From Cash to Digital: Indonesia’s Journey to Inclusive Government-to-Person Payments

The World Bank and TNP2K's study on Indonesia's G2P payment systems highlights the success of digitized social assistance programs like PKH, Sembako, and Kartu Prakerja in enhancing financial inclusion and beneficiary empowerment, while identifying persistent challenges in access, literacy, and infrastructure. Policy recommendations emphasize expanding beneficiary choice, strengthening financial education, and improving digital ecosystems for a more inclusive framework.

The World Bank, in collaboration with Indonesia’s National Team for Acceleration of Poverty Reduction (TNP2K), undertook a comprehensive study on the evolution and impact of government-to-person (G2P) payment systems. Supported by the Indonesia Human Capital Acceleration Multi-Donor Trust Fund and the G2Px Initiative Fund, the research focused on three flagship programs: Program Keluarga Harapan (PKH), Program Sembako, and Kartu Prakerja. These programs highlight Indonesia’s transition from cash-based to digital social assistance delivery, aimed at enhancing efficiency, transparency, and financial inclusion. Using a mixed-method approach, including surveys of 3,000 beneficiaries and focus groups, the study examined the successes and challenges of these reforms during the COVID-19 pandemic.

Digital Payment Systems: Expanding Financial Inclusion

Indonesia’s G2P payment system has undergone a significant transformation since 2017 with the digitization of PKH and Sembako, which shifted from cash distribution to bank account-based transfers. This change enabled broader access to formal financial services, particularly for low-income populations. For many, these accounts were their first entry into formal banking, with 85% of PKH and 80% of Sembako beneficiaries reporting they opened their first bank accounts through these programs. The introduction of Kartu Prakerja in 2020 further advanced this effort by allowing beneficiaries to choose between bank and e-money accounts for receiving their benefits. This flexibility encouraged greater engagement with digital financial services, with many beneficiaries using these accounts for transactions beyond social assistance. Despite these advancements, cash remains the preferred option for most beneficiaries, driven by limited financial literacy and access to digital infrastructure in rural areas.

Empowering Beneficiaries Through Choice

The study highlighted the transformative potential of beneficiary choice in social assistance programs. Kartu Prakerja stood out as an innovative model, granting beneficiaries the freedom to select their preferred payment method. This empowerment led to higher account usage for financial transactions and reduced the time and effort needed to cash out benefits. While urban beneficiaries reaped greater advantages due to better access to infrastructure, the program also succeeded in increasing digital financial service usage among rural populations. However, gaps in financial education remain a critical barrier, with many beneficiaries unaware of how to maximize the utility of their accounts or the importance of digital transactions.

Persistent Challenges in G2P Architecture

Despite significant strides, challenges persist in Indonesia’s G2P payment architecture. Limited options for payment accounts and providers, coupled with high access costs, hinder widespread adoption. The centralized onboarding process often results in data mismatches, delaying account creation and benefit disbursement. Additionally, beneficiaries reported difficulties in understanding account management, such as the need to change PINs or the benefits of digital transactions. The lack of robust telecommunications infrastructure in remote areas further compounds these issues, making it difficult for beneficiaries to access payment points or use digital financial services effectively. These challenges underscore the need for improved infrastructure and integration of financial literacy initiatives within social assistance programs.

Policy Recommendations for Inclusive Social Assistance

The study provides several policy recommendations to advance Indonesia’s G2P payment system. First, embedding beneficiary choice as a core principle of social assistance delivery can enhance user experience and account usage. Second, strengthening financial education is critical to ensuring beneficiaries understand and leverage their accounts effectively. Third, expanding the digital payment ecosystem by increasing the availability of ATMs, mobile banking services, and internet connectivity will address accessibility challenges. Finally, improving interoperability among payment systems and integrating data across social programs can streamline processes, minimize errors, and build trust among beneficiaries. These measures aim to create a more inclusive and efficient framework for social assistance.

Toward a Resilient and Inclusive System

Indonesia’s G2P payment reforms represent a significant leap forward in modernizing social assistance systems and promoting financial inclusion. The transition to digital payments has enhanced efficiency and transparency, while programs like Kartu Prakerja have empowered beneficiaries to engage more actively with financial systems. However, addressing persistent challenges, such as limited access to digital infrastructure and gaps in financial literacy, is essential to unlocking the full potential of these reforms. By incorporating the lessons from this study, Indonesia can refine its G2P roadmap to create a more inclusive, effective, and resilient social assistance system. These efforts not only benefit the nation’s most vulnerable populations but also contribute to broader economic resilience and empowerment.