The Thinker: Money on the Line

October 28, 2011

Michael Joseph & Yoko Doi

A World Bank survey last year found that half of Indonesians had no access to formal financial services. At the same time, mobile phones have reached more than 80 percent of the population. Some quarters are buzzing at the prospect of using “mobile money” to make financial exclusion a thing of the past.

One of the most successful pioneers in using mobile money to increase financial inclusion is Safaricom in Kenya. Led by a service called M-Pesa that was launched in 2007, Kenyans can transfer money from one mobile phone to another using several operator services. Today, some 15 million out of 41 million total Kenyans use M-Pesa to send remittances to their families. Some 600 organizations accept billing payments using M-Pesa, and the service has a nationwide network of some 32,000 trained agents who make the system work.

In 2010, about $7 billion was transferred through M-Pesa, equivalent to 20 percent of Kenya’s gross domestic product. Indonesia’s economy is more than 20 times that of Kenya’s. If a similar system saw these rates in Indonesia, users would be transferring $150 billion each year.

A mobile money system using mobile phones could provide safe, cost-effective and convenient access to finance, enabling almost every Indonesian to send money to family members and pay bills. It could grow into a system that encourages financially excluded individuals to even start saving money. No longer would those in remote areas be excluded from the advantages of being financially connected.

Commercial banks are now keen to work with telecommunications companies to tap this new market of customers. One of the most important needs of the financially excluded in Indonesia is the ability to save money safely and easily. To these ends, one idea is to create mobile-money accounts in which customers can use a mobile phone to send their money virtually into a bank account. In order to broaden access, banks could be represented by a nationwide network of agents — small shops, petrol stations, pharmacies and other retail outlets — from which customers could collect their cash.

This would allow 50 percent of Indonesians who have no savings accounts to save small sums of money at a low cost. Not only would this be a major step forward for the financially excluded, it would allow the banking sector access to an enormous and largely untapped market segment.

Government-to-person transfers are another potential step forward. A mobile-money system could be used by the government to make accurately targeted conditional cash transfers. Instead of the money being disbursed though the national post office network, causing long lines and often expensive trips to the nearest post office, funds could be disbursed via mobile money straight to recipients. Not only would this be safer and more cost-effective, but it would also improve transparency.

What is preventing the introduction of mobile money in Indonesia? The major issue is that the investment required to set up a nationwide network of agents is costly, involving the training, setting-up and monitoring of tens of thousands of agents. Another issue is the lack of clear regulations supporting the mobile-money system, thus deterring investment. To move forward, there is a need to look at international best-practices in mobile-money regulations and see what’s appropriate for Indonesia.

There is also the issue of whether Indonesia would be comfortable with “agency banking,” whereby banks provide financial services through existing mom-and-pop shops and other retail outlets. This was made possible in Kenya thanks to a change in banking laws, dramatically helping improve access to financial services, especially in rural areas.

Once a regulatory framework is settled, it is up to the various private-sector players to design attractive services for customers. This could be done by using independent but parallel systems, working together in alliances or even by teaming up with credit-card companies to make the system work. Competition, at least in the early stages, will lead to better products and lower prices in the long run.

Through a mobile money system, more than 100 million Indonesians could finally have access to savings accounts and other services. Commercial banks, the government and the economy all stand to benefit from a higher level of financial inclusion. It is time for policy makers to address the regulatory issues and allow the private sector to play its role in expanding financial inclusion across the archipelago.

Michael Joseph is a World Bank global fellow, former chief executive of Safaricom and founder of M-Pesa. Yoko Doi is a finance specialist at the World Bank in Jakarta.