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Prudent growth a must for digital banks to avoid systemic risks
The alarming fact is that 59 percent of NPLs come from debtors under 34 years old, with a nearly fourfold annual increase in NPLs from individuals under 19 years old.
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Debt trap: A person receives a message from the Financial Services Authority (OJK) on Sept. 10, 2023, asking Indonesian citizens to be wary of online lending platforms. (Antara/Cahya Sari)
T
he days of lining up at ATMs for financial transactions are long gone. Technological advancements have revolutionized banking, enabling seamless money transfers and even investments from the palm of one's hand.
Digital banking enables this seamless banking experience. This digital palpable revolution has advanced to such a degree that the physical bank branch is now obsolete, replaced by the rise of neobanks.
Within this digitalization spectrum, there is e-banking, which covers ATMs, internet banking and mobile banking. E-banking essentially represents traditional banking services conducted online.
On the opposite end, digital banking is more advanced, integrating financial services with technologies like artificial intelligence and data analytics to support various activities. In Indonesia, digital banks fall into two groups: bank-backed digital banks such as Jenius (BTPN) or Blu (BCA), and tech-backed ones such as Seabank (SEA Group) or Hijra (ALAMI).
Indonesia, the third most populous country in Asia, presents significant opportunities for digital banks with over 70 percent of its adult population unbanked and underserved. Bank Indonesia's official data confirms this, showing a fivefold increase in mobile and internet banking transactions from Rp 11.7 quadrillion (US$780 billion) in 2014 to Rp 58.3 quadrillion in 2023, indicating nearly a 20 percent average annual growth rate over the past decade.
The rapid growth and the influx of young and supposedly more affluent populations in the next several years will certainly be an enticing opportunity for digital bank players. Since 2016, a wave of major banks and tech firms have aggressively targeted Indonesian consumers, vying for dominance in this burgeoning market.
Many digital banks that have operated for several years are able to demonstrate profitability with high net interest margins (NIM). NIM, the difference between interest earned and paid, is a key indicator of a bank's profitability. Notably, most digital banks have NIMs that are two to three times higher than the industry average.
