Technological progress, the rise of millennial customers and the rise of fintech companies requiresbanks to transform their business. Technology has changed the world with the Internet of Things (IoT), gamification, artificial intelligence and digital assistants, omnichannel, blockchain, big data as well as robotic process automation (RPA). Automation will replace human labor in routine and repetitive tasks in the banking sector, such as new account creation, bookkeeping, accounting and auditing, teller tasks and loan issuance.

The demographic bonus in Indonesia will make the millennials a primary customer group for banks in the next five to ten years. As they are digital natives and technophiles, bank services should be adjusted toward their digital usage. They may not be familiar with conventional saving services, since most of their daily transactions are conducted through smartphones and fintech services. They want personalized, quick and easy services.

Those changes force banks to transform to secure their own relevance. Those that refuse to accept the changes and refuse to adapt accordingly will lose out in competition and be forced to close their business. What kind of banks can survive in the new environment and competition? Bank 4.0 businesses with the following four characteristics stand ready to survive or even expand.

The first characteristic is that banks will transform from product-based companies to service-based companies. Currently, banks offer their customers ready-made products. However, this approach will no longer suit the characteristics of future customers. Banks need to offer solutions instead of products. To offer solutions for customers’ problems, banks need to fully understand their customers.

This leads to the second characteristic of Bank 4.0: being customer centric. Personalized e-services will be the norm, this includes a personalized user experience, personalized offers, personalized advice and personalized marketing. As millennials will become banks’ prime customers, banks need to understand millennials’ needs and preferences.

Based on the Millennials Survey conducted by Mandiri Institute in 2018, the most-used banking products by millennials are savings accounts (91 percent) and transactions (78 percent) and the most-used nonbanking products are transactions (31 percent) and insurance (32 percent). Almost 60 percent of millennials use noncash payments more than ten times a month, and 53 percent use mobile banking apps more than ten times a month. Fifty-five percent rarely go to tellers or use internet banking, while 36 percent never use internet banking in a month. This reflects millennials’ needs for quick and easy services.

Even the different user experience of mobile banking and internet banking services resulted in significant different frequency of using those services. Millennials’ demands for banking services and products are dominated by apps, online services, mobile banking, payments and transactions (Figure 2). As fast and digital natives, they need fast and easy access to services.

The third characteristic of Bank 4.0 is that banks will be digital. Banks will transform into technology companies with banking licenses. Banking will no longer be about somewhere a customer goes, but about something a customer does. According to the Backbase Whitepaper from June 2018, the digital-first bank stands on four pillars: an omnibanking channel, modular banking, open banking and smart banking. Omni banking is a seamless and consistent interaction between customers and their financial institutions across multiple channels. Most customers move between multiple devices to accomplish their goals, and customers who use more channels hold more products. Therefore, it is important to have seamless and consistent interaction across multiple channels.

Given the speedy advancement of technology and the need to respond to dynamic customer demands, banks need agile systems. Modular banking is suitable for banks to become agile. The Lego-style is one approach to becoming agile. Instead of having one monolithic application or decoupled layer, the Lego-style operation enables banks to easily install and uninstall applications based on their needs. This agile production side should be accompanied by agile distribution with the characteristics of customer first, fast twitch, test–learn-tweak, right channeling and revenue readiness.

Open banking is the newest approach adopted by the banking sector. The European Union has pushed ahead by requiring that EU banks implement the revised Payment Service Directive (PSD2), in which banks’ monopoly with regard to their customers’ account information and payment services is about to disappear. Banks are forced to grant third-party providers access to their customers’ accounts through an open application program interface (API). This transforms banking into a platform for all customers’ financial transactions — Banking as a
Platform (BaaP).

Currently, most banks maintain a closed system with asset ownership, localized work, mass production, proprietary value and scarcity control. Meanwhile, an open banking system features connected access, distributed networks, unit production, shared value and abundance management. Changing from closed banking to open banking will increase banks’ competitiveness, especially with the emergence of fintech companies.

Digital banking is a form of smart banking making use of big data. A bank actually sits on new “oil”, which is big data on the demographic and financial information, the lifestyle and social activities of their customers. Using this wealth of data, banks can provide personalized products and services through preferred or selected channels. This experience will improve customer satisfaction and increase their loyalty to the bank.

Digital banks are also cognitive banks that use artificial intelligence. A study by Baker McKenzie found that 49 percent of banks will use AI for risk management, 45 percent for financial analysis and research, 37 percent for investment and portfolio management and only 17 percent of the banks have not yet introduced AI to their business. The use of these technologies can create new revenue streams, optimize business processes and cost and improve the customer experience.

The fourth characteristic of Bank 4.0 is the collaboration with fintech companies, which has been flourishing lately. In Indonesia, 45 fintech payment companies have registered with Bank Indonesia, 1 fintech lending (P2PL) license has been issued by the Financial Services Authority (OJK) and another 77 P2PL fintech companies have registered with the OJK.

According to the Millennial Survey by Mandiri Institute, around 82 percent of the millennials use both banking and fintech services and products. There are many options for banks to collaborate with fintech companies. Banks and fintech P2PL can collaborate on lending. One way is to use the white label partnership scheme. In this scheme, the bank cooperates with P2PL through co-branded products. With large databases, banks can offer their customers who do not qualify for bank loans to P2PL lenders and receive referral fees in return. In addition, since the regulation also allows the institutions to become lenders, banks can disburse loans through P2PL. Thus P2PL serves as a distribution channel. For banks, this will reduce the acquisition fee when looking for customers.

Another possibility is for banks to sell retail investment products through fintech firms. Currently, about 70 percent of lenders in P2PL schemes are of young age, between 18 and 35 years. This represents an opportunity for banks to offer investment products with smaller funds required that will be more in line with the needs of the millennial generation. This will lower the distribution channel cost for banks, as their products can reach more customers in a cheaper, easier and faster way. As for P2PL services, this will increase fee-based income.

Banks need to transform, otherwise they will go under in competition and eventually vanish. Are banks in Indonesia willing to transform?

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The writer is the head of Mandiri Institute.

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