Indonesian lenders tap into digital banking momentum
Indonesia’s banking sector is on the brink of a revolution as a new breed of digital banks seek to capitalize on the country’s large unbanked and underbanked population, and utilize the digital momentum created by the COVID-19 pandemic. 19 to propel their growth.
During Finastra’s virtual roundtable moderated by Fintech News Networks Editor-in-Chief Vincent Fong, senior executives and policy makers from Otoritas Jasa Keuangan (OJK), Indonesian Financial Services Authority, Bank BTPN , from Bank Neo Commerce and global financial software provider Finastra, examined the state of digital banking in Indonesia.
The webinar looked at the opportunities and challenges brought by digital technologies and shared their predictions of what’s next.
The acquisition frenzy
Tony, deputy director of the Department of Banking Research and Regulation, OJK, said that unlike Singapore and Hong Kong, Indonesia does not have a dedicated digital banking license. Instead, the financial regulator introduced new rules in 2021 to facilitate the introduction of digital banks through acquisitions.
While on the one hand the rules allow almost all foreign ownership of local lenders and reduce red tape for new services, on the other hand the regulator has raised the bar for the creation of new banks in addition than tripling the minimum capital requirements. With this decision, OJK aims to stimulate consolidation in a banking sector characterized by many small lenders.
Formerly known as Bank Yudha Bhakti, the lender officially rebranded as Bank Neo Commerce in 2020 as part of a digital banking shift. Alibaba-backed fintech company Akulaku had acquired stakes in the small lender since 2019 before finally taking over in October 2021.
Akulaku is one of several fintech operators and technology providers that recently acquired banking licenses in Indonesia, which they are in the process of reallocating.
In late 2020, Indonesian internet giant GoJek took a stake in Bank Jago to start offering digital banking services directly from the GoJek app. Meanwhile, Sea Group’s e-commerce arm, Shopee, acquired local lender Bank Kesejahteraan Ekonomi in February 2021 with the aim of turning it into a digital bank. Hong Kong virtual bank WeLab said last year it had raised $240 million to acquire Bank Jasa Jakarta with plans to launch its second digital bank in Asia.
Improve financial inclusion
It is also hoped that digital banking services will help improve financial inclusion. With approximately 270 million inhabitants, Indonesia is the fourth most populous country in the world. While half of the population remains underbanked and underbanked, around 60-70% own a mobile phone, which means huge growth prospects for digital banking.
“We see digital banking as very beneficial for Indonesia, which is a very big country with a big population,” Tony said.
“Digital banks…make it easy for people to get services. People just need to download an app and opening an account now only takes a few minutes… It is important to increase our financial inclusion in Indonesia.
Tjandra Gunawan, Chief Executive Officer and CEO of Bank Neo Commerce, said the wave of digitalization triggered by COVID-19 has already helped boost financial inclusion, noting that between 2019 and 2020, the proportion of individuals financially excluded decreased by 25 percentage points.
“It shows really good movement,” Tjandra said.
“We believe that in 2021, the number will be even lower as more digital banks are launched and more traditional banks also adopt digital banking. We will succeed in reaching new customers.
COVID-19 is driving digital adoption
Although digital adoption has been on the rise for years, the COVID-19 pandemic has accelerated the pace of adoption, forcing banks to innovate faster.
“Before, digitalization was not in [some of Indonesian banks’] priority list. Because of COVID-19, they had to put digitization at the top of their list. They had no choice, they had to survive and serve their customers,” Tjandra said. “For banks that had gone through a digitalization plan, with COVID-19, the momentum is higher, so they had to go faster.”
Echoing Tjandra, Calvin Boo, Head of Retail Banking, Global Solutions Consulting APAC, Finastra, said digital banking is “definitely heating up in Indonesia,” noting that his business has seen a rapid acceleration in engagement with local lenders seeking to transform . “It’s an exciting time for digital banking in Indonesia,” Calvin said.
Finastra, headquartered in London, provides products and services to the retail banking, transaction banking, lending and treasury capital markets, serving clients such as American Express, Commonwealth Bank of Australia, Bank of China and BNP Paribas.
In Indonesia, Finastra’s Fusion Digital Channels online and mobile software portfolio powered Bank BTPN’s Jenius mobile banking platform from the start.
“The BTPN bank, five years ago, began to look into [the digital banking] opportunity. It was a first time to have a digital bank,” said Darmadi Sutanto, Deputy Director of BTPN Bank.
“BTPN Bank was not a top bank at the time, so we needed to think outside the box to be able to be present in the retail banking sector. This is how Jenius was born in 2016.”
As of the first quarter of 2021, Jenius had 3.18 million users, making it the leader in the Indonesian digital banking space. But while being an early adopter has certainly given the bank a leg up, maintaining its leadership position is becoming a bit of a challenge.
“The competition came very quickly, especially during the pandemic. Over the past two years, we have seen so many more competitors to traditional banks as well as neobanks,” Darmadi said.
“It has created dynamism and enrichment in the country… For me, competition is about becoming better institutions [and offer better] solution.”
Evidence of the rapid adoption of digital banking is the surge in signups Bank Neo Commerce has witnessed since transitioning to a digital bank less than a year ago, Tjandra said.
“Over the past two years, digitization has become so massive. Last year alone we saw 13.3 million customers. We had just launched our application in March 2021. So, in just 10 months, we were lucky to have 13.3 million users. This shows the great public interest in using digital banking services.
As digital banking continues to grow, Calvin believes demand for banking as a service (BaaS) will increase, in addition to open banking and open APIs.
For BNTP Bank’s Darmadi, global trends such as lifestyle banking will finally reach the shore of Indonesia. Given the country’s youthful demographic, customer retention will be about providing life services in addition to banking services and enticing customers with rewards.
“Today, switching from one bank to another is so easy, so it’s important to build loyalty, consistency and trust,” Darmadi said. “If you talk to Gen Z or Millennials, they see banks as a tool for them. A banking app is no different than any other mobile app in meeting their needs.
At OJK, Tony said the regulator is considering introducing two pieces of regulation, including one involving digital banking and IT risk management.
“With digital banking regulation, we will try to follow what we have already published in our Blueprint [for Digital Transformation in Banking]”, said Tony. “Currently we are still working on these regulations, then we will publish a draft and get the information from the industry.
Cybersecurity rules are also in the works, he said, adding that the regulator is working with international peers given the global nature of cyber threats.
“One of the greatest risks [of digital banking] is cybersecurity and due to its global nature, we understand that we need to communicate with other financial regulators and that there are systemic risks,” said Tony. “That’s why we have collaborations with other financial regulators around the world to address cybersecurity risks.”