1

Topik Kebanksentralan II

Digital Economy and Finance: Concepts and trends

Mata Kuliah Kebanksentralan II

Ibrahim Kholilul Rohman, Ph.D

Bahan ajar ini merupakan milik BI Institute dan digunakan untuk kepentingan pengajaran yang terkait dengan BI Institute. Penggunaan
materi di luar kegiatan BI Institute perlu mendapat persetujuan.

Learning Objective, Goals and Outcome
Learning Goals
1. To explain the definition and the basic concepts of
digital economy
2. To familiarize with benefits and risk, the basic
statistic and the measurement of the digital sector
Bahan Ajar Kebanksentralan II – 2020/2021
2
Learning Objectives
1. To elaborate different scope of core, narrow and
broad definitions of the digital economy
2. To detail different layers of digital sector based on
the ICT ecosystem approach
3. To connect the concept with the problem of
digital divide in Indonesia
1. To acknowledge benefits and risks of the digital
sector
2. To understand the common classification of ICT
sectors based on OECD
3. To disentangle the ICT component of
manufacturing and services
4. To map the development of the digital economy
globally and nationally

Learning Objective, Goals and Outcome
Learning Goals
3. To explain the basic definition of the financial
technology and the impact of digital sector on
economy
Bahan Ajar Kebanksentralan II – 2020/2021
3
Learning Objectives
1. To understand the definition and the coverage of
financial technology
2. To realize the recent updates in Indonesia
3. To acknowledge the basic understanding on the
Central Bank Digital Currencies (CBDC)
4. To detect the impact of digital economy on
growth and inflation
 4

Learning Objective, Goals and Outcome

No Learning Output LG/LO Evaluations
1 Students understand the basic concepts of the digital economy 1.1 Quizz
from core, narrow and broad concepts
2 Students understand different sector of the digital economy 1.2 Quizz
based on ICT ecosystem framework
3 Students are able to the give nuances on the development of 1.3 and 2.3 Quizz
digital economy at the global and national levels.
4 Students familiarize with the measurement of digital economy 2.1 and 2.2 Quizz
globally accepted.
5 Students recognize the basic concept of financial technology 3.1 Quizz
and how this branch has evolved
6 Students acknowledge the recent development of Fintech using 3.2 Quizz
the more updated data at national and regional levels
7 Students realize the basic understanding on CBDC: its impacts 3.3 Quizz
and challenges.

Bahan Ajar Kebanksentralan II – 2020/2021

Competences 5

THE TRAGETTED COMPETENCES

Digital Economy and Finance: Concepts and trends
Statistics and
Basic definition Two-sided markets Global comparison
measurement
Core, narrow and Financial Solow productivity
ICT manufacturing paradox
technology
COMPETENCES

broader
Peer-to-peer General purpose
ICT ecosystem ICT services technology
lending
EU-US productivity
Digital divide Network element Cryptocurrencies
gap
The business Switching cost and
Network operators CBDC
model lock-in
Network Internet and Inverted-U demand
Money flowers
externality applications curve

Bahan Ajar Kebanksentralan II – 2020/2021

Contents

Digital economy-a glimpses

ICT ecosystem
Digital divide
The business model
Three causal relationship between financial sector and technology
Financial sector on technology
Technology on financial sector
Reinforcement between the two
Digital Finance
The Central Bank Digital Currencies (CBDC)
Contents

Digital economy-a glimpses

ICT ecosystem
Digital divide
The business model
Three causal relationship between financial sector and technology
Financial sector on technology
Technology on financial sector
Reinforcement between the two
Digital Finance
The Central Bank Digital Currencies (CBDC)
Digital economy

• A transformation of the economy with the

emergence of ICTs being used in every aspect of
life.
– Businesses activities adjust their supply and
demand chains and their internal organization to
fully exploit ICT responsible for creative
destruction through the birth of new firms and
greater productivity in other sectors of the so-
called General Purpose Technologies (GPT).
– The diffusion of ICTs in almost all aspect in the
daily life from common users perspective (OECD,
2009, p.13)
Academic definition

Broad scope
Digitalized economy

Narrow scope
Digital economy

Core : ICT sector

Digital services, platform economy

Electronic commerce, industry 4.0, algorithmic

economy, e-business
Classification
The
The share
share
Global of of
digital
digital employment
global
economy over total
digital sectors onemployment
GDP

Source : European Commission, PREDICT (2019)

How digitized have we been?
Intensities of digital sector: Indonesia and other
countries

Source: WIOD
Multiplier coefficients of digital sectors between countries
(2000-2014)

The challenges:
• The greater multiplier coefficients are generated
by manufacturing of ICT in every country.
• However the value has been decreasing all the
time in Indonesia
• Telecommunicationss, despite having greater
value added, entails the lowest multiplier
• See LIRE study in 2011 that Indonesia´s
telco usage has a disconnection with
economic activities

• As a comparison, The stability over the years has

proven to bring India as one of the strongest
representing lower middle income countries
• Manufacturing in particular remains robust while
telecommunications and computer programing
declined
• The key is ICT manufacturing

Source: WIOD
Over the years indonesia seems to be more digitized

• From the blended ICT

share and disentangled
by ICT component, it
seems that digitization
Indonesia has been seen
especially concerning
telecommunications
inputs

Source: EORA 1975-2015

PROGRESS OVER THE YEAR: ICT
Contents

Digital economy-a glimpses

ICT ecosystem
Digital divide
The business model
Three causal relationship between financial sector and technology
Financial sector on technology
Technology on financial sector
Reinforcement between the two
Digital Finance
The Central Bank Digital Currencies (CBDC)
Framework: ICT ecosystem
Institutional problem: ICT ecosystem
The producers and users of knowledge in the ICT
Sector
Demand side:
affordability
• Network elements
Literacy, privacy dan
• Network operators security: Kominfo,
OJK
• Apps and internet content
• Final consumer
Bank Indonesia, OJK,
Kominfo, Perdagangan,
Lintas kementrian

DTA

BRTI/ Kominfo

Menteri Perindustrian, Menistek,

Kominfo
Synchronized strategy in the digital sectors
We have to touch upon the whole ecosystem

Affordability, broadband access price <5% income

Digital divide in internet access and use

Privacy, security, and data protection Optimization between producers,

consumers and platforms

Digital and financial

inclusion

Network sharing, digital dividend and ASO

OTT vs telco?
Waterbed effect?

Last mile connection to connect to Palapa

Ring backbone
FTTH
The market structures of digital industry

Initially the market will be more

monopolistic competition that can easily
turns into oligopoly once the network
externalities are fully achieved

Generally oligopoly with regulation as the

barrier to entry

Generally oligopoly with barrier to entry in the

forms of intellectual capital and exorbitant
fixed cost
 22

Layer 3 Layer 2

HHI=0.1964

HHI=0.2467

HHI=0.498

Layer 1
Contents

Digital economy-a glimpses

ICT ecosystem
Digital divide
The business model
Three causal relationship between financial sector and technology
Financial sector on technology
Technology on financial sector
Reinforcement between the two
Digital Finance
The Central Bank Digital Currencies (CBDC)
Digital divide
The gap between individuals, households, business and
geographical areas at different socio- economic levels with
regards to the oppotunity to access information and
communication technologies (ICTs) and to thier use of the
Internet.
(OECD, 2001)
Determinants of digital divide

Knowledge Phychology
&skills factors & culture
Price,
Speed,Content
Socio-Economic & Quality of
status service

Institutional,
Infrastructure Digital
structure and type
divide
of government

Chalita Srinuan & Ibrahim Kholilul Rohman & Pratompong Srinuan & Erik Bohlin, 2010.
"Digital Divide in ASEAN Countries: Explaining the Gap," Chapters,in:
Competitiveness of the ASEAN Countries, chapter 7 Edward Elgar Publishing.
Coverage: the demand side

PENETRASI INTERNET INDONESIA

KOTA/KABUPATEN 2017
72.41%

49.49% 48.25%

URBAN RURAL-URBAN RURAL

6.759 does not have any access to telecommunications signal Pengguna Internet

6.961 does not have access to the internet

5% - 40%  the ratio of internet gap
97,67%  the lowest ratio at Mamberamo Tengah,
Province of Papua
Source: Podes, 2018. Aggregated at cities level
Contents

Digital economy-a glimpses

ICT ecosystem
Digital divide
The business model
Three causal relationship between financial sector and technology
Financial sector on technology
Technology on financial sector
Reinforcement between the two
Digital Finance
The Central Bank Digital Currencies (CBDC)
Network externality

• Varian (2003) explains:

– unlike other sectors, the consumers’
utility regarding particular goods and
services of ICT products is affected by how
many other people purchase the product
(Varian, 2004, p.33).
– Consequently, there is a distinctive
demand for ICT services compared to the
traditional downward-sloping demand
curve for other goods and services.
– Varian explains the inverted U-demand
curve in the case of ICT services as shown
in the following Figure.
Network externality

• The critical mass points are drawn in A

and B:
– at point A, demand will return to the
original level, indicating that the network
is not large enough to sustain the
interconnection between users. In other
words, among the three equilibriums (the
one which intersects the Y axis, A and B),
the middle one (A) is unstable since it
describes the critical mass.
– If the market can get above the critical
mass, positive feedback kicks in and the
product boosts to success.
– However, if the product never reaches
the critical mass, it will go back to a
zero demand-zero supply equilibrium.
 Business Process
Phase in which the Peak of Inflated Expectation
new technology • We imagine what can this technology do? We
has enough basis imagine, wildly, our future and sometime
user for generating make an impulsive decisions.
• Case: Technology boom 1990s, bitcoin
profit.
Critical phenomenon, and artificial
Mass intelligent/machine learning adoption.

Trough of Disillusionment
• Phase in which we are disappointed by the
reality of technology.
• Case: dot com crisis, drop of bitcoin value,
and Softbank vs WeWork.

Slope of Enlightenment
• We adjust the valuation of the future the
new technology.
• Case: After dot com
Understanding the business model in ICT Ecosystem

This is where pretty much ALL

Final Consumer Indonesia´s digital sectors are
located Innovation 1
Idea Based
Platform Provider Start-up Zone Valuation

Network Operator
Innovation 2

Asset & Performance

Equipment Provider Based Valuation

∆𝑉1 ∆𝑉 2
∗ 𝐼𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛 1 > ∗ 𝐼𝑛𝑛𝑜𝑣𝑎𝑡𝑖𝑜𝑛 2
∆𝑡 ∆𝑡
“Acceleration of innovation in innovation 1 is more than innovation 2 because of
peak of inflated expectation.”
 Revenue Stream & Valuation

Data
User Activity 1 Industry 2 Industry 1
Service

Data Data
Platform
Revenue
Data Data

Data
User Activity 2 Industry 4 Industry 3
Service

• Platform maximizes the value of economies of scale from the network effect by providing the database generated from
decision process of users for industry in the real sector.
• That’s why the ratio of valuation-asset (or valuation-earning) of the platform is higher than industry in the real/ physical
sector.
• Their assets are mostly intangible making the balance-sheet valuation does not match with the nature of the industry
 “The term "Big Tech", along with its synonym "Tech Giants", has
been used to refer to the largest and most dominant companies
in the information technology industry. By the end of the 2010s,
Big Four American technology companies – Amazon, Apple,
Google and Microsoft – were, besides Saudi Aramco, the most
valuable public companies globally.”

Case of big tech

Giant Tech Companies source: businessinsider.com

Revenue Breakdown
The Case Of Microsoft
Business Model
Balance Sheet

- For an industrial company dealing with

physical assets and goods, the balance
sheet presents a reasonable picture of
productive assets and the income
statement provides a reasonable
approximation of expenses required to
create shareholder value.

- Balance Sheet has little salience for a

digital company.

Why?
Motornya Airbnb gak
bukan punya punya rumah
Gojek

Asset : $9B Asset : $160B

Value ; $500B Value ; $300B
 The Building Blocks for
Digital Companies

Organizational Human
R&D Brands Strategy Capital

Peer and Customer and Computerized

Supplier Social Data and
Networks Relationships Software,
Benefits of the digital sectors (1)

Source: Rohman (2012)

 42

Benefits (2) Telecommunications

Benefits (2) Telecommunications
Benefits (3)
On pricing: Technology becomes cheaper

Research and development

Membership organization Financial sectors Final demand

Decreasing 10% 0.2%-0.5%

of media and increases in
content price Intermediate demand to other sectors GDP

Retail trade Wholesale trade

Insurance

Source: Rohman (2011)

 45

Benefits (4) More advanced broadband technology

Source: Rohman (2012)

Risks (1): barrier to entry

• Patents on technology give a The market for

Price a technology
monopoly to the inventor.
• Bigger companies especially at layer
1 has an early mover advantage PM

• When the PC = MC
patent expires,
the market D
becomes competitive for the MR
entrants
QM Quantity
QC
 47

Risks (2): monopoly of technology

 48

Risks (2): monopoly of technology

The problems concerning Data-opoly
• Data-opolies can affect how we feel and think creating the
following problems:
• Bias. In filtering the information we receive based on
our preferences, data-opolies can reduce the
viewpoints we receive, thereby leading to “echo
chambers” and “filter bubbles.”
• Censorship. Data-opolies, through their platform, can
control or block content that users receive, and
enforce governmental censorship of political or
religious information.
• Manipulation. Data-opolies can promote stories that
further their particular business or political interests,
instead of their relevance or quality.
Risks (3): Solow productivity paradox
• Solow’s statement about the impact
of computers:
“PCs are showing up all over the
world, but not in productivity statistics”.
• Why:
– Firstly, the results of this
spending are applied locally and
cannot be expected to show up in
aggregate statistics at the national
level
– The benefit from IT investments
often requires structuring or major
cost cutting, and it is thus possible
that firms have yet to undertake
reporting this to the government.
– The measurement problem also
potentially contributes to this
issue
• The productivity paradox, also referred to as
the Solow paradox, could refer either to the
slowdown in productivity growth in the United
States in the 1970s and 1980s despite rapid
development in the field of information
technology (IT) over the same period
• the slowdown in productivity growth in the United
States and Developed World from the 2000s to
modern day 2020s; sometimes the newer slowdown
is referred to as the productivity slowdown,
the productivity puzzle, or the productivity paradox
2.0
• During the Covid time and before: lay-off in tech
companies
Contents

Digital economy-a glimpses

ICT ecosystem
Digital divide
The business model
Three causal relationship between financial sector and technology
Financial sector on technology
Technology on financial sector
Reinforcement between the two
Digital Finance
The Central Bank Digital Currencies (CBDC)
The issue of shadow economy

The shadow economy (SE) -unrecorded and •• It

It is
is measured
measuredby:
by (Schneider,
unreported economic activities- has been a
–2005; Veiga & Rohman
the discrepancy between 2018):
national
problem hampering economic progress as:
• it impacts tax revenue • the discrepancy
expenditure and income
between statistics;
national
• Increases unemployment rate second, between
expenditure and income statistics;
• associates with a higher inflation rate second,
– the officialbetween
and actual labor force
• Entails a greater probability of sovereign • the
– the officialofand
volume actual labor
transaction andforce
GNP
default
• produces negative spillover effects
• the
– the volumefor
demand of currency
transactionasand
it GNP
• a 1% increase in the SE lowers the growth
rate of the “official” GDP by 0.6% in
• the demand for
increases SE

developing countries. currency as it

increases SE
Three-variant of causalities between technology and CB
and financial sector
The function of Central Bank will be similar of that the
relationship between the CB and other sectors, i.e.
Manufacturing, services or trade. CB facilitate the ER stability to
maintain the growth of the sector. In this case: CB should be
monitoring and facilitating (CASE 1)

The function of Central Bank will be affected by the emergence of

the layer 3 of the digital sector (fintech, payment platform etc.)
which concerns with payments, creation of money and the speed
of financial inclusion Big parts of this have been shifted to the
role of OJK. In this case: CB should be anticipating the impact on
velocity of money, money multiplier and the stability (CASE 2)

The most tasking one: how the landscape of CB functions change

due to technology (e.g. CBDC) . In this case: CB should learn,
adapt and decide the most suited one (CASE 3)
Contents

Digital economy-a glimpses

ICT ecosystem
Digital divide
The business model
Three causal relationship between financial sector and technology
Financial sector on technology
Technology on financial sector
Reinforcement between the two
Digital Finance- financial technology
The Central Bank Digital Currencies (CBDC)
SMEs Financing Gap in ASEAN
Source of Capital (%)

External Mixed
5% 15%

Own
capital
80%

Source: Iwasaki (2018), Statistics Indonesia (2017)

The Emergence of FinTech

Source: FSA (2018)

Digital payment can be inclusive
Case of NTB: E-Cash Partnership with Wira Singa Cooperative
PROS
- No need of internet
and smartphone:
USSD *141#
- Faster and safer
- Multiple function
- Fee for cooperative,
SHU for member
CONS
SMS charge, doubt of
security, network

Foreign e-wallet generates benefit for tourism

Case of Bali: Local merchant partnership with SMESS (Feature: WeChat Pay, QQ Wallet, and other Chinese e-Wallet

- Attract Chinese customers

- Save more money for tourists, no need to exchange
money
- Offers and cashback for tourists
- Fee from WeChat
“Competition with the parallel process of money
creation”

Source: Bloomberg
Case 3. Technology and financial sector
reinforce each other (e.g. CBDC)
Contents

Digital economy-a glimpses

ICT ecosystem
Digital divide
The business model
Three causal relationship between financial sector and technology
Financial sector on technology
Technology on financial sector
Reinforcement between the two
Digital Finance- financial technology
The Central Bank Digital Currencies (CBDC)
 What are CBDCs?

• CBDC is an electronic account to central

banks that can be used to make payments Bank notes in circulation = CDBC
and store value in electronic central bank
money, alongside physical cash, an
electronic equivalent to banknotes,
denominated in the national, currency
 It allows businesses and It is a claim to the
households to hold balances in central banks
central bank money and to pay
each other in real time with full and
final settlement in electronic format Bank notes in circulation ≠ CDBC

Physical Digital

Source: Bank of England

 Money flower

CBDC
 Available to public without
restriction
 Co-circulated with cash and
other digital currencies by the
private sector
 Convertible with cash at a fixed
rate
 While public have the access
without restriction, the CANNOT
borrow from the central bank ---
no negative holdings
 The central banks might/might
not pay interest

Source : BIS (2017, 2018)

EGOV’5 - 2018
Benefits and Risks on issuing CBDC

BENEFITS RISKS

•Likely to be safer to distribute rather •Access limited to niche of users

than cash • Set up cost and maintenance cost
•Safer liquid assets store at central often high especially together with
bank cash
•Ensure that public will have legal • Additional compliance and monitoring
tender of cash is phase out • Vulnerable to electricity outrage unlike
•Faster settlement to the end users cash
•Lower transaction fees compared with • Unlike the private ones, it is not
conventional banking borderless
•More anonymity compared to • Bank runs
conventional banks card • Reduce the ability of commercial
•Cotrol currency issued easier to check banking for creating credit

Source : The Central Bank of New Zealand

EGOV’5 - 2018
Disruptions
Implication on monetary policy

BENEFITS RISKS

•It can be used as direct •Reliance on the wholesale

monetary policy tool if it funding market
was interest bearing •Reduction in bank
•Ensure monetary policy resiliency
effectiveness with the •Risks on bunk runs
extensive take-up from the
private digital currencies

EGOV’5 - 2018
Implication on balance sheet
RISKS

• Access limited to niche of

users
• Set up cost and
maintenance cost often high
especially together with cash
• Additional compliance and
monitoring
• Vulnerable to electricity
outrage unlike cash
• Unlike the private ones, it is
not borderless
• Higher exposure to bank
runs
• Reduce the ability of
commercial banking for
creating credit

Source: BIS
EGOV’5 - 2018
The challenges – internal aspects

• Cost associated with the system to be

implemented
• Increasing with the number of usage
• Consensus protocol requires sufficient
resources (broadband capacity,
electricity)
• The most feasible feature :
• A permissioned blockchain, thus only
central bank is issuing money, everyone
else is allowed to be involved in the
transaction but to creating/mining unlike
in private digitalvcurrencies
• Value based vs account based
• Remuneration
• zero or positive rate?
• Similar to interest rate or similar to the
excess bank reserves
As high as the deposit facility rate  it
would be risky as people might prefer to
convert their bank deposits to CBDC

EGOV’5 - 2018
The challenges – external aspects
To be explored

• Inequality across countries

• Electronic payment- credit
card usage
• Infrastructure development
• broadband
• storage
• scalability
• Stage of development
• From wholesale to
household
• Cryptography
• It is all about math
• Whom I am going to
complain if we cannot solve
the problem
• The importance of digital
literacy
EGOV’5 - 2018
Central bank´s view

“As a medium of exchange and unit

of account, money is subject to
substantial network externalities that
alternative currencies seem unlikely
to overcome.

Central banks are better able to

deliver price stability than rigid
monetary rule or an algorithm”

Jens Weidmann
President of the German Federal Bank

CBDC is an important subject with deferent level of

urgencies between countries

EGOV’5 - 2018
 71

Topik Kebanksentralan II

Digital Economy and Finance: Concepts and trends

Mata Kuliah Kebanksentralan II

Ibrahim Kholilul Rohman, Ph.D

Bahan ajar ini merupakan milik BI Institute dan digunakan untuk kepentingan pengajaran yang terkait dengan BI Institute. Penggunaan
materi di luar kegiatan BI Institute perlu mendapat persetujuan.