As fintech matures, 2021 is also expected to become a key year for the digital banking sector in Indonesia, which could give impetus to the country’s financial inclusion, according to industry insiders.
This format of financial management not a new trend in Indonesia as Bank BPTN launched its digital banking platform, Jenius, in 2016. Just a year later, DBS Indonesia also introduced an online bank product, Digibank. However, tech companies are also racing to launch their digital banks in Indonesia, and 2021 might see the inauguration of some.
Digital banks exist in Indonesia in two patterns, according to Sukarela Batunanggar, deputy commissioner of the OJK Institute and digital finance of Indonesia’s Financial Services Authority (OJK), as reported by local media Katadata. The first type consists of digital banks introduced by commercial banks, such as Jenius and Digibank. The second type are completely digital financial institutions established by companies after the acquisition of local lenders or commercial banks. These online banks are also known as neobanks.
The OJK, during its annual meeting in January, conveyed a number of priorities for 2021, like encouraging the consolidation of smaller banks and boosting the development of digital banks. Contrary to Singapore and other Southeast Asian countries, Indonesia does not issue digital banking licenses, so the acquisition of commercial banks or lenders with existing banking licenses is the only way for tech players to enter the country’s banking sector, which seems to be welcomed by the OJK.
Alibaba-backed fintech firm Akulaku pioneered the way in 2019 when it acquired Bank Yudha Bakti, later rebranding it into Bank Neo Commerce in 2020. The bank is not operative yet, as it is currently preparing its digital banking system. In an interview with CNBC Indonesia last September, Bank Neo Commerce chairman Tjandra Gunawan explained that his platform will work with Huawei and Sunline to develop its mobile and internet banking services.
While Bank Neo Commerce is set to become Indonesia’s first neobank, other tech platforms are also tapping the segment. Decacorn Gojek recently invested in Bank Jago, a Jakarta-listed digital bank (previously Bank Artos Indonesia). The goal of the partnership with Bank Jago is to provide access to digital banking services through Gojek’s platform, according to the ride-hailing firm.
“Our aim is to leverage more partnerships like this, to ultimately make the Gojek app a reliable resource for everyone’s financial needs,” Gojek’s co-CEO Andre Soelistyo said in a statement.
Meanwhile, Sea Group, the parent company of Shopee, is hiring in Indonesia for a digital banking push, after reports indicating the acquisition of a local lender. Sea Group, which has recently obtained a digital full-banking license in Singapore, has declined to comment on the matter.
Bank Digital BCA, formed through the acquisition of local lender Bank Royal by Indonesia’s largest private bank, BCA, is also expected to start operations in 2021.
Analysts predict that there will be more tech companies, particularly e-commerce platforms, entering the digital banking segment in Indonesia. For instance, e-commerce unicorn Bukalapak recently announced a partnership with Standard Chartered bank to “further advance the bank’s focus on digital banking.” Powered by Nexus, a banking-as-a-service solution by SC Ventures, Bukalapak will work with Standard Chartered to provide financial services through the e-commerce ecosystem, according to Bukalapak.
The partnership shows Standard Chartered intention to further advance its focus on digital banking, and signals a growing interest by tech firms such as Bukalapak to be part of the digital banking trend. Bukalapak has also reportedly received a USD 200 million investment from Standard Chartered, although the unicorn has declined to comment on this matter.
“The presence of digital banks in Indonesia will encourage innovation and digitalization of financial services,” said Adrian Gunadi, chairman of the Indonesian fintech lender association (AFPI), also co-founder and CEO of fintech lending platform Investree. “They can also increase financial inclusion as people can open new accounts online,” he added. It is expected that neobanks will provide financial services and channel credit in the retail and micro, small, and medium enterprises (MSMEs) segments.
More opportunities for mergers and acquisitions
Neobanks certainly have advantages over conventional banks. They have low operational expenses while they can reach out to a wider range of potential customers and debtors. Neobanks also offer more comprehensive services compared to fintech lending and payment operators, as they are already integrated with commercial banks.
However, Gunadi believes that digital banks are not a threat to existing fintech players. Instead, they will bring new opportunities for fintech firms to collaborate and develop a more comprehensive digital ecosystem. “We can explore potential collaboration with digital banks which can benefit both lenders and borrowers, especially MSMEs.”
Bhima Yudhistira, an analyst from the Institute for Development of Economics and Finance (INDEF), shares this sentiment. He thinks there will be tight vertical integration between digital banks, peer-to-peer (P2P) lenders, and fintech firms. He also expects to see mergers and acquisitions between small fintech players and upcoming digital banks.
“Since fintech has advanced technology such as big data and AI-based credit scoring, digital and neobanks can work with fintech platforms to tap into their tech capabilities,” said Yudhistira.
The collaboration between digital banks and fintech firms, or between smaller banks and tech companies, can offer a win-win solution to all parties. Last year, OJK raised the minimum required capital for smaller banks from USD 7 million to USD 212 million, effective by the end of 2022. Banks that don’t have that minimum capital need to find new investors or merge with other banks or financial institutions to maintain their license and operations, which opens the way to more investment by tech companies into the sector.
Moreover, digital banks also open up an opportunity for parent companies to finally make money, said Yudhistira. Companies like Gojek and Sea Group have been burning a lot of cash in the e-wallet sector. But with banking, they will be able to provide more financial services, in particular loans, that could be “very lucrative,” Yudhistira explained.
New regulation is needed
Currently, Indonesia’s legislation does not have specific rules to regulate digital banking activities, as the current directives by the OJK and Bank Indonesia (BI) only focus on tech-based lending, fintech, e-money, and digital services provided by commercial banks.
The lack of clear regulation provides a space for neobanks to launch certain innovations that could benefit operators, but could also be risky for customers.
“One example is when a fintech company acquires a commercial bank or vice versa. There will be a transfer of data between the two firms, but there is no provision governing that data transfer mechanism, or how the company handles users’ data. And since the data protection law has yet to be passed, there is no guarantee of data protection for consumers,” Yudhistira explained. He insisted that a new set of regulations for neobanks is needed for the healthy development of the sector.
“This also includes encouraging small fintech players to collaborate with digital banks,” Yudhistira added.
Nevertheless, defining new regulations is certainly not easy, said Investree’s Adrian Gunadi. Industry players and regulators need to discuss and think about the right business model, so that regulation will be effective and on target. “At the initial stage, a regulatory sandbox may be necessary, like when fintech lending started to emerge in Indonesia a few years ago,” Gunadi added.
An uphill battle for financial inclusion
Experts agree that a growing presence of digital banking will boost financial inclusion in Indonesia. Yet, there will be many challenges as digital banks develop their operations, as the country has an uneven digital infrastructure, especially in rural areas. Low financial literacy is another hurdle to overcome.
“I predict that in the next five years, the adoption and business of digital banks will still be concentrated in Java Island [Indonesia’s administrative center]. Even fintech lending today still faces the same problem, the majority of their loan distribution is in Java and they are struggling to penetrate in rural towns,” said Yudhistira.
He added that digital banks must compete with community development banks operating in towns outside of metropolitan areas. Community development banks provide banking services through branch networks in less developed areas of Indonesia and can get third-party funds from the state budget. Neobanks, however, won’t have financial support from the government, so it may be difficult for them to grow outside of big cities.
Another challenge is represented by a lack of trust in digital-only institutions. “During the pandemic, cybersecurity attacks increased sharply, not only in Indonesia, but also globally. This can make it difficult for neobanks to grow because people are worried about making transactions fully digitally,” said Yudhistira.
Indonesia’s internet penetration rate reached 73.7% or around 196 million users in the second quarter of 2020, according to the Indonesian Internet Providers Association (APJII). Meanwhile, Statista estimates the adoption of mobile phone usage is also increasing, reaching 70.5% in 2020 and will continue to rise to 89.21% by 2025. These factors could spur major consumer adoption of digital banking.