For many Indonesians, particularly those familiar with the country’s banking sector, this was shocking news. Citi established its presence in Indonesia in 1968 and since then it has been considered one of the most prestigious and respected foreign banks in Indonesia, by savers, borrowers and employees.

However, Citi lost market share in recent years. If we look at the total market share by assets, Citi's share dropped from 1.2 percent (Rp 73.7 trillion [US$5.08 billion]) in 2015 to 1.0 percent (Rp 75.1 trillion) in 2017, and further down to 0.9 percent (Rp 78.6 trillion).

Nevertheless, this phenomenon was not exclusive to Citi. In fact, Citi is not the first foreign bank to leave the country. Previously Royal Bank of Scotland (RBS) and Rabobank ceased their operations in Indonesia in 2017 and 2019, respectively. In Citi’s case, what makes the story notable is because it is probably the largest and best-known foreign bank in Indonesia to end its presence here so far.

If we look deeper, the departure of these gargantuan global banks from Indonesia, and many other emerging markets, reflects the changing landscape of the global banking system and the growing competition in the national banking industry.

In the past, industry players and policymakers believed that these foreign banks could receive almost unlimited cheap flows of funds from their headquarters to maintain their presence in the overseas markets and compete with domestic players. This benefit was underpinned further by global reputation, prestige and business connections.

The 2008 crisis changed that. After the crisis, large global banks, which are considered the global-systemically important banks (GSIBs), have been subject to more scrutiny by national and multinational regulatory bodies.

Macroprudential policies and regulations such as capital surcharge, stress-testing, and liquidity coverage ratio have increased the operational costs of these banks. These policies demand manpower, know-how and new IT infrastructure that eventually increases the operational costs of these big foreign banks.

As a consequence, the expenditure to maintain their global presence soars, which eventually reduces their competitiveness. Now these banks have to be more cautious in selecting their overseas expansion path by focusing on potentially profitable markets only.

There are also operational and reputational risks, such as human error, fraud and   money laundering. The financial crisis damaged the reputation and prestige of many of these global banks. Hence, global expansion now has to follow a more guarded approach. Some global banks even prefer to trim their branches and focus on digital banking instead, in order to minimize these risks.

Domestic factors play a role too. In line with the goal of the Financial Services Authority (OJK), Indonesia's banking sector is undergoing a consolidation process, where the number of banks declines through merger and acquisition, such as the merger of SMBC with BTPN.

National authorities have also aimed for a reduction in the number foreign entity banks by converting them to local legal entities (PTs). This happened to PT Bank HSBC Indonesia, which integrated HSBC and Bank Ekonomi.

As a result, this consolidation generates bigger and more competitive local banks that can compete with foreign banks due to more innovative products, economies of scale and stronger capital structures.

Some local banks have also integrated their business arms. Hence, where these banks used to offer conventional commercial banking products only, now they offer more integrated services, from commercial banking to investment banking and custodian services. This business model creates a one-stop service for clients, which encourage them to utilize various services offered by a single bank, from borrowing, saving and trade finance to derivative transactions.

Going forward, these trends will lead the banking industry in the right direction. From the competition point-of-view, the industry consolidation will result in a more dynamic banking system. Both local and foreign banks now have to think harder and formulate better strategies to thrive. Consumers may benefit the most, due to more competitive lending and borrowing rates as well as improved transparency in the banking system.

Financial regulators may also see this as a positive since competition improves business efficiency and better transparency increases the effectiveness of banking supervision. As a consequence, prudential regulations can have a more prominent role in maintaining financial stability.

Back to the case of Citi, the bank deserves much credit despite its pullout. It has contributed significantly to Indonesia's banking landscape. It is one of the oldest foreign banks and the pioneer of the wealth-management business in Indonesia. Most giant banks have now entered this business segment.

Citi also played a considerable role in investment banking as a bookrunner, lead arranger, rating advisor for debt issuances that contributed to financial innovations in Indonesia's banking system.

In the end, we can consider Citi's exit as a bittersweet farewell.

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The writer is a doctoral researcher at the University of Birmingham, the United Kingdom.