CGD Policy Paper 221, published in July 2021, examines the binding constraints on digital financial inclusion in Indonesia using the decision tree approach. Despite efforts to increase financial inclusion and the growth of digital payment services, a large portion of the population remains unbanked. The analysis focuses on e-money, one of the products with the potential to increase financial inclusion. The study finds that a regulatory framework that creates an unlevel playing field between banks and nonbank providers is a crucial binding constraint on the expansion of e-money services. Regulatory restrictions on cash-out services, agent recruitment, and know-your-customer processes are at the core of the problem. Additionally, a perception of low benefits from formal financial services and a lack of critical mass of customers in remote and rural areas also hinder the expansion of e-money services. The study also identifies other constraints, such as low provision of digital infrastructure in rural areas outside Java, that are binding for some specific groups. Overall, the findings suggest that regulatory reform and increased access to digital infrastructure are necessary to expand financial inclusion in Indonesia.
