conference.

Regulatory changes allowing remote meetings and signings

The OJK division in charge of capital markets has issued regulations allowing Indonesian public listed companies to hold electronic general meetings of shareholders. Another OJK division, which supervises insurance companies, has, in certain circumstances and subject to satisfaction of the prescribed safeguards, allowed in-person meetings and wet signatures to be replaced by video conferences and electronic signatures during the pandemic.

The rise of online commerce and marketplaces

Digitalisation has transformed the retail sector in Indonesia, with the rise of online commerce and marketplace platforms. According to Bank Indonesia statistics, e-commerce transactions in Indonesia totalled US$5.6 billion in 2016.  By 2019, their value had reached US$13.6 billion, and was expected to reach US$21 billion by the end of 2020.

Online commerce has enabled retailers to reach more consumers, including those in remote areas, benefitting Indonesians without access to shopping malls or large brick-and-mortar shops. As a result, retailers can reduce their numbers of physical stores, lowering start-up costs. This trend has also enabled more Indonesians to become online retailers through platforms such as Tokopedia, Shopee and Lazada, and even to sell products on social platforms such as Instagram, WhatsApp and Facebook.

The increasing importance of an online retail presence has become more evident during the pandemic, as brick-and-mortar stores have had to suspend their store operations temporarily and rely on their online stores to sustain their business. For more on the trends and issues facing retail brands today, please see our article here.

Government response

The Indonesian government is acutely aware of these developments, and has issued several regulations to more closely regulate online retail transactions and the revenues generated through such activities by both offshore and onshore players. They include Government Regulation No. 80 of 2019 on Trading through Electronic Systems, which sets out a regulatory framework for online commerce transactions, Minister of Trade Regulation No. 50 of 2020, and digital tax regulations that require certain offshore digital platforms with an Indonesian customer base to pay VAT.

Brands opening “official stores”

As e-commerce and marketplace platforms continue to gain popularity in Indonesia, various brands (including those with their own retail websites) have started to open “official stores” on such platforms. This also helps to reduce the risk of having counterfeit products sold online as consumers are more likely to make purchases from official stores rather than from other online merchants.

Direct to consumer business model

A few trends have emerged. First, more brands, from big to small, are moving to a direct-to-consumer (D2C) business model in order to increase their margins, develop more personal relationships with their consumers, and acquire more data about their consumers’ spending patterns and preferences. Second, brands must ensure that they have online store managers ready to respond to customer queries, often using shifts to ensure that queries can be handled 24/7. Some brands have even introduced separate managers for each of their sales channels – WhatsApp, LINE, Instagram, and marketplace platforms.

Growth of supporting players – e-commerce enablers, logistics and postal delivery companies

Third, new opportunities have been created for “e-commerce enablers”, which can assist brands in managing their online stores where they lack the capacity or desire to do this in-house. Fourth, increasing transaction volumes on e-commerce and marketplace platforms have spurred the growth of logistics and postal delivery businesses. This has also highlighted the importance of developing the country’s infrastructure so that more Indonesians outside Jakarta or the island of Java can obtain equal access to goods.

At a more general level, the use of digital tools has enabled companies to consider alternative sources of data, and to improve their data analytics capabilities, to enhance the data’s predictive accuracy.

Big data for credit scoring

One example is the use of big data for credit scoring by banks and P2P platforms. Through the use of data analytics platforms, they are better able to assess potential borrowers’ creditworthiness by collecting and analysing data from sources which were until recently considered unconventional, such as e-commerce and marketplace platforms and telecommunication service providers. This also helps to reduce false negatives for credit card applications, among other things. The availability of these alternative data sources also promotes financial inclusion, since Indonesians with no prior access to financial systems can now obtain loans from banks or through P2P platforms where they give consent for the use of alternative data for credit scoring purposes.

Artificial intelligence in the legal sector

In the legal sector, document review software using artificial intelligence is also starting to be deployed in Indonesia. This software can assist in large due diligence projects, allowing lawyers to focus on higher value work.

Democratisation of information

With the increasing use of digital platforms, it has become much easier to disseminate information to other people. Although there are some downsides (discussed below), this development offers several benefits. For one thing, with more access to information, the public can push the government and regulators to increase information transparency, such as on healthcare data during the pandemic.

As information becomes more readily available, this also makes it easier to cross check claims using credible sources.

Job creation

The digital economy has also helped to create jobs in Indonesia. Online retail and marketplace platforms have made it easier for individuals to become merchants. Some platforms even allow a “dropship” business model, where a middleman can purchase goods from a seller and have the seller deliver the goods directly to the buyer on their behalf, which some may liken to online retail arbitrage.

New types of jobs are also being created as people become “influencers” or “content creators”. These roles have emerged with reduced emphasis on mainstream media and large-scale advertising, allowing previously untapped segments of the Indonesian population to generate income and leading to more opportunities for creative people.

It may appear counter-intuitive, but as more processes are automated, we must ensure that there is a person responsible for and overseeing the decisions being made by the machines to which we delegate these tasks.

Financial services and fintech

As another example, several P2P platforms in Indonesia have implemented automated processes for their operations, from client on-boarding to allocation of funds and collection of repayments. In some cases, the use of automated machines to attempt to collect overdue payments from borrowers and answer customer queries without proper supervision or necessary intervention by people can lead to frustrated customers. It is encouraging to hear that OJK and Indonesia’s fintech industry association, Asosiasi Fintech Pendanaan Bersama Indonesia (AFPI), are now looking at introducing safeguards to ensure human representatives are available to respond to customer queries and complaints.

Retail sector

The importance customers place on human interaction is also evident in the retail sector. As mentioned above, brands in Indonesia are aware of the importance of having managers for their online sales channels ready to respond to customer queries. The emergence of social commerce as a subset of e-commerce is also supported by some customers’ preference to maintain interaction with human agents when making online purchases.

Data protection and customer consent

As more activities are taking place in the virtual world, more electronic data is being generated. Many observers and regulators have noted that in today’s digital world, data is the new oil. Companies are competing to access as much data as possible in order to predict customers’ behaviour and generate more sales. It is critical, therefore, to ensure that customers are made aware of the types of data being collected, and how each type may be used in delivering goods and services to them.

Regulators around the world, including in Indonesia, have put in place some form of data protection frameworks. Although these frameworks vary in their sophistication and comprehensiveness from one country to another, most require customers’ consent for the collection and use of their data.

The need to revolutionise procurement of consent

A practical issue is not whether companies are complying with the requirement to obtain their customers’ consent, but the way in which that consent is obtained. Most companies obtain consent by having customers tick a box indicating acceptance of their privacy policy. Many customers simply tick the box without reading the policy.

While it can be argued that these customers have chosen not to take up the opportunity to inform themselves on how their data will be used, some observers have commented that the way most privacy policies are written and presented is not very user friendly, not to mention the amount of time required to read the policy. According to an old study , an average customer would require more than 76 working days to read all the privacy policies they encounter in one year. The estimate is likely to be higher now as users install more apps on their phones and visit more websites.

Given the many innovations introduced to digitalise various aspects of our lives, simplifying the way in which privacy policies are presented to make sure customers are properly informed would be both reasonable and a welcome development.

Closely related to the importance of a data protection framework is the need to have appropriate digital infrastructures in place to ensure the security of electronic systems and data. There have been several major global data breaches, and Indonesia’s online platforms are not immune to them.

In Indonesia, this area can be improved through various means, including public education, a more active cybersecurity agency, and a more comprehensive regulatory framework. If taken together, these initiatives should lead to more investment by companies in ensuring that their digital infrastructures are resilient to cyber threats.

Balancing the merits of competition and standardisation

As in other highly skilled professions, few companies may have the capability to offer certain types of technology. While cultivating competition tends to result in a higher quality of goods and services being provided to customers at lower prices, it is important to balance this against the need for companies to standardise their systems and collaborate in order to avoid over-fragmentation of the industry and over-dependence on one provider.

Payment system standardisation through QRIS

One example where a regulator has encouraged industry players to standardise and collaborate is the implementation of the QR Code Indonesian Standards (QRIS) by Bank Indonesia in early 2020. QRIS enables one QR code to be used to accept payments using different e-money instruments. Prior to the implementation of QRIS, it was common for each merchant to have multiple QR codes – one for each e-money issuer. Bank Indonesia decided to implement QRIS to encourage interoperability between the various e-money issuers’ systems, promote efficiency, and prevent fragmentation in the electronic payment sector.

Fake news

As alluded to above, there are both upsides and downsides to democratisation of information. As it becomes easier to disseminate information, unfortunately fake news and hoaxes are becoming more common. It is also a human tendency to interact more with people with similar views, potentially leading to echo chambers where misinformation can be amplified.

Government response and public education

The Indonesian government has sought to address this challenge in several ways, ranging from creating official channels to counter fake news to blocking certain social media or communication platforms during certain critical periods. This issue is unlikely to go away, and digital platforms in Indonesia will need to play their part, including by educating their users. Guidelines that govern less formal forms of advertising carried out by “influencers” and “content creators” will help consumers to understand the nature of online content presented to them, and will also introduce a level playing field for all “influencers” and “content creators”. Such guidelines are already in place in other markets, including in the UK.

As discussed above, Indonesian banks are increasingly offering their customers digital products. They have also digitalised some processes, including Know Your Customer (KYC) checks and purchases of investment instruments. However, we do not yet have any regulations allowing the setting up of fully virtual banks without a brick-and-mortar presence, unlike the UK, Hong Kong, and Singapore. Such regulations would allow the banking sector to develop further, and could support the Indonesian government and regulators’ financial inclusion agenda.

In its 2025 Indonesia Payment System Blueprint, Bank Indonesia identified open banking as one of five key initiatives. If the European Union’s experience is anything to go by, the opening up of banking data through standardisation of open API (Application Programming Interface) as envisaged by Bank Indonesia is likely to create more opportunities for technology companies, including fintech players. Indeed, Indonesia’s journey towards open banking has already begun, with the adoption of artificial intelligence to engage with customers. One such example is providing customer service through WhatsApp, attended by digital assistants.

As the boundaries of digital innovation are pushed in the pursuit of virtual and open banking, market players and regulators need to keep in mind the pitfalls identified above. 

In late August 2020, OJK published its Digital Finance Innovation Roadmap and Action Plan 2020-2024, which emphasises the importance of encouraging innovation while also maintaining adequate operational resilience standards for the fintech industry.

Another subset of Indonesia’s financial services sector that would benefit from more digitalisation and a clearer regulatory framework in which players can operate is the insurance industry.

We understand that OJK is now considering a specific regulation on insurtech. In the meantime, insurance companies have been entering into partnerships to distribute their products using online channels, including with Indonesian tech unicorns. This is not surprising, given the much lower cost of distributing insurance products online compared with using physical branches and offices, which insurance companies had been doing in partnership with traditional channels such as banks prior to the emergence of insurtech.

This market segment is now particularly interesting, as market players innovate while navigating regulations aimed at more traditional distribution channels. It would surely benefit from a clearer regulatory framework that supports the wider adoption of digitalisation. For instance, while OJK has issued a circular letter allowing insurance companies to replace physical face-to-face meetings with recorded video calls to sell unit link products, and to use electronic signatures to execute certain policy-related documents, these measures are only interim, being intended to allow insurance companies to adjust their operations during the current pandemic. It would be helpful if these measures were made permanent, as this would encourage market players to invest more into the digitalisation of insurance distribution.

Like insurtech, market players in the health-tech sector are innovating while navigating regulations that support healthcare services through “traditional” channels, i.e. brick-and-mortar hospitals and clinics. Covid-19 has led to the issuance of some regulations that permit the supply of prescription drugs through online platforms, and that clarify the permitted scope of online consultations by doctors using health-tech platforms. Again, these regulations are also only temporary in nature, as a response to the pandemic. Once the pandemic status is lifted, the regulatory framework for health-tech will likely become less clear once again.

Regulatory support for Indonesia’s health-tech sector has the potential to benefit the entire population by providing fairer access to quality health services for citizens across this vast archipelago. We are optimistic that the government and regulators will soon develop the necessary regulatory and policy frameworks to encourage market players to innovate.

For more information on health tech in Indonesia, please see our separate briefing here .

There have been plans to deploy autonomous vehicles and create smart cities in Indonesia. In the case of autonomous vehicles, the vehicles need to communicate with one another in order to exchange information about the roads and surroundings. To make this possible, vehicle manufacturers must ensure that their various systems can communicate with one another.

As these plans are being devised and implemented, it is helpful to keep in mind the potential pitfalls highlighted above, including the need to avoid industry fragmentation and over-dependency on one provider. in the case of smart cities, while engaging one company to provide all the technology used in a smart city may create efficiencies, it may also lead to over-dependency, especially if the company’s systems are not easily replaced by or integrated with those of another technology provider.