E-KYC: Digital Economy’s Main Pillar

Every day, news continues to emerge about developments in Indonesia’s digital economy. This could be about the latest issues regarding financial technology, e-commerce or even the metaverse. It is undeniable that Indonesia's digital economy has made a large economic contribution, even though it is currently in decline because of the Covid-19 pandemic.

According to the Google, Temasek & Bain report, the valuation of Indonesia's digital economy, which increased 49 percent in 2021 to US$70 billion, is projected to increase further to $146 billion by 2025. The high potential growth of the digital economy is inseparable from the sharp increase in digital activities in various sectors such as e-commerce, which grew 52 percent, while transportation and food delivery services increased 36 percent in 2021.

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Along with these developments, a safe and fast identification system is needed to support various activities in digital space. For this reason, the electronic know your customer (e-KYC) ecosystem should be expanded and strengthened to encourage the development of Indonesia's digital economy. E-KYC has long been applied in the financial industry to verify a customer’s identity.

There are two basic things that encourage the use of e-KYC in Indonesia. One is the internet penetration rate and the other is the smartphone penetration rate. In terms of internet penetration, according to Statista, internet users in Indonesia comprised 72.8 percent of the total population while smartphone penetration reached 72.1 percent in 2021. According to the Google, Temasek & Bain report, Indonesia saw 21 million new digital consumers during the pandemic, of which 72 percent were in non-metropolitan areas.

Based on McKinsey data, in terms of digital identity in the Indonesian population, as many as 168 million Indonesians (63 percent of the population) have digital identities while 96 million Indonesians (36 percent of the population) already have an identity, but not a digital one. According to the Home Ministry, only 3 million Indonesians (1 percent of the population) do not have an identity at all. The number of identity ownership is predicted to increase in line with the Home Ministry’s efforts to increase its record of electronic ID cards.

E-KYC enables the creation of economic value for various groups of people as well as micro, small and medium enterprises (MSMEs) in various sectors by giving them wider access to services. It also helps reduce fraud, increase transparency, and promote efficient digitalization.

In the banking sector, for example, e-KYC plays an important role in increasing access to financial services. With remote customers, e-KYC can be used to identify customers through a highly secure process. In this way, the banking sector can reduce operating costs because there is no need to maintain a physical office.

In other sectors, such as the capital market, the presence of an integrated e-KYC will make it easier for retail investors to invest, such as in purchasing retail government securities. E-KYC is also useful in public services, such as in verifying the background of social aid recipients so the aid can reach the targeted recipients.

Potential and challenges

One country that has pioneered the use of digital identity is Estonia. Smart-ID in Estonia enables 99 percent security for online delivery of public services, with faster KYC checks, online voting, and digital tax payments.

Efforts to strengthen the e-KYC system in Indonesia face various challenges. Personal data protection policies are still scattered across various regulations. According to the Institute for Community Studies and Advocacy (Elsam), at least 46 regulations in various sectors have content related to personal data.

On the other hand, low public awareness on the importance of protecting personal data has also increased the opportunity for data breaches.

In addition, the rise in cases of personal data misuse has eroded public confidence in data management by both private and government institutions. On the other hand, low public awareness on the importance of protecting personal data has also increased the opportunity for data breaches.

To strengthen the e-KYC ecosystem, three strategies can serve as a basis for policy direction for the government and regulators.

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First, it is necessary to publix build trust in the digital ecosystem, often called digital trust. In this regard, it is necessary to accelerate deliberation of the Personal Data Protection Bill so there is a strong legal umbrella for digital space. In addition, the quality of infrastructure and digital talents needs to be developed and improved to support a robust data management system.

Second, it is necessary to add data parameters outside of ID cards to ensure the accuracy of users’ personal data. The use of e-KYC in various sectors also needs to be expanded, not only in the financial sector, in order to support growth of Indonesia’s digital economy. Furthermore, e-KYC services should be affordable, especially for the retail needs of various sectors.

Third, e-KYC requires a conducive digital ecosystem. In this regard, it is necessary to encourage improvements in digital literacy. Massive public education is therefore needed to increase digital literacy, such as by building awareness on the importance of protecting personal data. This is in line with one of the priority issues raised by the G20’s Digital Economy Working Group, namely digital skills and digital literacy.

In the end, it should be underlined that discussions about e-KYC are not only about efficiency and acceleration but also about security, which plays a crucial role in encouraging the formation of a healthy digital economy ecosystem. Growth in the digital economy will be meaningless if it is not accompanied by continuous efforts to mitigate risk, strengthen security, and protect consumers, with e-KYC being one of the most important pillars.

KOMPAS/IWAN SETIYAWAN

Mirza Adityaswara

Mirza Adityaswara, is chairman of the Indonesian Fintech Society (IFSOC)