Thriving amid change: Agents in Indonesia’s evolving digital financial services landscape – Part 2

• by Singgih Pangestu and Manoj Nayak
• May 14, 2024
• 5 min

Despite remarkable growth, Indonesia’s agent networks face challenges like limited account opening services, liquidity issues, and rising fraud. Navigating Indonesia’s evolving financial landscape demands collective action from governments and regulators, financial service providers, and development agencies. This is the second blog in a series discussing the insights from the recent Agent Network Accelerator (ANA) research in Indonesia

Our previous blog discussed agent networks’ remarkable growth in Indonesia. The agent network became more diverse between 2017 and 2023, which allowed multiple business models and provider practices to thrive. Despite its growth, longstanding challenges persisted, while new challenges emerged because of the networks’ increased scale. We discuss some such challenges below:

Lack of account opening services in agent outlets: Only 3% of bank agents offered bank account enrollment services—a decrease from the already low 28% in 2017. Inefficient e-KYC processes make the account opening or signing up process resource-intensive at the agent level. The process is manual, requires physical documents to be sent to bank branches, and takes one to two weeks to be completed.

Agents face liquidity management challenges: More than 60% of agents face barriers due to the unpredictable demand in DFS. The lack of working capital credit for agents exacerbates this problem. This is similar to the situation in 2017, when 63% of agents reported their struggle to manage liquidity.

Agents face increased incidents of fraud and robbery: Between 2017 and 2023, fraud against agents in Indonesia increased sevenfold in rural areas and tenfold in urban areas. 65% of agents are wary that their customers are most likely to commit fraud against them. This is a substantial cause of concern.

Provider compliance and risk mitigation measures remain inadequate: Provider compliance at agent outlets needs improvement. Only 14% of agents display tariffs, and only 42% display their agent IDs.

Providers struggle to train their agents adequately: Both banks and nonbanks struggle to provide refresher training. In 2023, only 19% of bank agents and 7% of nonbank agents received refresher training. Agents hesitate to sell new products without refresher training because they fear that they will make mistakes.

Providers have reduced support staff visits: 51% of agents reported that support staff visits have become less frequent as service providers rely on digital platforms for grievance resolution and communication. However, agents prefer in-person support staff visits to manage technical challenges.

Indonesia’s agent network has been instrumental in the extension of financial services to areas beyond Java Island and the urban regions. The amendments made by OJK and Bank Indonesia to Laku Pandai and e-money regulations in 2022 were forward-looking and aligned with global best practices. Regulators, service providers, and development partners must now collaborate to address challenges, foster innovation, and strengthen agent networks. Here are our recommendations to achieve this goal:

Recommendations for policymakers and regulators:

1. Promote e-KYC infrastructure’s use to increase products and services available through the agent network

Indonesia has a substantial unbanked population. It also has recently improved its e-KYC infrastructure, which includes digital ID and face recognition services. Agents can bridge the gap in account access by facilitating account openings. Yet regulators and policymakers need to promote the application of agent-assisted e-KYC processes to accelerate account opening and mitigate additional costs to make this happen. These additional costs include expenses for biometric devices to prevent hindrances to adoption.

2. Standardize training to improve agents’ capability with complex financial products

As agent networks expand, the provision of adequate training becomes challenging. This is especially important, given the introduction of complex financial products and rising digital fraud. Regulators should standardize training modules to maintain consistent service quality, particularly for full-service banking agents. They should also oversee these modules through regular audits to ensure compliance and effectiveness.

3. Encourage transparency in the agent outlet to improve consumer trust

Regulators must prioritize customer protection and transparency, as most agents fail to display official tariff sheets or agent IDs. They must disclose transaction fees, product information, and grievance resolution mechanisms to ensure transparent services.

4. Develop a supply-side database on DFS agents

The supply-side data on agents remains insufficient, especially on nonbank agents. Regulators must publish a regular and comprehensive database of agents. It will help assess the progress of financial inclusion and serve as a critical input for evidence-based policymaking. The database should include gender-disaggregated data for bank and nonbank agents beyond agent numbers and locations.

Recommendations for service providers:

1. Use e-KYC services to expand product offerings to customers

Service providers should use advancements in the e-KYC infrastructure to deliver more comprehensive products and services through agents. This will enhance the agent network’s sustainability and extend financial services to marginalized communities, which will help integrate them into the formal financial system.

1. Deploy third-party agent network managers to oversee agent operations

As the agent network expands in Indonesia, service providers face challenges when they seek to recruit, monitor, and train agents. They also struggle to provide support on liquidity management. Service providers should use recent regulatory changes to engage third-party agent network managers to provide comprehensive agent support services.

1. Offer affordable and predictable lending products to help agents manage liquidity

Service providers can offer credit to DFS agents due to the digital nature of their business, which simplifies credit assessment as it provides clear digital trails. Per MSC’s research, lending to DFS agents in Indonesia is a USD 139–250 million opportunity, which is set to grow to USD 245–490 million by 2027. Service providers can innovate internally or collaborate with lending institutions to offer credit solutions that include working capital credit and loans for their CICO-adjacent businesses.

1. Build internal systems and agents’ capability to detect fraud and build awareness to mitigate them

Wider adoption of DFS coincides with increased risk of fraud, both for agents and by agents. Service providers should help improve their agents’ ability to spot fraud. Service providers should also use digital media and refresher training to alert their agents about newer types of fraud and make them aware of such frauds to ensure safety.

Recommendations for development agencies:

1. Work with service providers to catalyze and derisk innovations on new use cases for products or services available at the agent point

Despite the growth in transactions, most transactions at agent points are limited to cash-in, cash-out, top ups, and bill payments. Additionally, 80% of money transfer transactions occur over the counter. The full potential of agent networks will be realized when more individuals can conduct digital transactions independently and eventually access other financial products and services.

Development agencies can help advance new use cases that improve DFS use. This involves the promotion of research, development of proof of concepts, and initiation of pilots to test new products and services. Development agencies can also improve agent networks’ operational efficiency if they share the risks and costs associated with the development of these new products.

2. Provide knowledge support to facilitate the transition from enhanced access to improved usage of financial services

Findings from the ANA 2023 research emphasize a need to shift policy focus from enhanced access to improved usage and quality of financial services. Development agencies can help improve agent networks’ regulatory and supervisory capability through research support, capacity-building support, and facilitation of exposure to international best practices. This knowledge support should extend to private sector stakeholders that intend to test innovative approaches to develop and manage their agent networks.

All stakeholders must work together to tackle the challenges and maximize the opportunities in Indonesia’s changing agent network. Meeting Indonesia’s financial inclusion targets demands efficient coordination among policymakers, service providers, and development agencies. This collective endeavor will empower agents, speed up financial access, and drive the sustainable expansion of Indonesia’s agent network.

For a complete overview of the recent findings, you can view the full Agent Network Accelerator (ANA) Research – 2023 report here