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Indonesia's convenience stores are its next banks

Bank CIMB Niaga's Rekening Ponsel is a mobile wallet service that uses text messaging to make electronic payments.

JAKARTA -- Despite boasting Southeast Asia's biggest economy, Indonesia has one of its most underdeveloped banking sectors. Loans to the private sector equal less than 40% of the country's gross domestic product, compared with the more than 100% for Singapore and Malaysia. Only a quarter of the population owns a bank account, as many of the low-income households that make up the majority of Indonesia's 250 million citizens cannot afford to open one.

     To make financial services more accessible across the archipelago, retailers are joining forces with banks and telecommunications companies in a government-backed program known as branchless banking. Under the program, lenders will be allowed to appoint third parties, such as convenience stores, to offer basic banking services. Regulators are set to lay out guidelines by the end of the year.

     Bank CIMB Niaga, the local subsidiary of Malaysia's CIMB Group, recently teamed up with Indonesia's two major convenience store chains to roll out its mobile wallet service. Shoppers can deposit money into an account linked to their mobile phones and use it to make payments at Alfamart and Indomaret stores, and even withdraw cash via text message. The minimum deposit is only 50,000 rupiah ($4.10), much lower than the requirements for a bank account. Niaga collects a 3,000 rupiah fee for cash withdrawals.

     Budiman Poedjirahardjo, Niaga's head of branch and branchless banking, says his ambitions go further. The lender plans to seek regulatory approval for basic banking services, such as applying for accounts and small loans, to be carried out in the outlets. In other words, Poedjirahardjo wants to turn the stores into bank branches.

Hitching a ride

Convenience stores have grown at a pace that banks can only dream of. The operators of Alfamart and Indomaret have both doubled their store networks over the last four years to a combined 20,000 outlets, six times larger than the total branch network of Indonesia's top three banks. It takes careful planning and investment for a new bank branch to start contributing financially, and the risks are especially high for opening branches in remote areas, where income levels are low. Convenience stores, on the other hand, can start generating revenue immediately and can be franchised out to local store owners.

     Banks are not the only ones aiming to seize this opportunity. State-owned mobile phone operator Telekomunikasi Indonesia, known as Telkom, has also partnered with Alfamart to roll out its mobile remittance service Delima, an acronym for delivery money access. Users can transfer funds by bringing cash to a store and filling in a form with the receiver's name and phone number. The recipient will then be sent a text message that can be used as verification to withdraw the cash at another outlet.

     Telkom has plans to use Delima to boost international remittances to and from the millions of Indonesians living outside the country. The company, which currently has more than 130 million domestic subscribers, has recently made a series of acquisitions to expand its overseas operations. Alfamart, which is opening stores in the Philippines under a partnership with local conglomerate SM Group, could become a part of its infrastructure.

Bringing it all together

Most of Indonesia's major lenders and telecoms have their own mobile payment services and none has so far gained nationwide popularity. Past attempts in other parts of the world show that an integrated service is the key to success. In Bangladesh, BRAC Bank, a private lender that focuses on microloans, set up a joint venture with a U.S.-based financial services company to develop a mobile payment service called bKash. It is now supported by four major mobile operators and has more than 10 million users. In April, the Bill & Melinda Gates Foundation invested in the company.

     Government backing is also crucial. Strict and frequently revised regulations on investment currently limit the ability of foreign companies to play an active role in the banking sector. Incoming President Joko Widodo, who assumes office on Oct. 20, is seen as taking a populist approach to economic policies. He has pledged to support low-income families and boost local businesses. His decisions on branchless banking will likely prove a test of his ability to bring industries together to boost economic growth.

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