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MSC: 25 years of thought leadership and impact

Posted on by Saumya Dixit

Everyone claims “thought-leadership and impact,” so I sympathize as you roll your eyes. But give me a few minutes of your precious time to “explain my claim.”

Twenty five years ago, MicroSave-Africa was established to help African microcredit providers diversify their mono-offerings to include savings products. The clue was in the brand. However, in 1998, East African microcredit organizations suffered primarily from enormous client churn. This was because their products were unsuitable and expensive for their target market. MicroSave’s mission quickly changed to helping financial service providers understand and address the low-income market.

Catalyzing a market-led approach for the industry

Initially, we focused on the demand side and tailored the approach I had used in Asia—participatory rapid appraisal tools set in focus groups—to derive deep insights into the needs, aspirations, perceptions, and behaviors of poor people. We codified this into the acclaimed “Market Research for MicroFinance” toolkit, which was later used by hundreds of MFIs and consultants worldwide. Indeed, a competitor design company described it as “the grandfather of human-centered design.” To this day, I am not sure if that was a compliment or a slight!

But of course, addressing the demand side alone is not enough. We needed to reengineer the supply side as well to be truly client-responsive. We collaborated with leading experts to build, test, and disseminate a range of toolkits on almost every aspect of a market-led organization. This included strategic business planning, process analysis, product marketing, and staff incentives. These toolkits are updated continuously to reflect the rapidly evolving market. They remain a core part of MSC’s internal and external training programs through what is now The Helix Institute at MSC (see table below).

Equity Bank and digital transformation

Equity Bank emerged as the poster child for MicroSave’s work to transform institutions—first on a market-led basis and then to be digitally led. When Equity Building Society first approached us in 2001, it had 109,000 customers. Today, it serves more than 15 million people in six countries, and 99% of its transactions in Kenya occur outside its branches. It was and continues to be a real privilege to work with Equity Bank and learn alongside it. The bank remains an inspiring beacon of how formal financial institutions can profitably serve the low- and moderate-income mass market if they use the digital revolution’s potential. Indeed, the lessons we learned working with Equity Bank form the basis for our extensive digital transformation practice. You can access a free introductory webinar on digital transformation here.

Therefore, it was perhaps reasonable that FSD-Kenya and CGAP’s final evaluation of the MicroSave-Africa project concluded: “MicroSave has made an undisputed contribution to the availability of better financial services for poor people across the globe. It has been good value for money, producing a wealth of outputs within the region and beyond.”

The acceleration and optimization of agent networks

The creation or use of effective agent networks is a key part of digital transformation. MSC has worked with and trained leading mobile network operators, banks, and third-party agent network managers. These efforts have been groundbreaking.

It all started with M-PESA. MSC sat on the initial Steering Committee and conducted preliminary customer research as part of the pilot testing. It highlighted the importance of agent support and monitoring.

We built on this to design and implement the Agent Network Accelerator (ANA) program, which surveyed 31,500 agents to analyze 81 providers in 14 countries. More recently, we have worked for GSMA to look at next-generation agents. We worked with CGAP to compare, contrast, and learn lessons from five very different markets. We worked with BCG to deepen our understanding of the economics of agent networks in Indonesia. Additionally, we worked with CGAP/DFI’s agent networks course. See here to enroll  .

Enhancing policy and digital governance

MSC collaborates with governments on public policy in various areas, such as food security, agriculture, health, energy, and financial inclusion. We have partnered with various countries to develop, evaluate, and implement vital digital public infrastructure and the programs they support. These countries include Bangladesh, Ethiopia, India, Indonesia, Malawi, and Zambia. Our efforts focused on the foundational infrastructure and the development and rollout of government-to-person (G2P) programs.

Driving policy and impact at real scale

1. Malawi and Zambia: We conducted digital readiness assessments and formulated detailed roadmaps for the countries’ transition to digital G2P payments.

2. India:

3. Indonesia:

  • We offered crucial insights for the Bantuan Pangan Non-Tunai (BPNT) food subsidy transfer program. It had 5 million beneficiaries in 2018, which has now increased to 20 million beneficiaries. It has been renamed to the Sembako program.
  • Our advisory role led to the formation of a strategy for the electronic know-your-customer (e-KYC) process. The strategy is expected to benefit 60 million unbanked individuals in Indonesia.

MSC uses deep market insights derived from our human-centered design and process analysis toolkits to devise innovative solutions, conduct preliminary tests, and solve complex challenges. We also provide monitoring and evaluation services that enable our clients to optimize their systems and operations.

Driving and scaling innovation

MSC’s leadership on digital inclusion, it is unsurprising that we have been involved as technical service providers to labs or accelerator programs in Bangladesh, India, Senegal, and Vietnam. These labs are differentiated by their resolute focus on nurturing startups. They have a clear and consistent commitment to serve the low- and moderate-income (LMI) segments. In India, the FI Lab has supported 50+ startups that have positively impacted the lives of 47.7+ million LMI people and raised USD 266.5 million in funding in just five years.

A center of excellence for professional development

As with all leading consulting firms, MSC experiences staff churn of 10-20% per annum. A few staff leave because of the pace of organizational growth and change, or the pressure of our commitment to excel in all that we do is too much. Several leave for higher studies and use their time and experience with us to gain enrollment for postgraduate studies in prestigious universities—typically in the US or the UK. Some leave to use their experience with us to set up their own startups—including the remarkable FarMart and Flow. But many leave to join other organizations—most commonly UNCDF, IFC, and GSMA. You can find a library of slides and videos of our alumni as they discuss their work and how their time at MSC helped them do it here.

Initially, we found it disheartening to spend years building the knowledge, skills, and professionalism of bright young individuals, only to see them whisked away by international agencies that now largely operate as rival consulting companies with higher salary structures. We are a little more sanguine now. We have to view MSC as a respected and valued center of excellence for professional development with outstanding graduates who make important contributions to global development and our core mission: “To strengthen the capacity of institutions to deliver market-led, scalable financial, economic, and social inclusion in the digital age to all people.”

Enabling and financing locally-led adaptation – the role of blended finance and digital technologies

Posted on by Deepesh Singh

The global community spends just USD 30 billion annually on climate adaptation. However, when you put this figure into perspective, it represents a mere 10% of the projected USD 387 billion required each year (UNEP, 2023). Furthermore, a limited proportion of this funding actually reaches developing countries and finances locally-led initiatives.

Locally-led adaptation is key. The most effective adaptation measures are those tailored to local needs, informed by community priorities, and implemented at the grassroots level. This localized approach not only responds to the immediacy of climate change impacts, but also ensures adaptation strategies resonate with the community’s lived experiences. However, as with all strategies, certain barriers can impede progress, such as ecological and physical constraints, limitations in knowledge and resources, and social dynamics. Yet, despite these challenges, several standout characteristics define successful adaptation initiatives: a commitment to addressing the foundational causes of vulnerability, a drive toward community-led innovations, a strong inclination toward decentralized governance, a relentless focus on overcoming social barriers, and devolved finance.

(From Asian Development Bank, 2023)

Devolved climate finance is a mechanism designed to redirect climate finance to where it is most impactful: the local level. When local entities have resources and decision-making authority, they are empowered to spearhead climate resilience and adaptation efforts. Countries, such as Kenya, Mali, and Senegal, are testaments to this approach’s efficacy, as they have incorporated decentralized finance mechanisms into their climate strategies. Central to the success of such mechanisms are principles, such as community-led planning, support to established institutions, emphasis on social inclusion, and a steady focus on public goods. Yet, several challenges persist, such as the fragmentation of funds, potential compromises in budget data quality, and issues of capacity and coordination.

The private sector is an often overlooked but critical player in adaptation financing. If enabled by international, philanthropic, and public sector funds, private finance’s vast potential could usher in a new era of progress towards sustainable development goals and impactful climate adaptation.

Blended finance, which combines public and private sector investments, offers a promising avenue to reduce risk and the weighted cost of capital, and to leverage capital to catalyze innovation and market transformation, at scale.

Over the past 25 years, a range of organizations, including MSC, have been instrumental in integrating local communities into the development, financing, and monitoring of projects. It is imperative to harness these accumulated insights to advance locally-led adaptation planning. A comprehensive approach should prioritize community involvement and incorporate existing regulatory, policy, climate science, and financial dimensions alongside the governance to monitor, evaluate, and learn from the implementation of locally-led adaptation plans.

We need a methodology that harmonizes national policies with local governance and future climate forecasts to provide a robust framework. A pivotal aspect of this strategy involves the diversification of financing mechanisms, which range from international climate funds to community-based organizations, and thus ensures an integrated approach to both planned and autonomous adaptation efforts.

Digital technologies can potentially facilitate, accelerate, and mainstream locally-led adaptation planning and the governance functions of monitoring, evaluation, and learning, to refine and optimize adaptation initiatives. Cash-in cash-out mobile money agents, microfinance institution staff, or agricultural extension agents in climate change-vulnerable areas could become nodal points to help develop LLA plans. They can provide access to key data and insights for the participatory planning process, and then enable the management and governance of the implementation of those plans. Perhaps most importantly, they also often are embedded in the communities most impacted and therefore may have the trust and access to local communities that can subsequently inform appropriate solution design.

This approach to LLA would entail these agents acting as “catalysts of change” who use and facilitate access to a range of digital technologies. These technologies can be deployed to support and scale LLA planning and monitor the implementation of those plans for performance-based payments. AI-enabled online forums in local languages could offer opportunities for communities to share knowledge, discuss challenges, and co-create adaptation strategies. Mobile platforms could be used to deliver educational content on adaptation practices suitable for local conditions, as well as a range of financial services and payments against performance or for carbon offsets.

Community-based and operated weather sensors, satellites, drone services, and feedback platforms could be leveraged to develop community-led plans as well as provide a means to report on progress and challenges in real-time. These technologies can provide insights and recommendations to improve adaptation initiatives alongside local and national climate adaptation policies. Thus digital technologies could help with the development, monitoring, and governance of implementation of adaptation plans and enable smart contracts to reward the achievement of performance goals.

Digital technologies could complement the effectiveness of LLA strategies by providing increased accessibility for rural communities as well as for the MFI staff or CICO and agricultural agents that serve them. However, these digital tools must align with the local context, needs, and language to foster community participation, knowledge sharing, and sustainable adaptation practices.

Particular care must be taken to ensure that the poorest and most vulnerable have the opportunity to participate and/or lead in the planning and monitoring exercises (Jones, 2010).

We look forward to partnering with organizations that are prioritizing locally-led adaptation and identifying ways that digital technologies can support their impact.

For a more detailed discussions of these issues, please see the CIFAR Alliance whitepaper on Locally-led Adaptation.

Five keys to building TRUST to strengthen customer protection in financial services

Posted on by Saumya Dixit

“Do not trust banks” and “avoiding a bank gives more privacy” were among the top most cited reasons why people choose to not have a bank account, as per the 2021 National Survey of unbanked and underbanked households by Federal Deposit Insurance Corporation.

Customer trust ranks as a priority for financial service providers (FSPs). Consumer protection is pivotal to foster this trust. It is a fundamental pillar of a secure financial system. It is essential for financial entities to streamline their products and services and, in the process, foster customer trust and safeguard their interests.

MSC has taken active steps to safeguard customers by increasing awareness of emerging risks. We collaborate with various stakeholders, such as FSPs, investors, and policymakers, to ensure that their practices prioritize customer well-being. This blog explores the significance of TRUST in financial services and offers FSPs a checklist to strengthen consumer protection.

  • Transparency: The first principle to build customers’ trust is to ensure transparency in the design of financial products and services. FSPs must disclose information on product features, guidelines, fees or subscription charges, terms and conditions, complaint management systems, etc. They can share this information through multiple channels, such as websites, SMS, calls, and printed disclosures, among others. Clear explanations of processes empower customers with a comprehensive grasp of the underlying rules. The provision of sufficient information to customers about FSPs’ operations can bolster their credibility. FSPs should also employ principles of behavioral science to simplify communication through tools. These include nudges, disclaimers, cool-off periods for consent, and prompts. These tools can increase understanding among customers, nudge customers to make informed choices, and provide timely information.  Behavioral insights can also be used to conduct pilots and experiments to assess the effectiveness of various transparency measures. FSPs can help consumers stay informed and increase accountability, user-friendliness, and transparency in their processes.
  • Relevance: Relevance refers to assessing if the products sold are suitable for the target consumer groups. Financial awareness is low in most developing geographies. Hence, it is easy to manipulate large audiences to avail of products and services that are unsuitable for them. For example, customers have fallen victim to mis-selling when they are sold insurance plans instead of loans or savings and endowment plans instead of term insurance. Customers often struggle to understand the intricacies of the product due to agents who intentionally mislead customers and push them to buy unsuitable plans. Similarly, many customers are pushed to buy policies to get bank lockers or loans. FSPs should guarantee regulatory compliance to ensure that products are sold in a clear and transparent manner only to relevant consumers and protect their interests. Agents are often incentivized based on the number of policies they sell as opposed to how well they explain the product features and processes to their clients. This brings us to the theme of designing incentive structures for insurance agents to protect consumer interests and reduce instances of fraud, misinformation, grievances, and complaints against insurance companies. FSPs should also use advanced analytics to analyze product suitability-related complaints registered by the customers. This can be a useful tool in self-evaluation for FSPs to monitor how well their products are mapped to their targeted market and needs. Advanced analytics and analysis of product suitability will also encourage FSPs to design better incentive structures and training programs for insurance agents so that they can ethically market insurance policies to potential customers.
  • User-friendliness: FSPs should ensure that the products and services offered to customers are user-friendly, easy to comprehend and navigate, and accessible through multiple channels, both physical and digital, to cater to a diverse range of users. The user interface’s ease of use and navigation, which encompasses the website, mobile applications, IVRS, and chatbots, is essential. At the same time, training for agents and staff is imperative to always uphold a customer-centric approach. FSPs should use behavioral economics to create and design interfaces that encourage responsible financial behaviors.
  • Security: FSPs should strengthen the security of financial products and services to protect customers’ personal information and assets. They must ensure that the financial products and services adhere to industry standards and regulations to comply with security and privacy assessments. This will include the use of innovative technology for advanced data encryption, fraud detection and prevention, multi-factor authentication, and firewalls, among others. FSPs must monitor and audit their processes and operations regularly. Additionally, they should invest in their staff’s training and capacity building to protect the customers against evolving risks and threats. These best practices will protect consumers against mis-selling and information asymmetry while they buy insurance.
  • Timely service: Quick and timely customer service helps gain customer loyalty and trust. Customers feel more secure when they can rely on prompt support whenever needed. Proactively addressing concerns can mitigate the risk of negative reviews, complaints, or legal actions, which can impact the reputation of FSPs. Positive experiences with timely customer service can lead to favorable word-of-mouth recommendations.FSPs should ensure that customers have access to an intuitive and inclusive grievance resolution system that monitors and analyzes customer complaints, identifies risks and issues, and much more. FSPs can use AI to optimize internal processes, which will ensure customer complaints are efficiently directed to the right personnel for resolution. Effective use of supervisory technologies can help FSPs monitor customer complaints effectively and provide timely resolution.

These five components play a crucial role to build customers’ trust and reinforce their protection. FSPs must ensure adherence to these principles at both the customer-facing front end and the internal systems, personnel, and processes on the back end of financial services.

Here is a checklist that FSPs can use to build trust, instill customer-centricity, and enhance protection at every stage of financial services delivery. These stages include customer onboarding, usage, transactions, and overall financial services management. The checklist directs FSPs to ensure trust and customer focus throughout their front-end and back-end processes and systems. This also covers functions that FSPs outsource to third parties and agents.

 

Top MSC blogs of 2023

Posted on by Saumya Dixit

1. Fishing for change: How a policy initiative in India’s Bihar state shows pathways to women’s economic empowerment and climate change adaptation

Explore the transformative approach that the Government of Bihar has undertaken to boost aquaculture in Bihar, through JEEViKA. This blog delves into how JEEViKA mobilizes women SHG-based fish farmer producer groups (FFPGs) and provides them with access to community ponds and water resources to take up aquaculture as a livelihood activity. This initiative has multiple gains, such as improved income and nutrition, increased access and control of women over community resources, and rejuvenation of water resources to tackle climate change. This initiative brings women to the forefront of a livelihood stream that has traditionally been a male domain.

2. Women in the digital economy

The COVID-19 pandemic carved out a prominent role for digital technologies in enabling economic transactions. However, the gender divide in access to digital technologies hurts women’s ability to participate in the labor force. This blog explores the nature of women’s work and how digitization shapes it. We outline the opportunities and challenges in the digital economy and offer recommendations to ensure a fair digital economy for women.

3. How policy changes could revolutionize how entrepreneurs in Kenya can access finance

This blog examines the Kenyan government’s policy reforms to allow entrepreneurs better access to affordable and convenient credit. It specifically looks at how the government’s financial inclusion fund—the Hustler Fund—promises to improve the financial health of MSME

4. UPI 123Pay: The four-leaf clover for feature phone-based payments in India?

UPI broke all records in August 2023. It observed 10.586 billion transactions that amounted to INR 15 trillion (~USD 189.64 billion). It has become the preferred payment choice for digitally-savvy Indians. However, it cannot reach the feature phone users. Its penetration is limited to urban segments with high usage of smartphones and mobile Internet. India is home to 400 million feature phone users. These users have limited avenues for digital transactions. They largely depend on physical access points for financial transactions. This blog discusses an innovative offline payment solution, UPI 123Pay, and its immense potential to bring digital payment convenience to the underserved segment.

5. Daily diaries: Reimagining how we generate insights to optimize cash-in, cash-out

The blog discusses the Agent Diaries approach, a research method that tracks the financial transactions of different types of CICO agents over time. It highlights the data gaps, challenges, and insights related to the agency business. It also compares the traditional and technology-driven ways of data collection and their cost-effectiveness.

6. Decoding agriculture market linkages for FPOs: Lessons from the field

India’s farmers have had a long history of struggle. For decades, they have battled a multitude of agricultural challenges, such as fragmented landholding, numerous intermediaries, and low value addition. In response, the country has actively promoted farmer producer organizations (FPOs) as a solution. FPOs intend to address these serious issues through the aggregation of demand for high-quality inputs, credit, and technologies and the aggregation of outputs to improve smallholder farmers’ market access. Yet despite these efforts, major processors and output purchasing companies hesitate to engage directly with FPOs. This blog explains the options available for FPOs to trade with institutional buyers and the on-ground issues FPOs must overcome to establish better market linkages.

7. Lessons from the Financial Diaries research with women traders in Kenyan open-air markets and cross-border trades

From our financial diaries research, we present the stories of Janet and Rebecca, two inspiring women entrepreneurs in Kenya. Please read our new blog as they shed light on women’s financial realities in the open-air market and cross-border trade sectors in Kenya.

8. DEBIT: Unpacking women’s choice of financial channels

MSC unpacked women’s choice of channels for financial transactions in India, Bangladesh, Kenya, and Indonesia. The result is a tool – the DEBIT framework. The four pillars of the framework are Diffidence, Education, Bias, Investment, and Trust. Read this blog to learn more about the framework and its application.

9. Decoding India’s Digital Personal Data Protection Act

The Digital Personal Data Protection Act (DPDP) of India was published in the Official Gazette on 11th August 2023, after years of deliberations. This came after the Act passed both Houses of Parliament and received Presidential approval. This blog highlights the key provisions of the DPDP Act. Please note that many significant details about the implementation of the Act will be decided later by rules set by the Central Government.

 

10. Enhancing resilience of smallholder farmers against climate change—can parametric agricultural insurance make a difference?

Parametric insurance solutions can offer smallholder farmers in developing countries an accessible, reliable, and affordable way to protect themselves. A multi-stakeholder approach is needed to make these solutions work for smallholder farmers, supported by catalytic capital for their development and scale-up.

Careful, not customary: How can consent terms be better designed to protect users?

Posted on by Deepesh Singh

Kaushal is a smallholder farmer in India. He recently opened a savings bank account to receive government benefits. A few days later, he noticed a deduction from his bank account for a premium under a life insurance policy he did not recall buying. When he asked a bank official, he learned that during the sign-up process his consent was taken to bundle the insurance policy along with his savings bank account.

Sheila, the owner of a small grocery store in Indonesia, opted for a digital credit scheme to expand her store operations. However, a delay in credit repayment resulted in officials threatening to leak her photograph, location, and other sensitive information. Upon further investigation, Sheila discovered that the company representative who had assisted her in obtaining the credit had sought her consent, during the sign-up process to share her details with third parties in specified or exceptional situations. Nevertheless, the definition of these “exceptional” circumstances remained unclear to Sheila, who “consented” without having complete information.

Sheila and Kaushal’s stories echo experiences worldwide. Many fall prey to data leaks and financial losses because taking consent during the collection of sensitive data is merely customary in its current form.

In a qualitative study that analyzed users’ perceptions of privacy across four Indian states, we found that most users in urban and rural settings alike were uncertain about the service terms and conditions of digital entities. Similarly, research on collecting refugee data shows that refugees and other vulnerable populations rarely know the purpose and use of their data, even as they give individual consent to share it with entities.

Entities typically request consent from users during the registration process for their services they offer. Its purpose is to ensure that users actively grant permission for the collection of their data and are fully aware of how the entity intends to use their personal information. While securing consent is essential to respecting users’ agency over their data, it is often reduced to an obligatory step, passively sought from users through checkboxes. This approach can pose high risks for users, primarily because it lacks a user-centric design. Consent terms are usually verbose and filled with difficult legalese an ordinary person would struggle to understand.

The risk is exacerbated for users who rely on assisted channels for registration. This group includes new users of services or those with less education. In such cases, users are asked upfront by facilitators if they agree to given terms instead of being briefed on the reason for data collection. The facilitator often ticks the check box and accepts the terms and conditions on the end-user’s behalf, and leaves customers in the dark about the terms.

The consent collection process needs reform to retain the end-users’ agency over their personal information. Laws in about 59% of countries cover the use and management of user data by seeking entities, such as the General Data Protection Regulation in the EU and the Data Protection Act in Kenya. Draft legislation exists in other countries, such as the Data Protection and Privacy Bill in India. All these legislations hinge on the premise that users make informed decisions around consent.

Clearly stating the purpose and use of data before seeking consent can enhance credibility of the seeking entities. Equally important is the communication of mechanisms to revoke consent.

Singapore has enabled an easily understandable consent management module for its Singpass app, which citizens use to access most government services and requires using the national biometric ID details to log in. This module explains the use and purpose of data and allows citizens to revoke consent and manage information shared with entities. This mechanism has a strong potential for success with a literate and tech-savvy population. Yet, what about parts of the world that still grapple with the digital divide?

To address this challenge, one effective approach is to invest in context-based tools that facilitate consent decisions for everyone. This is an increasingly common practice in the medical trials that occur with vulnerable communities. For instance, in the Gambia, researchers deployed multimedia tools — such as videos, animation, and audio — in all major spoken languages to take informed consent from the Gambia’s population. The country had a 50% literacy rate when the study was conducted in 2015. The study notes that this approach gives Gambians greater autonomy over their decisions. It also ensures a higher recall value of terms provided by entities and less “perceived” risk.

Some countries like India have attempted to address this issue through tools that can make consent management easier for a linguistically diverse population with varying levels of digital readiness. For example, MEITY’s Bhashini, a program to create models for translating Indian languages, can help communicate consent in language by the public and private sectors. Jugalbandi is another innovative example that uses ChatGPT and Bhashini to help answer queries in more than 25 Indian languages through voice notes on WhatsApp.

People can “chat” with Jugalbandi by sharing a voice recording with their questions and the AI-powered chatbot sends back an audio response along with text and convenient links wherever applicable.

The use of technologies that drive consent through easily understandable multimedia tools can help marginalized communities access more services and make informed decisions. Moreover, it also ensures that a lack of education does not hinder high civic awareness. Ultimately, seeking user’s consent should not be reduced to a customary click. Instead, this should be a transparent and easily understandable process that upholds choice in the information shared and empowers customers to make informed decisions around their personal data.

The blog was first published on the Hertie School website on 23rd October 2023.

From break out to breakthrough: Ways to sustain digital momentum in Indonesia

Posted on by Saumya Dixit

Behind Jakarta’s bustling business district, a small hawker skillfully prepares batagor, a beloved Sundanese delicacy. Customers form a queue and use Quick Response Code Indonesia Standard (QRIS) to conduct cashless transactions and buy the batagor for IDR 15,000 or approximately USD 1. In this unassuming setting, the seller is a pioneer in the digital realm who mirrors Indonesia’s revolution in the digital economy.

Indonesia’s digital economy experienced a remarkable 414% growth from 2017 to 2021, which is projected to grow eightfold from 2017 to 2025. For context, the global digital economy constitutes more than 15% of the world’s GDP and has grown 2.5 times faster than the offline world’s GDP in the past decade.

The Digital Intelligence Index categorized Indonesia and countries, such as India and Kenya, as “Break Out” economies. Despite the challenges of weak infrastructure and institutional capability, these “Break Out” economies are embracing digitalization and technology. They recognize digital technology’s potential to overcome traditional limitations and catch up with developed nations. Digital technology promises to catalyze the transformation of emerging economies, enhance economic productivity, diversify economic sectors, and push these countries into the high-income country bracket. 

However, past technological waves have shown that not all emerging economies can successfully seize these opportunities and translate potential into reality. A primary concern for these “Break Out” economies is to convert rapid digital progress into sustainable and meaningful outcomes for their people.

This blog highlights key forces that propel Indonesia’s digital economy forward, explores its challenges, and suggests ways to foster its sustainable growth.

Pivotal forces that propel Indonesia’s progress in the digital economy

Research for Mastercard Foundation highlights five key forces that significantly help accelerate the digital economy. These factors are the demographic dividend, ongoing urbanization, robust Internet penetration, expanded access to digital payments, and increased influence of super platforms. How a country manages these driving forces will determine whether it will remain a “Break Out” country or successfully break through into a higher economic orbit.

Infographic 1: Driving forces for the digital economy
 

Indonesia’s favorable position across all five forces enhances its potential for a breakthrough in the digital economy. Around 50% of its population is under 30. This demographic dividend drives growth and fosters a dynamic environment ripe for technological innovation and entrepreneurship. Moreover, the ongoing trend of urbanization transforms cities into focal points of growth through increased access to digital technologies and job opportunities. Indonesia has a robust presence in the digital space, with a 66% Internet penetration rate and a 47.08% smartphone penetration rate in 2022.

The COVID-19 pandemic accelerated the adoption of digital payments, as seen from the wide adoption of the QRIS. Small-ticket transactions from local merchants and neighborhood shops characterized this trend. Indonesians also use social media a lot. As of February 2022, Indonesia had around 191.4 million active social media users and ranked third after China and India in the Asia-Pacific region.

Additionally, Indonesia has seen a surge in the emergence of tech “unicorns,” such as Gojek, DANA, and eFishery. These tech platforms contribute to the evolution of a well-connected digital economy. They offer diverse services that exemplify Indonesia’s commitment to innovation and its capacity to foster impactful technological advancements.

Indonesia faces immediate challenges despite being well-placed with these five driving forces

The digital economy offers significant economic opportunities but requires concerted efforts to ensure equitable distribution of gains across the population. The most effective route to increase the country’s prosperity is to improve access to economic opportunities for all population segments. A significant number of quality jobs within the economy is crucial to maintain the digital transformation’s momentum.

The Government of Indonesia has announced its initiative to develop Indonesia’s digital economy blueprint. This initiative focuses on infrastructure, human resources, and the innovation ecosystem. In the infographic below, we have highlighted three crucial points that the government should focus on and add to the digital economy blueprint to ensure the digital economy’s sustainable growth. 

Develop digital public infrastructures (DPI) as a critical enabler of inclusive digital transformation

DPI includes digital systems and solutions that provide services efficiently to citizens and businesses. The three pillars of DPIs are digital identity, data exchange, and payments. DPIs authenticate citizens uniquely, ensure secure and quick information-sharing across systems, and facilitate seamless financial transactions. Moreover, DPIs show optimal effectiveness when they interoperate with other systems.

The Government of Indonesia has worked hard to advance DPI. For example, efforts are underway to improve the ID system. The government has introduced KTP Digital, an app-based identification system, to ease the transition from physical to digital ID cards. This effort intends to enhance access and strengthen the transparency of citizens’ data. The government has also enacted a regulation to enhance data management across government entities, known as Satu Data Indonesia. On the payments front, the implementation of QRIS streamlines digital payments, which fosters financial inclusion.

Policies should seek to integrate different elements of DPI to support the employment sector. An integrated DPI ensures that reliable identity systems and employment data inform targeted efforts to increase labor force participation, especially women’s participation. Indonesia can adapt lessons from the innovative use of DPIs in other emerging economies, such as India, Kenya, and Nigeria. 

Invest in digital education, upskilling, and reskilling programs

Governments should strive for greater inclusion to create a skilled workforce that participates in the digital economy’s growth and benefits from it. The World Bank’s research in Indonesia reveals that higher-skilled workers have gained more from opportunities in the digital economy than their lower-skilled counterparts. Indonesia’s Kartu Prakerja program, which has reached more than 14 million beneficiaries, intends to narrow this gap through accessible upskilling opportunities.

Moreover, sustainable upskilling and reskilling programs must include collaborative public-private initiatives that explicitly seek to empower low-skilled workers in the digital age. This approach ensures that individuals remain relevant and equipped with the skills needed to meet the job market’s evolving demands. MSC’s research explores essential skills in the digital age and addresses why skilling systems are important.

Understand the needs of vulnerable segments, such as women, people with disabilities, and workers in rural areas

Gender disparities persist in the digital economy. Women spend 2.6x more time than men on unpaid care and domestic work, which restricts the time they can spend on paid work or upskill themselves. The pervasive nature of digital work exacerbates this situation as it lacks defined working hours, which drives female workers to work for extended periods. Moreover, women have limited access to digital technologies, which hampers their ability to participate actively in the labor force. 

Access to digital platforms and technologies poses significant hurdles for people with disabilities. These issues limit how well they can engage in the digital economy. The lack of inclusive design in software and hardware can further marginalize individuals with disabilities. This restricts their access to educational resources, job opportunities, and online services. 

The urban-rural gap is also a persistent issue in Indonesia. People outside Java encounter several barriers to employment due to limited infrastructure, lower education levels, and a lack of diverse economic activities. The rural economy relies significantly on seasonal and informal jobs, such as agriculture. Formal employment in rural Indonesia was as low as 26% in 2022. 

The digital economy needs concerted efforts from policymakers, industry players, and local stakeholders to eliminate gender, accessibility, and urban-rural gaps and foster a more inclusive and equitable digital economy.
Indonesia has made remarkable strides in the use of technology for economic growth. However, the path forward needs a collective commitment, which would ensure equitable distribution of benefits, foster a skilled and inclusive workforce, and address the unique challenges marginalized groups face. A comprehensive strategy that combines the strengths of the public and private sectors will help Indonesia sustain its digital momentum and thrive in the digital age.